ESOP (Employee Stock Ownership Plan) in Singapore

In this article, we will cover everything you need to know about ESOPs in Singapore.

In Singapore, an employee stock ownership plan (ESOP) is a plan which gives employees shares of the company they work for. To simply put, ESOP in Singapore offer employees the right to buy shares at a predetermined price after a certain period. While ESOPs are basically popular methods of stock-based compensation in various companies around the world. It can be a rewarding experience which encourages employees to work harder and likewise, it improves retention rates. With the increasing adoption of ESOPs in Singapore, it is essential for employers to have an in-depth understanding. In this article, we will cover everything you need to know about ESOPs in Singapore.

ESOP in Singapore

Singapore, located in Southeast Asia, is a prosperous country and an emerging economy. It has long been a preferred choice when it comes to business opportunities. In fact, with no foreign debt, strong government revenue, and a constantly positive surplus, Singapore’s economy is currently among the most stable in the world. While in regard to ESOPs, companies located in Singapore are constantly investing in their employees. As a matter of fact, ESOPs are considered as a powerful tool to reward employees. However, with the rapid changes in the current business environment, it is important that companies develop a sound strategy when it comes to ESOPs. In the following section, we will look at the basic concept of ESOP in Singapore.

Understanding ESOP in Singapore

The term ESOP stands for Employee Stock Ownership Plan. Basically, an ESOP is an equity compensation tool which allows employees to be part owners of the company they work for. In other words, ESOP offers employees the right to acquire shares of the company they work for at a set price after a particular period of time. An ESOP works in a manner similar to stock options in private companies, but it has a long-term focus. Typically, it allows employees to share ownership and reap the benefits of a company’s growth. Thus, ESOP in Singapore is a great way to incentivize employees.

How does ESOP work in Singapore?

When it comes to ESOPs, there are a few factors that companies should take into consideration. From drafting rules to final issuance, the execution of ESOP must be handled carefully. In order to get the best out of ESOP, it is important for companies to prepare a detailed plan. Well, the first step is to identify and select the employees who are eligible for ESOPs including the number of shares to be granted, the price at which they will be issued, the vesting schedule, and so on.

Further, take approval from the board of directors and start granting the ESOPs. So, ESOPs are typically granted with the vesting period i.e. the employee must wait for a set number of years before they can buy the shares. Additionally, the price at which the shares can be bought is referred to as the strike or exercise price. Overall, the process of ESOP in Singapore is normally structured similarly to stock option plans.

Benefits of having an ESOP in Singapore

To begin with, ESOPs are an excellent way to reward employees in a company by giving them a portion of ownership. Here are a few more benefits of ESOP in Singapore:

Benefits of having an ESOP in Singapore

  • Motivates staff – When employees own shares in the company they work for, they will be more motivated to work hard. This helps improve productivity and retention rates in the company.
  • Loyalty from staff – By giving employees ownership in their company, it builds a sense of loyalty and togetherness which strengthens the overall culture in the workplace.
  • Better relationship with staff – As ESOPs last for a long period of time, it helps build long-term value for employees. Likewise, it helps to align the interests of employees and the company.
  • Attract talents – When employees are rewarded with shares, it encourages them to share their knowledge and experience with other individuals. In turn, this helps to attract new talent for the company.

How to set up an ESOP in Singapore

To setup ESOP in Singapore, there are a few basic steps that can be followed. Below mentioned are the three key steps to setting up an ESOP:

  • ESOP agreement and framing rules – This is the first and foremost step. Here, we will draft the agreement focusing on various aspects like vesting, date of grant, number of shares, strike price and other terms and conditions of ESOPs
  • Approval from board and shareholders – Once the rules and ESOP agreement are ready, they should be presented to the board and shareholders for approval. It is important that the board of directors takes all the necessary steps before they approve the ESOPs.
  • Granting of ESOPs – The final and often most crucial step is the granting of ESOPs. Here, the shares are allocated to employees. Once the ESOPs are granted, it is important to monitor and follow up with employees.

Restrictions of setting up ESOP in Singapore

When it comes to setting up ESOPs, we should keep certain things in mind. Well, ESOPs can be complicated and expensive at times. Companies are required to abide by a plethora of rules and regulations when implementing employee stock option plans. Additionally, these provide a variety of issuance scenarios, which might be confusing for managers with less knowledge.

In addition to this, the proportion of equity and dilution factors could have a direct impact on the company’s performance and value. The majority of business owners favour small, tightly-knit shareholdings for their organizations. However, if the company intends to grant ESOP options, it would result in equity dilution, which might not be good for current shareholders. Although, the most important restriction is that employees might be held under selling restrictions. Now, you might wonder what is selling restriction?

Selling restriction for ESOP in Singapore

As the name suggests, selling restriction prevents an employee from selling shares in a company for a certain period of time. A company’s ESOP may contain a selling limitation or a time period during which employees are not permitted to sell their shares. The duration of the restriction may depend on various factors like the stage of the company, terms and conditions of ESOPs, etc. In simple terms, the selling restriction is a requirement under the rules for ESOPs which limits an employee from selling shares for a defined period of time. Therefore, the employee can only sell their shares after the restriction period.

