ESOP vs. phantom shares in Singapore, explained
In brief
An employee share option plan (ESOP) gives an employee the right to buy real shares, so it dilutes the cap table and brings shareholder approvals and ACRA filings with it. A phantom share pays cash linked to the share value, so the register stays untouched but the company carries a cash liability, CPF and accounting volatility. Tax timing, the deemed exercise rule for departing foreign employees and the treatment at exit differ sharply between the two.
Key figures
0 Shares issued under a phantom share plan
14 days Deadline to lodge a return of allotment with ACRA after shares are issued on exercise
1 month Before cessation of employment, when unexercised options of a departing foreign employee are deemed exercised for tax
50 Member limit for a Singapore private company, which excludes shareholders who became members while employees
4 years · 1 year Common vesting period and cliff, a market convention rather than a legal requirement
Contents
ESOP vs phantom shares at a glance
How an ESOP works in a Singapore company
How phantom shares work
ESOP tax, CPF and the deemed exercise rule
Accounting for ESOPs and phantom shares
Leaver terms and change of control
Choosing between an ESOP and phantom shares
An equity incentive plan is a capital structure decision as much as a remuneration one. A Singapore company can give employees real equity through an employee share option plan (ESOP), or a cash right that tracks the value of the shares through a phantom share plan. The choice decides who appears on the register, what has to be filed with ACRA, when the employee is taxed, whether CPF applies and how the plan appears in the accounts.
1. ESOP vs phantom shares at a glance
A share option ends in a share. A phantom share ends in a cash payment. Almost every other difference follows from that.
Feature | ESOP share options | Phantom shares |
|---|---|---|
What the employee receives | The right to buy shares at a fixed exercise price | A contractual right to cash linked to the share value |
Effect on the cap table | Dilutive once exercised | No shares issued |
Company law steps on delivery | Shareholder approval under section 161, allotment, return of allotment, register update | None for the payout itself |
Singapore income tax | Generally on exercise, on the gain over the exercise price | As employment income, generally when paid |
CPF | Generally not payable where shares are delivered and no cash is paid | Generally payable on the cash payment |
Accounting under SFRS(I) 2 | Equity-settled, measured at grant date | Cash-settled liability, remeasured each reporting date |
Cash cost to the company | None on exercise, the employee pays the exercise price | The full payout |
2. How an ESOP works in a Singapore company
An ESOP delivers real shares, so every exercise is a share issue under the Companies Act 1967. The administrative burden falls on the company at each exercise, and errors surface in due diligence.
Market documents give a starting point. The Venture Capital Investment Model Agreements, known as VIMA 2.0 and published by the Singapore Academy of Law and the Singapore Venture & Private Capital Association in October 2022, include an Employee Share Option Plan Primer and an Employee Share Option Plan Schedule. Vesting over four years with a one-year cliff is a widely used convention, but it is a commercial choice and not a legal requirement.
Each exercise follows the share issue rules. The directors need prior shareholder approval under section 161, which may be a general approval. A general approval lapses at the next annual general meeting or the deadline for holding it, but shares may generally still be issued after that on the exercise of an option granted while the approval was in force. The directors resolve to allot, the company lodges a return of allotment with ACRA within 14 days, and ACRA updates the electronic register of members. Share issues and transfers in Singapore, explained sets out the steps and what happens if the approval is missing.
Employee shareholders affect the 50-member limit less than founders expect. Section 18 excludes employees, and former employees who became members while employed, from the count. An option exercised after the employee has left is different, because the holder becomes a member as a non-employee and counts towards the limit. Cap table consolidation before a Series A, explained covers the limit in more detail.
Employee shareholders also take part in any exit. A drag-along right binds an employee only if the employee is bound by the document that contains it, typically through a deed of adherence to the shareholders’ agreement or a provision in the constitution. Plan rules commonly require exercising employees to sign one.
3. How phantom shares work
A phantom share plan leaves the share register untouched. The employee receives a contractual right to cash, and the company carries the obligation to pay it.
No shares are issued, so the plan needs no section 161 approval for the payout, no return of allotment and no register update. That does not make it free of approvals. Shareholders’ agreements commonly make the adoption of any employee incentive plan a reserved matter that needs investor consent, whether or not shares are issued.
