Equalized-Tax Provisions in Expat Compensation Packages

A senior executive at a US tech company accepts a 3-year assignment to run the company’s London operation. Her compensation package includes base salary, bonus, and a large annual RSU grant. The package documents reference “tax equalization,” with the employer promising to keep her net take-home pay the same as if she had remained in the US.

For base salary this is mechanical: the employer computes her hypothetical US tax, deducts it as “hypothetical tax” from her paycheck, then grosses up the gross payment for actual UK and US taxes on the assignment compensation.

For equity vesting, the mechanics get complicated fast. UK taxes vests at marginal rates plus NICs that can hit 47%+. US taxes them at lower rates. The gross-up to keep her whole at UK rates on equity vest income becomes a significant expense for the employer: often 30-40% of the underlying grant value.

Understanding the equalization provisions and their equity interactions is essential for both the employee (to know what’s really covered) and the employer (to budget the assignment correctly).

Tax equalization vs tax protection

Two common employer policies:

Tax equalization (TEQ). Employer keeps employee whole: net take-home on the assignment equals net take-home in the home country. Employer pays all host-country taxes above the hypothetical home-country tax. If host-country tax is lower, employer keeps the savings (employee receives no windfall).

Tax protection (TP). Employer protects employee from higher-than-home taxes but lets the employee keep windfalls. If host-country tax is lower, the employee nets more. If higher, the employer grosses up.

TEQ is more common at large multinationals (predictable cost model for the employer). TP is more common at smaller companies or for specific one-off assignments.

Both policies typically cover:

Regular salary and bonus.
Equity compensation (RSUs, options, restricted stock).
Employer-paid benefits (housing, COLA, school fees).
Sometimes investment income during the assignment.

Both often exclude:

Personal investment income (interest, dividends, capital gains on personal investments).
Inheritances, gifts.
Pre-assignment or post-assignment income events.

The hypothetical tax mechanic

Under TEQ, the employer computes each year:

Hypothetical home-country tax. What the employee would have paid on the home-country-equivalent compensation had they remained at home.
Actual host-country tax. What was actually paid to the host country.
Actual home-country tax. What is still owed to the home country (US for a US citizen always remains).
Gross-up payments. Additional compensation needed to make the net-of-all-taxes total equal to (Compensation - Hypothetical Home Tax).

For a US citizen on a UK assignment with base $300K, bonus $150K, and $500K of RSU vest:

Total comp: $950K.
Hypothetical US tax (single, no other deductions): roughly $290K.
Hypothetical net: $660K.
Actual UK tax on $950K at marginal rates: roughly $420K.
Actual US tax after FTC: roughly $0 (full FTC absorption).
Gross-up required so that employee’s net = $660K: employer pays the difference between the net after actual host tax and the target hypothetical net.

The gross-up on equity vesting can be significant. The $500K RSU vest alone might require $100K-$150K of employer gross-up.

Hypothetical tax withholding from the employee’s paycheck

In a TEQ system, the employer deducts “hypothetical tax” from the employee’s paycheck as if it were withholding tax. The hypothetical tax amount is estimated based on the hypothetical home-country return.

At year-end, a reconciliation is done. Hypothetical tax paid vs actual hypothetical tax calculated. Employee may owe employer (if hypothetical tax was under-withheld) or be refunded (if over-withheld).

For equity vests, the hypothetical tax withholding is usually computed at vest: if the employee would have paid US federal tax on the vest income, that amount is withheld as hypothetical tax.

Equity-specific complications

Vesting during cross-border moves. A grant vesting partly while in home country and partly on assignment has sourcing implications. TEQ policies often assign the entire vest to the assignment period for simplicity, even though sourcing rules would split it. The TEQ policy’s simplified allocation can mean the employer over-grosses-up for the employee’s benefit.

Option exercises. If the employee exercises options during the assignment, the spread is compensation income in both countries potentially. TEQ covers the host-country cost. Option exercises late in an assignment are sometimes timed to occur after repatriation for simpler treatment.

Post-assignment vesting. If the employee returns home but has unvested RSUs granted during the assignment, those vests after return are typically outside the TEQ scope. The employee’s home-country tax on these vests is the employee’s responsibility. But the host-country trailing tax (UK source portion based on vesting-period workdays) may or may not be covered, depending on policy.

Sale of shares acquired during assignment. Capital gains are typically NOT covered by TEQ. The employee keeps gains but also pays all taxes. An assignment-acquired share sold in the host country is taxed at host-country CGT rates; sold after repatriation, at home-country rates.

Comparison: typical TEQ coverage scope

Income item	Covered by TEQ	Notes
Base salary	Yes	Full gross-up
Annual bonus	Yes	Full
RSU vest during assignment	Yes	Host-country tax grossed up
Stock option exercise during assignment	Yes	Similar treatment
ESPP purchase at assignment discount	Usually	Discount portion grossed up
Sale of employer stock	Usually no	Capital gain is employee’s
Interest and dividends on personal investments	Usually no	Personal income
PFIC gains on Indian mutual fund	No	Employee’s problem
Housing allowance	Yes	Often plus gross-up
Assignment-end bonus	Varies	Often covered in final reconciliation

The “equity carve-out” at assignment end

Many TEQ programs have specific language about equity granted during but vesting after an assignment. The tension: the employer grossed up the grant at the time of assignment, but doesn’t want to gross up the vest after the employee returns home.

Common provisions:

Pro-rata: gross up the portion of each vest attributable to the assignment period.
Full: gross up every vest for grants made during the assignment, regardless of when they vest.
None: no gross-up after repatriation; employee bears host-country trailing tax.

Employees negotiating expat packages should read this carefully. The difference between “full” and “pro-rata” treatment on $1M of RSUs can be $100K-$200K of employer gross-up.

Documentation and proof

TEQ relies on accurate computation of hypothetical tax, which requires:

Hypothetical home-country return prepared each year.
Actual home-country return.
Actual host-country return.
Reconciliation worksheet.

The process is often managed by the employer’s global mobility tax vendor (KPMG, PwC, Deloitte, EY, Mercer, BDO). The employee provides information; the vendor computes.

At assignment end, a closing reconciliation settles up any balance. The employee may owe back hypothetical tax shortfalls or receive excess gross-ups. Some TEQ balances carry years beyond repatriation.

Frequently asked

If I had more investment income during the assignment than the TEQ estimated, do I owe the employer? Usually no, if the policy excludes personal investment income. The employer’s hypothetical tax was based on assignment compensation only.

Does TEQ cover my spouse’s tax on spousal income? Some policies do. Depends on the specific agreement. Spousal employment income is usually NOT covered.

What happens if I quit during the assignment? TEQ coverage typically stops at termination. Year-end reconciliations for the partial year are still done. Some policies claw back gross-ups from the employee’s final paycheck.

How does TEQ interact with an IRC §911 foreign earned income exclusion? §911 (up to $126,500 in 2025 for US citizens working abroad) reduces US tax. TEQ typically takes the §911 exclusion into account when computing hypothetical US tax.

Is the gross-up itself taxable? Yes. The gross-up is wages. The gross-up must be grossed up further to cover its own tax, producing an iterative calculation (commonly solved to convergence using software).

Next step

If you are negotiating an expat assignment or currently on one, request a copy of your employer’s full TEQ policy document. Specifically confirm: equity treatment during and after the assignment, coverage scope for personal investment income, and end-of-assignment reconciliation procedures. For large grant values, model the TEQ output for at least one full year to see the real numbers.