Equity Compensation for Philippine Employees: Stock Options and ESOPs

TL;DR: A Philippine subsidiary can grant stock options to its employees, but each layer needs separate handling. Corporate approvals and the SEC securities exemption govern the grant, BIR Revenue Regulations No. 13-2022 taxes the spread at exercise as ordinary compensation for every employee, and the 15% capital gains tax applies only on a later sale of unlisted Philippine shares. If you would rather avoid issuing shares at all, a cash-settled phantom stock plan is the lower-friction route, with the same withholding tax when it pays out.

Most equity guides for founders assume a US or UK employee. A Philippine employee sits under a different set of rules. The tax is triggered at a different moment, the SEC treats a share grant as a securities sale, and Philippine labor law sits underneath whatever the plan document says. This guide walks through each layer in the order a foreign founder usually meets them, using the rules in force as of October 2026.

Who actually grants the equity

Before choosing a structure, decide whose shares the employee will hold. There are three realistic options, and the rest of the article follows from this choice.

1. Options over the Philippine subsidiary’s own shares. The local corporation issues shares to the employee on exercise.
2. Options over the foreign parent’s shares. The parent grants, the employee works for the subsidiary, and the shares are issued abroad.
3. Phantom stock or stock appreciation rights (SARs). No shares change hands. The company pays cash equal to a notional share value or its appreciation.

The comparison table below puts the three side by side. The sections after it explain each cell.

Can a Philippine corporation grant stock options at all?

Yes. A stock option is a contractual right to buy shares at a fixed price later. The Revised Corporation Code (Republic Act No. 11232) does not prohibit a corporation from offering one as part of a compensation package, and the usual approach is a board-approved plan.

The practical rules that matter are these.

• Authorized and unissued shares. The corporation can only issue shares that exist in its articles of incorporation as authorized capital and are still unissued. If your subsidiary has issued its full authorized capital to the parent, you must first increase authorized capital, which needs board approval, approval by stockholders holding at least two-thirds of the outstanding capital stock, and an SEC filing.
• Treasury shares. If the company holds treasury shares, it can reissue those to employees instead. Treasury shares come from a lawful repurchase out of unrestricted retained earnings, so this route is only available to a company with that capacity.
• Pre-emptive rights. Stockholders hold pre-emptive rights on new issuances unless the articles deny them or the issuance falls within an exception. A plan that is not covered by the articles or a waiver can be challenged by a minority stockholder. In a wholly foreign-owned subsidiary this is easy to fix on paper, but the paper has to exist.
• Foreign ownership limits. If the subsidiary operates in an activity with a foreign-equity cap, the foreign share must stay within the limit after every issuance.
• Subscription and payment. Shares are issued against a subscription, with a minimum paid-up requirement, and the corporation records the issuance in its stock and transfer book.

A sensible minimum paper trail is a board resolution adopting the plan, a stockholders’ resolution approving it and any capital increase, an individual option agreement with each grantee, and a Secretary’s certificate when shares are issued on exercise. Whether the shares are ordinary or a separate class with limited rights is a design choice worth making early, because it affects what the employee actually receives.

The SEC angle: shares are securities

Issuing a share to an employee is a sale of a security, and the Securities Regulation Code (Republic Act No. 8799) requires securities to be registered with the SEC before sale unless an exemption applies. Registration is built for public offerings and is not realistic for a private subsidiary granting options to a handful of staff.

The statutory exemption

Section 10.1 of the Securities Regulation Code lists exempt transactions. The one that fits a small private plan is the sale of securities by an issuer to fewer than twenty persons in the Philippines during any twelve-month period. The Code does not list a separate, automatic “employee stock option plan” exemption. A small plan therefore relies on the fewer-than-twenty route, and a larger plan, or one made up of many separate small grants within a year, can cross the line and needs a different basis.

Section 10.2 gives the SEC power to exempt other transactions when registration is not needed in the public interest or for investor protection. This is the route for plans that do not fit neatly under Section 10.1.

What filing is still expected

The SEC’s 2025 update to its exempt-transaction rules (SEC Memorandum Circular No. 11, series of 2025, dated September 9, 2025) reports that no notice or fee is required for Section 10.1 exempt transactions, and it adds an optional application to confirm that a transaction is exempt. A company that wants certainty, for example because an investor or auditor will ask, can file for that confirmation. The supporting package listed in secondary summaries includes the application form, disclosure statements, audited financial statements, current articles of incorporation and General Information Sheet, a Secretary’s certificate, and proof of the filing fee. Confirm the current checklist and fee with the SEC before filing.

The person relying on a Section 10.1 exemption must also give each offeree a written disclosure that identifies which provision of Section 10.1 the exemption comes from.

