A recharge agreement is a written agreement between a parent corporation and its subsidiary under which the subsidiary reimburses the parent corporation for the cost of equity compensation. Companies enter into this type of agreement in order to secure a corporate tax deduction at the subsidiary for equity compensation to its employees. In many countries, if a tax deduction is allowed, the subsidiary must bear the costs of the equity compensation either directly or indirectly via a written agreement. Additionally, a recharge agreement may be a tax-free way for the company to repatriate funds to the U.S. (so that the transfer of funds is not considered a dividend). For many companies, recharge agreements may be a sound corporate strategy; however, there are some pitfalls that you should be aware of if your company is considering implementing or has already entered into recharge agreements.

First, you will need to know the timing of when a recharge agreement must be in place in order for the company to take a corporate tax deduction. In some countries, the agreement must be in place at the time of grant. It is possible that the recharge agreement may even need to be a part of the grant language. This may mean that even with a recharge agreement in place, it is possible that not all grants will be part of the corporate tax deduction.

Second, there may be special requirements for tax deductibility beyond the recharge agreement. For example, deductibility may not apply to officers and/or directors of the subsidiary, the parent company may be required to use treasury shares, or the shares may need to be purchased by the subsidiary on the open market. Additionally, the requirements may differ between types of grants.

Third, the recharge agreement may cause exchange control or labor law issues in some countries. For example, the agreement may require exchange control approval, which may not be easy or likely to achieve. On the labor law side, the recharge agreement may cause the income from equity to be considered a part of compensation, which may open the company to entitlement issues.

Finally, the recharge agreement may trigger tax withholding on the gain in countries where a tax withholding on equity compensation income may not otherwise be required. This is important for two reasons. First, it means that with the recharge agreement in place, you will need to coordinate tax withholding with your payroll team in that country. Second, it may mean that the employer social insurance payment is required for employee equity income. This may even be high enough to negate the benefit of the corporate tax deduction.

Another consideration for recharge agreements: Don’t assume your company isn’t using them. Check with your tax team to make sure that your company hasn’t entered into an agreement that will impact your day-to-day operations (like tax withholding) or create unforeseen exposure for your company.

Want a quick review of tax deductibility for the countries your company does business in? We have several great resources on our Global Stock Plans portal. You can find information in the Country Guides as well as many of the matrices posted to the left portion of the portal.

-Rachel