The plan may still fall within securities law. Offers under phantom or cash-settled plans may be offers of securities-based derivatives contracts under the Securities and Futures Act 2001, which need a prospectus unless an exemption applies. Exemptions may be available, including for offers to employees and other qualifying persons, and the position should be checked for each plan.
The payout is a cash cost. A plan that pays on a sale of the company creates a liability the buyer will price into the purchase, so the shareholders in effect fund it from their proceeds. A plan that pays before an exit draws on the company’s own cash.
Case in point
The exit payout
A company grants phantom shares tracking 2% of its equity value, payable only on a sale. The company is sold for S$50 million. The phantom holders are entitled to S$1 million in cash. The buyer treats the obligation as a debt-like item and reduces the price it pays to the shareholders. The payout is taxed as the employees’ employment income and attracts CPF for those who are Singapore citizens or permanent residents, subject to the additional wage ceiling. Holders of share options in the same company would instead have exercised and sold shares alongside the other shareholders.
4. ESOP tax, CPF and the deemed exercise rule
Singapore taxes a share option gain as employment income, generally when the option is exercised. A foreign employee who leaves Singapore can be taxed earlier, on options not yet exercised or even vested, under the deemed exercise rule.
For an option granted while the employee is exercising employment in Singapore, the taxable gain is the open market value of the shares at exercise less the exercise price. Where a selling restriction applies, the gain is measured when the restriction lifts. For unlisted shares, IRAS may use the net asset value of the shares where no market price is readily available.
The deemed exercise rule applies to employees who are not Singapore citizens and cease employment in Singapore, to Singapore permanent residents who leave Singapore permanently and to permanent residents posted overseas. Options granted during Singapore employment that are unexercised, or not yet vested, are treated as exercised one month before the cessation date, or on the grant date if later. The tax falls due through the IR21 tax clearance process, before the employee has sold anything. If the actual gain later turns out lower, the employee may apply for reassessment within five years after the year in which employment ceased, or the year of grant if later.
IRAS offers a tracking option as an alternative, under which the employer reports and the employee pays tax on the actual gain when it arises. The eligibility conditions include a tracking system with at least two years of experience and either a capitalisation within the top 25% of the relevant index or a banker’s guarantee for each employee covered, which most start-ups will find difficult to meet.
Phantom shares sit outside IRAS’s guidance on employee share plans, which expressly excludes them. The payout is taxed as employment income, generally in the year it is paid. Unlike the delivery of shares on exercise, a cash payout under a phantom or cash-settled plan generally attracts employer and employee CPF contributions for Singapore citizens and permanent residents.
Note
Taxed before sale
Under the deemed exercise rule, a departing foreign employee can owe tax on options that have not been exercised or sold.
Case in point
The departing engineer
An engineer who is not a Singapore citizen holds 40,000 options over shares in a Singapore start-up, with an exercise price of S$0.10. Ten thousand have vested. She resigns to return home. One month before her last day the net asset value per share is S$0.60. Under the deemed exercise rule all 40,000 options are treated as exercised, giving a deemed gain of S$20,000, although she holds no shares and has received no cash. Her employer files the IR21 tax clearance and withholds money due to her pending clearance. If her actual gain later proves lower, for example because the start-up fails, she may be able to apply to IRAS for reassessment.
5. Accounting for ESOPs and phantom shares
Share options and phantom shares are accounted for differently, and the difference affects reported profit. Share options are measured once at grant. Phantom shares are remeasured until they are paid.
Under SFRS(I) 2, the Singapore equivalent of IFRS 2, a share option plan is an equity-settled share-based payment. The company measures the options at their fair value at grant date and spreads the expense over the vesting period, adjusting only for the number of options expected to vest. Later movements in the share price do not change the expense.
A phantom share plan is a cash-settled share-based payment. The company recognises a liability and remeasures it at fair value at each reporting date until it is settled, with the changes taken to profit or loss. As the company’s valuation rises, so does the expense. A company that reports under a different framework, such as SFRS for Small Entities, applies that framework’s own rules, which follow the same broad distinction.
6. Leaver terms and change of control
Both structures are contracts, and the plan rules decide what happens when an employee leaves or the company is sold. The statute supplies none of these terms.
