© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
F13. Employment & pensions (Articles 15 and 16)
ARTICLE 15
(1) Remuneration taxable in state of residence unless employment exercised in other Contracting State
"(1) Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State." (Model Article 15)
- Place of exercise: place where employee is physically present when performing activities for which income is paid
"[1] ... Employment is exercised in the place where the employee is physically present when performing the activities for which the employment income is paid. One consequence of this would be that a resident of a Contracting State who derived remuneration, in respect of an employment, from sources in the other State could not be taxed in that other State in respect of that remuneration merely because the results of this work were exploited in that other State." (OECD Commentary, Article 15)
(2) Source state does not have taxing rights if employer not resident/does not have PE there + employee not there 184 days
(2) Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned, and b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and c) the remuneration is not borne by a permanent establishment which the employer has in the other State. (3) Notwithstanding the preceding provisions of this Article, remuneration derived by a resident of a Contracting State in respect of an employment, as a member of the regular complement of a ship or aircraft, that is exercised aboard a ship or aircraft operated in international traffic, other than aboard a ship or aircraft operated solely within the other Contracting State, shall be taxable only in the first-mentioned State." (Model Article 15)
- Purpose: situations where employer does not get deduction and short-term employments
"[6.2] The object and purpose of subparagraphs b) and c) of paragraph 2 are to avoid the source taxation of short-term employments to the extent that the employment income is not allowed as a deductible expense in the State of source because the employer is not taxable in that State as it neither is a resident nor has a permanent establishment therein. These subparagraphs can also be justified by the fact that imposing source deduction requirements with respect to short-term employments in a given State may be considered to constitute an excessive administrative burden where the employer neither resides nor has a permanent establishment in that State." (OECD Commentary, Article 15)
- Consider all possible periods of twelve consecutive months for the day count test
"[3] The present wording of subparagraph 2 a) does away with such opportunities for tax avoidance. In applying that wording, all possible periods of twelve consecutive months must be considered, even periods which overlap others to a certain extent. For instance, if an employee is present in a State during 150 days between 1 April 01 and 31 March 02 but is present there during 210 days between 1 August 01 and 31 July 02, the employee will have been present for a period exceeding 183 days during the second 12 month period identified above even though he did not meet the minimum presence test during the first period considered and that first period partly overlaps the second." (OECD Commentary, Article 15)
- Presence at any time of the day counts
"[5] ...Under this method the following days are included in the calculation: part of a day, day of arrival, day of departure and all other days spent inside the State of activity such as Saturdays and Sundays, national holidays, holidays before, during and after the activity, short breaks (training, strikes, lock-out, delays in supplies), days of sickness (unless they prevent the individual from leaving and he would have otherwise qualified for the exemption) and death or sickness in the family. However, days spent in the State of activity in transit in the course of a trip between two points outside the State of activity should be excluded from the computation. It follows from these principles that any entire day spent outside the State of activity, whether for holidays, business trips, or any other reason, should not be taken into account. A day during any part of which, however brief, the taxpayer is present in a State counts as a day of presence in that State for purposes of computing the 183 day period." (OECD Commentary, Article 15)
- Only count days on which employee not resident in source state
"[5.1] Days during which the taxpayer is a resident of the source State should not, however, be taken into account in the calculation. Subparagraph a) has to be read in the context of the first part of paragraph 2, which refers to “remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State”, which does not apply to a person who resides and works in the same State..." (OECD Commentary, Article 15)
"From 2008/09 onwards (this overlaps for a year with the previous day counting method), days during which the tax payer is a resident of the UK should not be included in the calculation. The conditions in the treaty are for remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State and does not apply to a person who is resident and works in the same State." (DT 1921)
- Employer has PE in country: exemption given on condition remuneration not borne by PE
"[7] Under the third condition, if the employer has a permanent establishment in the State in which the employment is exercised, the exemption is given on condition that the remuneration is not borne by that permanent establishment. The phrase “borne by” must be interpreted in the light of the underlying purpose of subparagraph c) of the Article, which is to ensure that the exception provided for in paragraph 2 does not apply to remuneration that could give rise to a deduction, having regard to the principles of Article 7 and the nature of the remuneration, in computing the profits of a permanent establishment situated in the State in which the employment is exercised." (OECD Commentary, Article 15)
