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American RSUs in Ireland – 3 Important Investing & Tax Tips. Blog 203

22nd August 2022

Paddy Delaney

Tax and Investing RSUs in Ireland

Having clarity around the management of your RSUs in Ireland is critical to successfully avoiding major tax and succession issues in the future. In this short piece, I will share 3 critical aspects to US RSUs, and outline steps you can take to achieve successful outcomes for you and your loved-ones.

According to American Chamber of Commerce Ireland, there are 190,000 people in Ireland, employed by US Companies. Many of these individuals are employees of financially successful companies (think Google, Meta, Paypal, Intel, Oracle etc.) and have benefitted from that success, often in the form of Restricted Stock Units (RSUs) from their employer.

RSUs in Ireland – The Basics

RSUs , particularly for senior employees in these US companies, often generate significant wealth for the employee. The RSUs and/or proceeds of them become a key pillar to their financial independence and future planning. As such, it is critical to manage, invest, and plan for them prudently.

RSUs are essentially a commitment from the employer to an employee that they will give them a number of shares of the company on completion of a ‘vesting period’. This approach helps the company to retain the employee for a certain period (often 3-4 years), as they have a significant ‘carrot’ to stay around!

When the shares ‘vest’, the employee pays full Income Tax, USC and PRSI. This is the case assuming they are Irish tax resident, which we do in this piece. If that individual sells the shares at a profit in future, they will pay CGT on any gains realised, as with any share disposal.

Of course, RSUs are offered by many employers in Ireland, not just US companies. However, given the number of employees of US companies here, and the lack of awareness of some US-specific aspects – we believe it an important topic.

3 critical tips to be aware of in managing your US-based RSUs:

1) Estate Tax on American RSUs, and Shares in US companies

Federal Estate Tax (FET) on US-based assets is critical for beneficiaries of RSUs, and is often un-known. Beware if you own more than $60k worth of US RSUs, shares, or US-based assets.

The current marginal rate of FET is 40% on a tiered basis. It is our understanding if non-US citizens own US-based assets at the time of their death, then that property is liable to FET. There is a $60,000 exemption limit, and after this FET applies.

Let’s say you held $500,000 of US stock within the US FET net on the date of your death, and that it all passes to your spouse. No Irish tax is payable of course. However, the US FET rate on that level of assets is c31% on the total amount of stock.

The net result is an FET bill of c$155,000 of that $500,000 stock passing to your spouse. Why would one intentionally allow this to happen?

If your spouse retains these assets, and subsequently leaves the estate to your children, then the stock will again be subject to US FET, and also to Irish inheritance tax if they exceed their inheritance limits here! There is often an erosion of up to 50-70% of the asset value when passing to loved-ones.

Ireland and US Tax Treaty

Interestingly, there is an Irish–US tax treaty that can offer credit relief so that Irish inheritance tax (paid by kids in this instance) can be eliminated by the US FET paid when they are the beneficiaries!

The double taxation agreement provides that Ireland will grant Inheritance Tax credit relief for FET paid as the property is US-based (situs). As inheritance tax is not paid by the spouse in Ireland, but they are subject to FET, why would one pass any substantial US-based assets to their spouse if they didn’t need to!?

Ultimately, our understanding is that it can be a major financial error to leave a large value of US-based stock to your spouse. If you insist on retaining the RSUs or US-based stock until your death, it may be more beneficial to explore ‘willing’ them directly to your children on your death, and skipping your spouse entirely!

There are trust mechanisms also that some people use to navigate the issue. However, that does not come without complexity and costs.

2) Diversification of your RSUs in Ireland

Most senior employees that I have come to know, believe in the future prosperity of the companies they work with. They also recognise however that holding 20% or more of their entire net worth in a single company stock for multiple decades into the future is rather a precarious position to retain.

No matter how well-run and profitable a company is right now, asking it to remain so for the next 3 or 4 decades is a big ask, and an unnecessary risk.

According to McKinsey research, the longevity of S&P 500 individual companies is shrinking, and is set to continue to do so quite dramatically. By 2027, they say the average lifespan of a company in the S&P 500 (which all major US multi-nationals here are), will be 12 years….

This doesn’t suggest that your Meta or Google shares will become worthless in the next dozen years. However, it does point to a firm logic to hold a diversified portfolio of companies, instead of a single company stock.

Apart from potentially avoiding the FET issue, diversifying out of RSUs in Ireland and into a more diversified approach, can help get the proceeds invested in both names. You can then potentially benefit from the annual CGT allowance and more importantly, it can remain invested if you/spouse die.

If returns are your primary motive for retaining the RSUs, consider the probability of your RSUs in Company X outperforming a Global passive index fund over the coming 30 years.

While the probability is unknowable, is it wise to bet our future financial wellbeing or our legacy on it!? I say 30 years because, assuming you are retired or close to it, that is the average duration of retired life we hope to enjoy.

3) Unnecessary CGT on RSUs

If you receive RSUs in Ireland on an on-going basis, you will have same class shares vesting to you at different points in time. Under general CGT calculations, when you sell some stock, Revenue determine that you are selling the oldest shares you hold of that company.

They calculate CGT based on any price increase from the very first shares you received, and the current share price. This is the First In First Out (FIFO) rule, and applies to all shares of the same class. It can result in very significant CGT bills on the disposal of RSUs in Ireland.

However, there is an important exception to this FIFO rule you can use to your benefit. When you sell shares within 4 weeks of acquiring shares (a recent vesting), the CGT on that volume of shares is calculated from the price you received them at (less than 4 weeks ago) and today’s price.

This can save some people literally tens or hundreds of thousands in unnecessary CGT over time. Section 581 of the Taxes Consolidation Act 1997 confirms that the shares you have sold are those most recently acquired (within that four-week window).

In Summary

In summary, there is a lot to consider in managing your RSUs in Ireland. Receiving RSUs can be a wonderful boost to your finances and getting you to a strong financial position. Indeed the stock can perform very well (particularly in the recent decade or so).

However, careful planning is required. Having input from a trusted financial advisor, and indeed tax/estate planning expertise is highly recommended. For more tips on passing on assets, you might find blog 201, Gifting to adult children, helpful.

There are simply too many variables and unknowns for most of us to navigate this successfully alone. This piece is intended as a ‘heads-up’ and an invitation for you to give the topic your attention and planning. Best wishes with it, and I’m here to help if needed.

Thanks,

Paddy.

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