In late 2015, the Ministry of Finance and the State Administration of Taxation (the “SAT”) extended certain tax incentives nation-wide effective January 1, 2016 pursuant to Notice 116. Such tax incentives apply to stock awards, but likely not other stock-based awards such as options, RSUs or ESPP. Previously, these tax incentives were available only to companies in the national independent innovation demonstration zones.
Among the available tax incentives, preferential tax treatment now is available to all “high-new-technology enterprises” (“HNTEs”) in China. The preferential tax treatment allows employees of HNTEs to evenly recognize equity compensation income over multiple months in calculating the individual income tax attributable to such income in the same manner as provided under Notice 35. However, unlike Notice 35, HNTEs do not need to be a listed company, but instead, they must meet certain requirements and obtain recognition as an HNTE in China with the government accreditation office. Also, it is important to note that share awards made to all employees of an HNTE are ineligible for the preferential tax treatment under Circular 116.
Beyond the preferential tax treatment extended to HNTEs, the Hainan Provincial Tax Bureau also extended certain tax incentives to employees of unlisted companies in the Hainan Province pursuant to Circular 1151. Circular 1151 provides the same tax incentives as Circular 35 (e.g., employees are allowed to evenly recognize equity compensation income over multiple months in calculating the individual income tax). The preferential tax treatment applies to stock options, and likely also to RSUs. Unfortunately, it is unavailable to companies outside the Hainan Province.