Plan rules typically distinguish good leavers, who keep some or all vested awards, from bad leavers, who forfeit them. They set how long a leaver has to exercise vested options, and whether vesting accelerates on a change of control, either on the sale alone or only where the employee is also dismissed. A phantom plan needs the same terms, together with a definition of the value on which the cash payout is calculated.
Discretion in the rules carries risk. Where the board has discretion over leaver status or payout value, an employee who disagrees may bring a contractual claim, and courts may examine how the discretion was exercised. Clear definitions reduce that exposure under either structure.
7. Choosing between an ESOP and phantom shares
Neither structure is better in all cases. The table sets out the factors that tend to favour each.
Factor | Tends to favour share options | Tends to favour phantom shares |
|---|---|---|
Cash position | Limited cash, since exercise costs the company nothing | Cash available, or payout only on an exit |
Cap table | Dilution acceptable to founders and investors | Register kept closed to employees |
Employees | Employees who want to hold real shares | Employees who expect cash and need no vote |
Workforce | Mostly Singapore citizens | Many foreign employees who may leave before an exit |
Reported profit | Stable expense fixed at grant | Able to absorb remeasurement as the valuation rises |
Administration | Capacity to manage approvals and filings at each exercise | Capacity to fund payroll costs, including CPF |
Common questions
What are phantom shares?
Phantom shares are a contractual promise by a company to pay an employee cash equal to the value, or the increase in value, of a set number of shares. The employee receives no shares and no vote, and the company records the obligation as a liability. Payment is typically triggered by a sale of the company or a fixed date.
What is the difference between share options and phantom shares?
A share option gives an employee the right to buy real shares at a fixed exercise price, so it dilutes the cap table once exercised. A phantom share gives a contractual right to a cash payment linked to the value of the shares, so no shares are issued and the company bears the cash cost.
When are share option gains taxed in Singapore?
Generally in the year the option is exercised, on the open market value of the shares less the exercise price. Where a selling restriction applies, the gain is taxed when the restriction lifts. For unlisted shares IRAS may use net asset value where no market price is readily available.
What is the deemed exercise rule?
An IRAS rule under which options granted during Singapore employment are treated as exercised one month before a foreign employee ceases employment, or on the grant date if later. It applies to non-citizens leaving their Singapore employment and to permanent residents leaving permanently or posted overseas, and covers unexercised and unvested options. A tracking option is available to employers that meet IRAS conditions.
Is an ESOP taxable in Singapore?
Yes. Gains from an ESOP are employment income. The gain is the open market value of the shares at exercise less the exercise price, taxed in the year of exercise, or when any selling restriction lifts. Options granted to foreign employees during Singapore employment can be taxed earlier under the deemed exercise rule when they leave.
Are CPF contributions payable on phantom share payouts?
Generally yes. A cash payment under a phantom or cash-settled plan is treated as wages, so employer and employee CPF contributions apply for Singapore citizens and permanent residents, subject to the wage ceilings. Delivering shares on the exercise of an option, with no cash paid, generally does not attract CPF.
Does a phantom share plan need ACRA filings?
No ACRA filing is needed for the payout, because no shares are issued. The plan may still need investor consent under the shareholders’ agreement, and it may involve an offer of securities-based derivatives contracts under the Securities and Futures Act 2001, for which an exemption may need to be identified.
Do employee shareholders count towards the 50-member limit?
No, if they became members while employed. Section 18 of the Companies Act 1967 excludes employees, and former employees who became members while employed. A former employee who exercises options after leaving becomes a member as a non-employee and counts towards the limit.
About the author
Gavin McDaid is a practising solicitor (England and Wales) and former venture capitalist, with an LLM in Law and Technology from Queen’s University Belfast. He writes on company law, fundraising and governance in Singapore.
Sources
Singapore Venture & Private Capital Association — Model legal documents (VIMA 2.0)
Companies Act 1967, sections 18, 63 and 161 — Singapore Statutes Online
Accounting Standards Council Singapore — SFRS(I) 2 Share-based Payment
By Gavin McDaid. Last reviewed 31 October 2026.
General information only, current at the date of review. Not legal, tax or financial advice.