Singapore businesses are known to compete healthily and fiercely for qualified employees. Healthy competition like this is beneficial to the business and the economy at large since they result in the recruitment of qualified workers. However, startups are outclassed in this regard because they cannot attract a favourable workforce with good pay in comparison to multinationals and larger firms.
However, attracting top talent is essential for the survival and growth of any business. As a result, alternative compensation and incentives are being created to recruit or retain quality employees. An Employee Share Option Plan (ESOP) is a common method in Singapore. To take advantage of the plan, employers and employees must understand how it operates and how it is taxed.
An Employee Share Option Plan (ESOP) is a type of employee compensation that allows employees to purchase company stock at a predetermined price, usually at a discount to the market price. This type of compensation is frequently used by businesses, particularly startups, to attract and retain top talent, particularly by startups and is typically provided to employees as part of their overall compensation package.
In Singapore, ESOPs are often arranged as stock option plans, in which the employee can purchase a certain number of shares at a specific price over a set period. However, despite being promised as such, it is only a stock once it is granted to an employee.
The price at which qualified employees are offered the option is known as the Exercise Price. It is typically set at a discount to the market price of the company’s shares at the point when the option is granted. The employee may exercise the option at any time during the exercise period if they believe that the market price of the shares will rise in the future.
Employees can also be given other equity remunerations like Restricted Stock Units (RSUs). Read our article to know how Stock Options and Restricted Stock Units are different.
How the ESOP is Taxed in Singapore?
Both employers and employees in Singapore need to know about the tax implications of ESOPs in the country. This is because it can significantly impact the overall value of an employee’s remuneration and also the tax breaks an employer might receive. Employers must ensure that their ESOPs are structured in accordance with regulatory requirements to qualify for tax breaks and avoid penalties or fines.
It is also critical that they provide employees with clear and accurate information about the tax treatment of their ESOPs and how they can manage their tax liabilities. By properly understanding the tax implications of ESOPs, employees can become aware of tax breaks available through ESOPs and seek ways to become eligible for them.
Tax Implications Of ESOP For Employees
Not all income derived from ESOP is taxable. What is subject to taxation is the difference between the market value of the shares at the time of exercise and the exercise price. The term “exercise” refers to using available options to purchase stock in the company. The percentage taxed on this gain (the difference between market value and the exercise price) is determined by the employee’s usual remuneration and should be taxed as per the personal tax range of 0 to 22%.
However, it should be noted that an employee will not be taxed if he or she keeps the shares acquired through an option exercise. The profit or loss resulting from such withholding is treated as capital gains or losses and is not taxable in Singapore.
Tax Implications For Foreign Employees
If an employee is granted an ESOP while working abroad, the gains are also not taxable in Singapore. However, if the employee is granted any ESOP in Singapore, the Deemed Exercise Rule and the Tracking Option Rule apply.
What are the Deemed Exercise Rule and Tracking Option Rule?
According to the Deemed Exercise Rule, if employees do not exercise their options within a certain period, they are deemed to have been exercised. The employee is, therefore, liable for the same income tax on gains from the option as if he had exercised it. Likewise, the Tracking Options Rule allows companies to grant options with varying exercise prices and vesting periods. This is allowed as long as the options are tracked separately in the company’s books. This allows for easy tracking of employees’ ESOP gains.
Tax Deferment For An Employee
Employees with stock options under an ESOP are not eligible for tax deferment. There are, however, exceptions:
Restricted Stock Unit (RSU)
Let’s assume an employee exercises stock options granted under a “Restricted Stock Unit” (RSU) plan. Also, the shares acquired are subject to a vesting period before they can be sold. The employee may be able to apply for tax deferment until the vesting timespan ends and the shares can be traded.
Qualified Employee Equity-Based Remuneration Scheme (QEEBR)
Another way to be eligible for tax exemptions is for the employee to exercise stock options and use the proceeds to buy stock in the company or a subsidiary. Under the Qualified Employee Equity-Based Remuneration Scheme (QEEBR), gains from selling those shares are exempt from taxation. However, specific eligibility requirements and conditions must first be met for participation in this scheme.
Tax Implications Of ESOP For Employers
Employers in Singapore are typically exempt from ESOP tax obligations. They may be required, however, to report the grant of stock options to employees in their annual tax return and to withhold tax on the employment income derived by the employees from exercising the options. Employers are required to notify employees of any gains resulting from the exercise of stock options. This must also be reported to the Inland Revenue Authority of Singapore (IRAS) using Form IR8A.
Tax Deferment For An Employer
The Inland Revenue Authority of Singapore (IRAS) provides incentives to employers who offer ESOPs to their employees. Employers are entitled to a tax deduction equal to the market value of the shares or options at the time of grant, excluding any amount paid by the employee for the shares or options.
Furthermore, an employer or company may be eligible for an additional exemption if an employee holds the shares or options for a specified period. If the employee holds the shares or options for at least three years, the company will be exempt from paying taxes on any gains from the sale of the shares or options. However, if the shares or options are held for at least one year but less than three years, the company will be eligible for a partial tax exemption on the gains from the sale of the shares or options.
Singapore’s ESOP has proven to be an effective scheme to help employers secure and retain the best talents. It also gives employees a sense of belonging as they become a part of the business. With ESOP subject to taxation, knowing the ins and outs will help employees get the best out of the plan.
Taxation is based on several factors, the most important of which is the price at which the shares are acquired, and is governed by the Income Tax Act. Knowing your ESOP tax obligations has advantages for both employees and employers. Given this and the complexity of the tax obligations, it is critical to regularly seek professional advice on them.