How a Vietnamese employee participates in an offshore ESOP properly and tax implications?

Vietnam has yet clearly set a comprehensive legal framework for an ESOP and neither guidance exists in accounting standards nor corporate income tax regulations in treating the expense for such a ESOP. 

As far as concerns for controlling the indirect investment overseas by a resident, the Government has set out certain requirements for a resident doing outbound investment portfolio. Among others, how a Vietnam resident working in a multinational company can participate in an offshore ESOP properly is a question. 

Under the rules, an offshore ESOP refers to a foreign organization’s program that awards shares issued in overseas to employees working in the foreign organization’s commercial presence in Vietnam. Other an offshore ESOP, a Vietnamese employee is only allowed to make outbound portfolio investments by participating in an offshore ESOP. The ESOP is either an award of free shares or an offer to sell shares on preferential terms to the employees. 

The rules require the foreign organization issuing an ESOP must have a commercial presence in Vietnam and that is local employer of the selected employees under Vietnam labour law perspective. The commercial presence can be a subsidiary, affiliates, a branch, a representative office or even a project office. 

As such, the employee can hold shares in the overseas parent company by participating in the parent’s employee stock ownership plan. The employee can receive free or discounted shares from the parent company as a bonus upon working for the commercial presence here in Vietnam. 

It is required the ESOP to be registered with the State Bank of Vietnam to validate and secure the Vietnamese employees can legally own foreign shares and can legally remit monies out of Vietnam to purchase them upon exercise his option. The local employer (the Vietnam commercial presence) will file the ESOP registration with the State Bank of Vietnam and need to comply with periodic post-registration reporting requirements. 

The State Bank of Vietnam has 15 working days to respond to the registration counting from receipt of a complete dossier and in practice it can be longer. 

Once the State Bank has approved the ESOP registration, the commercial presence must open a foreign currency account at a Vietnam commercial bank to transfer ESOP funds in and out of Vietnam. The account is used to (i) receive amounts from the qualified local employees to pay for the shares, receive foreign currency from dividends and from the sale of the shares, and (ii) pay other expenses outside and inside Vietnam. All ESOP transactions must be conducted through the account.  

The commercial presence must file reports to the State Bank of Vietnam by the 20th day of the first month of each quarter. The report includes the list of Vietnamese participants, cashflow statement of the account and descriptions of the transactions,… 

Any associated tax compliance requirements arising out of or in connection with the ESOP will be the obligations of the commercial presence.  Specifically, the commercial presence must declare, withhold and pay personal income tax (“PIT”) on behalf of an employee upon the employee’s sale of the shares. 

It is noted that above regulations do not apply to expatriate employees working in Vietnam and participate in such parent company’s ESOP. However, forex control and tax implications might still apply if he is a resident of Vietnam during the year of taxable income. 

How Vietnam tax on the ESOP? 

Under personal income tax (PIT) regulations, the transfer of securities including shares, right to purchase shares,…will be subject to 0.1% PIT on the transferred price regardless of the transferor is a tax resident or non-resident of Vietnam. 

Employees receiving bonus in kinds (e.g. shares, stock options,…) will also be subject to PIT  under salary/wages category of which the highest tax bracket is up to 35% for tax residents and flat rate of 20% on total income for a non-resident. For residents, annual PIT reconciliation is required on his/her worldwide income basis but there is no such requirement for a non-resident who is taxed in Vietnam on Vietnam sourced income only. 

The principle for determining tax event of a bonus in shares is as follow: 

a. Value of the bonus shall be based on the amount recorded on accounting books of company which records the bonus expense. 

b. Taxing point: employees shall not be required to pay PIT when receiving bonus shares. After receiving bonus shares, if employees transfer shares which are the same kinds as bonus shares, he/she shall pay PIT for employment incomes being bonus shares (can be up to 35% tax bracket). However, he/she shall temporarily not be required to declare, pay PIT for this employment income at the time of transferring bonus shares. At the end of the year, individuals shall incorporate incomes from transferring bonus shares into total annual income from salary and wages and doing PIT finalization. 

In addition, when transferring bonus shares, employees shall have to pay PIT on securities transfer activity (at 0.1% of the transfer price). 

With the same principle, in case, the employees joins the ESOP at preferential terms, when receiving stock options as well as exercising these options, employees shall not be required to pay PIT yet. After exercising these options, if he/she transfer shares which are the same kinds as shares receiving from exercising options, he/she will have to pay PIT for employment incomes earned from receiving bonus of stock options (if any) and/or pay PIT on securities transfer activities (at 0.1% of the transfer price).