China Advances its Tax Regime for Employee Stock Options

By Richard Gu and Simon Ha, Linklaters, Shanghai

The Ministry of Finance and the State Administration of Taxation have jointly issued a new Circular, namely Issues Concerning the Levy of Individual Income Tax on Income from Personal Stock Options Circular (关于个人股票期权所得征收个人所得税问题的通知)(ref. Cai Shui [2005] No. 35 - the Circular, see p.53 for a translation), to elaborate on the tax treatment of income associated with the issue of stock options to employees by their employers. This is not the first time that the authorities have issued regulations seeking to tax employees receiving benefits (in the form of shares or other investment related means) other than their regular income. The Questions Concerning the Levy of Individual Income Tax on Discounts or Subsidies Granted by Employers to Individuals Who Subscribe for Negotiable Securities Such as Shares Circular (ref. Guo Shui Fa [1998] No. 9) imposes income tax on employees who receive warrants, shares of another entity and investment supplements from their employers (the 1998 Rules).

The Circular elaborates the concept of employee stock options contemplated in the 1998 Rules and introduces the mechanisms for the individuals to discharge their tax liabilities. It is intended for the Circular and the 1998 Rules to operate in tandem, but where inconsistencies arise the operation of the Circular prevails.