"The fact that an individual formally remains an employee of an overseas company does not on its own satisfy the test in Article 15(2)(b). Not only must the claimant remain an employee of the overseas company but the remuneration in respect of which the exemption is claimed must be paid by the overseas employer and not, for example, by a United Kingdom subsidiary company to whom the employee may have been seconded." (DT 1921)
Check benefits in kind separately
"Even where basic remuneration continues to be paid by the overseas employer it is common for benefits (for example, the use of a flat) to be provided at the cost of the United Kingdom employer to whom the employee has been seconded. Subject to the other conditions in the Article, the basic remuneration may be exempt from United Kingdom tax but the condition in Article 15(2)(b) is not satisfied in relation to benefits in these circumstances because they are not `remuneration paid by, or on behalf of,’ the overseas employer (unless the cost of the benefits is borne by the overseas employer through a recharge)." (DT 1921)
- Presumption that PE bears the cost
"If operations in the United Kingdom are carried out through a permanent establishment, it should be assumed in the absence of evidence to the contrary that the cost of remuneration of an employee seconded to the permanent establishment is a deduction in computing the profits of the permanent establishment. This will be the normal basis of allocating costs in accordance with international tax principles. The permanent establishment should therefore be regarded as bearing the cost of that individual's remuneration unless there is evidence that the overseas Head Office continues to pay the employee and the cost is not allocated to the United Kingdom permanent establishment for United Kingdom tax purposes. A permanent establishment cannot be said to `bear the remuneration' unless it is charged against its profits without a corresponding credit, for example by way of a management charge. In doubtful cases advice may be sought from the Inspector dealing with the accounts of the permanent establishment." (DT 1923)
- Deny benefit in cases of abuse
"[8.8] As mentioned in paragraph 8.2, even where the domestic law of the State that applies the Convention does not offer the possibility of questioning a formal contractual relationship and therefore does not allow the State to consider that services rendered to a local enterprise by an individual who is formally employed by a non-resident are rendered in an employment relationship (contract of service) with that local enterprise, that State may deny the application of the exception of paragraph 2 in abusive cases, as recognised by paragraph 9 of Article 29 (see also paragraphs 54 to 80 of the Commentary on Article 1)." (OECD Commentary, Article 15)
"Claims should not be admitted where payment by an overseas company forms part of an arrangement to avoid United Kingdom tax. PAYE Technical will advise in cases where, for example, the overseas employer is based in a tax haven or the employee is nominally employed by a company which exists to provide his services to the United Kingdom user of those services. Cases where an employment which existed prior to the employee’s assignment to the United Kingdom continues during that assignment usually do not cause difficulty. Cases where the employee has taken up a new formal employment with an overseas company at the time of assignment should be reviewed critically." (DT 1921)
- Claim exemption in self-assessment return
"For years of assessment 1996-97 onwards, claims to exemption from UK tax in respect of employment income are made as part of the taxpayer’s self assessment on the claim form attached, depending on the circumstances, to either Help Sheet IR302 (Dual-Residents) or Help Sheet IR304 (Non-Residents - Relief under Double Taxation Agreements). Both forms require the taxpayer to establish the fact of his residence in the other country for the purpose of the agreement (see INTM154000) and to declare that the relevant provisions of the particular agreement are considered to have been fulfilled. All claims under Article 15(2) should be checked carefully by reference to terms of the agreement and, where appropriate,to the guidance at DT1921 - DT1923, and enquiries raised in suitable cases. See also DT1924 about certain types of cases which must always be referred to Employment Income Technical, before a claim is accepted." (DT 1920)
(3) Ships and aircraft employments
"(3) Notwithstanding the preceding provisions of this Article, remuneration derived by a resident of a Contracting State in respect of an employment, as a member of the regular complement of a ship or aircraft, that is exercised aboard a ship or aircraft operated in international traffic, other than aboard a ship or aircraft operated solely within the other Contracting State, shall be taxable only in the first-mentioned State." (Model Article 15)
SCOPE
Employment v. self-employment
- Employment determined in accordance with domestic law
"[8.7] Since the concept of employment to which Article 15 refers is to be determined according to the domestic law of the State that applies the Convention (subject to the limit described in paragraph 8.11 and unless the context of a particular convention requires otherwise), it follows that a State which considers such services to be employment services will apply Article 15 accordingly." (OECD Commentary, Article 15)
- Deemed employment under domestic law: apply Article 15 accordingly
"[8.5] In some cases, services rendered by an individual to an enterprise may be considered to be employment services for purposes of domestic tax law even though these services are provided under a formal contract for services between, on the one hand, the enterprise that acquires the services, and, on the other hand, either the individual himself or another enterprise by which the individual is formally employed or with which the individual has concluded another formal contract for services.
