Circular on Improving Income Tax Policies relating to Equity Incentives and Technology Shares

　　Cai Shui [2016] No.101

　　September 20, 2016

　　The financial departments (bureaus), offices of the State Administration of Taxation and local taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government, and cities specifically designated in the state plan, and the Financial Bureau of Xinjiang Production and Construction Corps,

　　In order to support the implementation of mass entrepreneurship and innovation and promote the transformation and upgrading of our economic structure, the Circular on Improving Income Tax Policies relating to Equity Incentives and Technology Shares (the "Circular") is hereby set out as follows:

　　I. Apply the policy on deferred tax payment to eligible stock options, equity options, restricted stocks and equity rewards of non-listed companies
　　1. If the stock options, equity options, restricted stocks and equity rewards granted to employees by non-listed companies satisfy the specified conditions, the policy on deferred tax payment can be adopted upon filing with competent tax authorities, that is, employees are not required to pay tax temporarily when they obtain equity incentives, but may postpone the payment until such equity is transferred; when the equity is transferred, the balance of the income on equity transfer after the deduction of the cost for obtaining the equity and reasonable taxes and surcharges, if any, is applicable to the item of "income from transfer of property" and the individual income tax is calculated and paid at the tax rate of 20%.
　　When the equity is transferred, the cost for obtaining stock (equity) options should be determined at the exercise price; the cost for obtaining restricted stocks at the actual capital contribution; and the cost for obtaining equity rewards is zero.
　　2. To enjoy the policy on deferred tax payment, any equity incentive (including stock option, equity option, restricted stock and equity reward, hereinafter the same) of a non-listed company shall satisfy the following conditions at the same time:
　　(1) The incentive falls under the equity incentive plan of a domestic resident enterprise;
　　(2) The equity incentive plan is adopted upon deliberation by the board of directors or the shareholders' meeting (general meeting) of the company. For a state-owned entity without a shareholders' meeting (general meeting), such plan shall be examined and approved by the superior competent department. The purpose, objects, underlying equity, valid term, determination of various prices, and conditions or procedures for incentive objects to acquire the interests shall be set out in the equity incentive plan.
　　(3) The underlying equity should be the equity of a domestic resident enterprise. The underlying equity can be the equity acquired from the input of technological results into other domestic resident enterprises. The underlying stock (equity) includes those granted to the incentive objects through further issue, direct assignment by major shareholders or other reasonable methods permitted by laws and regulations.
　　(4) The incentive objects should be the backbone technicians and senior officers determined by the board of directors or at the shareholders' meeting (general meeting) and the accumulative number of incentive objects cannot exceed 30% of the average number of in-service employees of the company in the recent six months.
　　(5) The stock (equity) options have been held for three years as of the granting date, and one year as of the date of exercise; the restricted stocks have been held for three years as of the granting date, and one year upon lifting of restrictions; and the equity rewards have been held for three years as of the date the rewards are obtained. The above time conditions must be set out in the equity incentive plan.
　　(6) The period for stock (equity) options from the date of granting to the date of exercise cannot exceed ten years.
　　(7) The companies carrying out equity rewards and the target companies do not belong to the industries specified in the Catalog of Restricted Industries Subject to Policy on Tax Preference for Equity Rewards (see the Appendix). The industry of a company shall be determined as the industry with the highest proportion in primary business income in the previous tax year.
　　3. The stock (equity) option as mentioned in the Circular means that a company grants the incentive object the right to purchase its stock (equity) at a price agreed beforehand within a certain period; the restricted stock means that a company, according to the conditions determined beforehand, grants a certain amount of its equity to the incentive object who can dispose of such equity only if the years of service or performance objectives meet the conditions specified in the equity incentive plan; the equity reward means a portion of equity or shares that are granted to the incentive object without compensation by an enterprise.
　　4. Where a company's equity incentive plan fails to satisfy all the conditions specified in Paragraph 2 of Article 1 at the same time, or the company no longer meets Items 4 to 6, Paragraph 2, Article 1 due to the changes during the period of deferred tax payment, the company shall no longer enjoy the preference of deferred tax payment and, according to provisions, calculate and pay the individual income tax.