IRAS regulation for share-based compensation in Singapore

Now that we are done with the basics of ESOP, it is time to look at the Inland Revenue Authority of Singapore or IRAS regulation for share-based compensation. The following are some of the most important rules that IRAS has to offer:

  • QEEBR tax deferment – The QEEBR plan enables the deferral of stock option gains tax for up to five years with an interest charge. The goal of this plan is to make it easier for employees to use stock options as a form of compensation by easing the liquidity issues they encounter while exercising their options.
  • Taxation – Gains from ESOPs awarded on or after January 1, 2003, are taxable if the recipient is using their stock options while working in Singapore. As a result, you need to record the gains from ESOP every year on the employee’s tax return.
  • Vesting requirements – The minimum vesting period for an ESOP with an exercise price greater than the fair market value at the time of award is one year. The minimum vesting term is two years for ESOPs with exercise prices below the fair market value at the time of grant.
  • Employee requirements – There are a few instances when employees cannot be given an ESOP, which are as follows:
    • The employee has declared bankruptcy
    • The employee is a delinquent taxpayer according to IRAS records
    • Employee’s tax on stock option gains is less than $200 Employee has been given area representative status
    • The employee is not permitted to collect his tax in instalments under the current regulations
  • Deemed exercise rule – Gains from unexercised ESOP are taxed on a “deemed exercise” basis when a foreign employee leaves their employment in Singapore. The deemed exercise rule is applicable when a foreigner quits his or her job in Singapore, when a permanent resident leaves the country permanently, or when a permanent resident is assigned to work abroad.
  • Tracking options – The tracking option can be used instead of the Deemed Exercise regulation. Employers can then track the “income realization event” of the overseas employee and submit a report to IRAS at that time. This occurs when the ESOP selling limitations are removed or the foreign employee exercises previously unexercised options.

ESOP vs ESOW in Singapore

Employee Share Ownership (ESOW) plans enable a company’s employees to own or purchase stock in the company or its parent company. ESOWs typically do not include phantom shares or share appreciation rights. Phantom shares typically offer to pay a bonus over a predetermined time period that is equivalent to the value of the company’s shares, or the increase in that value.

This incentive can take the form of cash or equity. Share appreciation rights are not the same as phantom shares, but they are similar in the sense that they offer to pay the employee a bonus of a predetermined value. While on the other hand, as mentioned earlier, ESOPs also a type of ESOW, offer a right to buy shares for a pre-determined price after a particular duration.

Challenges of setting up and managing an ESOP in Singapore

In spite of an employee stock option plan (ESOP) being a relatively effective tool for employee motivation and retention, it may be difficult to set up and manage. Following are some of the challenges that employers face:

Challenges of setting up and managing an ESOP in Singapore

  • Manual management – Having an ESOP requires a great deal of commitment and control on the employer’s part. In this regard, manually managing an ESOP can be difficult and time-consuming. However, with the advent of technology, there is various online software available for ESOP management which makes the process a lot easier.
  • Complicated process – Setting up and managing an ESOP requires a certain degree of skill, knowledge, and expertise. It is important for the employer to hire an appropriate third-party expert like Eqvista to ensure that ESOPs are implemented and managed effectively.
  • Deciding the percentage of equity – There is no standard percentage of company equity to give out in ESOPs. The percentage depends on the employer and the employee’s role in the organization. Therefore, employers must be careful when deciding how much equity to offer.
  • Equity dilution – In financial terms, equity dilution refers to the reduction in the percentage of ownership when additional shares are issued. As such, careful analyses should be done to avoid any potential equity dilution.
  • Traditional record keeping – When ESOPs are set up and managed manually, it is often difficult to keep track of the employee’s shareholdings. Don’t worry, Eqvista offers a comprehensive solution for record keeping.

How does ESOPs tax work in Singapore?

According to Singaporean legislation, all ESOP gains that are related to Singaporean employees who are physically present in Singapore will be subject to Singaporean taxation. This means that any benefit received from these ESOPs by an employee of a Singapore-based company must be taxed. Basically, this ESOP taxation in Singapore is known as capital gain tax, which is an amount that is charged when the shares acquired from ESOPs are sold at a price higher than the purchase price. Therefore, it is important for companies as well as employees to understand the way ESOPs tax works in Singapore in order to avoid penalties.

Manage your ESOPs with Eqvista!

Are you looking to set up an ESOP for your Singapore company? Do you want to know how it works? Eqvista is the trusted service provider for companies seeking to set up, manage and implement a successful ESOP. With their expertise, personalized services, and their easy-to-use online management software, Eqvista can help you with all aspects of an ESOP. We aim to make the process of setting up, managing and implementing an ESOP as simple as possible. To know more about how Eqvista can help you with your ESOP, contact us today!

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