Nowadays most multinational companies issue share-based payment awards globally. Share-based payment awards are denominated in the equity of the consolidated parent entity and issued to employees who are rendering services to a variety of foreign subsidiaries of the US parent. Most foreign subsidiaries cannot deduct the cost of equity compensation issued to their employees by a separate entity, even if that entity is the consolidated US parent. As a result, the US parent cannot capture the tax benefit of issuing equity compensation outside its borders. Recharge agreements can fix this problem by enabling foreign subsidiaries to pay the US parent for the cost of equity issued to their own employees.
Recharge agreements permit the US parent to record an expected tax benefit and facilitate the tax-free repatriation of cash flow from the foreign subsidiary. This Issue Brief provides insight into the theoretical basis behind recharge agreements, important benefits and considerations, and practical implementation challenges.
