Employee Stock Ownership Plans (ESOPs) allow employees to own shares in the companies they work for, aligning their and the company’s interests. ESOPs have become an integral part of compensation structures, offering employees an opportunity to benefit from the company’s growth. ESOPs can be particularly beneficial in multinational corporations, where it serves as a motivational tool to drive performance, encourage long-term company growth, and retain talent. By allowing employees to share in the company’s success, ownership believes that ESOPs enhance employee commitment and contribute to organizational growth.
In this article, we explore and compare the regulatory frameworks for ESOPs in Australia and Vietnam, examining their legal foundations, taxation rules, and governance practices. While ESOPs are well-established in Australia, they are still emerging in Vietnam, which presents distinct challenges and opportunities.
Market Dynamics
Australia
ESOPs are widely implemented in Australia, particularly in large multinational corporations, publicly listed companies, and startups. The practice is supported by the cultural norm of employee share ownership, which is viewed as an effective incentive to increase productivity and enhance business growth. Companies often offer stock options or direct stock grants, with stock options allowing employees to buy shares at discounted rates or giving them free shares as part of a long-term incentive plan. Additionally, performance-based ESOPs are common, where employees earn more shares based on their performance or on the company’s results.
The Australian market has a robust culture of employee share ownership, with about 20% of companies offering some form of employee share scheme. This widespread adoption is seen across various sectors such as technology, finance, and manufacturing. Studies suggest that ESOPs do indeed enhance employee engagement and retention, making it a crucial tool.
Vietnam
ESOPs have become more common. Local businesses still rely heavily on traditional compensation structures without incorporating equity ownership while many multinational corporations worldwide offer ESOPs to its employees in Vietnam. Despite their limited use, ESOPs are gradually gaining traction in Vietnam, especially in larger Vietnamese corporations and startups. Startups whether foreign or Vietnamese both see the value of ESOPs.
Regulatory Framework
Australia
Australia has a well-established regulatory framework governing ESOPs. It is outlined primarily in the Corporations Act 2001 and further regulated by the Australian Taxation Office (ATO). The Corporations Act ensures compliance with corporate governance standards, protects shareholders’ rights, and mandates disclosure of relevant information in annual reports, ensuring transparency and scrutiny by shareholders. Public companies offering ESOPs must adhere to strict rules for share issuance, with shareholder approval required for new share allocations.
The ATO regulates the tax treatment of ESOPs. Since 2015, Australia has made it easier for employees to benefit from ESOPs by allowing tax deferrals on stock options or shares until the employee sells them or exercises their options. This deferral system reduces the immediate tax burden, making ESOP participation more attractive. Recent reforms, effective from 2022, also make it easier for smaller businesses and contractors to implement ESOPs, with provisions allowing unlisted companies to offer an unlimited number of shares, provided no employee receives more than AUD $30,000 per year in shares.
Vietnam
Any joint stock company incorporated in Vietnam can design its own ESOP whereby an employee is entitled to become a shareholder of the joint stock company. They are sometimes called “Onshore ESOPs”. There are general compliance requirements under the Law on Enterprises No. 59/2020/QH14 dated June 17, 2020, particularly in corporate governance and the issuance of shares. Vietnamese law governing Onshore ESOPs concentrates only on public companies. Stock issuance by a public company complies with the Law on Securities No. 54/2019/QH14 dated November 26, 2019. This law governs the public offering and trading of shares, including the issuance of shares to employees under an Onshore ESOP. Public companies are required to report to and file the Onshore ESOP documents with the State Securities Commission and carry out post-filing formalities with the relevant authorities. The requirements are as rigorous as those in Australia.
As of June 28, 2024, Vietnam introduced significant reforms that have reshaped the landscape for ESOPs. The State Bank of Vietnam (SBVN) issued Circular 23/2024/TT-NHNN (Circular 23), which has made it easier for the local subsidiary of an offshore parent to implement an ESOP, and Vietnamese employees are entitled to receive foreign shares of the parent company. SBVN approval is no longer required. They are called “Foreign ESOPs”. Although this change will reduce the administrative burdens and costs for both the local subsidiary and the parent company, the law still does not allow the local employee nor the subsidiary on her behalf to remit funds abroad to acquire shares. This impacts how a Foreign ESOP is structured to comply with Circular 23. The Vietnamese entity must continue to maintain a foreign currency account to process dividends and proceeds from the sale of foreign shares, by the subsidiary’s local employees.
