CHINA: Latest PRC individual income tax developments - SAR and RSU
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02/25/2009 - Latest PRC individual income tax developments - Share Appreciation Rights and Restricted Share Units (Revised)
http://www.pwcservices.com/pwc_serv/ias/iasmarketing.nsf/10086696c9bcd74585256ab2006f7162/6d25c8f9d32aa5db8525755100710bd7?OpenDocument Global Watch - China
Taxation on SARs and RSUs Income The MOF and SAT, for the first time, issued a tax circular addressing the PRC IIT treatment on SARs and RSUs income. Among other things, the circular provides that: • Income from SARs and RSUs is chargeable to PRC IIT pursuant to Circular 35 and its supplementary notice Guo Shui Han [2006] No. 902 ("Circular 902") (see numerical illustration below); • Similar to the requirement as currently imposed on share option plans, PRC listed companies are required to register their SARs and RSUs plans with the in-charge PRC local tax authorities in the location(s) where the plans are implemented; and • PRC listed companies are responsible for the PRC IIT reporting and withholding requirements in respect of the SARs and RSUs income. According to Circulars 35 and 902, the IIT payable on such income is calculated separately from the monthly salary in accordance with the following formula: (A / B X applicable marginal tax rate - quick deduction) X B - accumulated IIT paid on equity income in the calendar year concerned) Factor A represents the "accumulated equity income of the calendar year concerned" Factor B is the number of months for which the employee worked in China during the vesting period. In the case of multiple exercises occurring in the same calendar year, the vesting period of each exercise will be weighted average based on the respective amount of equity income. This factor is however capped at 12. To illustrate how this works, assuming an employee received SARs income of RMB100,000 in January 2009 from the exercise of some SARs with a vesting period of 12 months during which they worked in China, their PRC IIT liability on the SARs income will be calculated as follows: In January 2009 IIT on SARs X = [RMB100,000 / 12 X 20% - 375] X 12 = RMB15,500 It is worth noting that, in the absence of the Circular 35 preferential tax treatment, the SARs income will be added to the employee's monthly salary for PRC IIT calculation purpose. Hence, if the employee is chargeable to PRC IIT on their monthly salary at the top marginal tax rate of 45%, the PRC IIT on the SARs income would be RMB45,000 (which is almost three times higher as compared to the amount calculated using the preferential tax treatment). However, in the case where the employee exercises SARs more than once in the same calendar year concerned, the PRC IIT liability will be calculated as follows:
In January 2009 IIT on SARs X = [RMB100,000 / 12 X 20% - 375] X 12 = RMB15,500 In February 2009 IIT on SARs Y = [RMB500,000 / 12 * X 30% - 3,375] X 12 – RMB15,500 = RMB94,000 * Factor B = 8,400,000 / 500,000 = 16.8 (capped at 12) PwC Observations • Equity based awards are regarded as an effective means to motivate and retain talent. It is believed that there may be an increasing use of similar performance linked long-term equity based awards to replace the traditional cash based incentive compensation for companies to stay competitive, especially in the current economic downturn; • Circular 5 appears to restrict its application to the share-settled RSUs, but it is believed that it should be equally applied to cash-settled RSUs, despite the former being more common in China; • The literal reading of Circular 5 seems to impose the tax registration and IIT withholding requirements only to companies listed in China. This appears to be inconsistent with the current requirements imposed on share option plans pursuant to Circulars 35 and 902 which instead impose the requirements on listed companies, including those listed overseas, implementing the share option plans in China. PwC is in the course of clarifying this point with the SAT; and • There is an increasing trend that the local Chinese tax bureaus are tightening up the enforcement of the tax registration requirements on share option plans. In some locations, the local tax bureaus have refused to accept the Circular 35 preferential IIT treatment on share option income, unless the share plan has been properly registered with them. As the application of the preferential IIT treatment may, in most cases, give rise to tax savings to their employees, companies should ensure that their SARs and RSUs plans are in compliance with the necessary tax registration requirements in order to secure the use of the preferential IIT treatment. For further information, please contact your local PricewaterhouseCoopers representative. Note: This bulletin is designed for the information of readers. Whilst every effort has been made to ensure accuracy, information contained in this bulletin may not be comprehensive or may not yet be passed into law. Recipients should not act upon it without seeking professional advice. This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. |
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| Intended Audience: Tax, Payroll, Human Resources, Other | |||||||||||||||||
| Severity of Impact: High Impact - Immediate Effect | |||||||||||||||||
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