ESOP (Employee Stock Ownership Plan) in Hong Kong

In this article, we will elaborate on the concept of ESOPs in Hong Kong including the regulations and challenges of ESOPs in Hong Kong.

ESOPs, or employee stock ownership plans, are stock-based compensation programs that offer the right to buy stock in the company they work for. While ESOPs are very popular among startups and employees in Hong Kong. In fact, ESOPs are considered as a powerful strategy for attracting and retaining top talent in order to drive company growth. However, there is a lot to consider while implementing and managing ESOP in Hong Kong. In this article, we will elaborate on the concept of ESOPs in Hong Kong including the regulations and challenges of ESOPs in Hong Kong.

ESOP in Hong Kong

From a business perspective, Hong Kong has a highly educated workforce, sophisticated business and professional communities, stable policy, a favorable business environment and a highly developed capital market. So you would be a little skeptical when it comes to the idea of introducing an ‘employee stock ownership plan’ as a business strategy to attract and retain top talent in Hong Kong. But ESOPs are not only good strategies for business competitiveness or growth but also a powerful tool for rewarding employees in Hong Kong. Thus, it is essential to understand ESOP in Hong Kong before implementing these programs. The following section of the article will cover the basics of ESOP.

Understanding ESOP in Hong Kong

ESOPs are a type of stock-based compensation that is usually implemented in order to incentivize employees. In essence, under ESOPs, options are granted to employees that provide a right to buy shares at a predetermined price after a certain period of time. The options can be exercised anytime before the predetermined vesting period expires. ESOPs provide employees with a stake in the company, and in turn, these employees will be more dedicated to the company’s success. As a result, ESOPs can be an excellent tool for business competitiveness or growth in Hong Kong.

How does ESOP work in Hong Kong?

Well, under ESOPs, employees in Hong Kong are provided with a right to buy shares in the company they work for, based on certain terms and conditions. Basically, options are granted with a predetermined price known as strike or exercise price that is exercisable after a certain period of time known as the vesting period. Now, you might wonder what these terms are? As such, the strike price is the price at which the shares can be acquired, the vesting period is the period of time during which the employee must hold the options, and exercising of options refers to a process of actually buying the shares after all the conditions are met. Hence, the mechanism of ESOP in Hong Kong works similarly as the traditional stock option plans work.

Benefits of having an ESOP in Hong Kong

In essence, ESOPs are a great way for companies, especially startups, to grow their business and reward employees for their loyalty and commitment to the company. Here are a few benefits of ESOP in Hong Kong:

Benefits of having an ESOP in Hong Kong

  • Attract talent – ESOPs, like any other stock-based compensation plans, can be a powerful tool to attract and retain top talent in Hong Kong. A good example of this is the fact that ESOPs are used frequently by startups in order to incentivize their employees.
  • Keep employees motivated – With the financial benefit of ESOPs, employees will be motivated to work more effectively and efficiently for their company. Hence, the implementation of ESOPs can help a company in Hong Kong to be competitive in the market.
  • Maintain strong employee and employer relationship – Last but not least, the shares received by employees under an ESOP can be an excellent way to align the interests of employees and their employers. It can also be used as a powerful tool for corporate governance and corporate social responsibility.

How to set up an ESOP in Hong Kong?

Now that you have a fair idea of what ESOPs are, let us learn how to setup ESOP in Hong Kong. During the process of implementing ESOP in the company, the ESOPs program must be approved by the shareholders at the annual general meeting. Additionally, the board of directors must approve the same. Further, an Option Certificate will be issued after the plan’s execution. The rules and regulations for Employee Stock Ownership Plans are established by this certificate such as vesting schedules, number of shares granted, strike price, and other related information. Thus, it is essential for a company to complete all the prerequisites and have all the documents in place before implementing ESOP in Hong Kong.

