ESOP Academy #17: Equity Taxation for Expats in Singapore

What rules do expats in Singapore need to be aware of?

Singapore is an attractive destination for expats, offering a plethora of opportunities at both regional offices of multinational corporates and local startups. An attractive tax regime is a common factor that draws global talent to the country. To further entice talent, companies in Singapore tend to offer competitive compensation packages, often including equity.

So, what should incoming or current expats in Singapore keep in mind regarding the equity component of their compensation?

This edition of ESOP Academy sheds light on the unique tax implications for expats in Singapore, particularly focusing on the country's sourcing approach and the Deemed Exercise Rule.

This introductory article aims to enhance your understanding of employee equity. It is general in nature and prepared for informational purposes only. It is not intended to provide, nor should it be relied upon for, tax, legal, or accounting advice. You should consult your employer and tax, legal, and accounting adviser to discuss your specific circumstances and before engaging in any ESOP transactions.

What happens if you move between countries for work?

Tax implications for expats and mobile employees present a real challenge for both employees and their employers. If you have received equity and moved countries during your vesting period, things can get really messy.

The rules for taxation in the countries you reside in play a key role. One of the key concepts to be aware of is the countries' sourcing approach.

Sourcing rules

What is sourcing? Each country has a set of rules dictating what income will be considered and taxed. Many countries consider the time you spend within their borders and the income you've earned during this timeframe as taxable. This often applies to employee equity - in such scenarios, the awards would be taxable for the relevant portion of the vesting period that you spend in the country. For example, if the vesting period is two years and you spent only the first year in Country A, Country A would only consider 50% of the award as reportable income.

Singapore's sourcing approach

Singapore adopts a different approach. Here, the taxation of equity awards depends on when they were granted. Only awards granted during your employment in Singapore are taxable. This means any equity granted before moving to Singapore or after you've left won't be taxed locally.

That sounds like a good deal, but what's the catch?

The flip side is that grants made during your Singapore employment period are taxed in full.

How is equity normally taxed in Singapore?

In Singapore, the taxation of equity is designed to be straightforward and logical. As equity forms part of your total compensation, it is subject to income tax. And the taxing point for your awards is triggered when you realise the value.

For Options, taxation occurs at the moment of exercise, when you receive the underlying shares of the company you work for. The taxable amount is determined by the fair market value of those shares at that time minus any price you paid to acquire the options (option cost).

In the case of Restricted Share Units (RSUs) and Performance Share Units (PSUs), the tax is triggered when the shares are delivered to you upon vesting.

For equity plans like Restricted Share Awards (RSAs) or any other plans where the shares your receive are subject to further restrictions from selling (called a moratorium period), the taxing point is triggered when those restrictions are ultimately lifted.

The principle here is clear - tax is due when you receive shares that have value and when you're free to sell or transact those shares without any restrictions.

Keeping this framework in mind, it's important to consider how one certain rule specific to foreigners in Singapore can add complexity to this seemingly straightforward system.

Deemed Exercise Rule

This rule applies to:

• Foreigners (non-citizens of Singapore);
• Singapore Permanent Residents leaving Singapore permanently; and
• Foreigners moving overseas on a 3+ month-long assignment.

The rule triggers a taxing point on the value of all your outstanding equity awards when you cease employment in Singapore (including going on an extended overseas assignment even without leaving the company). Importantly, the taxation applies not only to your vested awards but also to unvested equity and vested equity that is subject to further selling restrictions - anything that hasn't been cancelled or forfeited.

This means that you would be taxed on the value of your entire equity balance that you hold - whether or not the awards have vested, and whether you have the ability to transact on them.

While the taxable value is locked in at the point you leave Singapore, IRAS provides provisions for reassessment of the amount in future years, should circumstances change (e.g., due to the difference in final ultimate gains because of a change in the value of shares or due to unvested awards that were initially taxed not vesting because of a failure to meet performance conditions).

The current rules stipulate that the employer must notify IRAS when an expat leaves Singapore for a continuous period of over three months, has or is about to cease employment in Singapore. This scenario also triggers the tax withholding obligation for your employer.

You can find detailed information about the deemed exercise rule in the useful IRAS guide available online.

What does that mean for you in practice?

If you are a foreign employee in Singapore who has decided to leave the country, the triggering of a taxing point on equity that potentially cannot be easily liquidated for cash to offset your tax bill (due to it being unvested or non-liquid if you are working in an unlisted company), can put you in a tricky situation. Getting hit with a potentially large tax bill in relation to assets you can't liquidate to pay for it is not ideal.

There is an alternative called the “tracking option” for employers to get around the rule, but in practice, the tracking option is not always available, especially for smaller companies, as often only large listed companies may be able to meet its strict eligibility criteria. As a result, expats in Singapore must be aware of the unique features of the local tax regime and the impact on their ESOPs and potential tax obligations.

Being Proactive and Planning Ahead

While tracking option can only be utilised in limited cases, employers may utilise other tools at their disposal to help alleviate some of the issues that can arise for you as a result of the rule. These include equity plan design, use of cash instruments, cash settlement provisions, use of loans or tax equalisation.

The best approach for expats in Singapore is to first be aware of the deemed exercise taxation requirements and engage their employer early to seek their help in preparing for potential implications of any future cessation of employment or internal cross-border mobility. Planning ahead is the best way to ensure you have the full picture of possible tax implications down the track.

Things can get even more complex

If you moved from Singapore to another country, in addition to the tax obligation in Singapore thanks to the deemed exercise rule, may also be subject to tax in their new country of residence and have double taxation exposure. What if you move more than once during the vesting period? As you can imagine, it’s not just the individual rules in each of the countries that will be important, but how these rules interact and what tax treaties the countries have in place will also play a part. Taking care of tax in one country is hard enough – imagine doing it in two or more!

How exactly awards granted outside of Singapore would be treated in other countries is outside the scope of this introductory article. If you are in this situation, you are encouraged to seek professional advice on your specific circumstances.

What’s next? ??

While Singapore is considered a friendly country for tax, there are still nuances that expats need to be mindful of that we've covered in this edition of ESOP Academy.

Next, we will explore the implications of participating in a unique type of equity programs - those that have no underlying equity interest at all - phantom and cash-settled plans. These plans are offered to employees around the world and are more prevalent in some jurisdictions. Curious to learn in which countries these plans are popular and why? Stay tuned.

Up next:?ESOP Academy?#18: What's the deal with phantom shares?