Employee Share Option Scheme (ESOS) and ESOW Plans: Singapore Tax Treatment for Employers and Employees

Singapore companies increasingly use employee share options and share ownership plans to attract and retain key staff, especially in the startup and technology sectors where cash salaries alone cannot compete with regional or Silicon Valley offers. But the tax treatment of these schemes catches out both employers and employees more often than almost any other area of payroll compliance, because the tax point is not the date the shares are granted, and in many cases is not even a date the employee controls.

An Employee Share Option Scheme (ESOS or ESOP) gives an employee the right to buy company shares at a fixed price in future, while an Employee Share Ownership (ESOW) plan, which includes restricted share awards and share purchase plans, gives the employee actual shares subject to a vesting or moratorium period. Both are taxed under Singapore’s employment income rules, but at different points in time and, for foreign employees leaving Singapore, under a rule that can trigger a tax bill before any shares have even been sold.

This article sets out how the Inland Revenue Authority of Singapore (IRAS) taxes gains from ESOP and ESOW plans, what remains of the once-popular tax exemption scheme for qualifying companies, how the tax deferral scheme actually works, and what employers must report on Form IR8A and Appendix 8B each year.

How ESOP and ESOW gains are taxed in Singapore

Gains from ESOP and ESOW plans are treated as employment income and taxed accordingly, not as capital gains. This matters because Singapore does not tax capital gains, so if these gains were treated as capital in nature they would escape tax entirely; IRAS’s e-Tax Guide “Tax Treatment of Employee Share Options and Other Forms of Employee Share Ownership Plans” makes clear that they are gains “in respect of employment” and therefore fully taxable under section 10(1)(b) read with section 10(5) of the Income Tax Act 1947.

ESOP: taxed on exercise

For a share option, the taxable gain is the difference between the open market value of the share on the date the option is exercised and the price the employee actually paid (the exercise price). No tax arises on the date the option is granted, and none arises simply because the option has vested but has not yet been exercised. The tax point is the act of exercise itself.

ESOW: taxed on vesting or release of restriction

For restricted shares, performance shares and other ESOW arrangements, the taxable gain is the open market value of the shares on the date the vesting conditions are satisfied (or the moratorium is lifted), less any amount the employee paid for them. Where shares are awarded outright with no restriction, the gain is simply taxed at the date of grant.

The deemed exercise rule for departing foreign employees

This is the trap that catches out the most people. Where an ESOP or ESOW plan is granted to an employee who is not a Singapore citizen, and the employee subsequently ceases Singapore employment (including relocating overseas or ceasing to be employed here) while still holding unexercised options or unvested shares, IRAS deems those gains to have arisen one month before the date of cessation of employment, even though no shares have actually been exercised, vested or sold. The employer must withhold tax on this deemed gain as part of tax clearance (Form IR21). As an alternative, the employer can apply to IRAS to use the “Tracking Option”, under which the employer undertakes to track and report the employee’s actual gains as and when the options are later exercised or shares vest, rather than triggering a deemed gain at departure. This has to be elected by the employer in advance and is not automatic.

What happened to the ESOP/ESOW tax exemption scheme

Many business owners still ask about “the ESOP/ESOW tax exemption for startups”, referring to the Equity Remuneration Incentive Scheme (ERIS), which used to give employees of qualifying start-ups, SMEs and other companies a partial exemption of 25% to 75% on their ESOP/ESOW gains, subject to caps of up to S$10 million over a 10-year period. This is worth correcting clearly: ERIS was phased out in Singapore Budget 2013 and has not applied to any new share option or restricted share grant made on or after 1 January 2014. It can still be relevant today only where an employee is holding options or restricted shares that were granted on or before 31 December 2013 and are only now being exercised or vesting. For virtually every company setting up a share scheme today, there is no equivalent partial tax exemption on ESOP/ESOW gains, and the full gain, calculated as described above, is taxable.

What remains genuinely current and useful for employees (not employers) is the Qualified Employee Equity-based Remuneration (QEEBR) Scheme, a deferral rather than an exemption, covered below.

The tax deferral scheme (QEEBR): how it actually works

Under the QEEBR Scheme, an employee who has a tax liability on ESOP/ESOW gains can apply to IRAS to defer payment of that tax for up to five years, with interest, rather than paying it upfront in the year the gain is assessed. This is commonly useful where an employee has exercised options or vested shares in an unlisted company and has no ready market to sell shares to fund the tax bill.

The scheme generally requires that:

• the employee was employed in Singapore at the time the option or share award was granted;
• the grant was made by the employing company or an associated company;
• the employer does not bear the tax on the employee’s ESOP/ESOW gains; and
• where the exercise price is at or above the share’s open market value at grant, the option cannot be exercised within one year of grant, and where the exercise price is below open market value at grant, it cannot be exercised within two years of grant, so that the plan is not simply a short-term cash-substitute arrangement.

