Key takeaways
The extension of the IIT preferential treatment for equity incentive income is welcome news for taxpayers.
Meanwhile, it is important to note that the Chinese tax authority has been strengthening the IIT compliance administration relating to equity incentive income. During the past year, we have seen local tax bureaus actively enforcing the reporting requirements imposed under Shui Zong Ke Fa [2021] No. 692 ("Notice 69") on equity incentive income. In some cities, in addition to the grant and/or vesting filings in accordance with Cai Shui [2005] No. 353, Notice 69 filings must be completed in order for the relevant employees to enjoy the preferential IIT treatment.
In light of this practical environment, companies are recommended to take measures to ensure the compliance with their IIT withholding and/or reporting obligations and address historic non-compliances (if any).
In more detail
The prevailing preferential individual income tax (IIT) policy for equity incentive income as provided under Cai Shui [2018] No. 1644 (“Notice 164”) was originally set to expire by the end of 2021. On 31 December 2021, the MOF and STA jointly issued Bulletin [2021] No. 425 ("Bulletin 42") which granted a one-year extension for the preferential IIT treatment for equity incentive income.
More recently, on 16 January 2023, the MOF and STA issued Bulletin 2 to further extend the preferential IIT treatment for equity incentive income for one additional year. Pursuant to Bulletin 2, PRC tax resident employees can continue enjoying preferential IIT treatment on qualified equity incentive income for the period from 1 January 2023 to 31 December 2023.
It is not surprising to see the preferential IIT policy on equity incentive income was further extended. In fact, it is common for the Chinese government to first set a limited effective period for tax incentives and then grant extensions from time to time. This approach provides the Chinese government the flexibility on whether to continue granting the relevant tax incentives depending on the specific circumstances.
In addition to equity incentive income, the prevailing preferential IIT treatments for annual bonus and expatriates' allowances are also scheduled to expire by the end of 2023. It remains to be seen if these preferential IIT policies would be further extended after 2023.
1 Bulletin of the PRC Ministry of Finance and the State Taxation Administration Relating to the Extension of Certain Preferential Individual Income Tax Policies, MOF and STA Bulletin [2023] No. 2, dated 16 January 2023 and retroactively effective as of 1 January 2023.
2 Notice of the State Taxation Administration on Certain Measures to Deepen the "Fang Guan Fu" Reform in the Tax Area and to Foster and Stimulate the Vitality of Market Players, Shui Zong Ke Fa [2021] No. 69, dated 12 October 2021 and effective as of the same date.
3 Notice of the PRC Ministry of Finance and the State Taxation Administration Relating to the Collection of Individual Income Tax on Stock Option Income, Cai Shui [2005] No. 35, dated 28 March 2005 and effective from 1 July 2005.
4 Notice of the PRC Ministry of Finance and the State Taxation Administration on the Transition of Relevant Preferential Tax Policies after the Amendment of the Individual Income Tax Law, Cai Shui [2018] No. 164, dated 27 December 2018 and effective as of 1 January 2019.
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