Employee stock options and share awards are commonly used by companies to reward and retain employees. These schemes can offer significant financial benefits, particularly in startups and multinational corporations where equity compensation forms part of an employee’s remuneration package.
However, employees leaving Singapore often face uncertainty regarding the tax treatment of their unexercised or unvested stock options and share awards. In Singapore, special tax rules apply when employees cease employment or leave the country, and these rules can result in taxation even before the shares are exercised or vested.
Understanding how Singapore taxes employees share benefits upon cessation of employment is important for both employers and employees to avoid unexpected tax liabilities and compliance issues.
What happens when you leave employment?
When an employee ceases employment in Singapore or leaves the country for an extended period, the employer may be required to apply a “deemed exercise” rule under Singapore tax law. This rule is commonly referred to as the deemed exercise rule for employee share plans.
Under this rule, unexercised stock options and unvested share awards may be treated as though they were exercised or vested immediately before the employee leaves employment or Singapore. As a result, tax may be imposed even though the employee has not actually received the shares and the options remain unexercised or the awards have not yet vested.
The deemed exercise rule exists to ensure that Singapore taxes gains attributable to employment exercised in Singapore before the employee departs the jurisdiction.
The taxable gain is generally computed based on: the open market value of the shares at the deemed exercise date minus the exercise price payable by the employee.
This can create cash flow issues because employees may face tax liabilities without having sold any shares or realised actual cash proceeds.
What if the actual gain upon subsequent exercise is less than the taxable gain under the “deemed exercise” rule?
From our review of the IRAS website, it states that the employee will be able to apply for a reassessment of the deemed gain within 4 years from the year of assessment following the year in which the “deemed exercise” rule is applied. For example, for deemed gain taxed in the Year of Assessment 2024, the application for reassessment must be made by 31 Dec 2028.
What are some steps you should take in order to minimise your liability?
1. Give sufficient notice to your employer
Your employer is required to file the Form IR21 on the IRAS website at least one month before you cease employment with them or depart from Singapore for over three months. For example, if the last day of your employment is 28 May 2026, your employer must file the form on 28 April 2026.
Hence, it is important to give adequate notice to your employer to ensure that this form is filled in on time in order to prevent any avoidable delays. This will also give you time to settle all your income tax before you either leave Singapore or start your new job.
To ensure that you pay all your income tax, your employer will have to withhold the payment of all monies (including your salary, any bonuses, potential overtime pay etc.) due to you from the date they are aware of your cessation of employment or departure from Singapore.
You should check with your employer whether the Form IR21 has been filed and begin fulfilling any outstanding income tax payments.
2. Applying for the Tracking Option
An alternative to the “deemed exercise” rule is the Tracking Option scheme, which allows employers to track when stock options are actually exercised or when share awards vest. Under this arrangement, the employer reports the gains based on the employee’s actual realised gains rather than applying a deemed exercise upon cessation of employment. As a result, the employee will generally only be taxed at the point when the options are eventually exercised or the shares vest in the future.
Conclusion
In Singapore, unexercised or unvested stock options and share awards may indeed become taxable when an employee leaves employment or departs the country. Under the deemed exercise rule, the Inland Revenue Authority of Singapore (IRAS) may treat these equity benefits as exercised or vested even if the employee has not yet received the shares or realised any cash gains.
Given the potentially significant tax consequences, both employers and employees should understand the applicable rules and plan carefully before any overseas relocation or employment termination. Contact us today for bespoke assistance on proper tax planning to help minimise any unexpected liabilities and ensure compliance with Singapore’s tax regulations. We can also assist with tax advisory, expat employment matters and compliance assistance.
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.