[8.6] In such cases, the relevant domestic law may ignore the way in which the services are characterised in the formal contracts. It may prefer to focus primarily on the nature of the services rendered by the individual and their integration into the business carried on by the enterprise that acquires the services to conclude that there is an employment relationship between the individual and that enterprise.
[8.7] Since the concept of employment to which Article 15 refers is to be determined according to the domestic law of the State that applies the Convention (subject to the limit described in paragraph 8.11 and unless the context of a particular convention requires otherwise), it follows that a State which considers such services to be employment services will apply Article 15 accordingly. It will, therefore, logically conclude that the enterprise to which the services are rendered is in an employment relationship with the individual so as to constitute his employer for purposes of subparagraphs 2 b) and c). That conclusion is consistent with the object and purpose of paragraph 2 of Article 15 since, in that case, the employment services may be said to be rendered to a resident of the State where the services are performed." (OECD Commentary, Article 15)
- Deemed employment must be based on objective criteria supporting that character
"[8.11] The conclusion that, under domestic law, a formal contractual relationship should be disregardedmust, however, be arrived at on the basis of objective criteria. For instance, a State could not argue that services are deemed, under its domestic law, to constitute employment services where, under the relevant facts and circumstances, it clearly appears that these services are rendered under a contract for the provision of services concluded between two separate enterprises. The relief provided under paragraph 2 of Article 15 would be rendered meaningless if States were allowed to deem services to constitute employment services in cases where there is clearly no employment relationship or to deny the quality of employer to an enterprise carried on by a non-resident where it is clear that that enterprise provides services, through its own personnel, to an enterprise carried on by a resident. Conversely, where services rendered by an individual may properly be regarded by a State as rendered in an employment relationship rather than as under a contract for services concluded between two enterprises, that State should logically also consider that the individual is not carrying on the business of the enterprise that constitutes that individual’s formal employer; this could be relevant, for example, for purposes of determining whether that enterprise has a permanent establishment at the place where the individual performs his activities." (OECD Commentary, Article 15)
- Relevant factors
"[8.14] Where a comparison of the nature of the services rendered by the individual with the business activities carried on by his formal employer and by the enterprise to which the services are provided points to an employment relationship that is different from the formal contractual relationship, the following additional factors may be relevant to determine whether this is really the case:
— who has the authority to instruct the individual regarding the manner in which the work has to be performed;
— who controls and has responsibility for the place at which the work is performed;
— the remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided (see paragraph 8.15 below);
— who puts the tools and materials necessary for the work at the individual’s disposal; — who determines the number and qualifications of the individuals performing the work;
— who has the right to select the individual who will perform the work and to terminate the contractual arrangements entered into with that individual for that purpose; — who has the right to impose disciplinary sanctions related to the work of that individual;
— who determines the holidays and work schedule of that individual." (OECD Commentary, Article 15)
Salary, wages and other similar remuneration
- All forms of remuneration from employment covered
"The words `salaries, wages and other similar remuneration’ should be understood in the broadest sense as covering all income from an employment, including benefits and share option gains chargeable under ICTA88/S135 (see DT1925)." (DT1920)
- Recourse to the law of the country applying the treaty as to scope of forms covered
