Tax Treatment for Shares and Options Schemes

Source: IRAS Circular - Changes To Tax Treatment of Employee Stock Options And Other Forms Of Employee Share Ownership Plans

For Personal Income Tax

1) Stock Options
An individual who is granted Stock Options (ESOP) while exercising employment in Singapore, the full amount of ESOP gains, irrespective of where the ESOP is exercised would be regarded as gains from employment derived from Singapore and come under S 10(1)(b). Note: If individual is granted ESOP while he is outside Singapore AND Not a tax resident, he is not taxed.

Gain is derived based on (Open Market Price of the shares at the time of exercise of the ESOP and the price paid for such shares).

Example 1:- ESOP granted while an individual is exercising employment in Singapore and he exercise his option overseas and is tax resident of Singapore.

Verdict => ESOP is taxable in Spore.

Mr Mahan, a Singapore citizen is granted ESOP on 25.02.03 by his employer, XYZ Company Ltd, which is a Singapore incorporated company. During his employment with XYZ Company Ltd, Mr Mahan performs his employment duties substantially in Singapore, but is required to travel out of Singapore occasionally to render services to XYZ Company Ltd’s clients in the Asia Pacific region. Mr Mahan is seconded to work for a related overseas company from 1.1.04 onwards. During his secondment overseas, Mr Mahan exercises his ESOP on 15.11.04 and ESOP gains amount to $100,000. His salary from his overseas employment of $250,000 is not remitted to Singapore during the
year 2004. Mr Mahan also does not have any other income from Singapore during the year 2004. Assuming that Mr Mahan is a tax resident of Singapore for YA 2005 (i.e. he
does not wish to avail himself of the concession to opt to be treated as a non-resident for YA 2005) and assuming YA 2003 tax rate structure applies:

Mr Mahan’s Income Tax Computation - Year of Assessment 2005

Salary from overseas employment (not remitted) $NIL
ESOP gains (derived from Singapore) $100,000
Less: Earned income relief (assume no other personal 1,000
reliefs claimed)
Chargeable income 99,000
Tax on first $80,000 = 4,600
On the next $19,000 @15%= 2,850
Tax payable 7,450

Example 2 - ESOP granted while the individual is exercising employment overseas
i.e. prior to his posting to Singapore

Verdict => ESOP is NOT taxable in Spore be'cos the ESOP was granted while o/seas.

During his employment with EFG-US, Mr Bravo, an American citizen was granted ESOP by the US parent company on 15.7.99. Subsequently, he was seconded by EFG-US to head its related subsidiary in Singapore, EFG Singapore from 21.5.01. On 15.1.02, Mr Bravo exercised the ESOP that was previously granted during his employment with EFG-US and derived ESOP gains amounting to $250,000. Mr Bravo’s salary (excluding the ESOP gains) for the full year of 2002 amounts to $500,000. Mr Bravo has not remitted any foreign income to Singapore or derived any other income from Singapore
during the year 2002. As Mr Bravo is a tax resident of Singapore for YA 2003:

Mr Bravo’s Income Tax Computation Year of Assessment 2003
$
Salary 500,000
Less: Earned income relief (assume no other personal 1,000
reliefs claimed)
Chargeable income 499,000

Tax on first $320,000 47,000
On the next $179,000 @ 22% 39,380
Tax payable 86,380

When is the ESOP Gains taxable?

If no vesting period or moratorium, it is taxable when the options are exercised.
If moratorium or vesting period involved, it becomes taxable when the moratorium is lifted (and as such need to use market price at the date when moratorium is lifted).


2) Shares Granted (ESOW)

If granted shares while in employment in Singapore, will be assessed to tax in Singapore. This is regardless of whether he is in or outside Singapore at date of vesting. The test is whether, when the shares were granted, was individual exercising employment in Singapore.

NOTE: FOR CORPORATE TAX, if individual is not taxed, Corporate cannot claim for tax deduction the expense relating to the granting of shares.

Gains on ESOW becomes taxable when the shares are granted, UNLESS there are vesting conditions imposed, for which gains become taxable when the vesting conditions are satisfied. So the key is when does the person gets the beneficial interest, if gets it while overseas, not taxable. If gets it when in Singapore then taxable.

When is the ESOW Gains taxable?

If no vesting period or moratorium, it is taxable when the shares are granted.
If moratorium or vesting period involved, it becomes taxable when the moratorium is lifted (and as such need to use market price at the date when moratorium is lifted).