Ministerial Statement By The Minister For Finance, Dr Richard Hu, On Entrepreneurial Employee Stock Option Scheme At Parliament House On 22 May 2000

Introduction

In my Budget Statement on 25th February this year, I said that a scheme to enhance the tax treatment of ESOP for high-tech start-ups would be announced by end May. Today, I am happy to announce the new ''Entrepreneurial Employee Stock Option Scheme''.

Employee stock options or ESOP play a key role in a vibrant entrepreneurial environment. Many fast-growing high-tech start-up companies attract talent, not through high salaries, but by offering stock options to employees. An attractive tax treatment of ESOP will therefore give a strong boost to entrepreneurship and risk-taking. Moreover, as talent is internationally mobile and are increasingly rewarded by means of stock options, especially in the high-tech start-ups, we must ensure that our tax treatment of ESOP is internationally attractive, to give us a competitive edge.

Entrepreneurial Employee Stock Option Scheme

This new scheme aims to foster an entrepreneurial spirit in the smaller high-risk companies and its employees, many of whom have to forego more secure and higher paying jobs to start or join these start-up companies.

Under the Entrepreneurial Employee Stock Option Scheme, a 50% income tax exemption will be granted on gains arising from exercising ESOP. The 50% tax exemption would be granted to up to $10 million of gains, over a 10-year period. To illustrate, if an employee exercises his stock options and makes a gain of $1 million, 50% or $500,000 of the gains will be exempt from tax. Over the next 9 years, he can enjoy 50% tax exemption on a further $9 million gains from ESOP.

Companies with gross assets of up to $100 million at the time the ESOP are granted will be able to benefit from this scheme. Based on the existing top marginal personal income tax rate of 28%, an employee can enjoy tax savings on gains from ESOP of up to $1.4 million. Coupled with the absence of capital gains tax in our regime and low personal tax rates, our tax treatment of stock options will be very attractive compared to most countries.

The scheme has been structured with minimal restrictions, so as to give companies the maximum flexibility to implement their ESOP plans to suit their differing business needs. I will now go through some of the details of the scheme.

Qualifying Companies

Instead of restricting the scheme to companies in high-tech sectors, which is difficult to define, I have decided that for a start, this scheme will be available to companies from all sectors. Companies, whether listed or unlisted, with gross assets of not more than $100 million, will be able to qualify for the scheme. In addition, these companies also have to be incorporated in Singapore and carry out business activities in Singapore.

Qualifying Employees

The scheme is targetted at those employees who devote a significant portion of their working time to the company. Therefore, to qualify, the employee must work at least 30 hours per week for the company. An employee who works less than 30 hours for a company can also qualify if he spends at least 75% of his total working time per week with that company. A non-executive director will not qualify. In addition, the employee should not control 25% or more of the voting rights of the company.

Effective Date and Timeframe for Review

The enhanced tax treatment will apply to ESOP issued on or after 1 June 2000. The scheme will operate for five years,after which the Government will review the scheme to evaluate whether the objectives of the scheme have been met. Meanwhile, during these 5 years, we will continue to finetune the scheme as and when modifications are warranted.

Further Details

Details of the scheme, including vesting period requirements and treatment of discounted options, will be released by IRAS by 1 June 2000. They will be available on the IRAS website.

Conclusion

Through the Entrepreneurial Employee Stock Option scheme, Singapore is sending a clear signal of its support for enterprise and wealth creation, and strong encouragement to those entrepreneurs and employees who are willing to take risks. The use of ESOP is of course also relevant for the larger and more established companies and should be encouraged. But the degree of incentive will be less as established companies have less problems with attracting and retaining people. My Ministry will be reviewing the tax treatment of ESOP for these larger companies. I will be announcing the scheme for the established companies in next year's Budget Statement.