Double Taxation Relief Manual: Guidance by country: United States of America: Share Options
Both the UK and the USA agree that share options granted by reason of employment are covered by the Income from Employment (previously Dependent Personal Services) Article. The Exchange of Notes to the new Agreement specifically covers how this is to be interpreted for options. This was also the practice followed under the old agreement as well.
For individuals working between the UK and the USA the period of employment to be taken is up to the date of exercise. This is because both domestic taxation systems for options also work to that date.
Where the employee has worked in both the UK and the US over the life of the option the taxation treatment is as set out in DT 1925A and the examples at DT1925B. Tax Bulletins 55, 56 and 60 also provide more information in more unusual situations. “That proportion of the option gain” will normally be determined by reference to the periods of employment in each country using a straight-line time apportionment. Occasionally, time-apportionment or other circumstances may not produce an appropriate result and the Exchange of Notes provides that the competent authorities will then endeavour to resolve the difficulty.
Any cases of doubt or difficulty should be referred to Employment Income Technical.