RSU vs ESOP Taxation: What are the differences, and which one is better?

Employers often grant different benefits to their employees throughout employment to keep them motivated and attract new talent. These benefits can sometimes come in the…

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Written by leitao

Employers often grant different benefits to their employees throughout employment to keep them motivated and attract new talent. These benefits can sometimes come in the form of company shares as well. Such shares are granted either in the form of RSU or ESOP. As a salaried employee, it is important to understand these employment perks to make the most out of them.

Here are the main differences between RSUs vs ESOPs:

BasisRestricted Stock Units (RSU)/(RS)Employee Stock Option Plan (ESOP)
DefinitionIt is a promise by an employer granting employees a predetermined number of shares free of cost at the end of the vesting period, provided certain conditions are met. Vesting period is the time period between the grant date and vesting date. Grant date is the date that the shares issued by Company to employees.

Even though employers grant RSUs free of cost, it comes with certain restrictions.

(i) Time-based restrictions: With these RSUs, an employee can sell them only after completing a specified period of employment with their employer. If they resign during the vesting period, their employer can revoke the RSU.

(ii) Milestone-based restrictions: It is a performance-based restriction where the employee can only exercise their ownership of the shares after achieving a predetermined milestone.

(iii) Composite restrictions: This is a composition of both time-based and mile-based restrictions. An employee must complete a specified period and achieve a determined milestone to get ownership of these shares.  

Types of restricted stock:
– RSU is awarded to lower-level employees.
– RS is awarded to Directors & other high-level executives.

RS tends to have more conditions and restrictions than an RSU.
It gives an employee the right to buy company shares on a future date at a predetermined price. Once an employer grants ESOP, they do not immediately transfer it to that employee. It remains there for a certain time, known as the vesting period. At the expiry of the vesting period, also known as the vesting date, the employee can choose to exercise his/her right to buy the shares.
Choice to receive the incentiveEmployees receive these shares at the end of the vesting period.  Employees can choose whether to buy the shares.
Market priceMarket price only matters for taxation.Market price plays a big role in an employee’s decision.
Payment by employeesEmployees get them free of cost from the Company.Employees need to pay to buy the underlying shares.
Type of companiesPopular with old companies which are well-established.Popular with start-ups and high growth companies in their early stage.
Taxation for Company & Employee For Company: Cost is tax deductible
For employees: Taxable when the sales restriction is lifted and the employees receive them.
For employees: Taxable when the employees exercise the share options.
Taxable amount

Tax on sale
Same as fair market value as employee receives them at free of cost.Is determined by the fair market value reduced by the price paid to get the shares.  
Apply the same for both RSU & ESOP. Capital gains from sale is taxable in USA. Whereas there is no tax on sale in Singapore.
In which country will the employee who receive the shares to pay taxes?Example:
(A) employee who working in overseas for Singapore company:
– The employee will be taxed in overseas but not in Singapore. Instead, Singapore’s double tax avoidance (DTA) agreement with the country where the employee received shares is used to calculate the tax.

However, this will trigger the Singapore Company to have permanent establishment (PE) in overseas and hence subject to corporate income tax in overseas.

(B) For shares granted to foreign employees who working in Singapore:
– The employee will be taxed in Singapore. Foreign worker leaving Singapore may be deemed to have vested ESOP and be subject to tax upon leaving Singapore.
Which option is better?Much safer and no risk as it only loss its value in case the company goes out of business, which is an unusual circumstance.Always have a risk of loss on investment as the employees need to pay money to exercise the option rights.