The foreign-issuer twist

Law firm commentary reports a separate SEC policy, adopted by the Commission en banc, that treats share-settled employee plans of foreign companies differently. Under it, foreign issuers of employee share plans are expected to obtain a confirmation of exemption under Section 10.2, and an issuance under an employee plan is no longer treated as automatically exempt under Section 10.1 even if fewer than twenty offerees are involved. The stated reason is that the SEC wants to review how these plans work for employees in the Philippines. The same commentary notes this replaced earlier, lighter guidance. Treat the details as secondary-source reporting. Confirm the current requirement against the primary SEC issuance with the SEC or counsel before you grant parent shares.

How the BIR taxes a stock option

The tax rules are the part founders most often get wrong, partly because older circulars are still quoted online.

What changed with RR 13-2022

For years, the BIR split employees into two groups. Under Revenue Memorandum Circular No. 88-2012 and No. 79-2014, the gain on a rank-and-file employee’s option was compensation income, while the gain on a managerial or supervisory employee’s option was a fringe benefit. The employer paid fringe benefit tax on the managerial gain, computed on a grossed-up value.

BIR Revenue Regulations No. 13-2022, issued on October 7, 2022, ended that split. It states that equity grants, once exercised or availed of by the employee, are compensation taxable under Section 32 of the National Internal Revenue Code, and that the rule applies “regardless of the employment status” of the employee, rank-and-file or managerial. The regulation took effect on October 29, 2022 and applies to exercises on or after that date. It also covers more than options. It reaches restricted stock units, stock appreciation rights and restricted share awards, and it applies whether the shares belong to the employer or to another company.

If you find an article telling you that a manager’s options attract fringe benefit tax, it is describing the pre-October 2022 rule.

The three moments

At grant

Receiving an option does not create taxable income. Grantors still have a reporting duty. Grant Thornton’s summary of the BIR rules says the employer submits a sworn statement to the Revenue District Office within 30 days of the grant, covering the plan terms, grantee details, the share valuation and the exercise price. Check the current text of RR 13-2022 and Revenue Memorandum Circular No. 143-2022 for the exact form and filing office.

At exercise

The taxable amount is the difference between the value of the shares at exercise and the exercise price fixed at grant. For shares of a private company, the BIR guidance says the value used is the higher of the book value and the fair market value of the shares on the exercise date. That higher-of rule is why a modest paper valuation can still produce a large taxable spread at exercise if the company’s book value has risen.

The spread is added to the employee’s compensation and the employer withholds under the usual compensation withholding tables. The employer then reports it on BIR Form 1601-C (monthly), 1604-C (annual) and the employee’s Form 2316. The exercise report is due by the 10th of the month following the exercise. See our guide to withholding tax for how compensation withholding is computed and remitted.

Worked example. An employee holds an option over 10,000 shares at an exercise price of PHP 10 per share. When she exercises, the higher of book value or fair market value is PHP 60 per share.

• Spread per share: PHP 60 less PHP 10 = PHP 50
• Taxable compensation: 10,000 x PHP 50 = PHP 500,000

The PHP 500,000 is added to her other compensation for the year, and the employer withholds on it even though she received shares and no cash. That last point is the practical trap. A private-company employee can owe a large tax bill on an asset she cannot sell. Plan for it by agreeing in advance whether the employee pays the tax in cash, whether the company advances it and recovers it from payroll, or whether the company withholds shares to cover it where the rules allow. The employment contract and plan should say which.

On sale

When the employee later sells unlisted shares of a Philippine corporation, the gain falls under the final tax on net capital gains from shares not traded through the stock exchange, at 15%, reported on BIR Form 1707 with the documentary stamp tax handled on the corresponding form. Listed shares sold through the stock exchange follow a different transaction-tax regime. This is the same treatment any seller of unlisted shares gets, and the employee reports it as an individual seller, not through payroll.

One point to confirm with a tax adviser before drafting the plan. Grant Thornton’s summary describes the capital gain as the difference between the sale price and the option price, while the exercise spread has already been taxed as compensation. Make sure the cost basis used on sale reflects the value already taxed at exercise, so the same gain is not taxed twice.

Options over the foreign parent’s shares

Many foreign-owned subsidiaries grant parent equity because that is the company the founders actually value and the employee actually wants to own. This works, but the Philippine side does not disappear.

Tax still follows the work

RR 13-2022 covers equity-based pay whether or not the shares belong to the employer, and an employee who performs services in the Philippines is taxed on that compensation here. The foreign parent’s grant letter does not change this. Practically, the parent often has no Philippine payroll, so the Philippine subsidiary has to calculate and withhold the tax on the spread. The subsidiary needs three inputs from the parent on each exercise date: the share value, the exercise price and the number of shares. If it receives them late, it still faces a withholding deadline.

A recurring failure is the subsidiary learning of the exercise from the parent’s equity platform weeks later. Write the information flow into an intercompany agreement before the first grant.

SEC and the foreign issuer

As covered above, share-settled plans of foreign issuers are reported to draw a Section 10.2 confirmation expectation from the SEC. Build that into the timeline for rolling out a parent plan to Philippine staff rather than assuming the home-country exemption is enough.

