Understanding ESOS and tax implications in Malaysia

Understanding ESOS and tax implications in Malaysia

Understanding ESOS and tax implications in Malaysia

Employee share option schemes (ESOS) have become increasingly popular among companies in Malaysia as a way to retain top talent and boost productivity. They offer employees the option to purchase company shares at a discounted price, which can result in a significant financial gain if the company performs well.

In this article, we will discuss the fundamentals of ESOS and why they are a valuable tool for employers. We will also examine the tax implications of ESOS in Malaysia; the regulatory bodies and laws governing ESOS taxation; and best practices for companies and C-suite leaders to achieve compliance and minimise tax liabilities.

What are ESOS?

ESOS are a form of employee compensation that allows employees to purchase company shares at a discounted price. These schemes are designed to incentivise employees to work productively and contribute meaningfully to the company’s success, as their financial gain is tied to the company share price movement. The higher the increase in share price, the larger the financial gain to the employees.

ESOS typically have a vesting period, meaning that employees must wait a certain amount of time before they can purchase shares. This period is intended to encourage employees to remain with the company longer and to align their interests with those of the company.

ESOS versus Employee Stock Ownership Plan (ESOP)

An ESOS (Employee Stock Option Scheme) and an ESOP (Employee Stock Ownership Plan) are both employee benefit programs that involve providing employees with a stake or ownership in the company.

However, there are some differences between the two:

  • Nature of ownership
  • Purpose
  • Structure and funding
  • Control and governance

Plan types such as restricted share plans and performance share plans all have different objectives but can all be categorised under long-term incentive plans.

Employee Benefits

Tax implications of ESOS in Malaysia

One of the most critical factors companies must consider when implementing ESOS is the tax implications for the business and their employees.

Failure to comply with tax regulations can result in significant financial penalties and reputational damage. Therefore, it is crucial that companies fully understand the tax requirements of ESOS in Malaysia and take steps to ensure compliance.

ESOS tax implications for employers and employees

ESOS can have different tax implications for both employers and employees.

For Malaysian employers, ESOS are usually considered a non-deductible expense for a company. Employers are required to report the value of the options granted to employees as an expense on their financial statements under Malaysian Financial Reporting Standard (MFRS) 2. The employer would also be required to deduct income tax from the amount of gain realised by the employee on the exercise of the option.

Employees who exercise their options to purchase shares are subject to income tax on the difference between the market value of the shares at the time of exercise and the option exercise price paid. The individual income tax rate in Malaysia varies depending on the chargeable income of the individual, with rates ranging from 0–30%.

Calculating ESOS tax liabilities

Companies must accurately calculate the tax liability associated with share options for both the employer and employee to ensure compliance.

Under MFRS 102, companies are required to recognise the fair value of the share-based payment as an expense in their financial statements. The fair value of the share-based payment is determined at the grant date, taking into account the exercise price, the term of the option, the current price of the underlying share and the expected volatility of the share price.

Once the fair value of the share-based payment has been calculated, it is recognised as an expense over the vesting period.

Tax Liabilities

How to ensure ESOS compliance

In Malaysia, the regulation of ESOS is overseen by several government bodies, including the Securities Commission Malaysia and the Inland Revenue Board of Malaysia (IRBM).

Under Malaysian law, ESOS tax treatment varies depending on whether the option is granted to a local or foreign employee. Local employees are subject to Malaysian tax on the gain from exercising the option. In contrast, foreign employees are taxed only on the portion of the gain attributable to work done in Malaysia.

Penalties for non-compliance with ESOS taxation regulations can be severe. Companies that fail to comply with ESOS regulations may face fines, penalties and legal action from the authorities.

Best practices for C-suite leaders

C-suite executives can support ESOS compliance while minimising tax liabilities by implementing the following best practices in their organisation:

  • Engage with tax experts who can provide guidance on the tax implications of ESOS and assist in accurately calculating tax liabilities for your business and your employees.
  • Ensure compliance with all regulations and laws governing ESOS taxation in Malaysia.
  • Develop a comprehensive understanding of the accounting for share options under MFRS 102. This accounting involves measuring the fair value of the options, recognising an expense in the income statement and recognising a liability in the balance sheet.
  • Keep accurate records of all ESOS transactions and ensure that all employees are adequately informed and educated about the tax implications of their share options.
Best Practices

Common pitfalls to avoid

Despite the importance of compliance and accurate tax calculation, there are some common pitfalls that companies and C-suite leaders can encounter when it comes to ESOS taxation, including:

  • failure to accurately calculate the tax liability associated with share options, which can result in underpayment or overpayment of taxes;
  • incorrectly accounting for share options under FRS 102, which can lead to misstated financial statements and regulatory compliance issues; and
  • failure to meet ESOS reporting obligations.

Woon Chee says it is not enough to ensure your company pays its ESOS taxes on time; it is also important to be aware of and fulfil the reporting requirements that follow. For example, she notes that “upon launching the ESOS, the employer has to notify the IRBM within 30 days after the expiry date of the period of acceptance of the offer.”

