Article

Taxes & ESOP in Singapore, what does it mean to you?

Estimated reading time:
5
minutes

Key Takeaways

  1. Gains from ESOP are taxable if you received them while exercising employment in Singapore
  2. ESOP is taxed in the year it is exercised
  3. If there are selling restrictions on the ESOP, it is taxed in the year the restrictions lift
  4. The Qualified Employee Equity-based Remuneration Scheme (QEEBR scheme) allows tax deferment on ESOP gains for up to 5 years with interest charge
  5. Foreigners or Permanent Residents who leave Singapore are subject to either the Deemed Exercise Rule or Tracking option

What is Taxable?

For ESOP granted on or after 1 Jan 2003, the gains are taxable if the individual is exercising employment in Singapore while stock options are granted to them.


This means, if you received ESOP or shares while working in Singapore or while your employment income is sourced from Singapore, those gains are taxable under Singaporean personal income tax. This is regardless of where the ESOP is exercised or where the shares vest.


Generally, the amount of taxable gains or profits is the difference between the open market price of shares at the time of exercise and the amount paid by the individual for the shares (exercise price). 


If you’d like to know more about how personal income tax rates are calculated in Singapore, click here!


Selling Restrictions

When there is a moratorium or selling restriction on the shares granted to individuals, the tax on ESOP gains will only apply on the date the selling restrictions are lifted.

Note: This guide is for ESOP taxation laws in Singapore after 1 Jan 2003. If you would like to know more, you can refer here to the official IRAS E-Tax guide to ESOP.

Taxable When Taxable Amount
ESOW with no vesting Taxed in the year the shares are granted Open Market Price (on date of grant) – exercise price
ESOP without selling restriction Taxed in the year the ESOP is exercised Open Market Price (on date of exercise) – exercise price
ESOP with selling restriction Taxed in the year the selling restriction is lifted. Open Market Price (on date the selling restrictions lift) – exercise price

*If the open market price of the shares is not readily available, a third party may be required to provide a valuation service. Alternatively, companies also frequently use last round valuation or the Net Asset Value (NAV). Consult an auditor for advice on your specific situation if you are unsure.


QEEBR & Tax Deferment

The QEEBR scheme allows for the payment of tax arising from stock option gains to be deferred for up to 5 years with interest charge.


The purpose of this scheme is to 1) ease the liquidity problems faced by employees who exercise their options without selling their shares and 2) facilitate the use of stock options as a remuneration tool.

Qualifying Criteria

Vesting Requirements

The QEEBR scheme applies to qualified ESOP that meet the vesting period requirements as prescribed by the SGX. 


For ESOP with an exercise price equal to or greater than the open market price at the time of grant, the minimum vesting period is 1 year.


For ESOP with an exercise price lower than the open market price at time of grant, the minimum vesting period is 2 years*.


*As it is a more common practise to set a lower exercise price, the second criteria will apply more often. 


Companies need not apply to IRAS for approval to be considered as qualified ESOP, however they should keep sufficient documentation to prove that the ESOP satisfies the vesting requirements. Companies are also required to certify on their employee’s QEEBR application that the plan is a qualified ESOP. 


Employee requirements

To qualify for QEEBR, the tax on ESOP gains should not be borne by any employer. 

The employee will also be disqualified from the scheme if: 

  • he is bankrupt 
  • he is a delinquent taxpayer based on IRAS’ record 
  • his tax on the stock option gains is less than $200
  • he is granted area representative status 
  • he is not allowed to settle his tax by instalments under existing guidelines


If you are an employee looking to apply for the QEEBR tax deferment scheme on your ESOP gains, please refer to the IRAS page here


Deemed Exercise Rule

When a foreign employee ceases employment in Singapore with unexercised ESOP, the gains from these unexercised ESOP are taxed on a “deemed exercise” basis.


The deemed exercise rule applies when a) a foreigner ceases employment in Singapore or b) when a permanent resident leaves the country permanently or c) a permanent resident is posted to work overseas.


Under this rule, the employee is deemed to have received a final gain from the following:

  • Unexercised ESOP
  • ESOP with selling restrictions yet to be lifted
  • Unvested ESOP

The final gains are deemed as income received by the employee one month before the foreign employee ceases employment in Singapore or the date of grant, whichever the later. Thus, the taxable gains are:

Open Market Price of shares at (one month before employment ceases or date of grant, whichever the later) – exercise price 

If the actual gains are lower than the value calculated, contact IRAS. The tax liability may be reassessed as an administrative concession. 


Tracking Option

Tracking option serves as an alternative to the Deemed Exercise rule. This allows employers to track when the “income realisation event” of the foreign employee occurs and report to IRAS then. This refers to when the foreign employee a) exercises options that were unexercised, b) when the selling restrictions on ESOP are lifted.


With the tracking option, the employer takes responsibility for reporting, collecting, and paying the tax on the ESOP gains to the Singaporean government. 


For this option, the employer must be a Singapore incorporated company with an adequate HR and digital system to track the status of stock plans. The company must also meet capital requirements and have a good taxpayer record for the past three years. 

Conclusion

Keeping track of ESOP gains and what is taxable can be tedious and time consuming. If you are an employer in Singapore looking to use ESOP to build your business, we recommend using a dedicated management platform to monitor and issue ESOP to your employees.


At Svested, our all-in-one digital platform makes ESOP easy for you. Request a demo with us or chat with us on our chat box for more information!

Note: This guide is for ESOP taxation laws in Singapore after 1 Jan 2003. If you would like to know more, you can refer here to the official IRAS E-Tax guide to ESOP.