What is ESOP and How Does It Work in Hong Kong?

December 12, 2022

An Employee Stock Options Plan (ESOP) is a strategy employers use to retain well-performing candidates in their company. Simply put, the company, either private or listed, lets the employees buy and own shares of the organization for a particular period called the exercise period. These stock owners will benefit from the employee shares according to the company’s future value. The employees are allowed to sell or cash out the stocks only at the time of retirement or termination after all vesting rules are followed.

This article throws light on the benefits of ESOP for employees and employers, what factors you should bear in mind when you consider ESOP for employees and more ESOP examples for your better understanding.

Employee Stock Options Plan in Hong Kong

To sustain deserving talents in the company, the employers choose certain employees considering their performance and significance in the company’s growth. It is mutually rewarding for both the employees and the employers. The end result, however, is favorable for the growth of the company. This way, the employees will hold a part of the company shares. Read on to learn how ESOP in Hong Kong works.

What is ESOP?

If you are an employee, your company may provide share options to you, assessing the quality of your work. Note the share option is the right that allows you acquisition of shares for an exercise period. This can help you feel motivated to work better and for a longer period with the company. The employer adopts this as a strategy to keep your goals aligned with those of the company while also allowing you to take ownership of the shares. You can also see this as a way to raise your overall compensation and be more involved in the company’s growth, just as any employer would.

How does ESOP work in Hong Kong?

The employee shares are offered to a staff member based on his tenure and productivity. The Employee Stock Options Plan works in two ways. They can either be exercised after a vesting period or be exercised immediately with a ‘cliff’- usually one year. During the one-year cliff, you cannot exercise your power over the shares. This is usually done to decipher the longevity of the employee’s association with the organization. Every company reserves certain shares to be assigned to its employees. The reserved shares are referred to as the options pool. However, opting to use these shares is not a compulsion.

Who can benefit from ESOP?

It is not only the employees who can enjoy the perks of ESOP in Hong Kong. The directors of the company and the consultants can also reap the benefits of ESOP for employees and employers. To know how the benefits vary from employee to employer, read further.

Benefits of ESOP for employers

If you are an employer offering an Employee Stock Options Plan to your workers, you can expect the following benefits.

You can ensure there is enough funding to keep your people happy
The best talents will promise a longer association
Instead of providing incentive benefits in the form of cash or expensive vouchers, you can opt for stock incentives
When you face a dearth of financial resources to allocate to your employees, these employee shares can save a lot of money.
Your equity capital will rise with the allocation of stocks in the company
Third-party vendors will come forward to provide resources and thereby maximize your income.
Transactions involving stocks are better than those involving cash as they are not liable for taxation.
If there are any outstanding debts concerning your business, you can refinance them using the ESOP in Hong Kong.

Benefits of ESOP for employees

If you are an employee working for an organization receiving employee shares, you can have the following benefits.

You will feel appreciated for your work, motivating you to keep working with the company for a longer time.
As long as your shares are a part of the company trust, you can enjoy non-taxation for the shares you own.
The shares will be returned to you during your retirement or termination.
The shares are sure to grow in their value. You can also assess its future value for as long as you want to stay with the company.
You can be sure of job security during your exercise time.

Example of ESOP

If you want to better understand the stock options for employees, the following ESOP example will resolve your doubts.

Case 1

Consider Jack has been working for ABC company in Hong Kong since 2019, and the company grants him 500 options for 2 years with a one-year cliff. He cannot exercise his right to use it for the first year. He can later exercise his ownership of 50% of the shares, ie., 250 options in 2020 and the next 50% of it in 2021.

Case 2

Similarly, Jack has been working with ABC company in Hong Kong since 2019, and the company offers 500 options for a vesting period of 2 years. After 2 years of service in the same company, he can exercise his right to use the stocks ie., 500 options. If Jack chooses to quit before completing 2 years, the options automatically get canceled for usage.

Tax treatment of ESOP in Hong Kong Administrative formalities for ESOP in Hong Kong

According to the Companies Ordinance, the ESOP in Hong Kong is not a taxable income. But if you are an employer offering shares to your selected staff, you must immediately notify the Inland Revenue Department. If the employee uses the stock options, the IRD assesses the income he may generate. Depending on the way the shares are used and the profits made, he will be liable to pay salary tax. The gains in the share values will be assessed and are liable for taxation during the particular year of exercising the share option. The taxable amount is calculated by determining the value of shares at the exercise time.

Other consideration for ESOP in Hong Kong

The employers need not follow any set regulation on the option pool volume. Considering the company’s industry, overall size, and work culture, a standard rate of 8% to 20% of the total share capital will be offered. And these shares will allow you the exercising power not just in the working company but also in the subsidiaries based on certain factors considering the options pool. Similarly, if you are an overseas employee exercising ESOP in Hong Kong, you are liable for salary tax in favorable cases. Sometimes, the dividends you receive on ESOP are eligible for a tax deduction if the sum is used to repay an ESOP loan.

How to set up ESOP in Hong Kong?

Every company will decide on the particulars of the Employee Stock Options Plan during the annual general meeting. Upon the approval of all the board directors and deciding authorities, you will receive an Options Certificate. Be wary of the regulations about certificate issuance. If the company garners enough funds to support the plan, you can start offering employee shares after the first investment cycle.

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