How to avoid pitfalls

To avoid these mistakes, it is crucial for companies to engage with an expert ESOS provider who:

Offers a comprehensive platform for ESOS management that gives your employees and HR professionals full visibility of the details and status of each scheme
Possesses a deep knowledge of local tax laws within the jurisdictions your organisation operates, a wealth of ESOS management and relevant professional qualifications
Specialises in an integrated suite of corporate services alongside ESOS management, including taxation, accounting and payroll (so that all the expertise you need is easily, quickly accessible via one point of contact)

Woon Chee urges businesses not to underestimate the power of an innovative ESOS management platform.

“A good ESOS platform shows you all the details of every ESOS, so it’s easy for you to keep track of them and will largely reduce your tax liability,” she says.

It also takes the guesswork out of tax calculations so you can have confidence in your regulatory compliance.

Unlock the power of ESOS

ESOS is a powerful tool for retaining talent and boosting productivity, but C-suite leaders need to have a comprehensive understanding of the tax implications and regulatory requirements for ESOS in Malaysia.

By engaging with tax experts, staying up to date with regulatory requirements and following best practices for compliance and accurate tax calculation, companies can minimise tax liabilities and ensure that their ESOS programs successfully achieve their intended goals.

At BoardRoom, we offer expert accounting and tax advisory services across the Asia-Pacific region. By engaging our tax professionals, you receive access to specialist guidance and support to ensure compliance with all regulatory requirements and minimise tax liabilities related to ESOS.

Additionally, we can connect you with trusted consultants to support you with plan design, prior to implementing, so that your schemes are tailored to your needs.

Please contact us to find out how our world-class ESOS services can benefit your business.

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What is an Employee Share Plan? (ESAS vs ESPP)

Employee Share Plans in Malaysia

What is an Employee Share Plan? (ESAS vs ESPP)

How Employee Share Plans work in Malaysia

Essentially, an Employee Share Plan is a remuneration package that can reward employees of both privately held and publicly listed companies in Malaysia with either:

  • the company’s ordinary shares; or
  • the option to buy these shares in the future at a subsidised rate.

Employee Share Plans are an effective way to attract and motivate your employees while providing an incentive for them to contribute to long-term company performance. These plans can help you to retain and reward your talent whilst managing company cash flow or working capital.

You can use several Employee Share Plan types to provide cash-free remuneration to staff, including:

  • Employee Share Option Schemes (ESOSs);
  • Share Award Schemes (SASs)
  • Performance Share Plans (PSPs)
  • Restricted Share Plans (RSPs); and
  • Employee Share Purchase Plans (ESPPs).

Our guide to each type below can help you to decide on the best option for your company.

Employee Share Option Schemes (ESOSs): ESOS Meaning & Details

An Employee Share Option Scheme (ESOS) gives employees the contractual right to buy company shares at an exercise price in the future. The reason for this is, the greater the share price, the greater the gain from exercising their options. Typically, you will assign a preferential, pre-determined price or benchmarked value to the share options. It is worth noting that employees are not obligated to purchase these shares, however this right is granted to incentivise employees to continue working hard, as they will directly reap benefits if the company’s share price rises.

An ESOS case study example

Nora Yeoh, the Chief Operating Officer of Jack Manufacturing Company, has received a share option offer to acquire 50,000 company shares. The offer price (also known as the exercise price) per share is RM20.00. There can be a moratorium period which Nora will not be able to exercise the options, which is called a vesting period. Once the moratorium has been lifted, Nora’s options are now vested, and Nora can pay an exercise cost to acquire the shares within a specified period of time.

There could also be certain performance criteria that Nora will have to fulfil before the options vest.

Assuming that the share options vest and Nora is still working at the company on 1 April 2020, she can choose to exercise her share options. If she does this, she will pay RM20.00 per share to receive 50,000 shares in the company.

Malaysia Employee share option schemes

Share Award Schemes (SASs): SAS Meaning & Details

A Share Award Scheme (SAS) is very similar to an ESOS. The key difference is that employees are rewarded with actual share ownership from the outset, instead of only receiving the option to buy future shares.

As with an ESOS, there could also be certain criteria or performance metrics that the employee will have to fulfil.

To prevent share dilution, companies often only allot 15% of their current outstanding ordinary shares at any time to use in an SAS.

As outlined in the table below, there are two types of SAS:

  • Performance Share Plans (PSPs); or
  • Restricted Share Plans (RSPs).
Type of SASPlan DurationVesting PeriodPerformance MetricParticipantTarget Companies
PSP3-5 YearsEnd of Plan (with Annual Evaluation)

– Total Shareholder Return

– Return on Equity

– Return on Sales

– Market Ranking

– Directors

– Non-Executive Directors

– Senior Managers

– Heads of Department

 

– Listed and Private Companies
RSP3 YearsAnnually

– EBITDA

– Economic Value Added

– Manager 

Performance Share Plans (PSPs): PSP Meaning & Details

Performance Share Plans (PSPs) are typically aimed at a company’s senior management team. They provide incentives to focus on delivering long-term company performance that creates shareholder value. To help achieve longer-term company objectives, PSPs tend to have longer plan durations (often 3-5 years), and the shares vest at the end of a PSP.

