By now, most lawyers advising international companies on compensation packages for expatriates that include deferred compensation are familiar with section 409A of the United States Internal Revenue Code (“US tax code” or “Code”). That provision of the Code, as has been stated and restated, imposes complicated restrictions, with heavy penalties for non-compliance, on untimely elections to defer payments of deferred compensation, the circumstances under which deferred compensation is paid out, and, in certain situations, the extent to which deferred compensation can be paid on an accelerated basis.

However, the lesser known Code section 457A creates new complexity, applicable where deferred compensation, including many types of equity compensation, is earned by U.S. taxpayers who perform services for certain non-U.S. corporations and partnerships located in a jurisdiction that is tax indifferent (or more colloquially, a tax haven). In general, if section 457A applies, the period that compensation may be excluded from a U.S. taxpayer’s taxable income is limited to no more than 12 months after any service-based vesting condition is satisfied. If a vesting period is based on performance (rather than on the passage of time), the income exclusion may be longer than 12 months, but the amount is subject to an additional 20% tax when paid.

These rules may affect compensation earned not only by U.S. citizens, but also by nonresident aliens with existing deferred compensation who become U.S. tax residents (i.e., green card holders).

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