Ruling 01/2021: Taxable Gains from a Leveraged Employee Share Plan

Employer and collective holding vehicle

The Singapore employer belonged to a group with a French parent. Employees subscribed for new shares through collective vehicle A, formed and governed under specified French Monetary and Financial Code provisions.

Employee contribution and bank financing

A subscribed on employees’ behalf. Employees paid Y% of the subscription price as personal contribution. Under a swap the bank paid the remaining 100%−Y%; employees were not liable for that bank-funded balance. A used both contributions to acquire the shares.

Units, lock-up and dividends

Employees received A units corresponding to their investment, generally not redeemable for N years from issue, subject to exceptions. Throughout the plan A paid the bank any dividends on the underlying shares. Y and N were anonymised; the summary does not specify actual percentages or duration.

Payout choices at the end

At lock-up expiry, each employee received an entitlement to a leveraged amount comprising the personal contribution and a formula-based return. They could redeem it in cash or shares, or transfer units to another similar shareholding vehicle to continue the investment.

Swap settlement and downside protection

At expiry A owed the bank the shares’ swap-determined market value less the leveraged amount and settled by selling shares to the bank. If the share-price fall would otherwise reduce an employee’s formula payout below their contribution, the bank paid a top-up to A to ensure receipt of that contribution.

Taxable amount and reasons

IRAS ruled the gains taxable employment income under section 10(1)(b) pursuant to section 10(6). The taxable amount was the actual leveraged amount received at lock-up expiry or early exit, less personal contribution. Relevant provisions also included section 10(7) in the 2014 Revised Edition.

The employee was offered rights to acquire shares during Singapore employment, bringing the gains within section 10(6). The leveraged amount represented the redeemable shares’ or units’ value. Funding part of the purchase through the bank was a financing arrangement and did not alter the tax character of the acquisition-right gains.

Publication date and scope

The source is the IRAS ruling published on 21 May 2021. It binds only the applicant and specified transaction. IRAS need not give another similar transaction the same treatment and does not update published summaries for later legislative or interpretive changes. This article retains the dated source’s provision numbers and factual limits.