"[10.1] The terms 'salaries', 'wages' and, above all, 'similar remuneration' would in themselves be open, and a dynamic interpretation independent of the convention would therefore not be excluded from the outset. However, according to the practically unanimous academic opinion pursuant to art 3 para 2 OECD-MA or art 3 para 2 DTA CH-AE respectively, with recourse to the law of the country of application in order to enable a complete recording of taxable income from work..."(AA v. BA (2023) 26 ITLR 146 at 212, Swiss Federal Supreme Court)
- Includes share options, phantom share options
"The words `salaries, wages and other similar remuneration’ in Articles of agreements dealing with employment income should be regarded as including -
1. share option gains chargeable under ICTA88/S135;
2. bonus payments such as those arising under phantom share option schemes and;
3. share option gains chargeable under capital gains legislation." (DT 1925)
- Not everything that a Contracting State taxes as employment income is within Article 15(1)
"[39] ... There is nothing in the context of the Act or in the language of the Convention, however, to indicate that Article 14 of the Convention should be construed as encompassing anything that falls within the charge to tax under Schedule E or within ITEPA. Thus I do not think that the gratuitous payment should be treated as within the Treaty concept of "salaries, wages and other similar remuneration" just because it happens to be taxed by the UK as an amount that counts as employment income." (Haderlein v. HMRC [2008] UKSPC SPC00710, Judge Gammie QC)
- Must be similar to salary and wages, not just remuneration
"[37] ...Strictly it is not enough that a payment is similar or "equivalent" to remuneration. The payment must be similar remuneration to salary and wages to be within the scope of the Treaty language. A PILON may be remuneration (and if so is clearly similar to salary or wages) but that does not seem to me to be true of the ex gratia payment with which I am concerned." (Haderlein v. HMRC [2008] UKSPC SPC00710, Judge Gammie QC)
- Remuneration involves concept of something that is given as a quid pro quo for services rendered
As I have decided, the ex gratia payment was a gift 'for doing the right thing'. It was not in respect of any service that Mrs Haderlein had rendered or that she was obliged (but for short notice) to render. It cannot therefore be said to fall within the ordinary meaning of the words "salaries, wages and other similar remuneration" even if I approach the words on the basis that the parties to the Convention would expect them to be construed broadly. It seems to me that "other similar remuneration" is capable of extending to any reward that a person derives in respect of their employment services, whatever form it takes, including termination payments such as PILONs. "Remuneration" is a wider term than salary and can envisage anything that a person gets for giving his services (see R v Postmaster-General (1976) 1 QBD 658 per Blackburn J at 663-664) but remuneration still involves the concept of something that is given as a quid pro quo for services rendered..." (Haderlein v. HMRC [2008] UKSPC SPC00710, Judge Gammie QC)
- Compensation for loss of future earnings not for services rendered
"[10.5] It has already been explained with regard to art 17 DTA CH-AE that the payment in dispute was not related to actual appearances by the Respondent for the Football Club after 9 July 2013, but that the Respondent received it for the loss of future opportunities to appear (see E.8.3 above). From an employment law perspective, it is most comparable to continued payment of wages during leave of absence or to payment of damages for the loss of wages suffered. One way or another, it does not constitute consideration for employment that the Respondent would have carried out in the United Arab Emirates. Accordingly, the United Arab Emirates also has no right of taxation under art 15 para 1 DTA CH-AE, on the basis of which Switzerland would have to exempt the income in dispute from taxation under art 22 para 1 lit. a DTA CH-AE. There is no other provision on the basis of which the United Arab Emirates could have a right to tax the payment in dispute under the DTA CH-AE." (AA v. BA (2023) 26 ITLR 146 at 212, Swiss Federal Supreme Court)
- Ex gratia payment on resignation not for services rendered
"[38] ... In the present case, the only thing for which the ex gratia payment could be described as a quid pro quo was the fact that Mrs Haderlein had voluntarily resigned her position as Human Resources Director. An ex gratia payment that the company chooses to make following resignation in circumstances such as these cannot in my view be described as remuneration in any ordinary sense of the word. It is not solely the fact that it is ex gratia but the payment lacks the necessary nexus with services rendered that usually characterizes payments as salary, wages or other similar remuneration." (Haderlein v. HMRC [2008] UKSPC SPC00710, Judge Gammie QC)
