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HMRC internal manual

Double Taxation Relief Manual

Non-residents: UK income: share option gains, phantom share option gains and bonuses: interaction with double taxation agreements

Interaction with Double Taxation Agreements

If the employee moves between countries a tax charge may also arise in another country when the option is exercised, assigned or released.

If there is no double taxation agreement (DTA) with the other country then the UK will tax income in accordance with UK domestic laws. In some circumstances, however, the United Kingdom will grant its residents unilateral relief in respect of foreign tax suffered on income that arises in another country but is taxed in the UK on the basis of residence.

However if a comprehensive DTA exists it will normally have an employment income Article along the lines of Article 15 of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention. Gains realised from the exercise of options granted to an employee fall within the provisions of this Article.

Article 15(1) provides that if a resident of one country performs the duties of his employment in the other country, then the latter country retains any domestic rights to taxation of remuneration and benefits from that portion of the employment.

To avoid double taxation, where an employee

  • was granted a share option in the UK during the course of an employment,
  • exercised that employment in the other country during the period between the grant and exercise of the option,
  • remains in that employment at the date of the exercise and,
  • would be taxed by both of them in respect of the option gain; and
  • is not resident in the UK at the date of exercise;

then the UK will give relief in calculating the tax charge for the proportion of the option gain which relates to the period or periods between the grant and exercise of the option during which the employee exercised the employment in the other country.

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.

In other cases credit relief may be appropriate.

Examples of situations where relief may be calculated by districts are given at DT1925B. Other situations should be referred to Employment Income Technical.