Are Employee Stock Options (ESOP) Subject To Personal Income Tax?

Key takeaways

• Tax on stock awards is only incurred when an employee transfers (sells) the shares, not at the moment they are granted.
• Whether bonus shares are taxed depends on the time of sale, not the time of receipt.
• The responsibility for declaring and paying the tax on behalf of the employee falls to an organization, such as a securities company or the issuing company, not the individual.
• Employee Stock Ownership Plans (ESOPs) require a clear compliance process to avoid legal risks.

Under current law, bonus shares from a company are considered taxable income to ensure fairness across all forms of employee benefits. When an employee sells their bonus shares, they must declare and pay personal income tax on the proceeds, which is calculated based on both income from salary and income from the transfer of securities.

Are bonus shares subject to personal income tax?

The most significant positive in the current tax policy is the deferral of the tax obligation for stock awards. According to regulations in Circular 111/2013/TT-BTC, employees do not have to pay PIT at the moment they receive bonus shares from their company. The tax liability is only officially triggered when the individual transfers (sells) these shares.

This tax deferral mechanism offers a dual benefit for both the company and the employee:

• For the company, It allows the rollout of ESOPs without creating an immediate financial burden on employees, thereby increasing the appeal of the employee benefits package.
• For the employee: They can hold the shares for the long term to maximize their investment value without worrying about an upfront tax burden.

When an individual decides to sell their bonus shares, the income received is taxed from two different perspectives.

• First, it is considered income from wages and salary, as the bonus shares are fundamentally a benefit granted by the company to recognize performance and incentivize long-term commitment.
• At the same time, this income is also taxed as income arising from the transfer of securities.

Applying this tax mechanism creates a flexible financial tool for businesses. Employees can choose the most opportune time to sell based on their personal financial situation and market trends, thereby optimizing both their personal gains and the effectiveness of the company’s reward program. This is particularly meaningful for startups or companies in a high-growth phase, where stock value can fluctuate significantly over time.

How is PIT declared for employee stock awards?

One of the most notable aspects of the current regulations is the shifting of tax responsibility from the individual to professional organizations. Based on Decree 126/2020/NĐ-CP, the responsibility for declaring and paying tax on behalf of the employee belongs not to the individual but to the issuing organization or intermediary institutions, depending on where the securities are traded.

This mechanism offers significant advantages:

• It reduces the administrative burden for employees.
• It lowers the risk of errors in PIT declaration services thanks to professional handling.
• It increases transparency in the management of ESOP-related taxes.

For shares traded on a stock exchange

Shares that are traded on an official stock exchange have a relatively simple and transparent tax management system. The responsibility for declaring and paying tax on behalf of the employee falls to:

• The securities company or commercial bank where the individual has opened a depository account.
• The fund management company where the individual has entrusted their investment portfolio.

These organizations are typically equipped with automated tax management systems capable of calculating and withholding tax at the moment of the transaction. This ensures that the employee receives the correct net amount after tax quickly and accurately, while tax compliance is fulfilled without direct intervention from the issuing company.

For shares not traded on a stock exchange

For shares that are not listed on an official exchange, determining tax responsibility becomes more complex. This responsibility is assigned based on the legal status and management method of each type of security:

• Securities of a public company already registered at the securities depository: The securities company or bank where the individual holds the depository account will handle the tax obligation.
• Securities of a non-public joint-stock company that has authorized a share register manager: The securities company authorized to manage the shareholder list will be responsible for declaring and paying the tax.
• In all other cases, the issuing company itself will be responsible for declaring and paying the tax on behalf of the employee.

The third scenario is the most noteworthy—and is especially common for startups or unlisted small and medium-sized enterprises. This reality places high demands on these companies to build internal compliance capabilities. CEOs must ensure their finance and HR teams have sufficient tax expertise or establish relationships with professional administrative and compliance advisory services to ensure this obligation is met without creating legal risks for the company.Stock awards represent a progressive HR strategy, helping a company not only attract but also retain talent for the long term by sharing its success. However, the success of an ESOP policy depends entirely on the company’s ability to understand and comply with the accompanying legal obligations. CEOs need to direct the immediate establishment of a robust compliance process for stock award taxes, standardize payroll procedures, clearly define which entity is responsible for each type of stock transaction, and invest in the necessary expertise to protect both the company’s interests and the employees’ rights.