Employee stock options (ESOs) have become a cornerstone of modern compensation strategies, offering employees and executives a stake in their company’s success. By definition, ESO is a form of equity-based compensation provided to employees and executives (Investopedia, 2024).
However, ESOs are not granted free of charge. Instead, recipients are given the right to purchase shares at a price below market value for a specified period. Once this period ends, the option to purchase at the discounted rate expires.
Typically, companies issue a formal contract outlining the terms of the stock options, including a grant date—the point at which the vesting period begins. The vesting period is the timeframe during which the recipient can acquire shares, often in stages. For instance, a company may grant 50,000 lots over a four-year vesting schedule (Glints, 2023).
Although companies provide these options, they hold no intrinsic value unless exercised by the recipient. Once the shares are acquired, the employee or executive may manage them freely (e.g., selling them or holding them as a long-term investment).
Legally, employees who acquire shares through ESOs assume the same rights and obligations as other shareholders. This is regulated in Article 43 Section 3 Point a of Law of the Republic of Indonesia Number 40 of 2007 concerning Limited Liability Companies (Undang-Undang Perseroan Terbatas/PT Law). Under the PT Law, shareholders are entitled to:
- Receive proof of share ownership.
- Participate in GMS votes.
- Claim dividend payments.
- File lawsuits against the company if harmed.
- Buy and sell shares at fair market value.
- Access information about the company and its management.
- Initiate a GMS if holding ≥10% of issued shares.
Accordingly, employees and executives who become shareholders through ESOs are entitled to dividend payments. This article explores the tax rights and obligations associated with such arrangements.
The legal basis for the taxation of ESOs is Law of the Republic of Indonesia Number 7 of 1983 concerning Income Tax (Undang-Undang Pajak Penghasilan/PPh Law) as amended by Law of the Republic of Indonesia Number 7 of 2021 concerning Harmonization of Tax Regulations.
Article 4 Section 1 Point d Number 1 of the PPh Law identifies taxable income as any increase in economic capacity received or earned by taxpayers, whether from domestic or foreign sources, that can be used for consumption or to increase wealth—regardless of its name or form. This includes gains arising from asset transfers made in exchange for shares or capital ownership in companies, partnerships, or other entities.
Moreover, Article 4 Section 2 Point c of the PPh Law stipulates that certain types of income may be subject to final tax, including income from the sale of shares or other securities, derivatives traded on the stock exchange, and share sales or capital transfers in investee companies received by venture capital firms.
Additional guidance is provided through the Director General of Taxes Circular Letter No. SE-13/PJ.43/1999, which outlines the tax treatment of stock options. However, the circular applies only to foreign companies offering shares listed on foreign exchanges to employees or affiliated individuals in Indonesia. As such, it does not apply to domestic ESOs.
Based on current regulations, there are two primary tax implications for ESOs: capital gains and dividends. A capital gain arises if the sale price of shares exceeds their purchase price or par value. When the ESO strike price is above par value, any premium from the sale is subject to income tax under Article 4 Section 1 Point d. Similarly, gains from the resale of shares acquired through ESOs are taxable if the selling price exceeds the acquisition cost.
However, ESOs typically do not trigger final income tax under Article 4 Section 2 because such transactions usually occur off-exchange. Consequently, no final tax applies to these derivative transactions.
As for dividends, Article 4 Section 1 Point g of the PPh Law specifies that dividends are taxable regardless of name or form. This includes distributions made by insurance companies to policyholders. Nonetheless, Article 4 Section 3 of PPh Law exempts domestic-source dividends received by corporate or individual taxpayers from tax, provided the dividends are reinvested domestically within a prescribed period.
Therefore, as long as dividends from ESO shares are sourced from domestic corporations and reinvested within Indonesia, they are excluded from taxable income.
This concludes the tax treatment overview for employee stock options. For tailored guidance on ESO compliance, consult Ideatax’s experts.
Relevant Provisions
- Law of the Republic of Indonesia Number 7 of 1983 concerning Income Tax as amended by Law of the Republic of Indonesia Number 7 of 2021 concerning Harmonization of Tax Regulations.
- Law of the Republic of Indonesia Number 40 of 2007 concerning Limited Liability Companies.
- Director General of Taxes Circular Letter Number SE-13/PJ.43/1999 concerning Tax Treatment of Stock Options.
References
- Glints.Jadi Karyawan Sekaligus Pemilik Perusahaan, Inilah Employee Stock Option
InvestopediaEmployee Stock Options (ESOs): A Complete Guide
