ABSTRACT There is no doubt that the Employee Stock Option Plan is to improve employee loyalty and enhance the company's long-term performance for aligning the interest of employees more closely with those of stockholders. It is positive significance for formation of diversified incentives. However, with respect to levying taxation on Employee Stock Option, if it is designed against the principle of equity and legitimacy, it may make the Employee Stock Option Plan ineffective and lose incentive even make the employees granted stock option and granting companies suffer that cash flow cannot fulfil the rigid obligation of tax burden so that arises the sense of frustration. During the period between 2005 and 2014, the industry of casino was in blooming development, which was in sore need of working force, suffered competition for working force in Macau SAR. In order to attracting and retaining highly-skilled employees, more and more casino companies adopted Employee Stock Option as a form of remuneration at the same time the form of remuneration can relieve the pressure of capital and liquidity. The Circular No.02/DIR/2009, which was issued on 7 January 2009 to regulate the taxation on Employee Stock Option, was labeled as immature on the date of its promulgation which were shown: I. At the time only the actual exercise, assignment or release of the stock options, the income of Employee Stock Option included in the total income from work of the year and are levied professional tax by applying progressive tax schedules. Usually employment income is taxed at the moment of the employee receives, collects or realizes the income according to cash principle. Furthermore, if the employee who is granted ESOs ceases to work before the exercise, assignment or release of the option in the employing entity which granted ESOs, he should be levied tax on estimated income as accidental collection. However, the Circular No.02/DIR/2009 violates the substantive of taxation based on cash principle, violates the principle of the ability-to-pay that employees cannot have cash earnings to cover the rigid obligation of tax burden due to limited conditions that stocks cannot be immediately sold once employees exercise their option to acquire stocks. II. The Circular No.02/DIR/2009 doesn't clarify the costs for setting-up and operating stock plans whether they should be deductible and the cost of the stock options whether it should be deductible and to what extent if so. III. The Circular No.02/DIR/2009 regulates that employers have obligation to declare the information relative to the attribution of the stock option right to the Macau Department of Finance within a period of 30 days from the date of attribution, remit the information relevant to the transaction within a period of 30 days from in which the employee exercises, assigns or releases the stock option right, and is responsible for the calculation and retention of Professional Tax when the employee exercises the stock option rights. However, employer and the granting company are not the same company, which are related companies. The employer or holding of office in Macau SAR is difficult to realize when their employee who are sent to work for related company and granted Employee Stock Option by related company will exercise and how much will be earned at actual exercise, assignment or release of the stock option. Tax calculation and retention of Employee Stock Option break with the principle of efficiency that is the cost imposed as little as possible for enforcing the collection. It means that the Circular No.02/DIR/2009 was not designed from principle of equity, the principle of efficiency, the principle of benefit and the principle of ability-to-pay at the source. For the purpose, the paper applies the comparative method and case analysis to analyze the existing tax system layer by layer. From the perspective of jurisprudence, the root of such deficiencies is that the distribution of tax jurisdiction is defined unclearly. Only on the basis of clear definition of distribution of tax jurisdiction, the taxation on Employee Stock Option can adhere to the principle of equity, the principle of efficiency, the principle of benefit and the principle of ability-to-pay and will be neutral to affect the development Of Employee Stock Option in the market. On the basis of substantive level rather than form level, the discretion of tax authority can prevent from the loss of tax revenue. The paper includes five chapters, which will be introduced following. First Chapter: It explains what the stock option is and makes two examples Of the Galaxy Macau and Melco Crown Macau limited, which grant Employee Stock Option to their employees for rewarding their service rendered, and retaining to carry out taxation issue prior to the Circular No.01/DIR/2009 and after issued Circular No.01 /DIR/2009. Second Chapter: it introduces what is the employee stock option from life cycle and legal nature and introduces the tax system of U.S., the Republic of China, Hong Kong and OECD in terms of employee stock option. Through comparing 2011 Stock Incentive Plan with 2006 Stock Incentive Plan, it carries that it doesn't fundamentally change the nature of labor contract whatever signing contract of employee stock option plan, although employees would be stockholders once exercising. The dual nature on ESOs arise the problem whether it should consider as compensation for work or capital income. The chapter mainly defines the nature of income of employee stock option. Third Chapter: through comparison and case analysis, it mentions that the Circular No.01/DIR/2009 violates the principle of benefit, the principle of equity, the principle of efficiency and the principle of ability-to-pay in terms of jurisdiction, tax retention, timing of taxation and cost deduction. Fourth Chapter: continues the analysis of Circular No.02/DIR/2009 from viewpoint of principle of benefit, principle of efficiency, principle of ability-to-pay to conclude that some enlightenment targeted for improving the shortcomings of taxation treatment on ESOs in Circular No.02/DIR/2009 from four levels. Fifth Chapter: Conclusion Keywords: Employee Stock Option, Taxation, Ability-to-Pay