Personal tax in Singapore is not a very complex matter, usually. However, there are some scenarios that can get you confused. For example, when you buy or get awarded with the shares of the company you’re working in, what should you consider while you complete your personal taxation? Are you supposed to pay tax on the shares? We explain the impact of having an ESOP as part of your employment income.

So what exactly are ESOPs/ESOWs?
We’re talking about you employment income here. There are two ways of obtaining shares of the company you’re working in or in a parent company – via ESOPs and ESOWs.

Employee Stock Options (ESOPs) are basically rights to buy shares of your employer, i.e. a share in the company’s common stock.

Employee Share Ownership (ESOWs) are share awards, restricted stock units of your employer /the ultimate parent company.

What are the tax consequences?

What you will be taxed on
ESOPs and ESOWs work similarly. As an example, let’s have a closer look at ESOWs.

While working in London, you were given 1,000 shares of the UK company as a bonus. However, you can only sell these shares after a period of 1 year. During the year, you relocated to Singapore where you were given another 1,000 shares as performance incentive.

The tax effects of these two share awards in Singapore are:

Taxable Not taxable
Shares given in London X
Shares given in Singapore X

Why are the shares given in London not taxed in Singapore? Because they were given to you prior to commencement of your Singapore employment, even though you were only able to sell the shares while in Singapore. The event of awarding these shares happened while you were a foreigner residing outside Singapore.

When you will get taxed
In the above example, the shares that you received in Singapore are taxed as on the date they were granted to you, commonly known as the grant date. However, you need to declare them to IRAS only in your year-end tax filing.

On the other hand, the shares that you received in Singapore are taxed here. This is because they are provided in respect of your employment in Singapore.

During your Singapore employment, you were awarded additional 500 shares with a restriction that you will have access to them after two years. Before the end of the two-year waiting period, you completed your Singapore employment and relocated back to your home country.

Here, the 500 shares will still be taxed to you in Singapore. It will be your employer’s responsibility to make the necessary declaration to IRAS. This is known as the “deemed exercise” rule and it is applied one month prior to your departure from Singapore. To make it easier to understand, this portion is considered as part of your employment income and will be declared by the employer in the tax clearance declaration for the employee.

Also Read: The 6 most fashionable tax incentives for Singapore startups

How the tax on ESOPs/ESOWs is calculated
How is the value of ESOPs calculated? Again this is easily explained with the help of an example

The market value per company share is S$5. You have been given the shares at the nominal price of S$1.

  1,000 shares given to you upon arrival in Singapore:

The amount taxed on you will be S$4,000 = (S$5-S$1)*1,000. This is called taxing the gains on exercise of ESOPS. So essentially the bearer gets taxed on the gains made on ESOPs and not on the actual market price.

  500 shares awarded in Singapore but accessible after  two years:

Assuming that your employment ceases before end of two-year waiting period, IRAS will apply the “deemed exercise” rule (see above). You will be taxed on S$2,000 earned ((S$5-S$1)*500), irrespective of whether the shares are in your possession or not.

So to summarise, the ESOPs/ESOWs are taxed in Singapore only if they pertain to your Singapore employment and while you are physically present in Singapore.

If you’re a business owner considering to issue ESOPs to your employees, look out for our next article on how to do it right.

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