Monday, August 30, 2010

Restricted Stock Unit (RSU) Tax Reporting in Malaysia

If you work for the U.S. based company, you probably have heard about Restricted Stock Unit (RSU) but do you know what is the tax implication? If you're not interested in RSU, you can ignore this article...

Restricted stock unit (RSU) has been quite sometime with us as a replacement of stock option in many companies and suprisingly there are still many of us do not understand how how the tax reporting works for RSU. This article explains the RSU tax reporting in Malaysia and is applicable to rest of the countries as well since this is pretty general thing.

What is the difference between RSU and Stock Option?

A very funny statement I always heard from my colleage: "Wow! Why such a so big amount stated in my EA form?! I didn't even sell or excersise any of my stock!" Huh? Perhaps most people still do not understand the key difference between RSU and stock option:

  • Stock options are taxed at the time when your stocks are exercise or sold by you.
  • RSUs are taxed at the time when your stocks are vested or released to you by your employer (that's why you see such big amount in your EA form because your broker automatically sells your share to pay for the tax - see detail explanation below).
Notes: EA form is the form issued by an employer to tell how much earning of the employee and employee use this form to file for income tax annually.

What is the RSU taxable amount?

The RSU taxable amount is based on the total value of shares vested or released by your employer. For example, you're granted 400 RSUs in 2009 for 4 years to and only 100 RSUs will be vested in 2010 and the subsequent years. When the 100 RSUs are vested now at the closing price of $20, your total of RSU gain is $20 X 100 = $2000.

That means now $2000 is your taxable income.  Depends on your country tax law - In Malaysia, the Tax withholding rate is 26% (for year 2010) which means your total taxable withholding amount is $2000 X 26% = $520. Please keep in mind that this is just an estimated tax that your employer will deduct from your salary (based on the country tax withholding law).

The next thing is your brokerage (e.g. E-trade, Smith Barney and etc.) will sell enough shares to pay for this estimated tax. For example the next day, the closing price jumps to $21 and your brokerage sells 26 shares and the brokerage fee is $25. Therefore the total earning of this transaction is  $21 X 26 - $25  = $521. So now you use this money to pay for the tax withholding amount (i.e. $520) and the remaining $1 will be deposited to your account and shown in your EA form.

I know this could be confusing, so I try to summarize what happen here:
  • Total RSU Gain: 100 X $20 = $2000.  It is calculated based on the vested unit and closing price of the vested date.
  • Total tax withholding amount: $2000 X 26%= $520. Your employer calculates the estimated tax withholding for the vested RSUs based on the closing stock price.
  • Your broker sell enough shares: ($21 X 26 - $25 = $521) at the closing price of that day (i.e. $26) to cover the amount of tax withholding and $25 brokerage fees. This earning is used to pay the estimated tax withholding amount (i.e. %520) to the Income Tax Office.
  • The remaining money: ($521 - $520 = $1) will be deposited to your account and will be stated in your EA form.
Note: The closing prices is calculated based on the average of highest and lowest prices of that day. E.g. the highest price is $21 and the lowest prices is $19. Therefore, the closing price of that day is calculated as $20.

Note: The example may still subject to the currency exchange. E.g. You still need to convert the currency back to MYR. For simplicity, I just purposely ignore that...

Are you still confused? 

Some of you may still be confusing and the most frequent question that I heard is:
"Why tax me at MAX (i.e. 26%)? My tax bracket is not yet reach 26%!"
RSU Gain is the key! It really doesn't matter because the very MOST important thing here is NOT the tax BUT your RSU Gain. In this example, your RSU gain is $2K. It will be stated in your EA form. If your actual tax is less than 26%, that is perfectly okay because the tax withholding by your employer is just an ESTIMATION. This is nothing new. If your tax deduction is less than the actual, you pay back and otherwise you claim back your money.

Do you find this useful? Let me know if you have any questions to clarify.


Anonymous said...

Now this makes a lot of sense now. Previously, I was confused. Thanks for the sharing!

ChampDog said...

You're welcome! :)

Unknown said... abount tax position from the subsidiary of company located in malaysia with holding of US of which receive debit note charges yearly from the holding company.

ChampDog said...

Sorry, I"m a bit confused with your question. If it is related to company tax, I don't think I can help much on that. Probably you can consult the finance guy in your company(assuming you're the employee of tat company).

Gan said...