Taxation of ESOPs
Australia
The taxation of ESOPs is primarily governed by the Employee Share Scheme tax rules. These rules allow employees to defer taxes on shares or stock options until they sell the shares or exercise the options. For stock options, employees are taxed on the difference between the exercise price and the market value at the time of exercise. This amount is treated as income and is taxed at the employee’s marginal tax rate. Similarly, for direct share grants, employees are taxed on the market value of the shares when they are granted. If the shares are later sold, any increase in value is subject to capital gains tax.
Startups and small businesses benefit from additional tax deferrals, allowing employees to delay taxes for up to seven years or until a liquidity event occurs, encouraging participation without immediate tax burdens. Employers are required to withhold taxes when stock options are exercised or shares are sold, ensuring compliance with Australian tax laws.
Vietnam
Taxation is generally governed by personal income tax law and regulations. Employees are typically taxed on ESOP gains at the time of sale of the shares. The taxable income at sale is divided into employment income and securities income. Depending on the type of a particular ESOP, the employment income would be determined to be the discount to the market value of the share at purchase, or the nominal exercise price (as compared to the market value of the share) at grant, or the market value of the shares which are awarded free of charge. While the employment income is taxed at progressive rates up to 35%, the securities income is taxed at 0.1% of the entire sale proceeds of the share. For an Onshore ESOP, the local entity, being the local employer, is responsible for withholding and declaring personal income taxes on behalf of its employees.
As all proceeds of sale, and dividends, if any, are repatriated through the foreign currency account opened and maintained by the local entity for the Foreign ESOP, the local entity withholds personal income tax and transfers the balance to the Vietnamese employees. Current tax regulations only regulate tax declaration and payment in cases where an employee receives bonus shares from the local employer (ie, Onshore ESOPs). In this regard, the local entity is recommended to obtain a written position from the Vietnamese tax authorities regarding the timing of taxation and tax rates.
Governance and Disclosure
Australia
Governance and disclosure practices for ESOPs in Australia are well-established. Publicly listed companies must disclose the details of their ESOPs in their annual reports, and these reports are subject to scrutiny by shareholders and regulatory authorities such as the Australian Securities and Investments Commission. The disclosure process ensures that ESOPs align with the company’s articles of incorporation and are consistent with corporate governance standards, preventing conflicts of interest and ensuring transparency.
Vietnam
While publicly listed companies must follow securities regulations, private companies or foreign subsidiaries do not have the same level of oversight. Internal company regulations and agreements often govern the terms of the ESOP (eg, for a private joint stock company or a foreign-owned subsidiary within a multinational group), which may result in less consistency across different companies. Meanwhile, Circular 23 does not mandate disclosures by a Foreign ESOP, which are different from those required by the SBVN. No later than the 12th of each month (ie, once per month by the 12th day), the local entity must report to the SBVN on the ongoing operation of both existing and new ESOPs.
Conclusion
Both Australia and Vietnam offer ESOPs, but their regulatory frameworks differ significantly. In Australia, a well-established legal and tax framework provides clear rules and protections for employees and employers, encouraging participation in ESOPs through tax deferrals and robust governance standards.
Vietnam, on the other hand, has gradually progressed its regulatory environment, with the implementation of ESOPs being guided by general enterprise laws and securities laws. Particularly, recent reforms such as the abolition of SBVN’s approval requirements for Foreign ESOPs mark a significant shift in the regulatory landscape, streamlining the process and enhancing flexibility in structuring Foreign ESOPs.
As Vietnam’s economy continues to globalize and the presence of multinational companies increases, it is expected that the regulatory framework for ESOPs will evolve further to meet international standards. Until then, companies operating in Vietnam must navigate a more flexible, but still less standard legal environment. The recent changes offer a promising outlook for the future of ESOPs in Vietnam, aligning the country with global trends in employee share ownership.
For further information, please contact:
Dao Hong Diu, Russin & Vecchi
DHDiu@russinvecchi.com.vn
