Circular on Relevant Individual Income Tax Issues on Equity Incentives

(Issued by the State Administration of Taxation on, and effective as of, August 24 2009.)

Guo Shui Han [2009] No.461

Local taxation bureaux of the provinces, autonomous regions, municipalities directly under the central government and cities with independent development plans, and the offices of the State Administration of Taxation of Tibet, Ningxia and Qinghai Provinces (Autonomous Regions):

With a view to accommodating the remuneration system reform of, and the equity incentive plans implemented by, listed companies (here and hereafter including both companies listed domestically and those listed overseas) and in keeping with the relevant spirit of the PRC Individual Income Tax Law (IIT Law) and the Implementing Regulations for the PRC Individual Income Tax Law (Implementing Regulations), the Ministry of Finance and the State Administration of Taxation issued documents such as the Circular on Issues Concerning the Levy of Individual Income Tax on Income from Personal Stock Options (Cai Shui [2005] No.35), the Circular on Issues Relevant to the Levy of Individual Income Tax on Income Derived from Stock Appreciation Rights and Income Derived from Restricted Stock (Cai Shui [2009] No.5), etc. We hereby notify you on matters relevant to the implementation of the foregoing documents as follows:

1. Determination of equity incentive income items and tax assessment method

Pursuant to the IIT Law, its Implementing Regulations and document Cai Shui [2009] No.5, a listed company or its domestic establishment shall treat the income derived by an individual from the stock appreciation rights and restricted stock obtained from the listed company in connection with his/her serving therewith or being employed thereby as “wage or salary income” and shall withhold in accordance with the law individual income tax thereon based on the tax assessment method for individual income tax on stock option income.

2. Determination of the taxable income derived from stock appreciation rights

The returns derived by a grantee from stock appreciation rights are the difference in the price of the stock between the grant date and the exercise date multiplied by the number of shares granted and paid directly by the listed company to the grantee in cash. When realising the stock appreciation rights for the grantee, the listed company shall withhold individual income tax in accordance with the law. The formula for calculating the taxable income derived by a grantee from stock appreciation rights is set forth below:

Taxable income derived from an exercise of stock appreciation rights = (stock price on exercise date – stock price on grant date) × number of shares exercised.

3. Determination of taxable income derived from restricted stock

Pursuant to relevant provisions of the IIT Law and its Implementing Regulations, the taxable income derived from income on a restricted stock shall, in principle, be confirmed at the time that title to the restricted stock vests in the incentive recipient, namely, when a listed company implements a restricted stock plan, it shall take the average of the market price (here and hereafter the closing price on the date in question) of the incentive recipient's restricted stock on the date that it is registered with the China Securities Depository and Clearing Corporation (in the case of an overseas listing, on the date of registration with the securities registration and deposit institution) and the market price (here and hereafter the closing price on the date in question) thereof on the date the restriction is lifted on the shares in question, multiply that by the number of shares on which the restriction is lifted and subtract the amount that the incentive recipient actually paid for in respect of the portion of shares on which the restriction is lifted. The difference is the taxable income. The formula for calculating an incentive recipient's taxable income derived from restricted stock is set forth below:

Taxable income = (market price of the stock on registration date + market price of the stock on the date the restriction is lifted on the shares in question) ÷ 2 × number of shares on which the restriction is lifted – the total amount actually paid by the incentive recipient × (number of shares on which the restriction is lifted ÷ total number of restricted shares obtained by the incentive recipient).

4. Calculation of tax payable on equity incentive income

(1) When an individual first obtains stock option or stock appreciation right income or restricted stock income in a tax year, the listed company shall calculate and withhold individual income tax thereon in accordance with the formula set forth in Item (1) of Article 4 of document Cai Shui [2005] No.35.

(2) If an individual obtains stock option or stock appreciation right income or restricted stock income, etc. twice or more in a tax year, including if both (or more) times the income is derived from the same type of equity incentive or if the individual simultaneously derives income from different equity incentives, the listed company shall consolidate the equity incentive income derived on each occasion during the year by the individual and calculate and withhold individual income tax thereon in accordance with the formulas set forth in Articles 7 and 8 of the State Administration of Taxation, Supplementary Circular on Issues Relevant to Stock Options (Guo Shui Han [2006] No.902).

5. Time when tax obligation arises

(1) The individual income tax obligation on stock appreciation rights arises on the date that the listed company realises the grantee's income on the stock appreciation rights.

(2) The individual income tax obligation on restricted stock arises on the date that the restriction on each batch of restricted shares is lifted.

6. Provisions on the submission of information

(1) A domestically listed company that implements a stock option or stock appreciation right plan shall submit relevant information in accordance with Item (3) of Article 5 of document Cai Shui [2005] No.35.

(2) A domestically listed company that implements a restricted stock plan shall submit its restricted stock plan or implementation plan, agreement, notice of grant, stock registration date and closing price on such date, the lock-up period and the list of equity incentive beneficiaries, etc. to the competent tax authority for the record within 15 days after registration of the stock with the China Securities Depository and Clearing Corporation (in the case of an overseas listing, on the date of registration with the securities registration and deposit institution) and announcement thereof by the listed company.

The domestic establishment of a company listed overseas shall submit Chinese (foreign) language information on the equity incentive plan implemented by the company listed overseas to the competent tax authority for the record.

(3) An individual who files a tax return himself/herself or a withholding agent shall, at the time of filing a tax return or withholding, submit information on the equity received or transferred by the individual, details of the shares purchased (including the class, quantity, grant price, exercise price, market price, transfer price, etc.), list of equity incentive beneficiaries, taxable income, tax payable, etc. to the competent tax authority during the tax-return filing period specified in tax laws.

7. Provisions on other relevant issues

(1) The individual income tax policies on equity incentives in documents Cai Shui [2005] No.35, Guo Shui Han [2006] No.902 and Cai Shui [2009] No.5 and this Circular shall apply to employees of listed companies (and their branches) and of controlled enterprises of listed companies where the listed company holds at least 30% of the shares of the controlled enterprise (indirect control shall be limited to listed companies' shareholdings in class 2 subsidiaries).

Indirect shareholding percentages are derived by multiplying the shareholding percentages at each level. If a listed company's shareholding in a class 1 subsidiary exceeds 50%, such shareholding shall be counted as 100%.

(2) If any of the following circumstances applies to equity incentive income, the preferential tax assessment method set forth herein shall not apply thereto, the same shall be directly counted as part of the individual's income for the period in question and individual income tax shall be levied thereon:

(a) equity incentive income was obtained by group company and non-listed company employees other than those specified in Item (1) of this Article;

(b) equity incentive income was derived from an equity incentive plan established before the listing of a company and obtained after listing of the company; or

(c) the listed company failed to submit relevant information to the competent tax authority for the record in accordance with Article 6 hereof.

(3) If an incentive recipient sells the stock in order to pay individual income tax and the sale price thereof is different from the original assessed price, the taxable income and tax amount shall be calculated based on the original assessed price.

8. This Circular shall be implemented from the date of issuance. Matters that have occurred before the issuance of this Circular but remain outstanding shall be handled in accordance with this Circular.