Equity incentive plans in China are subject to specific tax rules, regulatory requirements, and preferential policies covering stock options, restricted shares, and equity awards. Companies should carefully assess the tax implications before structuring plans. 

Equity incentive plans can be a powerful tool for companies to reward and retain employees and align employee interests with business objectives, while also attracting key talent for hard-to-fill roles. 

However, they also come with tax implications and specific tax rules that both companies and participating employees must be aware of before designing and committing to a plan.

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This is the first article in our two-part series on the tax implications of equity incentive plans in China.  

In part one, we cover how equity incentives are taxed in China, including how taxable income is calculated for different types of incentive schemes. 

In part two, we cover preferential treatment for equity incentive plans and discuss how companies can design compliant and tax-efficient plans to attract and retain employees. 

How are equity incentives taxed in China? 

The rules for calculating taxable income and tax payable on stock options, restricted shares, and equity awards are outlined in a series of notices from the State Tax Administration (STA) and Ministry of Finance (MOF), including: 

Equity incentives in China are taxed as income from salaries and wages and are subject to individual income tax (IIT) withheld by the employer in the first instance. Depending on the loss or gain when selling the shares, the additional gain is then subject to IIT as income from property transfer. At the same time, certain qualifying equity incentives granted by non-listed companies may be eligible for deferred taxation and eventual taxation as income from property transfer. 

Chinese tax law identifies three main types of equity incentives: 

  • Stock or equity options (hereinafter “stock options”): the right granted by a company to an employee to purchase the company’s stock or equity at an agreed-upon price within a specified period.
  • Restricted shares: where a certain quantity of the company’s equity is granted to employees subject to predetermined conditions, whereby the recipients may dispose of such equity upon meeting the tenure or performance targets stipulated in the equity incentive plan; and
  • Equity awards: where a certain share of equity or quantity of shares is granted by a company to an employee at no cost. 

The point at which a tax event arises depends on the type of equity incentive: 

  • Stock options: when the options are purchased by the employee (exercise date) and when the shares are sold (selling date).
  • Restricted shares: when restrictions on the shares (or a portion of the shares) for an employee are lifted (unlock date) and when the shares are sold (selling date).
  • Equity awards: when the equity award is received by the employee (receipt date). 

Acceptance of an equity incentive or an equity incentive plan by an employee is not generally treated as a tax event. 

Determining taxable income from equity incentives 

Stock options 

Taxable income from a stock option is determined by the difference between the actual purchase price paid by the employee to the company and the fair market value on the date of purchase (the closing price on the date of purchase for listed companies).

 

Taxable income from stock options is calculated according to the following formula:  

Taxable income from stock options = (Market price per share of the exercised stock – Exercise price per share paid by the employee to acquire the stock option) × Number of shares

 

Restricted shares 

The taxable income of a restricted share is determined by combining the average market price (the closing price on the relevant day in listed companies) on the day the shares are registered with the China Securities Depository and Clearing Corporation (the “registration date price”) and the market price (the closing price on the relevant day in listed companies) on the day the shares are unlocked (the “unlock date price”), multiplied by the number of shares being unlocked. The amount of funds actually paid by the employee to acquire the restricted share corresponding to the vested shares is then deducted from this figure, and the resulting difference constitutes the taxable income.

 

Taxable income from restricted shares is calculated according to the following formula:  

Taxable income = [(Registration date price + Unlock date price) / 2 × Unlocked shares] − [Total amount paid × (Unlocked shares / Total restricted shares acquired]

 

Equity awards 

Where equity awards are granted free of charge, taxable income is generally equal to the fair market value of the awarded shares on the receipt date.

Taxable income from equity awards is calculated according to the following formula:  

Taxable income = Receipt date market price x Number of shares

 

Determining share value in non-listed companies 

For listed companies, the “fair market value” of a share or equity is the closing share price on the trading day of the given tax event, or the preceding trading date if the day of the tax event is a non-trading day.

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For non-listed companies, the “fair market value” of shares is generally determined using accepted valuation methods, such as the net asset method, the comparable method, and other reasonable methods. Under the net asset method, the price is determined based on the net assets at the end of the year prior to the acquisition of the shares or equity. 

Determining tax payable on income from equity incentives

Under Notice [2023] No. 25, taxable income from equity incentives granted by listed companies to a tax resident individual is now taxed in full separately from the comprehensive income of the current year by applying the comprehensive IIT rate schedule, provided the equity plan has been registered with the in-charge tax bureau based on the regulations’ requests. 

 

Tax payable is calculated according to the following formula: 

Tax payable = Taxable income from equity incentives × Applicable tax rate – Quick deduction 

 

If an employee who is a tax resident receives equity incentives on two or more occasions in a single tax year, the income is aggregated, and tax is calculated according to the above formula. 

China imposes a progressive IIT regime, with the current rates and quick deductions as follows:

Taxable Income Amount (RMB)  Withholding Rate  Quick Deduction (RMB) 
≤36,000  3%  0 
36,000 – 144,000  10%  2,520 
144,000 – 300,000  20%  16,920 
300,000 – 420,000  25%  31,920 
420,000 – 660,000  30%  52,920 
660,000 – 960,000  35%  85,920 
>960,000  45%  181,920 

These rules for calculating tax payable are in place until 31 December 2027. 

 

Example

An employee in a domestic listed company has 10,000 restricted shares. 5,000 are unlocked this year, and this is the only equity incentive income this tax year. 

  • Price paid per share: RMB 5; RMB 50,000 in total.
  • Registration date price: RMB 20.
  • Unlock date price: RMB 28.

Taxable income is calculated as follows: 

  • (20 + 28) ÷ 2 × 5,000 = RMB 120,000.
  • Amount paid for the unlocked shares: 50,000 × (5,000 ÷ 10,000) = RMB 25,000.
  • Taxable income = 120,000 − 25,000 = RMB 95,000.

Tax payable is then calculated as follows: 

  • RMB 95,000 falls in the RMB 36,000 – 144,000 tax bracket: 10% rate; RMB 2,520 quick deduction.
  • Tax payable = 95,000 × 10% − 2,520 = RMB 6,980.

Note: The above example is for illustration purposes only. Actual withholding calculations may differ depending on specific equity incentive arrangements and applicable tax authority guidance. 

 

How Dezan Shira & Associates can help 

Dezan Shira & Associates helps companies understand the tax implications of equity incentive plans in China, including how taxable income is calculated for stock options, restricted shares, and equity awards, when tax liabilities arise, and how applicable IIT rates and filing requirements affect employees and employers. Our team can provide tax advisory support to help companies assess their equity incentive arrangements and understand the relevant compliance obligations. Contact us to discuss your company’s tax considerations.