I know expat tech workers who left Singapore — and received a surprise ESOP exit tax.
This is what's called the "Deemed Exercise Rule."
Protip: If you're a foreign tech worker with ESOP in Singapore, be prepared to pay this exit tax upon your clearance.
What is the Deemed Exercise Rule?
When you cease employment in Singapore as a foreigner, you may still be required to pay an “exit tax” on unvested ESOW, unexercised ESOPs, and ESOPs where selling restrictions yet to be lifted.
According to the IRAS website:
Under the "deemed exercise" rule, a foreign employee is deemed to have derived gains from the unexercised/restricted Employee Share Option Plan (ESOP) and unvested/restricted Employee Share Ownership Plans (ESOW) which he has at the time he ceases to work in Singapore with the employer which granted him the ESOP or ESOW. This rule applies to ESOP and ESOW granted from 1 Jan 2003.
Yes, even if you haven’t exercised your ESOPs, these likely still fall under the Deemed Exercise Rule.
Who does this rule apply to?
- Foreigners (non-Singaporean Citizens)
- Singapore PRs leaving Singapore permanently or getting posted overseas
How do you calculate your tax implications?
Prepare to pay taxes on your ESOP as part of this clearance. Don't get caught by surprise.
The amount you'll pay varies based on a few factors.
Here is how IRAS calculates Deemed Exercise taxable gains:
Gross gains from ESOP = (Open Market Value per share - Exercise or Deemed Exercise price) * # of shares
- Open Market Value per share = one month before the date the employee ceases employment or the date of grant of the ESOP or ESOW (whichever is later)
- Exercise price = the price paid or payable for the shares acquired
For example, let's say:
- You're a Product Manager working at ACME Corp Singapore and received an ESOP package of 10,000 options
- You are departing Singapore to go back to your home country of Australia
- You have not exercised your ESOP yet
Here's your Deemed Exercise calculations:
- The Open Market Value per share = $10
- Your exercise price = $5
- ($10 - $5) * 10,000 = $50,000 taxable gain
In other words, $50,000 is your taxable gain.
This $50,000 is added to your total personal income for the tax year when calculating your personal income tax due.
How are your stock options taxed generally?
According to the Ministry of Finance:
The gains from stock options are part of employment income. The tax rate charged depends on the amount of income an individual earns and whether the individual is regarded as a tax resident or non-resident in Singapore. If an individual is a tax-resident, then his income will be taxed at graduated rates from 4% to 22%. If an individual is a non-resident, then his income will be taxed at 15% or resident rates, whichever gives rise to higher tax.
When do you owe the taxes?
In your final month of employment, your employer will withhold money from your salary for tax clearance.
This includes your Deemed Exercise amount.
What can you do about this tax?
You can explore various possible options for mitigating your tax liability:
- Claim a tax exemption: This depends on your home country. If your home country has a double tax treaty with Singapore (like Australia), you may be able to claim an exemption under this treaty.
- Offset foreign tax credits: This also depends on your home country. Some countries like US and Australia, allow their expats, to offset taxes paid in Singapore against their home country income tax liability to reduce their overall tax liability.
- Re-assess the deemed gain for tax refund: Read the next section to learn how this works.
What if the eventual gain upon exercise is less than the taxable gain under the "deemed exercise" rule?
Good news! IRAS says you can 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 2023, the application for reassessment must be made by 31 Dec 2027.
That means, in the next 4 years, if you believe that your company share value will have dropped for some reason (eg equity market fluctuations), then you have an opportunity to apply for a reassessment and get a tax refund.
In April 2020, KPMG issued a tax alert to its clients citing this opportunity to ask for a reassessment from Singapore's tax authority given the global equity market had tanked.
How to apply
- Fill out and sign the password-protected PDF of the Template for Reassessment of Tax on Deemed Share Gains (phew that's hard to say in 1 breath)
- Submit the PDF, along with relevant supporting documents, via myTax Mail e-Service the iRAS portal or online form.
What if you leave Singapore and then your unexercised shares are forfeited?
Based on IRAS feedback to a couple expats, IRAS confirmed that the expats can apply for a reassessment of the deemed gain within 4 years from the assessment year.
Can you cancel your ESOP contract?
The first step is to align with your employer on the particular conditions of your ESOP contract before you leave Singapore.
Ultimately, it's up to your employer to submit your deemed exercise documentation to IRAS.
Employment jurisdiction matters
According to the IRAS website, Deemed Exercise applies to ESOP granted to you while you’re employed in Singapore. i.e. ESOP granted (in another jurisdiction) before starting your job in Singapore is not mentioned under Deemed Exercise.
Corporate structure matters
Expats in Singapore can be working under different structures.
- Individual employees under their Singapore employer. The guide so far applies.
- Contractors or employees of their own Singapore entity that serves clients. In this scenario, things work a bit differently. From first-hand accounts of expats, the feedback from IRAS CS is that if the entity itself is the recipient of the ESOP, then even if its employee leaves Singapore for another country, the entity still remains within Singapore jurisdiction. Hence, no Deemed Exercise or exit tax is applied.
If you're an expat tech worker in Singapore with ESOPs or RSUs, set aside some budget early. Be prepared to pay the exit tax on your way out.
Note: I’m not a lawyer, accountant, or tax professional. I’m sharing this content for for educational and informational purposes. Before making any decisions, I recommend speaking to IRAS or a tax professional.