Some companies have a claw-back policy that requires the individual to return a certain number (if not all) of their rewarded shares if their performance is dissatisfactory.

A PSP case study example

After joining the Jack Manufacturing Company Performance Share Plan (PSP), Sarah Perry was allotted 1,000,000 shares on 1 April 2020. At each annual performance evaluation, Sarah receives a score that is independent of her score in previous years.

At the end of her three-year period, Sarah receives 900,000 ordinary shares, based on the average of all of her scores. She can choose to keep or sell these shares. However, she knows that keeping them allows her to enjoy voting rights and makes her eligible to receive dividend payments.

Sarah’s PSP results appear in the table below:

Evaluation Date (Annually)2 April 20212 April 20222 April 2023
Score Card95%110%65%
Average Score across 3 years(95% + 110% + 65%) / 3 = 90%
Total Awarded1,000,000 x 90% = 900,000 Ordinary Shares

Restricted Share Plans (RSPs): RSP Meaning & Details

Restricted Share Plans (RSPs) work similarly to PSPs, but over a shorter term.  The key difference is that shares in an RSP vest annually, which means these plans tend to better suit companies with short-term objectives.

An RSP case study example

After joining the Jack Manufacturing Company Restricted Share Plan (RSP), Peter Li was allotted 1,000,000 shares on 1 April 2020. The RSP plan has a three-year duration and two vesting periods.

The first vesting date is 2 April 2022. On this date, 50% of Peter’s allotted shares will vest based on his performance from 2 April 2020 until 1 April 2022.

The second vesting date is on 2 April 2023. On this date, the remaining 50% of Peter’s allotted shares will vest, depending on his performance from 2 April 2020 till 1 April 2023.

During the first vesting period, Peter only manages to reach 95% of his pre-set target. The Remuneration Committee (RC) therefore decides to vest only 450,000 shares. They could place the remaining 50,000 shares back in the company’s treasury account, or evaluate it again towards the second vesting period.

For simplicity, let’s assume for this example that they place Peter’s unvested 50,000 shares back into Jack Manufacturing Company’s treasury account.

During the second vesting period, Peter performs well and manages to reach his target. The RC therefore decides to reward him with 500,000 shares.

At the end of the three-year period, Peter has received a total of 950,000 ordinary shares. Like Sarah, he can choose to keep or sell the shares.

Peter’s PSP results appear in the following table:

Vesting Period2 April 20222 April 2023
Performance Metrics95%100%
Vested450,000500,000
Unvested50,0000
Total Awarded450,000 + 500,00 = 950,000
Employee Shared Plan in Malaysia

Employee Share Purchase Plans (ESPPs): ESPP Meaning & Details

You can offer this type of Employee Share Plan to all company employees. Effectively, it means your company subsidises employees to buy ordinary shares in the company.

In an Employee Share Purchase Plan (ESPP), you automatically deduct a portion of the employee’s gross income every month and place it in a separate company account for a minimum one-year period. These plans also usually do not have a vesting period.

At the end of the year, the employee can either:

  • choose to use those funds to purchase ordinary shares; or
  • have the money transferred back to their personal account.

As an extra incentive for employee participation, you can also offer a good interest rate on the set-aside funds. This means that the employee benefits even if they don’t choose to buy your company’s ordinary shares.

Other effective participation incentives include:

  • subsidising a certain amount (such as 25%) of the total cost of any shares that an employee purchases; and
  • share purchase matching, in which your company uses its own funds to buy x number of ordinary shares for every x number of ordinary shares the employee buys.

Which Employee Share Plan is best for my company?

In theory, you can use any of the Employee Share Plans in this article to provide cash-free remuneration to staff. However, you still need to consider the complexities and administrative costs of each option.

In our experience, coming up with a single Employee Share Plan that will work for everyone is not possible. That’s why we have designed a specialised digital Employee Share Plan system that is completely flexible.

Our experts can provide you with a purpose-built solution for your needs that will increase efficiencies and reduce costs, while still complying with current and future reporting requirements.

Choose BoardRoom as your trusted Employee Share Plan firm in Malaysia

If you are looking for reliable ESP services in Malaysia from a reputable provider, BoardRoom is your optimal choice. Our expert team has years of experience providing advice, solutions, and services for companies of all sizes and industries, whilst ensuring your organisation stays compliant with all local laws and regulations. Whether you have questions about the best Employee Share Plan options (ESOS, ESPP, or otherwise), the meaning and implications of choosing these plans, how to implement them, and so on, we are happy to assist.

We are also proud to use innovative technologies as part of our offerings – as such, we have designed an all-encompassing Employee Share Plan solution that combines the experience of our expert team with a powerful digital platform, EmployeeServe.

Contact us today to find out more about our comprehensive Employee Stock Option Plan (ESOP) services.

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