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Explore how Employee Stock Option Plans (ESOPs) work in the US, Singapore, India, the UK, and the UAE. Learn about local terminology, regulations, tax treatment, and key plan differences across jurisdictions.
Farheen Shaikh
August 8, 2025
August 8, 2025
Table of Contents
Employee Stock Option Plans (ESOPs) are a form of equity-based compensation that give employees the right, but not the obligation, to purchase company shares at a predetermined price, known as the exercise or strike price, after meeting certain conditions.
These conditions are usually linked to time-based vesting or performance milestones.
The concept is straightforward: If the company’s value increases, employees can buy shares at the original set price and benefit from the appreciation.
Companies use ESOPs to:
However, the meaning of “ESOP” varies across jurisdictions. In some countries, it is used broadly to describe any employee stock option scheme, while in others, such as the United States, it refers specifically to an Employee Stock Ownership Plan, a regulated retirement plan that is distinct from stock options.
In the sections that follow, we will explore how ESOPs are defined and regulated in different parts of the world.
In the United States, employee stock options are commonly referred to simply as “stock options” or “employee stock options.” Under the US tax law, there are two primary categories: Incentive Stock Options (ISOs) and Non‑Qualified Stock Options (NSOs or NQSOs).
ISOs are regulated by Sections 421 through 424 of the Internal Revenue Code and are issued only to employees.
They offer preferential tax treatment if certain holding conditions are met. Gains on ISOs may qualify for long‑term capital gains tax rates if the shares are held for at least one year after exercise and two years after the grant date, although exercising ISOs can trigger the Alternative Minimum Tax.
Employees can receive up to $100,000 worth of ISOs that become exercisable in any calendar year.
NSOs can be granted to a wider range of recipients such as employees, contractors, advisors, and directors. They do not receive the same tax advantages as ISOs.
At exercise, the difference between the fair market value and the exercise price is taxed as ordinary income. Any subsequent increase in value is taxed as capital gains upon sale of the shares.
Both ISOs and NSOs must comply with Section 409A of the Internal Revenue Code, which governs deferred compensation arrangements and sets rules for determining the exercise price.
Public companies must follow the US Securities and Exchange Commission (SEC) regulations.
In the U.S., the acronym ESOP means Employee Stock Ownership Plan, which is a qualified retirement plan regulated under the Employee Retirement Income Security Act (ERISA). These plans invest primarily in the employer’s stock and are designed to provide retirement benefits, making them fundamentally different from stock options, which are a form of discretionary compensation.
In official tax guidance, Singapore’s IRAS uses “Employee Share Option (ESOP)” and “Other forms of Employee Share Ownership (ESOW)” as the core terms, and requires Appendix 8B reporting.
For listed companies, corporate documents and shareholder circulars often use the term Employee Share Option Scheme (ESOS), reflecting the terminology in the Singapore Exchange (SGX) Listing Rules under “share option schemes or share schemes.”
From a legal standpoint, there is no difference in meaning between “ESOP” and “ESOS” in Singapore. They both refer to plans that give employees the right to acquire company shares at a fixed price, subject to vesting and other conditions.
For listed issuers, an option scheme must be approved by shareholders and comply with SGX Listing Rules Part VIII, which cover items like grant limits, pricing, disclosures, and timing of exercisability. For example, options granted at a discount may only be exercisable after two years; other options may be exercisable after one year.
For private companies, share options are issued under the Singapore Companies Act and must be approved by both the board and shareholders.
Under IRAS rules, gains from ESOPs are generally taxable as employment income when the option is exercised. If the plan imposes a selling restriction on the acquired shares, the tax point shifts to when that restriction ends.
A “deemed exercise” rule can apply to non-citizens who cease Singapore employment, bringing tax forward to the cessation date.
A separate QEEBR deferral mechanism allows qualifying employees to defer payment of tax on ESOP/ESOW gains for up to five years with interest. By contrast, the old ERIS incentives have been phased out and are not applicable after YA 2024.
Employers report ESOP/ESOW gains to IRAS using Appendix 8B together with Form IR8A or via AIS e-submission.
In India, the term ESOP is widely used in everyday business language to describe employee stock option plans.
Legally, these plans are referred to as Employee Stock Option Schemes (ESOS) under the Companies Act, 2013. For publicly listed companies, they are regulated by the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.
For private companies, ESOSs are governed by the Companies Act, 2013 and the Companies (Share Capital and Debentures) Rules, 2014. These rules prescribe procedural requirements such as shareholder approval, minimum vesting periods (generally one year), and restrictions on transfer of options.
