Our company is a US based software start-up. We have 3-4 contractors in India (Indian citizens, never worked in US) and we pay them directly. We are considering issuing stock options to them. I would like to know if there are legal and tax implication on issuing stock options to them?
I would like to know if there legal and tax implication on issuingLegal: it may affect your corporate structure. For example, non-US people can only be shareholders of a C -Corp, so if you're counting on an S-Corp preferential treatment - forget it.
stock options to them?
Tax: depending on the Indo-US treaty and Indian law, this is probably going to be a taxable event for them and they'll have to pay income taxes on the value of the options received, either now or when exercised.
If your startup is a disregarded entity (e.g.: LLC) then there may be some more issues.
Talk to a tax adviser experienced in Indo-US tax issues. You should also ask an attorney about the potential legal issues. I'm neither a tax adviser nor an attorney.