IRD regulation for share-based compensation in Hong Kong

IRD (Inland Revenue Department) is the government organization that manages the taxation and corporate affairs of companies in Hong Kong, including employee stock ownership plans. The following are the main regulations that IRD has issued to manage the share-based compensation plans in Hong Kong:

  • Employer’s return – On the first working day of April 2022, the Hong Kong Inland Revenue Department (“IRD”) will issue the Employer’s Return of Remuneration and Pensions (Form B.I.R. 56A) for the fiscal year ended 31 March 2022 (i.e. the Year of Assessment 2021/22) to most Hong Kong employers. For each of the following instances, a separate form (Form I.R. 56B) detailing the compensation provided to each employee must be filled out and sent along with Form B.I.R. 56A when filing a Form B.I.R. 56A:
    • An employee with an annual salary of HK$132,000 or more (single person)
    • Married employee
    • Part-time employee
    • An employee of an overseas company
    • Director
  • Employee-assigned work in Hong Kong – When an expatriate is seconded or assigned to a Hong Kong firm, the company is required to declare the taxable compensation received by the expatriate by filing the pertinent Employer’s Returns, including the I.R. 56E. Secondment means that an expatriate will continue to be employed by their overseas employer while working in Hong Kong. The assignment means that an employer in Hong Kong will hire a foreign national directly. Unless specifically exempted by applicable Hong Kong tax rules or by a double tax agreement that Hong Kong has signed with another jurisdiction, the expatriate will be subject to the Hong Kong wages tax under either strategy.
  • Hong Kong or non-Hong Kong sourced employment – The compensation earned by an expatriate for services rendered both inside and outside of Hong Kong is taxable if the source of the employment is in Hong Kong. If certain requirements are met, the expatriate may apply to the IRD for a full exemption from salary tax on his or her remuneration if they spend most of their time providing services outside of Hong Kong. Only the percentage of an expat’s compensation received for services performed in Hong Kong is liable to salary tax if the employment source is outside of Hong Kong. The total number of days the expatriate spends in Hong Kong during the assessment year, which runs from 1 April to 31 March, is typically used by the IRD to calculate the amount of taxable income.
  • Individual tax return – Unless specifically exempted, foreign workers in Hong Kong must complete and submit Individual Tax Returns just like native Hong Kong employees. While the IRD will provide individual taxpayers with Individual Tax Returns for the Year of Assessment 2021/22 on June 1, 2022, it may also provide certain expatriates with Provisional Individual Tax Returns after the IRD has been notified by their employers of the start of their secondment or assignment. The due date for filing Individuals Tax Returns under not involving sole proprietorship is 2 July 2023, while under involving sole proprietorship is 1 September 2023.
  • Stock awards and share options – A benefit plan known as an ESOP often grants employees a specified level of ownership or interest in the corporation or its affiliated businesses. To encourage employees to meet performance goals and align their interests with those of the shareholders, employers may offer them share options or share awards (such as restricted stock units, or “RSUs”) under an ESOP. By incorporating a vesting time, ESOP can also be used to lower turnover rates and ease the financial strain on employers. Other types of employee benefit programmes exist as well, such as phantom shares, stock appreciation rights, etc.

Challenges of setting up and managing an ESOP in Hong Kong

Below are some of the challenges that employers may face during the implementation of an ESOP in Hong Kong:

Challenges of setting up and managing an ESOP in Hong Kong

  • Manual management – Traditionally, manually managing, tracking, and implementing ESOPs for employees can be tedious and labor-intensive. In this digital age, it is essential to adopt digital solutions that simplify the management and implementation of ESOPs, thus minimizing the administrative burden on employers.
  • Remote employees – Globalization of the workforce has presented difficulties for businesses implementing ESOPs worldwide. At the moment, setting up their Central Depository (CDP) accounts, receiving physical offer letters, and having almost no real-time access to their equity plan information for global participants need tiresome administrative procedures with HR.
  • Misalignment of share value – Due to a lack of awareness of how equity is a sort of compensation and appreciation for their efforts, present cultural habits are more oriented toward short-term benefits. It is, therefore, imperative for employers to clearly understand and track the value of the shares being offered to their employees and keep them informed of investment opportunities.
  • Lack of internal resources – When it comes to the management and administration of an ESOP, a business can be faced with issues such as the scarcity of internal resources, lack of employee engagement, or high turnover rates. A dedicated team can help alleviate these challenges while increasing the business’s reach in attracting talent.
  • Non-digital record keeping – Collection and tracking of paper records for ESOPs can be a tedious task for employers, especially with the high level of compensation that is often involved. Why not automate these processes and thus reduce costs by embracing the digitalization of ESOPs?

How does ESOPs tax work in Hong Kong?

This type of stock option plan is exempt from taxes. Salaries taxes continue to apply when an employee exercises the plan’s option. Both the employee and the employee must report this to the Inland Revenue Department, but ESOPs are not considered relevant income. It is important for employers to make sure that employees receive notification about the option before it is exercised, and all the details related to ESOP taxation in Hong Kong is well defined. As a result, the employee must calculate the gains based on the exercise price.

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