This GMS Flash Alert reports on recently-issued guidance in the People’s Republic of China (PRC) on favourable individual income tax (IIT) treatment of certain employee equity incentive awards.
Recently-issued guidance in the People’s Republic of China (PRC) sets out the qualifying criteria for favourable individual income tax (IIT) treatment of certain employee equity incentive awards granted by private companies, and capital contributions to PRC-resident enterprises through technology investment.1
The new rules came into effect on 1 September 2016.
With the roll-out of the new rules, PRC IIT preferential treatment is now available to equity awards granted by both listed and unlisted companies, which should encourage the use of equity awards as a form of compensation in the PRC. For private companies, the use of equity awards can be a tax-efficient way to help align employees’ interest and behaviour.
In particular, the new rules allow the taxation of these equity awards to be deferred to the point of disposal and reduce the marginal tax rate from 45 percent (top marginal tax rate applicable to employment related income) to 20 percent. The extent of potential tax savings to an equity-award granting employer will largely depend on the design of the plan.
The new guidance, contained in Circular 101 and Announcement 62, covers restricted shares and share options granted by unlisted PRC-resident companies to their employees. It establishes the criteria (noted below) which these equity awards must satisfy in order for the preferential tax treatment to apply:
1. The share incentive plan must be implemented by a PRC-resident company.
2. The share incentive plan must have been approved by the company’s board of directors and documented in the shareholders meeting minutes.
3. The underlying shares must be shares in the PRC-resident company, or shares of another PRC-resident company received by the employing company as a result of a capital contribution in the form of technology.
4. The number of participants cannot exceed 30 percent of the average employee population of the company in the last six months.
5. Share options and restricted shares must be subject to a minimum vesting period of three years, and sale restrictions of at least one year should be placed on shares acquired under the plan.
6. The expiration period of the share options must not exceed 10 years.
7. Shares which immediately vest upon grant must be granted by PRC-resident companies in the qualified industry.
Following the release of Circular 101 and Announcement 62, the KPMG International member firm in the PRC reached out to various local tax authorities to seek clarifications on some of the practical implications of the circulars. A summary on some of the key points is provided below.
1 Circular on Income Tax Policy Enhancing Equity Incentives and Capital Contribution through Technology Investment (Caishui  No.101, “Circular No.101”), jointly issued by the Ministry of Finance and the State Administration of Taxation on 22 September 2016 and effective on 1 September 2016.Circular on Administration of Income Tax on Equity Incentives and Capital Contribution In The Form of Technology (Announcement No. 62 of the State Administration of Taxation in 2016, “Announcement 62”) issued by the State Administration of Taxation on 28 September 2016, and effective on 1 September 2016. Announcement 62 provides for the administrative guidelines and detailed implementation rules.
2 As we stated in the “KPMG Note” on page 2, tax professionals with the KPMG International member firm in the People’s Republic of China have contacted various local tax authorities (generally with the policy regulatory departments in those authorizes) in the PRC to seek clarifications. The points we raise in the “Insights” section of this newsletter reflect the content of these discussions. It is important to bear in mind that the local practice may still vary among different tax authorities. Please consider consulting with your qualified tax professional before taking any decisions affecting your business or your employees/taxpayers.
This article is excerpted, with permission, from “Tax Incentive Policy on Equity-Based Compensation” in China Tax Alert (Issue 34, November 2016), a publication of the KPMG International member firm in the PRC.
For additional information or assistance, please contact your local GMS or People Services professional or one of the following professionals with the KPMG International member firm in the People’s Republic of China:
Tel. +86 (21) 2212 3458
Tel. +86 (21) 2212 3486
The information contained in this newsletter was submitted by the KPMG International member firm in the People’s Republic of China.
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