The Singapore Budget 2025 is introducing a welcome change to the requirements for obtaining a tax deduction for share-based awards granted to employees in Singapore.
With effect from the Year of Assessment (YA) 2026, a tax deduction for such awards will be available also for awards that are settled with newly issued shares, not just treasury shares. Additional clarifications from the Inland Revenue Authority of Singapore (IRAS) on the specific requirements and timing for the tax deduction are expected to become available by September 30, 2025.
Background
Under existing law, companies granting share-based awards to employees in Singapore could claim a tax deduction in Singapore for awards only if the awards were settled with treasury shares. The rationale for this rule was that a deduction should be available only for actual costs incurred by the company in relation to the awards. If settling awards with newly issued shares, companies were not perceived to incur an actual cost – even in situations where a Singapore subsidiary reimbursed a non-Singapore parent company for shares issued by the parent.
By contrast, if the company settled awards with treasury shares, the company incurred a cost equal to the amount of the price paid to purchase the shares and such cost was generally deductible in Singapore (provided certain other conditions were met). In practice, this rule made it difficult for many companies to claim a tax deduction for share-based awards granted in Singapore. In some cases, local corporate law rules do not provide for the concept of treasury shares. And even for companies that did or could purchase shares to be held in treasury, tracking the purchase price for such shares and matching it to the shares issued in satisfaction of awards granted in Singapore was extremely challenging. Therefore, again, few companies were able to claim tax deductions for share-based awards granted in Singapore.
Update
Under the Singapore Budget 2025, it will now be possible for a Singapore company to claim a tax deduction for payments made to the parent or other holding company (or a special purpose vehicle) for newly issued shares of the parent company with effect from YA 2026.
A Singapore company will be allowed to claim a deduction for the lower of the following (in both cases minus any price paid by employees to acquire the shares):
(i) the amount paid by the Singapore company, and
(ii) the fair market value, or net asset value of the shares (if the fair market value is not readily available), at the time the shares are applied for the benefit of the employee.
There are still a number of open questions that we expect the IRAS to provide guidance on by the third quarter of 2025. In particular, it is not clear if the new regime will apply as of January 1, 2025 (i.e., the beginning of the YA 2026) or a later date, and whether a deduction could be claimed only for share-based awards granted after the commencement of the new regime or for share-based awards settled after this date (even if granted before this date). Therefore, it may be premature for parent companies to enter into recharge agreements with their Singapore subsidiaries until further clarity is obtained on the precise mechanics for the administration of the new regime.
Our Singapore colleagues are currently engaging with IRAS, to ensure all open issues will be addressed in the IRAS’ expected guidance. If you have any questions or comments with respect to the forthcoming guidance, please contact your Compensation attorney.
Relatedly, IRAS has taken the position that notional stock-based compensation (SBC) expenses are to be included in the cost base when computing service fees that are to be charged by a Singapore company to an intercompany affiliate where a cost-plus methodology is adopted. IRAS has taken this position even in situations where the notional SBC expenses are recorded on the Singapore subsidiary’s books solely from an accounting perspective and there is no actual recharge that has been incurred by the Singapore subsidiary to the issuing company for the shares. If the notional SBC expenses are included in the cost base, this increases the service fees that are to be recognized by the Singapore company. If there is no corresponding deduction for the Singapore subsidiary, the increase to taxable income could potentially be material. It is therefore important to consider the implications of the historical and prospective SBC arrangement in order to mitigate the Singapore tax exposure, such as through implementing a recharge arrangement claiming a tax deduction for the shares under the new regime if conditions are met.
To access our Singapore office’s client alert on all relevant tax updates introduced by Singapore Budget 2025, please see here.
