Author: Wang Quan, litigation lawyer, Gui Yiwei, litigation lawyer|Note: Yes【Tax Law Writing】Press
In the early stage, we shared a lot of articles on the tax-related legal practice of equity incentives, and we also received inquiries from interested friends in the background, and some friends put forward whether the views of the relevant articles have legal and policy basis (i.e., "legality"). To this end, we have summarized and interpreted the tax-related policies of equity incentives, so that it is convenient for friends to grasp them.
[Lawyer's point of view].
1. Policy review and interpretation on the applicable tax types, tax items, tax rates and taxation links of equity incentives.
Equity incentives are property incentives for people, and the incentive equity is usually lower than its actual fair value, otherwise, it will lose its incentive significance. From this point of view, the incentive object has obtained a property income. Generally speaking, the property income obtained by the employee is subject to tax; In addition, after the employee obtains the incentive equity, when it needs to be realized, the equity will be transferred to the outside world, and the income obtained at this time is also subject to tax. The tax that needs to be paid for these two types of income obtained by employees is the tax "individual income tax" stipulated in the Individual Income Tax Law. As for which "tax item" is levied according to the "individual income tax", it is necessary to conduct a further analysis of the tax-related policy documents.
1. When employees obtain incentive equity, they are generally taxed according to the tax item of "wages and salaries", and the comprehensive income tax rate table (3%-45%) is applied separately to calculate and pay taxes
Document basis: (1) Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Levy of Individual Income Tax on the Income of Individual ** Options (CS (2005) No. 35).
2) Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Levy of Individual Income Tax on Income from Value-added Rights and Restrictive Income (CS (2009) No. 5).
3) Supplementary Notice of the State Administration of Taxation on Issues Concerning the Payment of Individual Income Tax on Individual ** Option Income (Guo Shui Han (2006) No. 902).
4) Notice on Extending the Relevant Tax Pilot Policies of the National Independent Innovation Demonstration Zone to the Whole Country (Cai Shui (2015) No. 116).
5) Announcement of the State Administration of Taxation on the Collection and Administration of Individual Income Tax on Equity Awards and Conversion of Share Capital (Announcement No. 80 [2015] of the State Administration of Taxation).
6) Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Convergence of Relevant Preferential Policies after the Revision of the Individual Income Tax Law (CS (2018) No. 164).
7) Notice of the State Administration of Taxation on Individual Income Tax Issues Relating to Equity Incentives (Guo Shui Han 2009 No. 461).
Interpretation: (1) When granting options and restrictive **, the employee does not actually obtain transferable equity (property), which is not regarded as having obtained a property income, and usually does not need to pay tax. After the employee actually exercises his rights or the restriction is lifted, the employee actually obtains a transferable equity (property), which is deemed to have obtained a property income and needs to pay individual income tax according to "wages and salaries".
2) If the option granted by the company to the employee is transferable at the time of authorization (publicly tradeable option), the employee will actually obtain the transferable option (property), which shall be deemed to have obtained a property income and shall be subject to individual income tax according to "wages and salaries". Considering that publicly traded options are already taxed on the date of grant, employees do not have to pay taxes again when they actually exercise the options.
3) Although the options granted by the company to employees are not transferable at the time of authorization (non-publicly traded options), it does not preclude employees from transferring options before exercising the options. When an employee transfers an option, it is deemed that the employee has actually obtained a property income, and needs to pay individual income tax according to "wages and salaries".
4) If an employee obtains an equity award, he or she has already obtained a property income and needs to pay individual income tax according to "wages and salaries".
5) Employees who obtain virtual equity (** value-added rights) and do not obtain actual property on the grant date, and when they actually obtain cash income on the exercise date, they shall pay individual income tax according to "wages and salaries".
2. After the employee obtains the incentive equity, he or she has been taxed according to the "wages and salaries", and when it is transferred to the outside world, it shall be taxed according to the tax item of "income from property transfer" (20% of the difference).
Document basis: (1) Cai Shui (2005) No. 35.
2) Guo Shui Han (2006) No. 902.
3) Notice on the Continued Temporary Exemption of Individual Income Tax on Income from Individual Transfer ** (Cai Shui Zi (1998) No. 61).
Interpretation: (1) For the equity (votes) after the exercise and lifting of the ban, as well as the equity (votes) of the award, if the employee subsequently transfers to the outside world, the difference between the fair market price obtained at the time of transfer is higher than the fair market price of the equity (vote) on the exercise date, the lifting date and the reward date, which belongs to the income from property transfer, and is generally subject to 20% individual income tax. However, the transfer of domestic listed companies** shall be temporarily exempted from individual income tax.
2) For publicly tradable options, individual income tax has been paid according to "wages and salaries" on the grant date, and if the option is subsequently transferred before exercising, it shall be taxed according to the income from "property transfer", but it is currently temporarily exempted from individual income tax.
