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China | Employment Tax | Another extension of the preferential policy for equity incentives

China | Employment Tax | Another extension of the preferential policy for equity incentives

January 29, 2024

Employment Tax

China | Another extension of the preferential policy for equity incentives

Highlight
On 18 August, China’s Ministry of Finance (MOF) and the State Taxation Administration (STA) jointly issued the Notice Regarding the Extension of Individual Income Tax (IIT) Preferential Treatment on Equity Incentive Income>, MOF STA Public Notice [2023] No.25 (PN25), providing the preferential tax policy on equity incentive income (originally valid until the end of this year) will now be extended until 31 December 2027.

The Details
As a recap of the preferential policy, the IIT preferential treatment for equity incentive income allows a separate taxation method without adding it to the comprehensive income received by tax residents. Under this calculation method, the individual generally benefits from a tax savings as the equity incentive income will not be added to the regular income for tax calculation purposes and hence a lower tax rate could be applied.

Since the implementation of the new IIT law in 2019, the IIT preferential policy has been extended several times. This policy extension is regarded as a significant support for the capital market and the promotion of innovation and company development through tax policies. It is welcomed by many companies and taxpayers and promotes the use of equity- based compensation.

The Takeaways
The extension of preferential tax policy on equity incentive income in China is expected to further solidify equity incentives as a popular compensation component for companies to incentivize their employees. Companies who adopt the preferential treatment should pay attention to the followings:

It is mentioned again in PN 25 that resident taxpayers receiving equity incentive income can adopt the preferential treatment provided that relevant conditions as stipulated in those relevant tax circulars governing equity incentive income are fulfilled. Among all the relevant requirements, tax registration is one of the conditions and deemed a requirement to be tax compliant.
Failure to complete the required tax registration may result in the revocation of the preferential tax treatment, leading to late payment surcharges and penalties. Thus, companies that offer equity-based compensation to qualified employees should ensure that relevant conditions, including tax registration, are fulfilled in a timely manner.
Taxation of equity-based compensation can be complex, as the features and conditions of each equity grant can vary, and taxation rules in different jurisdictions can be complicated, especially for international assignees. For example, the nature of the income (employment income vs. capital gain), the sourcing of the income (especially for international assignees working in different countries/regions over the vesting period), the taxation rules adopted in different countries/regions (some determine the sourcing based on grant while others based on vesting), the trailing liability, the respective reporting and withholding obligations at home and host countries/regions etc.
In addition to the tax related compliance requirement for equity-based compensation, companies should also review and ensure that the compliance requirement from the State Administration of Foreign Exchange (“SAFE”) perspective has been duly completed. From our experience, companies may sometimes confuse the tax registration with the SAFE registration for equity plans. It is important to note that these are two different compliance requirements serving different purposes. The SAFE registration is a forex compliance requirement for overseas companies that offer equity-based compensation to Chinese nationals and to facilitate inward/outward fund remittance.

Contact us
Please reach out to your usual Vialto Partners contact should you have any questions on the above. Alternatively, you may contact the following members of Vialto Partners China team:

Jacky Chu
China Lead Partner

Monica Xu
Partner

Further information on Vialto Partners can be found on our website: www.vialtopartners.com

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Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.

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