For listed companies, SEBI’s SBEB & SE Regulations, 2021 set out comprehensive requirements on scheme administration, disclosures, accounting treatment, and compliance reporting.
These regulations also cover other forms of equity-based benefits such as Stock Appreciation Rights (SARs) and Restricted Stock Units (RSUs).
ESOP plans in India must be approved by both the board of directors and shareholders through a special resolution. Listed companies must also make detailed scheme disclosures to the stock exchanges. Certain categories of shareholders, including promoters or directors holding more than ten percent of the company’s equity, are generally ineligible to participate.
Under the Indian Income Tax Act, the spread between the fair market value of shares on the date of exercise and the exercise price paid is treated as a perquisite and taxed as part of the employee’s salary income.
When the shares are eventually sold, capital gains tax applies on the difference between the sale price and the fair market value on the date of exercise.
In the United Kingdom, employee equity incentives are generally referred to as share options or employee share schemes.
Legally, they may take the form of Enterprise Management Incentives (EMI), Company Share Option Plans (CSOP), Share Incentive Plans (SIP), or unapproved share option schemes. The first three are tax‑advantaged arrangements approved by HM Revenue & Customs (HMRC).
An EMI scheme is designed for small to medium-sized companies engaged in a qualifying trade, and not primarily involved in excluded activities such as financial services or property development.
It allows companies to grant qualifying employees up to £250,000 worth of options in a three‑year period. EMI schemes have fewer restrictions on eligibility, but the company must have fewer than 250 full-time employees and gross assets under £30 million.
A CSOP is available to a broader range of companies, including larger businesses. Employees can be granted options worth up to £60,000 at the time of grant.
A Share Incentive Plan (SIP) allows employees to acquire shares, with favourable tax treatment if certain holding conditions are met. Shares can be provided in different ways:
Employers can also allow employees to reinvest dividends from SIP shares into more shares, known as “dividend shares”.
Unapproved share option schemes are not tax‑advantaged but can be more flexible in design.
Tax‑advantaged schemes must be registered with HMRC, and companies must submit annual returns detailing grants, exercises, and cancellations.
EMI schemes require that the company operates a qualifying trade and meets certain gross asset and employee number thresholds. CSOPs must follow strict conditions on grant value, option terms, and share classes. SIPs must be offered to all eligible employees on similar terms.
For tax‑advantaged schemes such as EMI and CSOP, there is typically no income tax or National Insurance Contributions (NICs) payable when the options are granted or exercised, provided the exercise price is at or above the market value at the time of grant and the qualifying conditions are met.
Gains on sale of shares are subject to Capital Gains Tax (CGT), which may be reduced to 10 percent if the disposal qualifies for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief).
For unapproved schemes, the difference between the market value at exercise and the exercise price is taxed as employment income, and both employee and employer NICs may be payable. Subsequent gains are taxed as capital gains.
While “ESOP” is the common business term across the region, the legal terminology and governance requirements differ between mainland and free zones.
Under the UAE Commercial Companies Law (Federal Decree-Law No. 32 of 2021), these arrangements are referred to as employee share incentive schemes. Article 228 explicitly permits a company to increase its share capital to issue shares to employees under such a scheme, provided it is approved by a special resolution of shareholders. The law requires the board to present the scheme to the general assembly for approval, and it prohibits directors from participating.
Both the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) have their own company regulations, which are based on English common law. While “ESOP” is still the colloquial term, the legal documents typically call them employee share schemes or employee incentive plans.
In the DIFC, the Companies Law contains statutory pre-emption rights but allows carve-outs for shares issued under employee share schemes, making it straightforward to implement English-style plans.
In the ADGM, the Companies Regulations 2020 (Section 525) explicitly state that pre-emption rights do not apply to equity issued under an employees’ share scheme, and companies can also disapply pre-emption by special resolution or via their articles of association.
In both free zones, there are no standalone “ESOP regulations”. The rules are embedded in the company law framework, which governs how shares can be issued and to whom.
The UAE does not currently impose personal income tax, so there is no local tax liability on the grant, exercise, or sale of shares under an ESOP. However, UAE-based employees participating in foreign parent company plans may have tax obligations in the parent company’s jurisdiction or in their country of tax residence. Companies with cross-border ESOPs should also be mindful of any applicable reporting obligations under foreign tax laws.
While equity compensation is a global concept, the structure, regulation, and terminology of employee stock option plans can vary significantly by jurisdiction. What one country calls an ESOP might refer to a retirement plan, while another uses the same term for a flexible employee incentive scheme.
Understanding these differences is essential for companies with international teams, global equity plans, or plans to expand into new markets.
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