Tax Treatment on the Grant Of Shares under Employee Share Options and Employee Share Ownership Plans

Employee Share Options (“ESOP”) and Employee Share Ownership (“ESOW”) Plans are typically used to incentivise and retain talent in an organisation. These Plans reward employees with a share in the company’s success through equity ownership. 

Under an ESOP Plan, qualifying employees are granted options to acquire shares in their employer entity (or its parent company) at a pre-determined preferential price at a future date. In contrast, an ESOW Plan grants qualifying employees the right to own a certain number of shares in their employer entity (or its parent company) either for free or at a price below market value. There may be a vesting period involved for such shares granted to the employees.

This article outlines the tax implications for employees in their exercising of options granted to them under an ESOP Plan and the vesting of shares under an ESOW Plan. It also covers the relevant compliance and reporting obligations for the employers.
 

Tax Implications for Employees

Basis of taxation

Employees are subject to tax in Singapore on gains or profits derived from the exercise of options under an ESOP Plan or acquiring shares under an ESOW Plan at a price below market value if these benefits are conferred by virtue of their employment in Singapore. The taxability event applies even if the employee is outside Singapore at the time of exercising the options or when the shares vest.

Conversely, any gains or profits derived from the exercise of options under an ESOP Plan or the vesting of shares under an ESOW Plan will not be subject to tax in Singapore if such options and rights are granted to employees in connection with their overseas employment even if the exercise or vesting event takes place while the employees are in Singapore.

Taxation of ESOP and ESOW gains

The timing for reporting and the taxation of gains derived from exercising ESOP options or the vesting of shares under an ESOW Plan will depend on whether there are selling restrictions imposed on such shares.  The taxing events are summarised below.
 

Options granted under an ESOP Plan

• No tax is payable at the date of grant.
• Gains are taxed at the date of exercise*.
• Computation of gains to be brought to individual income tax:
  • Open market value of shares as at the date of exercise *
  • Less: Price paid by the employee
  • Net gain to be brought to tax

* or as at the date when selling restrictions are lifted.

Rights granted under an ESOW Plan

• Gains are taxed at the date of grant or later when the shares are vested
• Computation of gains to be brought to individual income tax:
  • Open market value of shares as at the date of grant or vesting*
  • Less: Price paid by the employee
  • Net gains to be brought to tax 

*  or as at the date when selling restrictions are lifted. 

Tax Implications for Employer

The Singapore employer entity must declare ESOP or ESOW gains in the “Return of Employee’s Remuneration” (i.e. Form IR8A) along with the “Details of gains or profits from ESOP/ESOW Plans” (i.e. Appendix 8B) for for the relevant Year of Assessment (“YA”) even if the parent company of the Singapore employer grants the share options or awards.

For instance, if ESOP or ESOW gains are taxable in calendar year 2025, they must be reported in the YA2026 forms.

A company is allowed tax deduction for treasury shares transferred (but not if new shares are issued) to its employees under an ESOP or ESOW Plan. Tax deduction is allowed on the actual cost incurred in acquiring the treasury shares less any amount payable by employees for such shares.

Where a holding company transfers its treasury shares to employees of a subsidiary under an ESOP or ESOW Plan, the subsidiary is allowed tax deduction if the holding company recharges it for the shares transferred.  Tax deduction is allowed to the subsidiary based on the lower of actual cost incurred by the holding company to acquire the treasury shares and the recharge, reduced by any amount payable by employees for the shares.

For both treasury shares and shares administered through a special purpose vehicle, the timing of tax deduction for costs incurred by a company for shares transferred to employees under an ESOP Plan is the date the options are exercised. As for an ESOW Plan, it is the date the shares are vested or the date of share grant if there is no vesting condition. 

Where the company is charged for the cost of the shares transferred by its holding company or the special purpose vehicle who administers the scheme, tax deduction is allowed when the shares vest to the employees or when the company is liable to pay the recharge for the shares, whichever is later. 

In the 2025 Budget Statement delivered by the Minister for Finance on 18 February 2025, it was proposed that, from YA 2026, payments made to the holding company or a special purpose vehicle for the issuance of new shares of the holding company under an ESOP or ESOW Plan will be allowed a deduction based on the lower of (a) the amount paid by the company and (b) the fair market value (or net asset value) of the shares at the time they are applied for the benefit of the employees, reduced by the amount paid by employees for such shares. 
 

In our next article, we will explore the key tax considerations for ESOP/ESOW shares granted to expatriates working in Singapore. Stay tuned!