3. The dividends and dividends obtained by employees during the period of obtaining incentive equity shareholding or the period of lifting the ban on restrictive ** shall be levied according to the individual income tax (20%) of "interest, dividends and bonus income", and the differentiated individual income tax policy will be implemented for the dividends and dividends of domestic listed companies.
2. Sorting out and summarizing the policies on deferred tax payment of equity incentives.
Considering the equity incentive of non-listed companies, the lack of liquidity, and the actual cash flow pressure of the incentive object, the tax law allows eligible companies to apply the preferential tax policy of deferring tax payment to the transfer link. For listed companies, it has strong liquidity (except for restricted shares), which is easier to realize, and the equity incentive income only supports a 12-month deferred tax policy.
Document basis: 1. Notice of the Ministry of Finance and the State Administration of Taxation on Improving the Income Tax Policies Related to Equity Incentives and Technology Shareholding (Cai Shui [2016] No. 101).
2. Cai Shui (2015) No. 116.
Interpretation: (1) For non-listed companies, eligible incentive objects can temporarily not pay taxes in the process of option exercise, restrictive lifting, and equity award acquisition, and when the equity is actually transferred, they will directly pay individual income tax according to the tax item of "income from property transfer" and the tax rate of 20%, and there is no need to pay individual income tax according to "income from wages and salaries".
2) For the ** options, restricted ** and equity awards granted to individuals by listed companies, after filing with the competent tax authorities, the individual may pay individual income tax within a period of no more than 12 months from the date of ** option exercise, restrictive ** lifting of the ban or obtaining equity awards.
3) High-tech enterprises transform scientific and technological achievements, and give equity rewards to the technical personnel of the enterprise, after filing, they can formulate an installment tax payment plan according to the actual situation, and pay in installments within no more than 5 calendar years.
3. Policy review and summary on whether equity incentive expenses can be deducted before tax.
Under normal circumstances, the costs and expenses incurred by the company can be deducted before tax. Equity incentives can be seen as shareholders handing over equity to the company for disposal at a low price or free of charge, and the company uses incentive equity as consideration to obtain employee labor. This type of exchange is similar to the nature of a company paying employees for their labor in order to obtain labor. The labor remuneration paid is a pre-tax deductible expense of the company. Therefore, theoretically, the equity incentive expenses actually incurred by the company can also be deducted before tax.
Document basis: 1. Regulations for the Implementation of the Enterprise Income Tax Law
2. Notice of the State Administration of Taxation on Issues Concerning the Deduction of Wages and Salaries and Employee Welfare Expenses of Enterprises (Guo Shui Han (2009) No. 3).
3. Announcement of the State Administration of Taxation on Issues Concerning the Treatment of Enterprise Income Tax in the Implementation of Equity Incentive Plans by Resident Enterprises in China (Announcement No. 18 [2012] of the State Administration of Taxation).
Interpretation: From the literal understanding of the relevant provisions of the tax-related documents, the "reasonable wages and salaries" allowed by the tax law to be deducted before tax refer to the expenses of the company to fulfill the "wages and salaries" income tax withholding and payment obligations for employees. Those who have not paid individual income tax on the income of "wages and salaries" or even if they have paid individual income tax but are not income from the tax item of "wages and salaries", they shall not be deducted before tax.
As for non-listed companies that are subject to the deferred tax policy, it is recommended that the relevant implementing units consult the local tax authorities as to whether the equity incentives that are subject to individual income tax according to the income from the "property transfer" tax item can be deducted before tax.
4. Policy sorting and summary on the filing of equity incentives.
Considering that equity incentives are not the company's regular business, and taxpayers have a natural instinct to evade taxes, it is also in order to deepen the reform of "delegating power, delegating power, delegating power, and providing services". Enterprises implementing equity incentives should be recorded, and enterprises enjoying deferred tax incentives should be recorded.
Document basis: 1. Cai Shui (2015) No. 116.
2. Announcement No. 80 of 2015 of the State Administration of Taxation.
3. Cai Shui [2016] No. 101.
4. General Tax Collection Law [2021] No. 69.
Interpretation: (1) All enterprises that implement equity incentives, regardless of whether they enjoy preferential tax deferred policies, shall be recorded.
2) Since January 1, 2016, high-tech enterprises nationwide to transform scientific and technological achievements, to the relevant technical personnel of the enterprise equity awards, individuals have difficulty in paying taxes at one time, according to the actual situation to develop their own installment payment plan, in no more than 5 calendar years (inclusive) installment payment, and the relevant information reported to the competent tax authorities for the record. (Non-listed high-tech enterprises can also deferred the transfer of share capital to individual shareholders for the purpose of distributing profits, surplus reserves, and capital reserves.) ）
3) If the deferred tax policy is applied to the equity incentive (or investment in technological achievements), the applicant shall go through the filing formalities with the competent tax authority within the prescribed time limit. Those who have not gone through the filing formalities shall not enjoy the preferential policy of deferred tax payment.