- Grant for which service is not the substantial quid pro quo not employee remuneration
"In short, Bingler draws a line between work done as part of a 'substantial quid pro quo,' which is taxable as compensation, and 'relatively disinterested, 'no-strings' educational grants,' which are tax-exempt. Id. at 751. This distinction parallels the United States-Russia Tax Treaty's distinction between taxable 'salaries, wages, and other similar remuneration' and a tax-exempt 'grant, allowance, or other similar payments.'6 Because the Treaty directs us to US law, and because of the parallels between the Bingler framework and the Treaty's structure, we look to I.R.C. § 117 and its implementing regulations to inform whether payments are tax-exempt 'grant[s], allowance[s], or other similar payments' under art 18 of the United States-Russia Tax Treaty." (Baturin v. CIR (2022) 24 ITLR 701, US Court of Appeals for the Fourth Circuit)
TERMINATION OF EMPLOYMENT
Payments in accordance with the contract/legal rights
- Deferred remuneration: attribute to the period of employment giving rise to it
"[2.11] Payments may be made after the termination of employment pursuant to various deferred remuneration arrangements. Such a payment should be treated as remuneration covered by Article 15 and, to the extent that it can be associated to a specific period of past employment in a given State, it should be considered to be derived from the employment activities exercised in that State..." (OECD Commentary, Article 15)
- Incentive compensation: see share options
"[2.12] Various payments may be made after the termination of an employment on account of incentive compensation in general and stock-options in particular. Whilst the treaty treatment of each such payment will depend on its own characteristics, the principles put forward in paragraphs 12 to 12.15, which deal specifically with stock-options, will assist in dealing with other forms of incentive compensation." (OECD Commentary, Article 15)
- PILON: derives from State where it is reasonable to assume employee would have worked during notice
"[2.6]...The remuneration received in such a case should be considered to be derived from the State where it is reasonable to assume that the employee would have worked during the period of notice...In most cases it will be the last location where the employee worked for a substantial period of time before the employment was terminated; also, it would clearly be inappropriate to take account of a prospective employment period in a State where the employee might have been expected to work but did not, in fact, perform his employment for a substantial period of time." (OECD Commentary, Article 15)
- Legally required redundancy/severance payment: divergent views
OECD: treat as remuneration for last 12 months' employment
"[2.8]...Absent facts and circumstances indicating otherwise, such a severance payment should be considered to be remuneration covered by the Article for the last 12 months of employment, allocated on a pro-rated basis to where the employment was exercised during that period; as such it constitutes remuneration derived from that employment for the purposes of the last sentence of paragraph 1.
...
[2.14]...A payment made by the employer pursuant to the terms of the employment contract even though the sickness or injury is not workrelated or the employer is not responsible for that sickness or injury should be dealt with in the same way as a severance payment: absent facts and circumstances indicating otherwise, such a payment should be considered to be remuneration covered by the Article for the last 12 months of employment, allocated on a pro-rated basis to where the employment was exercised during that period." (OECD Commentary, Article 15)
Employment state has no right if not effectively compensation for work actually carried out
"[10.4] In summary, it can be stated that there is no room for the assumption of a right of taxation of the state in which the work is carried out under art 15 para 1 DTA CH-AE if a severance payment does not effectively compensate for work actually carried out in the state in which the work is carried out, even if it has its basis in a (former) employment relationship. The result of judgment BGE 143 II 257 must therefore be confirmed..." (AA v. BA (2023) 26 ITLR 146 at 212, Swiss Federal Supreme Court - T, a footballer, entered into a contract with a club in UAE in 2011, which was terminated by settlement in 2013. T was entitled to a payment under that settlement, but the club attempted to not pay. Award made in 2017 when T was resident in Swizterland. Switzerland entitled to tax the award/not exempt under Article 15)
And see above on the need to be remuneration for service.
