ESR review of startup share scheme taxes should address employee liquidity challenge: observers 

[SINGAPORE] A review of Singapore’s tax framework for employee share schemes could make startups more attractive to specialised talent by ensuring staff are taxed only when they are able to realise the value of their equity, observers said.

Their comments follow the recent release of the Economic Strategy Review (ESR) committee’s final report, which elaborated on 32 recommendations first outlined in an executive summary published in May.

As part of its proposals to foster a more dynamic enterprise ecosystem – where more Singapore-based companies can start, scale and succeed globally – the committee suggested reviewing the taxation framework for employee share option plans (Esops) and other employee share ownership schemes.

The committee noted that many startups rely on share-based remuneration to attract skilled employees, and said a review of the framework would “ensure Singapore remains a competitive location for talent”.

It did not, however, detail the specific issues it hoped such a review would address.

Under Singapore’s current framework, gains from employee share schemes are generally taxed as employment income. For Esops, tax is typically payable when employees exercise their share options, while gains from employee share ownership schemes are taxed when the shares vest. 

The ESR committee’s proposal comes ahead of the introduction of an artificial intelligence and technology track under the Ministry of Manpower’s Overseas Networks & Expertise Pass in January 2027.

The new track, which will replace the existing Tech.Pass, aims to attract top-tier technology talent by allowing applicants to meet the fixed monthly salary criterion of at least S$30,000 through a mix of cash and equity-based remuneration.

The liquidity challenge 

Taxing potentially illiquid and high-risk paper gains as ordinary employment income puts Singapore’s startup ecosystem at a “potential disadvantage when competing for highly mobile global startup talent”, said Deloitte Singapore’s global employer services partner Jod Gill and director Simon Chapman.

At present, more than 70 per cent of local startups implement an equity plan by Series A. Some seed-stage startups launch Esop pools even sooner due to investor expectations and a competitive talent market, indicated a 2025 report by equity management platform Qapita. 

The report also found that 85 per cent of Singapore startups use share options as their primary equity instrument. 

Some founders told The Business Times that employee share schemes help startups compete for talent despite being unable to match the cash salaries offered by larger employers. At the same time, these plans give employees a stake in the company’s long-term success.

“We use them because we want our team, especially our senior leaders, to have skin in the game,” said Raunak Mehta, co-founder and CEO of insurtech startup Igloo.

“Stock or equity gives employees a sense of ownership. It fundamentally shifts the psychology from ‘I work for this company’ to ‘I am building this company’.”

However, Qapita founder and CEO Ravi Ravulaparthi noted that employees frequently ask when they will be able to realise the value of their equity, and “often, the honest answer is: not soon, and not simply”. 

He explained that private startup employees may not have the option to sell their shares on the open market to help meet any tax liabilities – unlike staff of listed companies, who can generally do so.

“There is no liquid market to sell to, yet the tax obligation is immediate. Employees are effectively required to pay tax on paper gains they cannot yet access,” he added. 

He also said that in South-east Asia, liquidity events remain far less frequent than in more mature markets, pointing to his firm’s 2025 report which found that 75 per cent of companies in the region had yet to offer any form of liquidity to employees.

As far as Singapore is concerned, Deloitte’s Gill and Chapman described the country’s framework as stable and transparent, noting that it already incorporates progressive measures such as the Qualified Employee Equity-based Remuneration Scheme, which allows eligible employees to defer tax payments. 

Still, they said there was scope to review whether the current five-year deferral period remains appropriate for startup life cycles, as well as the interest charged on deferred tax.

What could change?

More broadly, Gill and Chapman said Singapore could strengthen its competitiveness as a startup hub by reviewing when startup equity is taxed, how it is taxed, and the tax treatment of foreign talent. 

They noted that jurisdictions such as the UK, the US and several Baltic countries offer more favourable tax treatment for qualifying startup share schemes, including deferring taxation until shares become liquid in some cases.

The most significant reform for Singapore, they added, would be to shift the taxable event to the point when employees are able to realise value from their shares, rather than when options are exercised or shares vest.

Ravulaparthi of Qapita agreed, noting that “even when an employee has exercised their options and become a shareholder, the reality is that no value has been accessed until employees sell their shares or a liquidity event occurs”.

“Aligning the tax trigger with this moment instead would remove the most notable financial friction in the current framework and emphasise the true value of equity for employees,” he said.

Gill and Chapman also suggested reviewing Singapore’s “deemed exercise” rule, under which foreign employees may face a tax bill on unvested or unexercised equity when they leave Singapore.

They said the rule is “unique among established tax jurisdictions” and could influence where globally mobile talent chooses to relocate.

However, tax reform alone would not be enough to strengthen startup equity as a talent attraction tool, said Ravulaparthi.

He said improving employees’ understanding of equity compensation and expanding secondary liquidity options, such as company-led buybacks and facilitated secondary sales, would also make employee share schemes more attractive.

“Access to liquidity should not depend solely on an initial public offering or acquisition. Developing more liquidity pathways… would allow employees to participate in the upside throughout the company’s growth, not only at the terminal exit.”

While reviewing the tax framework could strengthen the appeal of employee share schemes, recruiters cautioned that they remain only one factor in attracting talent.

ManpowerGroup Singapore country manager Linda Teo said Esops and employee share ownership schemes generally “play a supporting role” in helping startups attract and retain specialised talent, as candidates typically anchor their decisions on cash salaries and immediate benefits.

“Equity tends to carry more influence when there is strong confidence in the startup’s direction and greater clarity on potential outcomes, and when the role offers opportunities for ownership and growth,” she said, adding that this was particularly the case for senior leadership hires.

Shane Chiang, co-founder and CEO of cybersecurity startup Momentum Z, echoed the view that tax was just one part of the equation.

“People join startups because they believe in the mission, the team and the opportunity to build something meaningful. A better Esop framework won’t replace those fundamentals, but it can make Singapore startups more competitive when we are trying to recruit exceptional talent,” he said. 

“Employees are taking a real risk by accepting equity instead of higher cash compensation. If we want more innovation and more globally successful Singapore companies, the policy framework should encourage people to take that calculated risk alongside founders.”