“Options are tax‑free, right?” Founders hear this all the time. In some markets there’s no personal income tax, so the assumption feels safe. But the reality across MENA is more nuanced: what’s tax‑free for the employee in one country can be taxable in another—and the employer almost always has accounting and reporting obligations. Here’s how to keep incentives motivating without triggering penalties, payroll surprises, or valuation haircuts at audit time.

What ‘tax‑free’ usually misses

When people say “tax‑free ESOP,” they often ignore three facts:

1. Tax points differ — Equity can be taxed at grant, vesting, exercise, or sale, depending on local rules and the plan design.

2. Employer duties remain — Even if employees owe no income tax, companies still face IFRS 2 expense, documentation, and sometimes withholding/reporting when staff sit in tax‑paying countries.

3. Cross‑border teams change outcomes — Remote Egyptian staff exercising options granted by a UAE parent can create payroll and even permanent establishment exposure in Egypt.

Four common MENA scenarios (and what to watch)

1) Egypt‑based employees, foreign parent grants options Employee gains are typically taxable as employment income when options are exercised (or RSUs vest). That means payroll calculation, payslip disclosure, and timely remittance. If you don’t plan for FX and liquidity, employees can owe tax before they’ve sold any shares.

2) UAE‑based employees in a no‑PIT environment Employees may owe no personal income tax. But the company still books IFRS 2 share‑based payment expense, needs grant letters and fair‑value reports, and should align its corporate tax deduction with a proper cost‑recharge policy (especially in group structures).

3) Saudi employees with a foreign parent plan There’s no personal income tax on salaries, but equity arrangements still need clean governance: board approvals, option registers, and arm’s‑length recharge terms if the foreign parent passes ESOP costs down. Poor documentation can lead to deductibility challenges or other compliance questions.

4) Cross‑border hires and secondees If talent moves between Egypt, UAE, KSA—or works remotely—tax residency and the taxing point can shift. A grant made in one country and exercised in another can split the gain across jurisdictions, creating payroll and reporting in more than one place.

Design choices that change the tax result

• Options vs RSUs vs cash‑settled — RSUs often create a tax event at vest; options typically at exercise. Cash‑settled plans behave like bonuses.

• Early exercise / net exercise — Can reduce future gains but may pull tax earlier; model liquidity and admin.

• Good/bad leaver rules — Poorly drafted rules trigger disputes and unexpected tax timing.

Accounting & payroll: get the basics right

• IFRS 2 every time — Run a formal fair‑value at grant (and modification dates) and recognise monthly expense. Auditors will book this whether you planned for it or not.

• Payroll alignment — Create workflows for equity tax points by country (grant/vest/exercise/sale). Include payslip notes, approvals, and employee comms.

• Cost recharges — If a foreign parent recharges option costs to a local entity, paper it with an intercompany agreement and arm’s‑length basis.

Documentation that investors expect to see

• Board and shareholder approvals for the plan and each grant

• ESOP plan rules + individual grant letters with vesting, cliff, and leaver terms

• Fair‑value/valuation reports and IFRS 2 journal entries

• Country‑by‑country tax map of the plan (who gets taxed when, and how payroll handles it)

• Evidence that the cap table ties to the option register and exercises

Quick founder checklist

✔️ Confirm tax points for every country where employees sit.

✔️ Run fair‑value at grant and book monthly expense (IFRS 2).

✔️ Align payroll to equity events; prepare payslip notes and employee FAQs.

✔️ Execute intercompany agreements for any ESOP cost recharges.

✔️ Keep a live option register that ties to your cap table and board minutes.

✔️ Communicate liquidity: how employees can fund exercise or taxes, and any sale windows.

Final word

ESOPs are powerful—and affordable—until compliance slips. Treat equity like any other cross‑border compensation item: plan the tax points, build the audit trail, and align payroll and accounting. Your team stays motivated, and your next round moves faster.

Need an ESOP health check? E Advisory helps MENA startups align plan rules, accounting, and tax in days—not months.