　　II. Properly extend the tax payment period for stock options, restricted stocks and equity rewards of listed companies
　　1. After the stock options, restricted stocks and equity rewards granted by listed companies to individuals are submitted to the competent tax authorities for filing, the individuals can pay individual income tax within the period of not longer than 12 months as of the date of exercise of stock options, lifting of restrictions on restricted stocks or acquisition of equity rewards. The Circular of the Ministry of Finance and the State Administration of Taxation on Issues concerning the Payment of Individual Income Tax on Stock Option Income by Senior Officers of Listed Companies (Cai Shui [2009] No.40) shall be repealed upon implementation of this Circular.
　　2. The calculation of the tax payable on stock options or restricted stocks of listed companies shall be continuously subject to the Circular of the Ministry of Finance and the State Administration of Taxation on Issues concerning the Imposition of Individual Income Tax on Incomes from Individual Stock Options (Cai Shui [2005] No.35), the Circular of the Ministry of Finance and the State Administration of Taxation on Issues concerning the Imposition of Individual Income Tax on Income Derived from Stock Appreciation Rights and Restricted Stocks (Cai Shui [2009] No.5), the Circular of the State Administration of Taxation on Issues concerning Individual Income Tax on Equity Incentives (Guo Shui Han [2009] No.461) and other relevant provisions. The provisions above shall apply mutatis mutandis to the calculation of tax payable on equity rewards.

　　III. Apply optional tax preference policies to technology investment shares
　　1. Where an enterprise or individual invests technological results in a domestic resident enterprise as shares, and the entire consideration paid by the investee is stock (equity), such enterprise or individual may continue to follow the current related tax policies or adopt the preferential policy on deferred tax payment.
　　Where an enterprise or individual selects the policy on deferred tax payment in terms of technology investment shares, the enterprise or individual is not required to pay tax temporarily in the current period of investment after filing with the competent tax authority and may postpone the payment until their transfer of such technology shares, at which time they are required to pay income tax calculated on the basis of the share transfer income minus the original value of the technological results and reasonable taxes and surcharges.
　　2. Where an enterprise or individual opts to adopt any of the policies above, the investee may be allowed to record such accounts based on the valuation when the technology shares are invested, and amortize and deduct them before enterprise income tax.
　　3. The term "technological results" refers to the patented technology (including national defense patent), computer software copyright, exclusive right to integrated circuit layout design, rights to new plant varieties, new biological medicinal products and other technological results determined by the Ministry of Science and Technology, the Ministry of Finance and the State Administration of Taxation.
　　4. The technology investment as shares refers to the assignment of the ownership of technological results to the investee by a taxpayer for the acquisition of its stock (equity).

　　IV. Relevant policies
　　1. Where an individual who fails to satisfy the policy on deferred tax payment acquires the stock (equity) from his/her employer at a price lower than the fair market price, the individual income tax on the difference between the actual capital contribution and the fair market price shall, by reference to the relevant provisions of the Circular of the Ministry of Finance and the State Administration of Taxation on Issues concerning the Imposition of Individual Income Tax on Incomes from Individual Stock Options (Cai Shui [2005] No.35), be calculated and paid as the item of "income from wages or salaries."
　　2. Where a non-listed company is listed domestically after an individual acquires the equity due to the equity incentive or technology investment shares, the disposal of the equity for deferred tax payment shall be executed on the basis of tax collection provisions related to current restricted stocks.
　　3. When an individual transfers its equity, equity deemed to enjoy the preferential policy of deferred tax payment will be prior transferred. The equity cost of deferred tax payment shall be calculated using the method of weighted averages and shall not be consolidated with the costs acquired by other means.
　　4. During the period of holding the equity subject to deferred tax payment, the tax shall be paid currently for the income from reserve-converted shares arising due to such equity and any non-monetary asset investment with the equity subject to deferred tax payment.
　　5. For listed companies in the National Equities Exchange and Quotations, the policies shall be executed according to Article 1 of the Circular.
　　Listed companies applicable to Article 2 of the Circular refer to the companies limited by shares whose stocks are listed on the Shanghai Stock Exchange or Shenzhen Stock Exchange for trading.

　　V. Supporting management measures
　　1. Where an enterprise opts to adopt the policy of deferred tax payment for equity incentives or technology investment shares, it shall handle the filing formalities at the competent tax authority within the specified period. Otherwise, such enterprise cannot enjoy the preferential policy of deferred tax payment specified in the Circular.
　　2. When an enterprise carries out equity incentive, or an individual invests the technology as shares, such enterprise or individual should be deemed as the obligor for deduction and payment of individual income tax. During the period of deferred tax payment, the obligor shall report the information on deferred tax payment to the competent tax authority after the end of each tax year.
　　3. Industry and commerce departments shall share the information on equity change with tax departments; if an industry and commerce department is unqualified for real-time network sharing of information, such department shall, within three working days after the registration of equity change, share the information with the tax department.

　　VI. The Circular will be implemented as of September 1, 2016.
　　Where equity reward matters of Zhongguancun Science Park occurring from January 1, 2016 to August 31, 2016, which are not subject to tax payment, are eligible for the conditions specified in the Circular, the equity rewards may be executed according to the policies herein.

　　Appendix: Catalog of Restricted Industries Subject to Policy on Tax Preference for Equity Rewards

　　Note: the catalog above is prepared in accordance with the Industrial Categories of the National Economy (GB/T 4754-2011).