Holding the shares and moving the money

How does the employee hold foreign shares in practice? Typical routes are a brokerage account with the parent’s plan administrator, or a cap-table platform that holds the shares in a nominee name. Decide this early, because the employee needs a way to exercise and to sell.

Money moves in two directions.

• Outbound. If the employee pays the exercise price in cash, that payment goes abroad. The BSP’s foreign exchange rules let a Philippine resident buy foreign currency from an authorized agent bank for outward investment without prior BSP approval up to the annual limits the Manual of Regulations on Foreign Exchange Transactions sets, which the BSP has described in the tens of millions of US dollars per investor per year. An individual employee will stay far under any such limit. The practical points are the bank’s documentation requests and that the purchase is routed through an authorized bank.
• Inbound. Sale proceeds returning from abroad come in through a bank account. Retain the confirmation of exercise, the brokerage statement and the tax computation, because the bank and the BIR can ask.

This guide cites no BSP rule specific to employee stock plans. If your plan involves the subsidiary itself paying the exercise price on the employee’s behalf, or reimbursing the parent for the cost of the equity through an intercompany charge, take specific advice. That charge raises separate questions about transfer pricing, withholding on payments abroad and deductibility.

Vesting, leaving, and Philippine labor law

An equity plan lives alongside the employment relationship and cannot rewrite it. The Labor Code protects security of tenure, so an employee can only be dismissed for a just or authorized cause with due process. Separation pay, where it is owed, and final pay, including the pro-rated 13th month pay and unused leave conversions the law requires, are statutory entitlements. A plan clause cannot reduce them or condition them on forfeiting equity.

What the plan does decide is the separate question of unvested and unexercised equity. A well-drafted Philippine plan:

1. States the vesting schedule and cliff in the option agreement, with the employer’s discretion to accelerate.
2. Says what happens to vested but unexercised options after resignation, dismissal for cause, dismissal without cause, death or disability, usually with a post-termination exercise window.
3. Treats forfeiture of unvested options as the consequence of leaving, not as a penalty applied on top of final pay.
4. Avoids any set-off of the exercise price or tax against final pay unless the employee has given written consent that meets Labor Code limits on deductions from wages.

The deduction point deserves care. The Labor Code restricts deductions from wages. If your plan allows the company to recover unpaid exercise tax or exercise price from an employee’s final pay, get that consent in a form that the Department of Labor and Employment will accept. See our overview of employee benefits for how equity sits next to the mandatory benefits.

Clawback and good-leaver or bad-leaver clauses are widely used abroad. In the Philippines, a bad-leaver clause that forfeits already-vested equity because the employee resigned is open to challenge, and the cleaner approach is to limit forfeiture to unvested equity and to specific, documented misconduct.

The simpler alternative: phantom stock and SARs

A phantom stock plan promises a cash payment tied to the value of the company’s shares. A stock appreciation right pays the increase in value between grant and a chosen date. Neither issues shares, so no cap-table entry, pre-emptive right waiver, share transfer or exemption analysis arises on the securities side. Foreign-owned subsidiaries commonly choose this route for exactly that reason, and it suits a company whose Philippine team is small, whose shares are illiquid, or whose parent does not want Philippine employees on its register.

The tax result is straightforward. The cash payout is compensation income and the company withholds on it through payroll when it pays, with the usual reporting on Forms 1601-C, 1604-C and 2316. Because no shares are held, there is no later capital gains event. The employee gets the money at the time of the payout, which avoids the tax-on-illiquid-shares problem from the worked example above.

The trade-offs are real:

• The employee has no ownership, voting rights or information rights.
• The company carries a cash liability that grows with share value, so it needs the cash when payout events occur.
• The plan document must be drafted carefully so the right to payment is clear and the valuation method is fixed in advance. A vague formula invites disputes.

For many early-stage subsidiaries, a phantom plan is the right first step. Move to real equity when you have a share valuation process, a tax-funding approach and counsel who has handled the SEC exemption.

Setting this up: a sequence that works

1. Decide the instrument. Local options, parent options or phantom stock, using the table above.
2. Check the securities route. For local shares, confirm the fewer-than-twenty exemption fits your headcount over a rolling twelve months. For parent shares, confirm the Section 10.2 position with the SEC.
3. Complete corporate approvals. Board and stockholder resolutions, any increase in authorized capital, and pre-emptive right waivers.
4. Draft the plan and option agreements. Include vesting, leaver terms, exercise mechanics, a tax-funding clause, and the information flow between parent and subsidiary.
5. Set up the tax process. Value the shares at exercise, withhold through payroll, and report the grant and each exercise to the BIR on time.
6. Brief the employee. Explain that exercising can create a tax bill before any sale.

This guide is general information, not legal or tax advice on your specific facts. Book a consultation if you want a fixed-scope review of your plan before you grant the first option.