On September 20, 2016, the Ministry of Finance and the State Administration of Taxation jointly issued the Circular of the Ministry of Finance and the State Administration of Taxation on the Effective Implementation of Income Tax Policies on Equity Incentives and Technology Shares (the “Circular”) to improve income tax policies on equity incentives and technology shares. The contents of the Circular are highlighted below.
1. A tax deferral policy will be implemented for qualified stock options, equity options, restrictive stocks and equity rewards of a private company. The Circular provides that a private company issuing qualified stock options, equity options, restrictive stocks or stock rewards may enjoy the benefits of the tax deferral policy by notifying the competent tax authorities of such offers for recordation. This also means that the employees of such private company may defer the tax payment on such equity incentives until the shares are transferred, upon which they will be assessed at a 20% income tax rate under “asset transfer income” based on the difference between the share transfer income after tax and the cost basis. The Circular also provides the seven main conditions that a private company’s stock options, equity options, restrictive stocks and stock rewards must meet to become eligible for the tax deferral policy.
2. The deadline for tax payments on stock options, restrictive stocks and stock rewards granted by a public company is extended from 6 months to 12 months. For the above that were granted to individuals and were also recorded with the competent tax authority, the individuals may pay their personal income taxes within 12 months beginning from the day the stock option becomes exercisable, the restrictions on the restrictive stock is lifted or the stock reward is obtained. The Circular of the Ministry of Finance and the State Administration of Taxation on Issues Concerning Payment of Individual Income Taxes on Income Generated from Stock Options of Senior Managers of Listed Companies (Cai Sui  No. 40) became void on the effective date of this Circular.
3. A selective preferential tax policy is implemented for investment in equity via technological achievements or results. Holders of technological achievements or results may choose either the current tax policy or the preferential tax deferral policy. If the tax deferral policy is chosen, once recordation is filed with the competent tax authority, no tax is payable from the time the shares are obtained up until the transfer of such shares. The tax owed shall be based on the difference between the share transfer income after tax and the original value of the technology achievements or results.
4. Summary of relevant policies for better distinction to taxpayers:
(1) When individuals obtain shares (equity) from their corporate employer at a price below fair market value, if they do not meet the tax deferral conditions, they must calculate the income tax owed based on the difference in the actual amount paid and the fair market value, in accordance with the relevant provisions of the Circular of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Levy of Individual Income Taxes on Income Generated from Stock Options of Individuals (Cai Shui  No. 35), and pay such tax upon receipt of such shares.
(2) For individuals who obtain shares from incentives or by technological achievements/results, when a private company becomes listed in China and disposes of its tax deferred shares, those individuals shall be taxed per the current provisions on taxation of restricted shares.
(3) When individuals transfer shares, it shall be deemed that the equity enjoying the tax deferral polices is transferred first. The cost basis of the tax deferred equity is calculated based on the weighted average method and may not be combined with those of shares obtained through other methods.
(4) During the period in which tax deferred equity is held, the tax on the income generated from transfer of such equity to paid-in capital and on re-investment of such equity in non-monetary assets shall be paid during that period.
(5) Companies listed in the National Equities Exchange and Quotations will be governed by Article 1 of the Circular. The listed companies to which Article 2 of the Circular applies refer to companies limited by shares that are listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
5. Accommodating administrative measures to ensure policy implementation: The Circular also implements a recordation-based administrative system for enterprises that choose to apply the tax deferral policy for their equity incentives or equity provided in consideration of technology achievements or results. An enterprise that implements equity incentives or grants shares in exchange for technological achievements/results to individuals shall serve as the individual income tax withholding agent for those shares. During the tax deferral period, the withholding agent is required to report the status of deferred taxes to the competent tax authority at the end of each tax year. Meanwhile, industry and commerce agencies shall timely share with tax agencies information on companies’ changes to their equities. For agencies not equipped with the means to conduct online real-time information sharing, the industry and commerce agencies shall share such information with the tax agencies within three working days after the company makes the equity amendment registration.
The Circular came into effect on September 1, 2016. Meanwhile, for equity incentive matters taking place between January 1, 2016 and August 31, 2016 in the Zhongguancun National Innovation Demonstration Zone and on which no tax has yet been paid, those that meet the relevant conditions may apply the new policies.