The deferment application must be made together with the employee’s income tax return, generally no later than 18 April of the relevant year of assessment. Interest is charged on the deferred amount at 1.5 percentage points above the prevailing three-month compounded Singapore Overnight Rate Average (SORA), computed annually on a simple interest basis, and the maximum deferral runs to 31 December of the fifth year after the year of assessment in which the gain is taxable. Employers should note this is an employee-elected relief; the company’s role is limited to certifying the plan’s terms if IRAS asks.

Employer reporting: Form IR8A and Appendix 8B

Employers granting ESOP or ESOW plans have a specific annual reporting obligation, separate from ordinary salary reporting. Appendix 8B must be prepared and submitted together with the employee’s Form IR8A by 1 March each year, setting out the details of gains derived by the employee from ESOP or ESOW plans during the preceding year, including the type of plan, the grant date, the date of exercise or vesting, the open market value used, and the amount paid by the employee. Where the plan is claimed to be eligible for QEEBR or, for legacy pre-2014 grants, ERIS treatment, the employer must certify on Appendix 8B that the relevant qualifying conditions, including the applicable vesting or holding period, were actually met, not simply assumed.

Companies operating employee share schemes through payroll should read this alongside the wider annual payroll and CPF reporting cycle; see our related guide on Singapore payroll and CPF documents required for employers and on payroll processing timelines and benchmarks, since ESOP/ESOW gains are employment income for CPF purposes too, though CPF contributions are generally not payable on such gains as they are not cash wages within the meaning of the CPF Act.

Worked example

Assume a private company grants an employee options over 20,000 shares in January 2024, with an exercise price of S$0.50 per share, equal to the open market value at the date of grant. The employee exercises the options in March 2026, when the shares are independently valued at S$3.20 each.

• Open market value on exercise: 20,000 x S$3.20 = S$64,000
• Amount paid by employee: 20,000 x S$0.50 = S$10,000
• Taxable gain assessable in Year of Assessment 2027: S$54,000

Because the grant post-dates 1 January 2014, ERIS does not apply, and the full S$54,000 is added to the employee’s other employment income and taxed at the employee’s marginal personal income tax rate. If the employee cannot readily sell shares in the unlisted company to fund the resulting tax, and the exercise price was at or above open market value at grant (so the one-year minimum holding condition is satisfied here), the employee may apply under QEEBR to defer payment of the tax attributable to this gain for up to five years, with interest accruing on the deferred amount at SORA plus 1.5 percentage points. The employer reports the S$54,000 gain, the grant date, exercise date and valuation basis on Appendix 8B filed together with that year’s Form IR8A.

ESOP vs ESOW: a quick comparison

Common vesting and exercise timing traps

A few recurring issues are worth flagging for founders and finance teams running these plans:

• Assuming the exemption still exists. Advisers and even some accountants still describe ERIS as if it were current. It is not, for any grant made from 1 January 2014 onwards.
• Missing the QEEBR deadline. Because the deferment election must be made with the tax return by 18 April, an employee who exercises options late in the preceding calendar year has very little time to arrange a valuation and file the application correctly.
• Forgetting the deemed exercise rule when a foreign employee resigns. Employers must consider unexercised ESOP and unvested ESOW when filing Form IR21 for tax clearance of a departing non-citizen employee; failing to do so is a common cause of tax clearance delays.
• Valuing unlisted shares inconsistently. Because the taxable gain depends on open market value at exercise or vesting, not a contractually stated price, companies should keep a defensible, contemporaneous valuation on file, particularly around fundraising rounds when share value can move quickly.
• Late or incomplete Appendix 8B filing. This is filed together with Form IR8A, and the qualifying-condition certifications on the form are a common area IRAS queries during employer audits.

Founders considering how an equity scheme interacts with their cap table more broadly may also find our piece on Startup SG Equity’s deep tech expansion and structuring the cap table useful, alongside our separate guide to setting up ESOP share incentives for key employees, which covers the corporate and constitutional mechanics rather than the tax treatment. Directors granted options in their own company should also be aware of how this interacts with their remuneration reporting; see our note on CPF contributions for company directors in Singapore.

Conclusion

The tax treatment of ESOP and ESOW plans in Singapore is more nuanced than most founders expect: gains are taxed as employment income at exercise or vesting, not at grant; the once-generous ERIS exemption is now a legacy relief for pre-2014 grants only; and the current relief available is a deferral of payment under QEEBR, not an exemption of the gain itself. Employers also carry a distinct annual reporting duty through Appendix 8B, filed alongside Form IR8A, and must handle the deemed exercise rule correctly whenever a foreign employee with unexercised options or unvested shares leaves Singapore employment. Structuring the scheme correctly at the outset, and reporting it correctly every year after, avoids both an unpleasant surprise for the employee and a compliance gap for the employer. Readers can verify the current rules directly at IRAS’s page on ESOP and ESOW taxation or in the IRAS guidance on gains from the exercise of stock options, and for those weighing whether an equity scheme is the right retention tool at all, independent financial planning perspectives can also be a useful sense check before shares change hands.

To speak with the team at Raffles Corporate Services, you can email [email protected] or call, SMS, or WhatsApp +65 8501 7133. We are happy to assist with any queries.

– The Editorial Team, Raffles Corporate Services