- Insufficient notice/failure to pay severance payment: treat like remuneration they replace
"[2.8]...For instance, damages granted because an insufficient period of notice was given or because a severance payment required by law or contract was not made should be treated like the remuneration that these damages replace." (OECD Commentary, Article 15)
Breach of contract and damages
- Contractual payment relating to sickness or injury: attribute to last 12 months of employment
"[2.14]...A payment made by the employer pursuant to the terms of the employment contract even though the sickness or injury is not workrelated or the employer is not responsible for that sickness or injury should be dealt with in the same way as a severance payment: absent facts and circumstances indicating otherwise, such a payment should be considered to be remuneration covered by the Article for the last 12 months of employment, allocated on a pro-rated basis to where the employment was exercised during that period..." (OECD Commentary, Article 15)
- Punitive damages, discrimination, injury to reputation: Article 21
"[2.8]...Punitive damages or damages awarded on grounds such as discriminatory treatment or injury to one’s reputation should, however, be treated differently; these payments would typically fall under Article 21." (OECD Commentary, Article 15)
- Loss of future earnings damages due to injury: Article 21
"[2.14]...A payment made because the employee has legal grounds for claiming damages from his employer with respect to a work-related sickness or injury would typically fall under Article 21." (OECD Commentary, Article 15)
- Loss of future earnings due to wrongful termination: not consideration for services performed
"[10.5] It has already been explained with regard to art 17 DTA CH-AE that the payment in dispute was not related to actual appearances by the Respondent for the Football Club after 9 July 2013, but that the Respondent received it for the loss of future opportunities to appear (see E.8.3 above). From an employment law perspective, it is most comparable to continued payment of wages during leave of absence or to payment of damages for the loss of wages suffered. One way or another, it does not constitute consideration for employment that the Respondent would have carried out in the United Arab Emirates. Accordingly, the United Arab Emirates also has no right of taxation under art 15 para 1 DTA CH-AE, on the basis of which Switzerland would have to exempt the income in dispute from taxation under art 22 para 1 lit. a DTA CH-AE. There is no other provision on the basis of which the United Arab Emirates could have a right to tax the payment in dispute under the DTA CH-AE." (AA v. BA (2023) 26 ITLR 146 at 212, Swiss Federal Supreme Court)
Post-termination conduct
- Restrictive covenants: not usually consideration for activities performed during employment - state of residence
"[2.9] Under the provisions of an employment contract or of a settlement following the termination of an employment, a previous employee may receive a payment in consideration for an obligation not to work for a competitor of his ex-employer. This obligation is almost always time-limited and often geographically-limited. Whilst such a payment is directly related to the employment and is therefore “remuneration ... derived in respect of an employment”, it would not, in most circumstances, constitute remuneration derived from employment activities performed before the termination of the employment. For that reason, it will usually be taxable only in the State where the recipient resides at the time the payment is received." (OECD Commentary, Article 15)
SHARE OPTIONS
Relationship to Article 13 (capital gains)
- Employment state has taxing rights up to the later of: (i) option being exercised and (ii) end of period of employment required to earn the benefit
"[12.2] ... This Article, and not Article 13, will apply to any benefit derived from the option itself until it has been exercised, sold or otherwise alienated (e.g. upon cancellation or acquisition by the employer or issuer). Once the option is exercised or alienated, however, the employment benefit has been realised and any subsequent gain on the acquired shares (i.e. the value of the shares that accrues after exercise) will be derived by the employee in his capacity of investor-shareholder and will be covered by Article 13. Indeed, it is at the time of exercise that the option, which is what the employee obtained from his employment, disappears and the recipient obtains the status of shareholder (and usually invests money in order to do so)." (OECD Commentary, Article 15)
Employment article continues to apply if shares acquired are not irrevocably vested
"[12.2] ...Where, however, the option that has been exercised entitles the employee to acquire shares that will not irrevocably vest until the end of a period of required employment, it will be appropriate to apply this Article to the increase in value, if any, until the end of the required period of employment that is subsequent to the exercise of the option." (OECD Commentary, Article 15)
- Residence state may tax gain within Article 13 as employment income
"[12.4] ... The same will be true in the State of residence. For example, while that State will have sole taxation right on the increase of value of the share obtained after exercise since this will be considered to fall under Article 13 of the Convention, it may well decide to tax such increase as employment income rather than as a capital gain under its domestic law." (OECD Commentary, Article 15)
Allocating to particular periods of employment
- Option does not relate to service rendered after period required to acquire right to exercise
"[12.7] The first principle is that, as a general rule, an employee stock-option should not be considered to relate to any services rendered after the period of employment that is required as a condition for the employee to acquire the right to exercise that option. Thus, where a stock-option is granted to an employee on the condition that he provides employment services to the same employer (or an associated enterprise) for a period of three years, the employment benefit derived from that option should generally not be attributed to services performed after that three year period." (OECD Commentary, Article 15)
