Which country taxes options granted in one country and exercised in another?
Both may, on parts of the same benefit. The benefit is generally sourced by reference to workdays between grant and vest, so a period of work in one country and a period in the other each carry a share, and each country taxes its own share. That is why the answer is rarely a single country. For an employer the practical consequence is that a payroll obligation can fall in a country the employee no longer works in, and for the employee that two returns may each report a slice of one exercise.
How is an option benefit split between two countries?
By workdays over the period the benefit was earned, which in most systems means the days between grant and vest. The split is arithmetic once the day count is settled, and the difficulty is almost always the evidence rather than the method: reconstructing where someone actually worked across a period of years, from records kept for other purposes. Build the day count from a travel record and the option agreement's dates, keep it with the working papers, and expect to produce it if either country asks how the share was arrived at.
Why am I being taxed twice on the same option gain?
Because the two countries may not tax at the same moment. Each system has its own taxing point, whether grant, vest, exercise or sale, and where those points differ one country can tax in a year the other taxes nothing, then the position reverses. A credit relieves double taxation on the same income in the same year; it cannot reach income the two systems recognise in different years. That timing mismatch, rather than the source split, is what produces double taxation no credit claim will fix, and it has to be identified and documented rather than claimed away.
When are options taxed, at grant, vest, exercise or sale?
It depends on the system, and that is the whole problem. Each country chooses its own taxing point from those events, so the same option can be a taxable event in one country at one stage and in the other at a different stage. Before assuming a date, establish the taxing point in each country involved and then lay the two out against the grant, vest and exercise dates. Where they do not coincide, the order of filing and the credit position have to be planned around the mismatch rather than discovered after it.
Do we still withhold if the employee has already left the country?
Quite possibly, because the share sourced to the period worked in that country does not disappear when the person moves. The obligation attaches to the payer, and a payer that failed to withhold is the one pursued for it, which is uncomfortable when the exercise happens long after the transfer and the local payroll has stopped running. An employer with option holders who have moved should know, for each grant, which country's share an exercise will trigger and which payroll has to act. Establish that before an exercise, not during one.
What records do we need to support an option source split?
The grant and vest dates from the plan documents, and a defensible day-by-day record of where the employee worked between them. Everything else follows from those two. Calendars, travel bookings and immigration records are the usual sources, and they need to be gathered while they still exist rather than at the point of an exercise many years later. Keep the working paper that turns the day count into the split, because the split is easy to compute and hard to justify after the fact if nobody wrote down which days went where.
Do I get credit for all of the foreign tax I paid?
Only up to your own country's tax on that same income, and only for tax you were legally obliged to pay. Two consequences follow. Living somewhere that taxes you more heavily than your residence country does leaves an excess that becomes a carryover rather than a refund. And withholding suffered above the treaty rate is not creditable — the route back to that money is a refund claim in the country that took it. See claiming the credit.
Do I have to file in both countries?
Frequently yes, and the two filings do different jobs. The country where the income arises taxes it at source; the country where you are resident taxes your worldwide income and then gives credit for the tax already paid. Filing only one side is what leaves relief unclaimed — the credit has to be asked for on a return. We prepare both sides so the numbers agree. See dual filing.
