Taxation of employee equity compensation awards varies from country to country and knowing how tax works is essential to ensure you are making the right decisions with your Restricted Stock Units (RSUs), stock awards or employee stock options (ESOs). We are focusing on one country at a time to highlight for you the key high level tax considerations you should know for that country. Clearly every individual’s tax situation is different so what we share below is high level guidance for typical scenarios but do your own research or seek specific advice on your situation before taking any action.
The focus today is China.
Do employee stock awards have income tax applied at grant date or vesting date?
In China income tax is payable at the vesting date for Restricted stock units and restricted stock and on the exercise date for stock options. Income tax is calculated based on the market value (market value less cost for options).
If Notice 35 filing has been successfully completed there is a possibility of reduced taxation.
Are stock awards subject to capital gains tax (CGT)?
Yes, capital gains tax applies upon the sale of the stock. Once vested/exercised the stock is an asset you own and is typically subject to CGT based on the gain made between vesting date and sell date.
Is income tax withheld by the employer or the responsibility of the employee?
Yes, employers are responsible for tax withholding and reporting.
Anything else worth noting about China?
For foreign companies there are additional ‘SAFE’ requirements in order to run employee share plans for Chinese employees. SAFE is the State Administration of Foreign Exchange and has essentially imposed restrictions on employee equity plans to ensure all awards are repatriated to a China based foreign exchange account as part of the process. Registering plans/awards with SAFE can be complex and time consuming and some companies opt to simplify things by settling their long term incentives with cash at time of vesting.
We hope this was useful, please do visit the website and use our free equity plan valuation tool if you are thinking about tax and need to understand the current value of your employee stock awards / long term incentives.