If i resign from the company before the vested date, does my RSU will be forfeited? If so, how abt the tax that I've already paid?

ChampDog said...

Yes, it will be forfeited. You don't get taxed if your RSU is not vested. Hope it helps.

Bret said...

1. Does that mean I will have 1,974 shares after the brokerage sold it?

2. Why must the brokerage sell my shares? What can't I pay the 26% * $2000 tax amount when I declare my tax in April?

3. If the RSU is vested, and I quit my company years later, is the RSU still mine to sell? If not, how would I get back my paid tax?

ChampDog said...

For question (1), you should have 74 shares instead of 100 after tax deduction by your broker. Did I answer your question?

For question (2), it is due to the new rules by bank negara Malaysia. I guess they want to do this is to avoid those who try to run away from being taxed.

For question (3), after RSU is vested, it belongs to you forever. You still can claim back the money if your overall income is over taxed when you file your income tax later.

Hope that address your question. :)

Bret said...

Yes, thanks a lot :)

yemmy said...

Thanks for sharing.
Any thought if I transfer to another legal entity in other country within the same Company, would the taxable benefits for RSU being charged proportionally in Malaysia? Or rather the complete vested units will be computed as part of taxable income in Malaysia even I might physically in new country.

ChampDog said...

Unfortunately, this tax thingy is very complex and different depending on which country you relocated to. Technically, you should check with tax consultation or your company relocation consultation. If this is under company relocation, the company should take care of your tax. If it is not, try to negotiate for that.

In general, there are few criteria (e.g. based on how long you stay there) and the worst case is you have to be taxed at both countries. But if you relocated based on company assignment, I think the company should bare the tax for the country you travel to.

Sorry that I may not able help much here. Hope you can get a proper consultant to help you on that.

yemmy said...

Thanks so much. You are very knowledgeable. I appreciate your expertise. Will consult the relevant tax consultant to review the specific relocation ;)

ChampDog said...

lol, you're welcome! :)

Anonymous said...

Hello I am still confused.

1.How do I know if my broker had sell the 26 shares out of the 100 shares vested?
2.If I sell all the 100 vested shares and the shares price is higher than the vested value, do I still need to pay the tax balance of the RSU gain money?

ChampDog said...

1. It is stated in the transaction in your broker account. You should able to see that.

2. No you don't need to. That means if you sell share at lower price than the vested value, they won't pay you back to the money.

Think of this way, capital gain has no tax in Malaysia. Capital gain means you buy share at lower price and sell it at higher price later. However, there is a tax for company's compensation. Unfortunately, RSU gain when it is vested is considered as company's compensation.

Btw, I"m talking about Malaysian tax scheme for RSU and please note that it may not applicable to other country (e.g. capital gain is taxable in other countries). :)

小郭 said...

hi ChampDog, i saw the last post in from 2013, i hope you are still reponding to question here.

My question is:
1. is the 26% tax by US or malaysian government.
2. i have left the company which i sold some stokc option last year - so i was expecting to still get an EA form and file the tax. btu i did not - hence question 1 above.

ChampDog said...

Sure, I will answer questions as long as I'm alive. :)

(1)26% is held by the company to be given to the tax office. You can be taxed either at 26% or less than that based on your annual income tax assessment.

(2)Just contact your ex-company HR, ask them to send you the letter. For me, I already instruct them to send the EA form to my home after I left. Once you have the EA form, filling tax is easy.

小郭 said...

thanks, ChampDog.

Well they did, stating the amount i earn from selling the options for tax purposes, but ignore the 26% from the PCB part. I think they have forgotten they are witholding my money.

小郭 said...

to make things straight, i just got the EA from from them yesterday :). earlier i said i did not get any from from them... :P

ChampDog said...

Yupe, you need to verify it. If they deduct your PCB but don't mention anywhere else, that is a mistake.

Please double confirm because I imagine this kind of thing hardly has a mistake.

Unknown said...

Why 1 is stated in EA form, instead of 2000?

Unknown said...

Hi I read your article and found it very helpful and clear on the Malaysian tax for RSUs. I do have 1 question though. The company I work for is a US based company with shares trading on the NYSE. I was granted RSUs which will be vested in January. I am a malaysian citizen and employed and work here in malaysia only. Will I be also subjected to RSU taxes in the US considering I am NOT a US resident or a US employee? Or will I only be taxed in Malaysia under the Malaysian Tax laws based on your examples in your blog article?

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