New Announcement on IIT for Equity Incentives
- Backgrounds
Today, talents are gradually becoming the pillar of innovation and progress of companies, therefore, some companies began to concentrate more on employees’ benefits and care, career planning and expectations of the vision and other means to retain high-end talents. Equity incentives are one of the newer and more effective incentives.
Equity incentives (or options) are a way for a company to take out a portion of its equity to incentivize senior management or outstanding employees. Generally, they are attached by the conditions of the incentive, for example: employees need to work with the company for several years, or to complete a specific goal to be incentivized.
This type of incentive is different from direct shareholder equity. Shareholder equity refers to the right of shareholders to obtain economic benefits from the company and participate in the company’s operation and management based on the shareholders’ qualification; whereas equity incentive refers to the right granted by the company to certain people to purchase a certain number of equities or shares of the company within a certain period in the future at a pre-determined price and under certain conditions.
To support the innovation and development of enterprises, the State Administration of Taxation (SAT) has issued an Announcement on Individual Income Tax Policies Relating to Equity Incentives for Listed Companies, on 17th April 2024.
- Conditions for companies
The policies apply only to domestic listed companies, which are joint stock companies whose shares are listed and traded on the Shanghai Stock Exchange, the Shenzhen Stock Exchange, and the Beijing Stock Exchange.
- Main context of the policy
For stock options, restricted shares and equity awards granted to individuals by domestic listed companies, upon filing with the competent tax authorities, individuals may pay individual income tax within a period not exceeding 36 months from the date of exercise of stock options, release of restricted shares or acquisition of equity awards (hereinafter referred to as the date of exercise). If the taxpayer leaves his/her job within this period, he/she shall pay the entire tax before leaving his/her job.
- Validation period
From 1st January 2024 to 31st December 2027, taxpayers who exercise their rights during this period may follow the provisions of this announcement.
In addition, if the taxpayer exercises the right after 1st January 2023 and has not yet fully paid the tax, the tax may be implemented in accordance with the provisions of this announcement, and the period for paying the tax in installments will be calculated from the date of the exercise.
- Calculation method
Equity incentives are taxed separately at a rate of 20%, which is calculated as follows:
Taxable Amount = Equity Incentive Income x 20%
Note that the separate calculation of equity incentives is a tax incentive policy which will expire on 31 December 2027. Upon expiration, the income will be merged and consolidated into the individual’s comprehensive income for recalculation of individual income tax.
- Deadline
- for unrestricted options: the date of exercise;
- for restricted options: the date of release;
In addition, it is important to note that after the exercise or release of the option, individuals will be required to pay individual income tax on future dividends as well as on the final transfer and sale of the option.
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