Employment Tax

China | Recent updates in tax enforcement on Equity Incentive Plans

Summary

With a series of tax inquiries launched by China local tax authorities from city to city recently, we would like to take the chance to share with you the focus and new requirements from this year’s action, as well as some key considerations and recommended action plan for your information and update.

The detail

Recent tax inquiries on Dividends and Sales Proceeds from Equity Incentive Awards

What is new?

In recent weeks, local tax authorities across China have initiated inquiries in the forms of questionnaires, reminders or notices, etc. to assess companies’ compliance with tax obligations related to equity incentive plans. These inquiries primarily focus on three key areas:

• Tax withholding compliance: Whether companies are properly withholding China individual income tax (“IIT”) on equity awards;
• Regulatory filings: Whether companies have completed the required record filing for their equity incentive plans; and
• Employee tax obligations: Whether companies are assisting employees in fulfilling their self-tax reporting requirements for overseas sourced income such as dividends and sales proceeds arising from the vested shares under the equity incentive plans.

This initiative aligns with the State Administration Notice (2025) No. 57 on the Governance of the China IIT Annual Reconciliation Filing which emphasizes stricter oversight of overseas income declarations.  The questionnaire appears to be part of a broader effort by the local tax authorities to collect data on participants in China who receive dividends or sales proceeds derived from equity incentive plans of overseas listed companies.  Companies should be prepared for potential follow-up inquires or reviews based on the initial findings.

What is next?

Companies implementing equity incentive plans should conduct a thorough review of their current compliance status, particularly focusing on tax withholding practices and compliance registration requirements.  While dividends and capital gains from share sales (property transfer income) are not subject to mandatory employer withholding in China, recent regulatory guidance strongly encourages companies to actively support employees in fulfilling their self-reporting obligations for such overseas-sourced income.  This support should include conducting employees’ communication sessions on relevant China tax implications, clearly communicating filing obligations and ensuring all plan documentation properly addresses these obligations for participants in China.

With the 2024 China tax annual reconciliation filing now well underway, companies must immediately address three critical compliance priorities:

1. Compliance review (immediate action required)

• Conduct emergency review of tax withholding procedures
• Verify all regulatory registrations are current and complete
• Document all employee communications regarding tax obligations

2. Employee support (time-sensitive) – While dividends and capital gains remain employee self-reporting obligations:

• Immediately schedule mandatory tax briefing sessions
• Distribute updated filing instructions this week
• Provide individualized support for complex cases

3. Regulatory preparedness (urgent) – With authorities actively reviewing equity compensation:

• Compile all equity transaction records immediately
• Prepare response team for potential inquiries
• Conduct compliance spot checks before month-end

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

Jacky Chu
China Leader

Monica Xu
Partner

Suzy Sun
Associate Director

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