Employee Share Option Plans in Singapore are a valuable incentive for both start-ups and employees in the country. It is essential for companies that adopt ESOPs to understand the tax implications that surround ESOPs, both for the granting company and the employees who receive them.
Read on as we shed light on the key tax considerations related to ESOPs in the vibrant start-up ecosystem of Singapore.
Taxation of ESOPs in Singapore
ESOPs can be a boon for employees, but navigating the tax landscape can be challenging. In Singapore, ESOPs are primarily taxed at two instances:
Taxation upon Exercise: When an employee exercises their ESOPs by purchasing company shares, the tax is levied on any profit or gains arising from this exercise. The taxable amount is calculated as the difference between the open market value of the shares and the exercise price.
Taxation upon Lifting Selling Restrictions: If ESOPs come with selling restrictions, taxation occurs only when those restrictions are lifted. The taxable amount is again calculated as the difference between the open market value and the exercise price at the time the restrictions are lifted.
These tax implications are applicable to ESOPs granted to employees in Singapore. However, for ESOPs granted during overseas employment, taxation depends on the double taxation avoidance agreement between Singapore and the country in which the ESOPs were granted.
Taxation of ESOPs for Foreign Employees
Gains made by employees who receive ESOPs while working abroad are not taxable in Singapore because they are not considered income. Instead, Singapore’s double taxation avoidance agreement with the country where the employee received ESOPs is used to calculate the tax. However, for ESOPs granted to employees in Singapore, two rules apply:
Deemed Exercise Rule: This rule applies to ESOPs granted to foreign nationals who are employed in Singapore. Gains from unexercised ESOPs are regarded as income received by the employee once their employment has ended.
Tracking Option Rule: This allows employers to track when foreign employees realise gains from ESOPs and report those gains to the government.
It is worth noting that the deemed exercise rule does not apply when the employer has received approval to adopt the tracking option rule. ESOPs are also taxed when employees leave Singapore for more than three months, regardless of the reason.
ESOPs are a popular tool in the start-up ecosystem of Singapore for attracting and retaining top talent. Understanding the tax implications of ESOPs is essential for both companies and employees. While ESOPs offer significant incentives, it is crucial to navigate the tax landscape correctly and ensure compliance with Singapore’s tax laws. Consulting with tax professionals and staying up-to-date with the latest regulations is advisable to make the most of ESOPs while managing tax obligations effectively.
At Max Lewis, we provide an array of services, from asset-based valuations to transfer pricing services in Singapore. Our firm has been awarded the Best Business Valuation Consultancy Firm of the Year Award at the Corporate LiveWire Global Awards, as well as the Best Valuation Firm 2022 Award at the APAC Insider Singapore Business Awards, demonstrating our reliable services. Contact us today for tailored solutions that drive your business forward.
*The above represents our opinions and views and does not necessarily reflect the position of any entities mentioned.