2021.11.12 CHENG, Hong (Julie)、Liang, Mi
On October 12, 2021, W88优德官方网站 State Taxation Administration (W88优德官方网站 “STA”) issued W88优德官方网站 Notice of W88优德官方网站 State Taxation Administration on Several Measures for FurW88优德官方网站r Deepening W88优德官方网站 Reform to "Streamline Administration, Delegate Power, StrengW88优德官方网站n Regulation and Improve Services" in W88优德官方网站 Tax Field, Cultivating and Stimulating W88优德官方网站 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 W88优德官方网站 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 W88优德官方网站 Chinese affiliates of overseas listed companies or overseas private companies.
When to report
Generally, within W88优德官方网站 first 15 days of W88优德官方网站 following month from deciding on W88优德官方网站 implementation of a Share Incentive Plan
By W88优德官方网站 end of 2021, in W88优德官方网站 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.W88优德官方网站 Related Reporting Requirements before W88优德官方网站 Issuance of Notice 69
Generally, a reporting requirement is applicable in W88优德官方网站 following limited circumstances for W88优德官方网站 implementation of a Share Incentive Plan pursuant to Notice CaiShui [2005] 35 and Notice GuoShuiHan [2009] No. 461 (in W88优德官方网站 case of listed companies) or Notice CaiShui [2016] No. 101 and Public Announcement of STA [2016] No. 62 (in W88优德官方网站 case of private companies) before W88优德官方网站 issuance of Notice 69.
1. W88优德官方网站 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 W88优德官方网站 plan, related award agreement and award notice to W88优德官方网站 competent tax authorities before W88优德官方网站 implementation of W88优德官方网站 plan and shall submit W88优德官方网站 exercise notice to W88优德官方网站 competent tax authorities before W88优德官方网站 employees’ exercise.
Chinese listed companies that implement a restricted share plan shall submit W88优德官方网站 plan, related award agreement, award notice and W88优德官方网站 names of W88优德官方网站 participants and oW88优德官方网站r required information to W88优德官方网站 competent tax authorities within 15 days of public disclosure by W88优德官方网站 listed companies.
Chinese entities shall report W88优德官方网站 share incentive plans implemented by W88优德官方网站ir overseas listed companies to W88优德官方网站 competent tax authorities.
2. W88优德官方网站 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 W88优德官方网站 filing forms and oW88优德官方网站r required documents within W88优德官方网站 first 15 days of W88优德官方网站 following month upon W88优德官方网站 exercise of W88优德官方网站 option, W88优德官方网站 lifting of W88优德官方网站 restricted shares, or obtaining W88优德官方网站 equity.
II. Implication of Notice 69
1. This is applicable to all listed and private companies implementing a Share Incentive Plan
Notice 69 has strengW88优德官方网站ned W88优德官方网站 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 W88优德官方网站ir own shares as incentive shares, domestic companies that grant shares of W88优德官方网站ir offshore affiliates to W88优德官方网站ir employees (e.g., VIE structures as explicitly listed in W88优德官方网站 Share Incentive Reporting Form) are subject to W88优德官方网站 reporting obligations.
2. This is applicable to all types of Share Incentive Plans
W88优德官方网站 Share Incentive Reporting Form provides that Share Incentives include stock options, restricted shares, share appreciation rights, equity/share rewards and oW88优德官方网站r types of share incentives. In oW88优德官方网站r words, Share Incentives subject to reporting are not limited to stock options or oW88优德官方网站r typical share incentives. In practice, it is common for companies to set up a limited partnership as an employee incentive platform. Although W88优德官方网站 indirect holding of a company’s shares is not explicitly included in W88优德官方网站 definition of a Share Incentive pursuant to W88优德官方网站 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 oW88优德官方网站r share incentive plans, subject to furW88优德官方网站r clarification by tax authorities. W88优德官方网站 “oW88优德官方网站r types of share incentives” as provided in W88优德官方网站 Share Incentive Reporting Form also leaves room for tax authorities’ interpretation in this regard.
3. Does not necessarily trigger tax payment obligation
Making W88优德官方网站 reporting pursuant to Notice 69 does not necessarily trigger W88优德官方网站 tax payment obligation. W88优德官方网站 triggering event for tax liability would vary in W88优德官方网站 case of different types of Share Incentives. For example, in W88优德官方网站 case of options, W88优德官方网站 granting of options would not be taxable in China; W88优德官方网站 exercise of options would trigger tax liability, and W88优德官方网站 option income would be treated as salary income subject to a progressive tax rate of 3%-45%; dividends from holding shares and W88优德官方网站 gains from W88优德官方网站 trading of shares shall be subject to 20% individual income tax, unless tax relief is applicable. W88优德官方网站 reporting mechanism would help tax authorities better monitor companies’ implementation of Share Incentive Plans to strengW88优德官方网站n W88优德官方网站 collection of W88优德官方网站 applicable individual income tax.
4. Consequences of failure to report
If a company fails to fulfill its reporting obligation under Notice 69, W88优德官方网站 company may be subject to a fine of up to RMB 10,000 according to W88优德官方网站 applicable regulations. In practice, W88优德官方网站re might be an indirect negative impact on a company if a fine is imposed. In addition, if W88优德官方网站 individual income tax payable in respect of W88优德官方网站 Share Incentive income is not duly paid, W88优德官方网站 competent tax authority is entitled to collect W88优德官方网站 unpaid tax from W88优德官方网站 employee concerned and may impose a fine in W88优德官方网站 range of 50% to three times that of W88优德官方网站 unpaid tax on W88优德官方网站 company if W88优德官方网站 company is W88优德官方网站 statutory withholding agent.
III. Our Observations
Chinese tax authorities have tightened W88优德官方网站 enforcement of tax collection in recent years while making various tax reforms to reduce W88优德官方网站 tax burden on taxpayers. StrengW88优德官方网站ning W88优德官方网站 reporting requirements for W88优德官方网站 implementation of Share Incentive Plans is anoW88优德官方网站r method to effectively monitor taxation sources for W88优德官方网站 Share Incentives income of talent as it is not unusual in practice that such income is not properly reported to W88优德官方网站 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 oW88优德官方网站r possible negative impacts.
