RSU vs ESOP Taxation: What are the Differences and Which One is Better?

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

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Written by leitao

Employers often grant different benefits to staff throughout employment to keep them motivated and attract new talent. These benefits can sometimes come in the form of company share. Such shares are granted either in the form of RSU or ESOP. As a salaried staff member, it is important to not only understand these employment perks, but to make the most 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 staff 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 shares are issued by a Company to its staff.

Even though employers grant RSUs free of charge, they come with certain restrictions.

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

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

(iii) Composite restrictions: This is a composition of both time-based and mile-based restrictions. Staff 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 staff the right to buy company shares on a future date at a predetermined price. Once an employer grants ESOP, it is not immediately transferred to that staff member. It remains there for a certain period of time, known as the vesting period. At the expiry of the vesting period, also known as the vesting date, staff can choose to exercise the right to buy the shares.
Choice to receive the incentiveStaff receive these shares at the end of the vesting period.  Staff choose whether to buy the shares.
Market priceMarket price only matters for taxation.Market price plays a big role in a staff member’s decision.
Payment by staffStaff get them free of charge from the Company.staff 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 staff: Taxable when the sales restriction is lifted and staff receive them.
For staff: Taxable when staff exercise the share options.
Taxable amount



Tax on sale		Same as fair market value as staff receive them free of charge.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) Staff working overseas for Singaporean company:
– Staff will be taxed overseas but not in Singapore. Instead, Singapore’s double tax avoidance (DTA) agreement with the country where staff received shares, is used to calculate tax.

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

(B) For shares granted to foreign staff working in Singapore:
– Staff will be taxed in Singapore. Foreign workers 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 staff need to pay money to exercise the option rights.

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