Distinguish from delay to exercise not based on service
"[12.8] In applying the above principle, however, it is important to distinguish between a period of employment that is required to obtain the right to exercise an employee stock-option and a period of time that is merely a delay before such option may be exercised (a blocking period)..." (OECD Commentary, Article 15)
- Risk of forfeiture after right to exercise vested does not extend period of employment to which option relates
"[12.9] It is also important to distinguish between a situation where a period of employment is required as a condition for the acquisition of the right to exercise an option, i.e. the vesting of the option, and a situation where an option that has already vested may be forfeited if it is not exercised before employment is terminated (or within a short period after). In the latter situation, the benefit of the option should not be considered to relate to services rendered after vesting since the employee has already obtained the benefit and could in fact realise it at any time. A condition under which the vested option may be forfeited if employment is terminated is not a condition for the acquisition of the benefit but, rather, one under which the benefit already acquired may subsequently be lost." (OECD Commentary, Article 15)
- Options that clearly relate to service to be provided in future, but with no condition
"[12.10] There are cases where that first principle might not apply. One such case could be where the stock-option is granted without any condition to an employee at the time he either takes up an employment, is transferred to a new country or is given significant new responsibilities and, in each case, the option clearly relates to the new functions to be performed by the employee during a specific future period. In that case, it may be appropriate to consider that the option relates to these new functions even if the right to exercise the option is acquired before these are performed." (OECD Commentary, Article 15)
- Options is to acquire shares that will not fully vest until period of employment completed
"[12.10] ...There are also cases where an option vested technically but where that option entitles the employee to acquire shares which will not vest until the end of a period of required employment. In such cases, it may be appropriate to consider that the benefit of the option relates to the services rendered in the whole period between the grant of the option and the vesting of the shares." (OECD Commentary, Article 15)
- Past service: option only taken to relate to past if objective evidence demonstrates it rewards a specific period
"[12.11] The second principle is that an employee stock-option should only be considered to relate to services rendered before the time when it is granted to the extent that such grant is intended to reward the provision of such services by the recipient for a specific period. This would be the case, for example, where the remuneration is demonstrably based on the employee’s past performance during a certain period or is based on the employer’s past financial results and is conditional on the employee having been employed by the employer or an associated enterprise during a certain period to which these financial results relate." (OECD Commentary, Article 15)
- Accelerated vesting on early termination/retirement: option relates to employment in period prior to termination
"[12.12] Where a period of employment is required to obtain the right to exercise an employee’s stock-option but such requirement is not applied in certain circumstances, e.g. where the employment is terminated by the employer or where the employee reaches retirement age, the stock-option benefit should be considered to relate only to the period of services actually performed when these circumstances have in fact occurred." (OECD Commentary, Article 15)
- Mixed indicators as to what option relates to: presumption that options are to incentivise future performance
"[12.13] Finally, there may be situations in which some factors may suggest that an employee stock-option is rewarding past services but other factors seem to indicate that it relates to future services. In cases of doubt, it should be recognised that employee stock-options are generally provided as an incentive to future performance or as a way to retain valuable employees. Thus, employee stock-options are primarily related to future services. However, all relevant facts and circumstances will need to be taken into account..." (OECD Commentary, Article 15)
Allocating to particular locations of employment
- Apportion based on day count
"[12.14] ... In such a case, the employment benefit attributable to the stock-option should be considered to be derived from a particular country in proportion of the number of days during which employment has been exercised in that country to the total number of days during which the employment services from which the stock-option is derived has been exercised. For that purpose, the only days of employment that should be taken into account are those that are relevant for the stock-option plan, e.g. those during which services are rendered to the same employer or to other employers the employment by whom would be taken into account to satisfy a period of employment required to acquire the right to exercise the option." (OECD Commentary, Article 15)
- HMRC's view: share option gains normally accrue evenly between grant and exercise date
"Share option gains should usually be regarded as accruing evenly between the grant and exercise dates. If, subsequent to the date when the option was granted, the employee ceases to be a resident of the United Kingdom and becomes a resident of a state with whom the United Kingdom has a double taxation agreement, he may claim that part of the gain is exempt under the Article of that agreement dealing with employment income." (DT 1925)
"The gain will normally be time-apportioned on a straight-line basis. Periods not in that particular employment are left out of account so that the apportionment is still made on the basis of relative periods of employment in each country. Very occasionally this may not provide a sufficiently accurate apportionment or lead to double taxation. Refer any claim for an alternative basis to Employment Income Technical." (DT 1925a)
See examples at DT 1925b.