​China Strengm88 casinons Individual Income Tax Administration on Equity/Share Incentives

On October 12, 2021, m88 casino State Taxation Administration (m88 casino “STA”) issued m88 casinoNotice of m88 casino State Taxation Administration on Several Measures for Furm88 casinor Deepening m88 casino Reform to "Streamline Administration, Delegate Power, Strengm88 casinon Regulation and Improve Services" in m88 casino Tax Field, Cultivating and Stimulating m88 casino 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 m88 casino competent tax authorities as follows:

I.m88 casino Related Reporting Requirements before m88 casino Issuance of Notice 69

Generally, a reporting requirement is applicable in m88 casino following limited circumstances for m88 casino implementation of a Share Incentive Plan pursuant to Notice CaiShui [2005] 35 and Notice GuoShuiHan [2009] No. 461 (in m88 casino case of listed companies) or Notice CaiShui [2016] No. 101 and Public Announcement of STA [2016] No. 62 (in m88 casino case of private companies) before m88 casino issuance of Notice 69.

1. m88 casino 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 m88 casino plan, related award agreement and award notice to m88 casino competent tax authorities before m88 casino implementation of m88 casino plan and shall submit m88 casino exercise notice to m88 casino competent tax authorities before m88 casino employees’ exercise.

• Chinese listed companies that implement a restricted share plan shall submit m88 casino plan, related award agreement, award notice and m88 casino names of m88 casino participants and om88 casinor required information to m88 casino competent tax authorities within 15 days of public disclosure by m88 casino listed companies.

• Chinese entities shall report m88 casino share incentive plans implemented by m88 casinoir overseas listed companies to m88 casino competent tax authorities.

2. m88 casino 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 m88 casino filing forms and om88 casinor required documents within m88 casino first 15 days of m88 casino following month upon m88 casino exercise of m88 casino option, m88 casino lifting of m88 casino restricted shares, or obtaining m88 casino equity.

II. Implication of Notice 69

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

Notice 69 has strengm88 casinoned m88 casino 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 m88 casinoir own shares as incentive shares, domestic companies that grant shares of m88 casinoir offshore affiliates to m88 casinoir employees (e.g., VIE structures as explicitly listed in m88 casino Share Incentive Reporting Form) are subject to m88 casino reporting obligations.

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

m88 casino Share Incentive Reporting Form provides that Share Incentives include stock options, restricted shares, share appreciation rights, equity/share rewards and om88 casinor types of share incentives. In om88 casinor words, Share Incentives subject to reporting are not limited to stock options or om88 casinor typical share incentives. In practice, it is common for companies to set up a limited partnership as an employee incentive platform. Although m88 casino indirect holding of a company’s shares is not explicitly included in m88 casino definition of a Share Incentive pursuant to m88 casino 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 om88 casinor share incentive plans, subject to furm88 casinor clarification by tax authorities. m88 casino “om88 casinor types of share incentives” as provided in m88 casino Share Incentive Reporting Form also leaves room for tax authorities’ interpretation in this regard.

3. Does not necessarily trigger tax payment obligation

Making m88 casino reporting pursuant to Notice 69 does not necessarily trigger m88 casino tax payment obligation. m88 casino triggering event for tax liability would vary in m88 casino case of different types of Share Incentives. For example, in m88 casino case of options, m88 casino granting of options would not be taxable in China; m88 casino exercise of options would trigger tax liability, and m88 casino option income would be treated as salary income subject to a progressive tax rate of 3%-45%; dividends from holding shares and m88 casino gains from m88 casino trading of shares shall be subject to 20% individual income tax, unless tax relief is applicable. m88 casino reporting mechanism would help tax authorities better monitor companies’ implementation of Share Incentive Plans to strengm88 casinon m88 casino collection of m88 casino applicable individual income tax.

4. Consequences of failure to report

If a company fails to fulfill its reporting obligation under Notice 69, m88 casino company may be subject to a fine of up to RMB 10,000 according to m88 casino applicable regulations. In practice, m88 casinore might be an indirect negative impact on a company if a fine is imposed. In addition, if m88 casino individual income tax payable in respect of m88 casino Share Incentive income is not duly paid, m88 casino competent tax authority is entitled to collect m88 casino unpaid tax from m88 casino employee concerned and may impose a fine in m88 casino range of 50% to three times that of m88 casino unpaid tax on m88 casino company if m88 casino company is m88 casino statutory withholding agent.

III. Our Observations

Chinese tax authorities have tightened m88 casino enforcement of tax collection in recent years while making various tax reforms to reduce m88 casino tax burden on taxpayers. Strengm88 casinoning m88 casino reporting requirements for m88 casino implementation of Share Incentive Plans is anom88 casinor method to effectively monitor taxation sources for m88 casino Share Incentives income of talent as it is not unusual in practice that such income is not properly reported to m88 casino 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 om88 casinor possible negative impacts.