Restricted Stock Units A Restricted Stock Unit (RSU) award is an agreement to issue stock at the time the award vests. No shares are delivered until the employee satisfies the vesting schedule. At that time, taxes are netted out of the units, with employees receiving company stock equal to the net after-tax value of the RSU. By using units instead of standard restricted stock for broad-based awards, companies gain a number of advantages, including:
- Eliminating the 83(b) election and the administrative and communications burdens associated with it
- Facilitating the payment of taxes at vesting with an automatic withholding of shares
- Postponing shareholder dilution until the vesting period
- Benefiting from consistent tax treatment and timing internationally
RSUs are not "property" under Section 83 of the Internal Revenue Code as long as they are an unfunded and unsecured promise to pay money or property in the future. Most companies reduce the employee distribution of stock at the vesting date of the award in order to satisfy employee tax withholding requirements, including ordinary income taxes and FICA/FUTA.
It is important to distinguish the slightly different tax and cash flow implications for the company with RSUs as compared to restricted stock. With restricted stock, the company receives a tax deduction and the employee is responsible for the taxes at the vesting date (assuming no 83(b) election). With RSUs, the company is responsible for paying the share equivalent tax amount in dollars to the IRS while still receiving the same tax deduction. Therefore, with RSUs, the tax implications are a "wash" for the company but with a slightly negative cash flow impact.
Based on the general principles of tax laws in many countries, RSUs should be taxed at vesting or release of the shares. It is always recommended to check the international tax treatment with the local tax authorities in each jurisdiction since there is often no specific guidance.
If RSUs are granted internationally, they are essentially "free" awards (no purchase price), which generally avoids the complications of securities filings in many countries, as the grants are not deemed "offerings" for the purposes of relevant securities rules.
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