This article was written in collaboration with Deloitte.
In the dynamic landscape of Southeast Asia’s startup world, Equity Stock Ownership Plans (ESOPs) have emerged as a pivotal tool for incentivizing and retaining talent while aligning employee interests with company success. ESOPs offer employees the opportunity to purchase or receive equity of their employer’s stock at a predetermined price, typically below market value.
However, navigating the taxation complexities surrounding ESOPs in this diverse region can be challenging, as regulations and practices vary significantly across countries such as Singapore, Indonesia, and Thailand.
In this article we’ll explore the diverse tax implications of ESOPs across Southeast Asia and delve into the essential considerations for structuring equity plans effectively amid regulatory diversity.
How are stock options taxed in Southeast Asia countries?
Gains from stock options are generally taxed upon the exercise of the options, except for unique tax rules such as the deemed exercise rule in Singapore or tax upon sale in Vietnam. The gains are generally determined by the difference between your exercise price and the fair market value of the options at exercise time.
In addition, there may be taxes on capital gains subsequent to the sale of the shares, except in Singapore where there is no capital gains tax.
Some key considerations when structuring an equity plan
Capital versus employment equity
Due to the different tax treatments for various types of equity, it is important to differentiate the characteristics of the equity one holds. For example, founding members of the company may acquire the company’s shares as part of the investment capital (also known as investment equity). The gains from these shares would usually be considered as capital gains instead of employment income. The differentiation may become a bit trickier when the founding member is also an executive of the company.
If one holds top management positions in the company, it is quite common that such individuals may be given the right to exercise the stock options to purchase the shares at the exercise price. The gains from these shares would be considered as employment income.
Timing of the equity grant
The timing factor is particularly impactful depending on which taxing system one is dealing with.
In a territorial tax system, income sourced in that jurisdiction would be taxed there generally. This means unless the equity is considered as earned within that jurisdiction, it would not be subject to tax there. Singapore, for example, will only tax the stock options if they were granted to the individual during his/her Singapore employment. Options granted prior to their work in Singapore would be considered as foreign source income and therefore not subject to tax in Singapore.
On the other hand, a global tax system seeks to tax one’s worldwide income regardless of where it is earned or paid as long as the individual is that country’s tax resident.
Exercising options when leaving the company
It is relatively simpler to turn the shares into cash by selling the shares on the open market if your employer is a publicly listed company. In a private company, you are likely to be able to only liquidate the shares at an exit event (e.g., a merger, acquisition, or initial public offering).
Employees should consider what happens to the vested options upon leaving the company—how long you have to exercise your remaining vested options and, in the event of a private company without an exit event to date, whether the options can be exercised when an exit event occurs.
As an employee, you may wish to understand the applicable treatments regarding good leaver (also known as an Eligible Leaver) versus bad leaver as there is a possibility that all unvested equity (options included) would be forfeited if one is not an eligible leaver.
As businesses strive to attract and retain top talent in Southeast Asia’s competitive market, understanding the intricacies of ESOP taxation is crucial for maintaining a strategic edge. By recognising the nuanced differences in tax regulations across the region and carefully structuring equity plans, companies can enhance their employee incentive programs while mitigating potential tax liabilities. We encourage you to reach out to your experienced taxation partner or the team at Carta for expert guidance tailored to your specific needs.
To learn how Carta and Deloitte can help with managing your ESOP and taxes, email partnerships-apac@carta.com.
