There is significant confusion if foreign founders are required to make an 83b election in connection to grants of unvested stock. The answer depends on the actual circumstance of each founder and each case has to be examined by the facts. However, usually foreign founders don’t need to make an election. Below is a short guide on how to make a determination.
Non-resident founders are subject to U.S. income tax only on certain types of U.S. source income and on income that is effectively connected with the conduct of a U.S. trade or business. The source of services income is where services are provided. Normally, therefore, a nonresident fonder will not be subject to U.S. tax on income from services to the US corporation, as long as the services are provided outside of the United States. Thus, for non-U.S. founders, who receive restricted stock option awards, the need to make an 83(b) election depends largely on the likelihood of their relocation to the U.S. within the vesting period.
Here, “relocate” refers to the location where the founder renders the majority of the services that are related to the restricted stock options. Hence, regardless of where you live, to determine taxability, Internal Revenue Service (IRS) will want to know where you rendered the services that you offer in exchange for the restricted stock option award.
Thus, where non-U.S. founders relocates their services to the U.S. and become U.S. taxpayers during the vesting period, they will in effect be double taxed on the value of their restricted stock if they did not file an 83(b) election. If they don’t relocate their services, filing the 83(b) election will have no effect as they won’t be considered US taxpayers when their options vest.
Another factor to consider for non-U.S. residents is the implications of 83(b) election on dividends. Dividends on the stock of a U.S. company paid to a nonresident are ordinarily subject to U.S. withholding tax at the rate of 30% (or typically 15% under an applicable treaty ). However, if the stock is unvested and no §83(b) election has been made, any dividends paid will not be treated as dividends, but will be treated as additional compensation for services. If all of the nonresident’s services are performed outside the United States, or if a treaty applies with respect to some services provided in the United States, no U.S. tax will be payable with respect to dividends treated as compensation.