(ESOP) ANd EMPLOYEE SHARE OWNERSHIP ... - bdo singapore

TAXATION OF EMPLOYEE
STOCK OPTIONS (ESOP)
and EMPLOYEE SHARE
OWNERSHIP PLANS (ESOW)
IN SINGAPORE
History
Prior to 1 January 2003, the gains on exercise of stock options
were subject to tax in Singapore if the individual exercised the
options while physically present in Singapore or while holding
an employment or office in Singapore. This treatment was
applicable even if the stock options were granted as a result of
a previous employment outside Singapore. Such treatment had
inadvertently resulted in double taxation as some countries
taxed portion of gains attributable to the period of the
individual’s employment in that country.
In response to the industry feedback of the double taxation
issues as highlighted to IRAS, the taxation of stock options was
subsequently revised from 1 January 2003.
Currently
With effect from 1 January 2003, the gains from the exercise of
stock option are taxed to the extent that they are connected
with Singapore employment. As such, gains from stock options
granted in respect of overseas employment will not be taxed in
Singapore, even if the stock options are exercised in Singapore.
Correspondingly, gains from stock options granted for Singapore
employment will be taxed in Singapore no matter where
the stock options are exercised. The taxable value would be
equivalent to the difference between the fair market value on
the date of exercise and the exercise price.
a) restricted ESOPs where the moratorium has not been
lifted on the date the individual ceases employment in
Singapore;
b) shares granted under any ESOW Plan where the beneficial
interest from the ownership of the shares has not yet
vested on the date the individual ceases employment in
Singapore;
c) restricted shares granted under any ESOWs Plan where the
moratorium has not been lifted on the date the individual
ceases employment in Singapore.
The “deemed exercise rule applies to the following categories of
employees upon cessation of their employment in Singapore:-
1. Foreigners and
2. Singapore Permanent Residents leaving Singapore
permanently.
Deemed Exercised Rule
Under this revised tax treatment , the “deemed exercise rule”
was also introduced to overcome the risk of not being able to
collect the tax on the gains in respect of unexercised options
of a foreign employee leaving Singapore upon completion of
assignment. Under this rule, an employee is deemed to have
exercised all options granted during his Singapore employment
and accordingly tax would have to be paid on such deemed
gains prior to leaving Singapore. The deemed exercise rule
applies to the following which are granted to individual while
exercising employment in Singapore:

The taxable value under the deemed exercise rule is computed as:
A – B
Where
A – is the open market price of the shares one month before the
date the individual ceases employment or the date of the grant
of the stock options, whichever is the later ; and
B – is the
• exercise price payable under the unexercised ESOP; or
• exercise price of the shares under restricted ESOP; or
• price paid or payable for shares acquired under an ESOW Plan
with vesting imposed (with no moratorium); or
• price paid or payable for restricted shares acquired under an
ESOW Plan, as the case may be.
Tracking Option
As an alternate to the deemed exercise rule, the employer
may elect for the tracking option scheme instead. Under this
scheme, the employer is required to compute and to report
the gains to the IRAS. However, the payment of taxes may be
deferred to the date when the options are exercised. In order
to be eligible for the tracking option, employers are required to
provide an undertaking that taxes would be paid. Additionally,
there are several conditions that need to be satisfied in order to
be eligible for the tracking option.
Prior approval must be sought from the IRAS before the
employer could operate under this scheme.
The final gain must be reported to IRAS in order to process the
employee’s tax clearance assessment prior to departure from
Singapore.
However, in the event that the actual gains derived upon the
exercise of the options are lower than that computed under the
“deemed exercise” rule, the employee may apply to the IRAS to
have a reassessment of his tax liability:-
• Within 6 years from the year of assessment following the year
in which the deemed exercise rule is applied ; and
• To furnish the relevant documentation to demonstrate that
the actual tax liability is lower than that computed under the
“deemed exercise rule”.
Rohan Solapurkar
Tax Director
Tax Advisory
rohan@bdo.com.sg
Direct: +65 6828 9171