Companies often provide stock options and share awards to employees as employment benefits. For expatriate employees planning on leaving Singapore, these unvested shares may result in additional tax liabilities.
Deemed Exercise Rule
Section 10(6) of the Income Tax Act 1947 provides for the “deemed exercise” rule.
Under this rule, when a foreign employee ends their employment and leaves Singapore, any unvested shares or unexercised stock options they hold at the time of departure are treated by the Inland Revenue Authority of Singapore (“IRAS”) as having been exercised or received on the last day of employment, even if the shares only vest at a later date.
IRAS will then tax you on the difference between the market value of the shares on that date and the exercise price (i.e. the price that you would have paid to acquire the shares).
Tracking Option
Rather than being taxed upfront on all unvested shares at the point of departure, it may be possible to defer the tax until the shares actually vest. This is referred to as the “tracking option”.
The Tracking Option is an arrangement where your employer applies to IRAS for approval to “track” your unvested shares or unexercised options. Once approved, you are only taxed when the shares actually vest or the options are exercised.
However, for your employer to be approved, they must meet strict conditions. The employer must be incorporated in Singapore, operate systems that can reliably track share plans, maintain a clean tax record for the preceding three years, and satisfy IRAS’s capital adequacy criteria.
Your employer takes on significant obligations, such as reporting the actual gains to IRAS within 30 days of the shares vesting, submitting an annual return on the status of the shares, and collecting and paying the tax due.
Refund
If you already paid tax on your shares when you left Singapore, but they are worth less when they actually vest, you may be entitled to a refund.
You can ask IRAS to reassess your tax based on the actual value at vesting, rather than the value used when you left. If the actual value is lower, you overpaid and can claim back the difference.
The following must be noted:
- You must apply for the reassessment within 4 years from the end of the Year of Assessment in which you were taxed. Miss this deadline, and your right to claim is lost.
- You will need to provide IRAS with documents showing the vesting date and the market value of the shares on that date.
Conclusion
If this scenario applies to you, you should review your share plans and your departure timeline. Check exactly which of your shares will vest around your departure date so you are aware of how much you will be taxed, and get a legal or tax advisor to evaluate whether adjusting your last day might help you manage the tax impact more effectively under the “deemed exercise” rules. You should also discuss the tracking option with your employer.
Disclaimer: This article provides general information and does not constitute legal advice. Please seek professional advice for your specific situation.
Do reach out to us at Legal Expat if you require professional advice. We have a team of qualified lawyers that can assist you. Email us at: info@legalexpat.sg or drop us a WhatsApp at: +65 8093 4393 if you require assistance.
