How Foreign Employees Pay Individual Income Tax
Nowadays, listed companies use equity incentives, such as stock options, stock appreciation rights, restricted stocks, and equity rewards to attract global talent. Thus, what are the tax considerations when foreign employees receive equity incentives from the listed companies and file individual income tax returns in China?
1.
First, we need to determine whether he is a resident taxpayer or a non-resident taxpayer in China because there are different tax preferential policies for different tax resident statuses.
Resident Taxpayer
Individuals who have a domicile in China or have resided in China for 183 or more days cumulatively within a tax year belong to the resident taxpayers category. Generally speaking, having a domicile in China means habitually residing in China due to household registration, family, and economic interests.
Non-resident taxpayer
Individuals who do not have a domicile in China or have resided in China for less than 183 days cumulatively within a tax year are in the non-resident taxpayer category.
2.
Different tax preferential policies apply to resident taxpayers or non-resident taxpayers when calculating the IIT on equity incentive income.
Because the equity incentive income is related to employment (performance and accomplishments in a company), the IIT on these incomes shall be imposed pursuant according to the provisions on “incomes from wages and salaries”.
China has given the tax preferential policies to taxpayers when calculating their IIT of the equity incentive income:
(1) IIT calculation policy for resident taxpayers, their equity incentive income shall not be included in the consolidated income of the current year and is taxed separately based on the total amount subject to the Consolidated Income Tax Rate Table before December 31, 2021, according to the circular Cai Shui [2018] No.164.
The calculation formula is as follows:
Tax payable for equity incentives within the tax year = (total of incomes from equity incentives in the tax year ÷ stipulated number of months × applicable tax rate –quick calculation deduction)×stipulated number of months- tax paid for the incomes from equity incentives in the tax year
The “Stipulated number of months” in the formula refers to the months in which the foreign employees work and gain the equity incentive income in China, and shall be 12 months if it is more than 12 months.
The “applicable tax rate” and “quick calculation deduction ” in the formula herein shall be the quotient of total incomes from equity incentives gained within the tax year divided by the stipulated number of months, following the Consolidated Income Tax Rate Table.
(2) IIT calculation policy for non-resident taxpayers, their equity incentive income in the current month shall be calculated separately and is not consolidated with other wages and salaries in the month. The tax payable shall be calculated subject to the monthly tax rate table.
The calculation formula is as below:
Tax payable for equity incentives in the current month = [(total of incomes from equity incentives in the tax year÷6) × applicable tax rate – quick deduction] × 6 – tax paid for the incomes from equity incentives in the tax year.
Both of the IIT calculation formulas above could reduce the IIT cost, as the tax rate will be lower than the case of consolidating the equity incentive income to other wages and salaries of the employee. However, the bad news is that the tax policy for resident taxpayers will expire by the end of 2021, and it is unknown whether the tax authorities will renew it or not. Note> before enjoying the above policies, the company should file its equity incentives plan to tax authorities.
3.
Other tax benefits for equity incentives
(1) Considering that the employees may not have enough funds to pay IIT when exercising their rights under equity incentives, China has granted tax policies to extend the tax levying period appropriately. According to the circular of Cai Shui [2016] No. 101, for stock options, restricted shares, and equity awards granted to individuals by listed companies, upon filing a record with the competent tax authorities, the individuals may pay individual income tax within not more than 12 months as of the exercise date in the case of stock options, the restrictions lapse date in the case of restricted stock or the award date in the case of equity awards. Foreign employees can also enjoy this preferential policy when exercising their rights of equity incentives.
(2) According to the IIT laws, if an employee sells stocks obtained from the equity incentives in the securities market and gets the gain from the selling price and the fair market price on the purchase day after he exercises the right, the IIT shall be imposed as “incomes from the transfer of property” (20% tax rate). However, based on the circular of Cai Shui Zi [1998] No. 61, the gain obtained by individuals from selling stocks of listed companies in the domestic securities market is exempted from IIT temporarily. In other words, when foreign employees sell stock in the China securities market, the income is IIT-free as long as the circular of Cai Shui Zi [1998] No. 61 is still valid.
[box type=”info” align=”” class=”” width=””]
Suggestion
To reduce the IIT cost of equity incentive income, we suggest that the foreign employee maintain close communication with the company’s HR or tax team to make sure their equity incentives plan is filed correctly and timely with the competent tax authorities.[/box]
