Setting up an equity compensation plan – Legal and Tax Considerations
Purpose of equity compensation:
Equity-based incentive plans have gained significant traction in Singapore as a tool to attract, retain and reward employees. These plans allow employees to share in the company’s success, aligning their interests with shareholders while also deferring part of the company’s expenses. SGX-listed (i.e. public) companies have long used these structures, and private companies, including startups, now increasingly adopt them for their flexibility and impact on long-term motivation of employees.
Common plan types:
The three (3) main types of plans used in Singapore are the following:
- Employee Share Option Plans (“ESOPs”), which let employees buy shares at a fixed price after vesting of share options;
- Share Award Plans (or Employee Share Ownership Plans, “ESOWs”), where employees receive shares free of charge upon meeting time or performance-based conditions; and
- Phantom Share Plans, which pay cash based on share value appreciation without actual share issuance.
Legal Considerations under Singapore Law:
- Companies Act 1967 (“CA”): When setting up an equity compensation plan, private companies (limited by shares) cannot breach the 50-shareholder limit under Section 18 of the CA. Employees and former employees receiving shares under the plan are generally excluded from this count, allowing companies to offer equity broadly without converting into a public company. Directors participating must disclose their interests under Sections 156 and 165 of the CA to meet corporate governance standards.
- Securities and Futures Act 2001 (“SFA”): As a general principle, offers of securities or securities-based derivatives in Singapore are accompanied by a prospectus, which is lodged and registered with the Monetary Authority of Singapore (“MAS”). However, there are certain exemptions from this requirement (where an offer qualifies for an exemption, no filing or registration is needed). For instance, grants of share options or share awards made to employees or former employees can be exempted from this prospectus obligation.
Employment and Data Protection Obligations:
- Employment Act 1968 (“EA”): Where a participant in an employee incentive plan qualifies as an “employee” under the Employment Act 1968, salary deductions to fund the exercise price of share options are permitted with the employee’s written consent. Employees must also be allowed to withdraw their consent at any time. Additionally, any such deductions must not exceed 50% of the employee’s total monthly wages. This ensures that employee participation in such plans is legal and does not contravene wage protection measures.
- Under the Personal Data Protection Act 2012 (“PDPA”), organisations must generally obtain an individual’s consent before collecting, using, or disclosing their personal data. However, where the individual is an employee, consent is not required if the data use is for legitimate interests (First Schedule, PDPA), e.g. the management of the employment relationship, including the award of share options, provided the employee is notified of the purpose of such use as soon as is practicable. For non-employees participating in an incentive plan, organisations should obtain explicit consent prior to collecting, using or disclosing their personal data.
Designing an Equity Compensation Plan:
Companies have flexibility in structuring their equity plans. For instance, vis-a-vis:
- Eligibility and Participation: Private companies may include non-employees (e.g. consultants or non-executive directors) in the plan. SGX-listed entities are more restricted, with only directors and employees of the company being able to participate in the plan.
- Share Classes: Companies setting up an equity compensation plan may issue non-voting shares to participating employees. This approach allows employees to benefit from the company’s financial success without giving them voting rights on corporate matters, helping to preserve control for existing shareholders.
- Vesting and Performance Conditions: Plans often set time-based or performance-linked conditions for the vesting of share options, in order to incentivise employees in accordance with the company’s interests. Metrics may include revenue targets or individual Key Performance Indicators (“KPIs”). These requirements are typically documented in the plan or in the grant letter issued to the employee.
- Exit and Leaver Treatment: Plans typically distinguish between good and bad leavers. Good leavers may retain vested options, while bad leavers may forfeit vested options. In such situations, having clawback provisions allow the employer to recover benefits in cases of fraud, misconduct, or regulatory types of breach.
- Buybacks and Dilution: Companies may cap employee incentive pools at 5–20% of issued capital. The Companies Act restricts buybacks to no more than 20% of each class of shares for each period commencing from the date that the resolution authorising the buyback is passed and expiring on the date that the next annual general meeting is held or is required by law to be held, whichever is the earlier. Valuation methods for buybacks should be pre-agreed in the plan.
KGP Legal seamlessly assists clients in understanding and structuring equity compensation plans, including share options and related employment terms. We always seek to equip our clients to protect their legal rights and achieve their commercial objectives.
Tax Considerations When Setting Up an Equity Compensation Plan
When designing an equity compensation plan for employees in Singapore, it is important to understand the tax and social security implications for both the employer and the employee. Failing to do so could lead employees being unaware of its implications and when unexpected tax implications arise, it can feel like a frustrating disincentive to work rather than a reward.
It doesn’t matter if the equity is in respect of a Singapore company or one overseas, gains from equity compensation such as stock options or share awards are typically regarded as employment income where they are related to the Singapore employment and taxed accordingly when the taxable event happens.
