The Chinese Ministry of Finance (MOF) and State Taxation Administration (STA) announced the extension of preferential individual income tax (IIT) for equity incentive income for another year, until December 31, 2023. Taxpayers will also continue to enjoy preferential IIT on annual bonuses and expatriates’ allowances for the remainder of the year.
The measure, announced last January, was welcomed by taxpayers. The prevailing preferential IIT policy for equity incentive income was originally set to expire by the end of 2021, but the MOF and STA granted a one-year extension.
The extension applies to preferential tax treatment of employee’s equity income from participation in equity plans of public companies and the temporary exemption from individual income tax of gains from investments by mainland individual investors through the Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong Stock Connect and from the trading of Hong Kong fund units under the mutual recognition of funds.
The equity incentives of listed companies will continue to be taxed separately, while preferential IIT policies of stock connect programs between the mainland and Hong Kong and the mutual recognition of funds will remain in place.
The Chinese government’s goal is to encourage the country’s capital market liberalization and corporate innovation.
Additionally, the list of other preferential tax policies extended until the end of 2023, includes the policy for foreign nationals’ benefits, and the annual one-time bonus of both foreign and Chinese individuals.
China’s IIT policy for the equity incentives of listed companies generally refers to stock options, stock appreciation rights, restricted stocks, and equity awards.
According to the MOF, resident taxpayers who obtain equity incentives from listed companies can avoid including them in the comprehensive income of the current tax year. The complete income tax rate will be calculated and paid separately.
Where a resident individual obtains equity incentives on two or more than two occasions within a tax year, they shall be consolidated for tax computation.
Under the IIT law, resident taxpayer refers to an individual who has a residence in China or has spent a total of at least 183 days there in a year; non-resident taxpayer refers to an individual who hasn’t resided in the country or hasn’t been listed as a resident for less than 183 days in a tax year.
Several other preferential IIT policies were also extended until the end of 2023. These include the preferential tax treatment for the annual one-time bonus; and the possibility of exemption from completing the formalities for final settlement of consolidated income for IIT when the taxpayer’s annual income does not exceed RMB 120,000 (US$17,695.72) and the retrospective tax payment is required upon the final settlement, which does not exceed RMB 400 (US$58,99).
According to this plan, the IIT on the annual one-time bonus can be calculated as opposed to being added to and taxed along with comprehensive income. Resident taxpayers in China are thus allowed to choose between the following two methods to calculate their IIT on the annual one-time bonus:
Taxing the annual one-time bonus separately; or taxing the annual one-time bonus as part of their annual comprehensive income.
This latest tax extension is not surprising. In fact, it is common for the government to first set a limited effective period for tax incentives, and then grant extensions. However, it is important to note that the tax authorities have been strengthening IIT compliance relating to equity incentive income.
China’s taxation system has been going through a comprehensive reform since 2018, and authorities have been implementing transitional regulations. This shifting tax environment can be confusing for companies and employees, exposing them to unwanted tax violations.
Companies are recommended to ensure compliance with their IIT withholding and/or reporting obligations, and to address historic non-compliances, if any. Both employers and employees should pay close attention to and be updated on the newest changes in China’s income tax regulations to avoid additional tax burden.
This extension provides the government with flexibility on whether to continue granting relevant tax incentives, depending on specific circumstances. It remains to be seen if these preferential IIT policies will be further extended after 2023.
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