Home / Publications / JunHe Legal Updates / details of junhe law review

​China Strengthens Individual Income Tax Administration on Equity/Share Incentives

2021.11.12 CHENG, Hong (Julie)、Liang, Mi

On October 12, 2021, the State Taxation Administration (the “STA”) issued the Notice of the State Taxation Administration on Several Measures for Further Deepening the Reform to "Streamline Administration, Delegate Power, Strengthen Regulation and Improve Services" in the Tax Field, Cultivating and Stimulating the Vitality of Market Subjects (Shuizongzhengkefa [2021] No. 69, “Notice 69”). One noteworthy measure relates to individual income tax administration on equity/share incentives (“Share Incentives”).  Specifically, all enterprises that implement Share Incentive Plans are required to report to the competent tax authorities as follows:

Who will be responsible for reporting

All listed and unlisted companies that implement a Share Incentive Plan, including Chinese listed companies, private companies and the Chinese affiliates of overseas listed companies or overseas private companies.

When to report

  • Generally, within the first 15 days of the following month from deciding on the implementation of a Share Incentive Plan

  • By the end of 2021, in the situation whereby a Share Incentive Plan has been implemented but not completed.

Key document required

A Share Incentive Reporting Form (“《股权激励情况报告表》” in Chinese)

I.The Related Reporting Requirements before the Issuance of Notice 69

Generally, a reporting requirement is applicable in the following limited circumstances for the implementation of a Share Incentive Plan pursuant to Notice CaiShui [2005] 35 and Notice GuoShuiHan [2009] No. 461 (in the case of listed companies) or Notice CaiShui [2016] No. 101 and Public Announcement of STA [2016] No. 62 (in the case of private companies) before the issuance of Notice 69.

1. The Implementation of a Share Incentive Plan by listed companies 

  • Chinese listed companies that implement an option plan or a share appreciation rights plan shall submit the plan, related award agreement and award notice to the competent tax authorities before the implementation of the plan and shall submit the exercise notice to the competent tax authorities before the employees’ exercise.

  • Chinese listed companies that implement a restricted share plan shall submit the plan, related award agreement, award notice and the names of the participants and other required information to the competent tax authorities within 15 days of public disclosure by the listed companies. 

  • Chinese entities shall report the share incentive plans implemented by their overseas listed companies to the competent tax authorities. 

2. The implementation of a Share Incentive Plan by a Chinese private company that qualifies for tax deferral treatment under Notice CaiShui [2016] No. 101 

  • If participants choose individual income tax deferral treatment, a private Chinese company shall submit the filing forms and other required documents within the first 15 days of the following month upon the exercise of the option, the lifting of the restricted shares, or obtaining the equity.

II. Implication of Notice 69

1. This is applicable to all listed and private companies implementing a Share Incentive Plan

Notice 69 has strengthened the reporting requirements to apply to all listed and private companies that implement a Share Incentive Plan. In particular, it specifies that in addition to those companies that are using their own shares as incentive shares, domestic companies that grant shares of their offshore affiliates to their employees (e.g., VIE structures as explicitly listed in the Share Incentive Reporting Form) are subject to the reporting obligations. 

2. This is applicable to all types of Share Incentive Plans

The Share Incentive Reporting Form provides that Share Incentives include stock options, restricted shares, share appreciation rights, equity/share rewards and other types of share incentives.  In other words, Share Incentives subject to reporting are not limited to stock options or other typical share incentives.  In practice, it is common for companies to set up a limited partnership as an employee incentive platform.  Although the indirect holding of a company’s shares is not explicitly included in the definition of a Share Incentive pursuant to the applicable tax laws and regulations, such an incentive platform is often considered as a long-term incentive granted by a company to its employees and may be regulated as other share incentive plans, subject to further clarification by tax authorities. The “other types of share incentives” as provided in the Share Incentive Reporting Form also leaves room for tax authorities’ interpretation in this regard. 

3. Does not necessarily trigger tax payment obligation

Making the reporting pursuant to Notice 69 does not necessarily trigger the tax payment obligation. The triggering event for tax liability would vary in the case of different types of Share Incentives. For example, in the case of options, the granting of options would not be taxable in China; the exercise of options would trigger tax liability, and the option income would be treated as salary income subject to a progressive tax rate of 3%-45%; dividends from holding shares and the gains from the trading of shares shall be subject to 20% individual income tax, unless tax relief is applicable.  The reporting mechanism would help tax authorities better monitor companies’ implementation of Share Incentive Plans to strengthen the collection of the applicable individual income tax.

4. Consequences of failure to report

If a company fails to fulfill its reporting obligation under Notice 69, the company may be subject to a fine of up to RMB 10,000 according to the applicable regulations.  In practice, there might be an indirect negative impact on a company if a fine is imposed.  In addition, if the individual income tax payable in respect of the Share Incentive income is not duly paid, the competent tax authority is entitled to collect the unpaid tax from the employee concerned and may impose a fine in the range of 50% to three times that of the unpaid tax on the company if the company is the statutory withholding agent. 

III. Our Observations

Chinese tax authorities have tightened the enforcement of tax collection in recent years while making various tax reforms to reduce the tax burden on taxpayers.  Strengthening the reporting requirements for the implementation of Share Incentive Plans is another method to effectively monitor taxation sources for the Share Incentives income of talent as it is not unusual in practice that such income is not properly reported to the tax authorities.  

Companies that have or will implement Share Incentive Plans are advised to pay attention to such reporting requirements and take appropriate action to avoid tax risks and other possible negative impacts.  

JunHe is the only Chinese law firm to be admitted as a member of Lex Mundi and Multilaw, two international networks of independent law firms. JunHe and selected top law firms in major European and Asian jurisdictions are “best friends.” Through these connections, we provide high quality legal services to clients doing business throughout the world.