So, in most plain vanilla type plans:
- Stock options are generally taxed when the employees exercised the option, and the taxable gain is the difference between the Open Market Value (“OMV”) of the shares at the point of exercise and the exercise price paid by the employee.
- Share awards are generally taxed at the point of that the share is received, based on the OMV of the shares on that date less the price paid by the employee.
Where there is a restriction imposed on the sale of the shares, then the tax point is deferred to when the sales restriction is lifted. E.g. where restricted shares are issued and there is a sale restriction until it vests the employee would be taxed at vest based on the OMV of the shares at vest, less what the employee paid.
Phantom share plans are generally easier to report as these are cash-settled awards that mirror the value of actual company shares but do not involve the transfer of actual shares. The tax point is generally in the year the payment is made or the employee is entitled to the payment.
Deemed Exercise Rule
Unique to Singapore is a deemed exercise rule which affects employees who are not Singapore Citizens that cease employment or leaves Singapore for an extended period of time (i.e. when tax clearance applies).
Under the deemed exercise rule, an employee is deemed to have derived income from the untaxed equity (e.g. unexercised options / unvested shares) usually one month before the date of cessation of employment. The deemed gain assessed would be the difference between the open market value of the share at the deemed exercise date, less any amount paid or payable by the employee for the shares.
This can create a liquidity challenge for the employee where they are taxed on income that they have not received and have no way to access (as they cannot sell the equity to fund the tax liability).
A reassessment is possible to downward adjust any actual gains from the deemed gains previously assessed. Supporting information must be submitted to the Inland Revenue Authorities of Singapore IRAS within four years from the Year of Assessment (YA) following the year in which the deemed exercise rule was applied.
Where the actual gains following the deemed exercise is higher than what was reported in the Form IR21, no reassessment is required.
Tracking options is an alternative to the deemed exercise rule. Under this scheme, it allows an employer to track when the “income realisation event” of the foreign employee occurs and report the gain to the Comptroller of Income Tax at that point rather than apply the deemed exercise rule as part of the tax clearance. IRAS approval is required for an employer operate tracking option rather than the deemed exercise rule.
Where deemed exercise does not apply, e.g. a Singapore Citizen, the employer will continue to have an obligation to report taxable income arising from equity plans for their ex-employees.
Employer Reporting Obligations
Employers must report the equity compensation to the IRAS, even if the shares are granted by the overseas parent company. This would be on Appendix 8A (to Form IR8A) which is due by 1 March each year, or Appendix 2 (to Form IR21) where tax clearance applies and is due a month before the employee’s departure.
Valuation Requirement for Equity Incentive Plans
In designing an equity compensation plan, it is useful for employers to perform a valuation of the company’s shares to understand the value of equity being granted, as well as to determine the exercise price of the ESOPs.
For reporting to the IRAS, employers are required to determine the OMV of shares issued under ESOPs and ESOWs at the time of exercise or vesting, respectively, to calculate the taxable gains for employees.
Under Financial Reporting Standards (FRS) 102 – Share-based Payment, which governs the accounting treatment of equity-based compensation, entities are required to recognise the fair value of ESOPs and ESOWs as an expense to be amortised over the vesting period.
As such, whether for strategic planning or in complying with tax or accounting purposes, it is important for employers to have a valuation of these equity plans. This will entail adopting suitable valuation approaches such as the discounted cash flow method under the Income Approach, comparable market multiples under the Market Approach, and option pricing methods where applicable.
Corporate Tax Deductions and Other Considerations
During the 2025 Singapore Budget, it was announced that with effect from YA 2026, a company can now claim a tax deduction for payments to their holding company or a Special Purpose Vehicle (SPV) for newly issued shares of its holding company based on the lower of:
- The amount paid by the company; or
- The fair market value (or net asset value) of the shares at the time of grant
- Less any amount payable by employees for the shares
Companies need to take note of the difference in the tax deduction rules between treasury shares and newly issued shares that are granted to employees under an Employee Equity Based Remuneration scheme.
While we have focused on legal and tax in this article, successful implementation of an equity compensation plan also depends on addressing other important areas such as accounting, valuation, and employee communication from a HR perspective.
Companies will need to consider the accounting treatment under the relevant accounting standards and ensure appropriate share valuations – especially for private companies. These factors impact financial reporting, audit readiness, and cost allocations.
From a HR perspective, clear and consistent communication helps employees understand the value of their awards, the tax timing and what happens in different scenarios (for e.g. resignation or international transfer). HR plays a critical role in shaping the messaging and engagement to ensure employees are informed and confident in participating in the schemes.
If you would like to have a discussion on the legal aspects of your equity compensation plans in Singapore, you can approach:
If you have any questions about the tax implications of setting up an equity compensation scheme or require support with valuing your equity plans, please contact:
