IIT equity incentives for expats filing their taxes in China.

China continues to attract international businesses, driving strong demand for foreign talent and expertise. To recruit and retain skilled professionals, many companies offer equity incentives as a key component of their remuneration packages.

This article explains the key considerations and methods for calculating individual income tax (IIT) on equity incentives in China. It also highlights common misconceptions and tax filing challenges that expatriates may encounter when reporting equity-based compensation.

Difference between residents and non-residents

The IIT law states that individual taxpayers in China are divided into resident and non-resident individuals. A resident individual refers to an individual who has a domicile in China or stays in China for a total of 183 days or more in a tax year (the Chinese tax year runs from 1 January to 31 December). A non-resident individual refers to an individual who does not have a domicile in China and stays in China for less than 183 days in a tax year. The tax related to an expatriate’s residence status is different, and the applicable equity incentive tax policy also differs.

For resident individuals, the preferential separate taxation method for equity incentive income from listed companies has been extended multiple times since it was first introduced. Following extensions in 2021 and 2023, the Ministry of Finance and the State Administration of Taxation confirmed in Announcement No. 25 of 2023 that the preferential treatment will remain in place through 31 December 2027. Under this arrangement, qualifying equity incentive income is not consolidated into the individual’s comprehensive income for the year. Instead, the comprehensive income tax rate is applied on a standalone basis against the equity incentive. Resident individuals subject to this preferential treatment may also be entitled to a range of individual income tax deductions for foreign employees, including reimbursed rent, school fees and home trip expenses.

The Announcement on Individual Income Tax Policies for Non-resident Individuals and Non-domiciled Resident Individuals (Ministry of Finance and State Administration of Taxation Announcement No. 35 (2019) provides that equity incentive income obtained by non-resident individuals is not consolidated with monthly wages and salaries. Instead, the income is calculated separately and apportioned over six months for tax calculation purposes, without applying expense deductions, using the applicable monthly tax rate table.

Method for calculating equity with incentives and taxation

Equity incentives generally include stock options, stock appreciation rights, restricted stocks and equity awards. For the equity incentives obtained by expatriates from listed companies, it is necessary to accurately calculate the equity incentive income and accurately calculate the IIT payable using different calculation methods applicable to individual residents and non-resident individuals.

Case study

The following example uses illustrative dates and figures to demonstrate how IIT is calculated on stock option income for both resident and non-resident individuals. The formulas and principles reflect the rules currently in force.

John is a foreign employee of a listed company, and he performed well in January-May 2018. The company granted 10,000 shares of stock options in May, the stock price of the grant was RMB 10, and the option price was RMB 8. These can be exercised in May 2019, assuming that John exercised on 28th May 2019, and the market price of the stock on the day of the exercise was RMB 16, then how much IIT does John need to pay?

According to the Notice of the Ministry of Finance and the State Administration of Taxation on Issues relating to the Collection of Individual Income Tax on Personal Income from Shares and Options, the income shall be calculated and paid using the provisions applicable to “wages and salaries”. Taking the difference between the actual purchase price (the exercise price) of the stock obtained from the enterprise and the fair market price on the purchase date (the stock’s closing price on the day of the stock).

The wages and salaries taxable income in the form of equity incentive = (market price per share of exercised stocks – the price per share paid by the stock option) x the number of shares. That is, John obtained the equity incentive income when exercised on 28 May 2019; therefore, the equation is as follows:

(16-8) x 10,000 = 80,000

If John is a resident individual, under the preferential separate taxation method, IIT payable = equity incentive income x applicable tax rate – quick deduction. John’s stock option incentives are fully taxed separately, therefore, the IIT payable is:

80,000 × 10% – 2,520 = 5,480

If John is a non-resident individual, he lived in China for 90 days but less than 183 days, assuming that he worked 85 days during Jan-May 2018, and only obtained this stock option incentive. According to the Ministry of Finance and State Administration of Taxation Announcement [2019] No. 35, his equity incentive income attributable to China = Incentive income x workdays ÷ calendar days in the period, therefore:

80,000 x 85 ÷ 151 = 45,033.11

IIT payable = [(equity incentive income attributable to China ÷ 6) x applicable tax rate – quick deduction] x 6 = tax paid. Therefore, the answer is:

[(45,033.11 ÷ 6) x 10% – 210] x 6 = 3,243.31

(Note: The quick deduction is fixed as part of the formula)

Other tax preferential policies

In addition to the general IIT rules discussed above, equity incentives may be subject to specific preferential tax treatments and compliance considerations.

Deferred IIT payment on equity incentives

The rules around deferred IIT payment on equity incentives have been updated. Under the Ministry of Finance and State Administration of Taxation Announcement issued on 17 April 2024, eligible employees of domestic listed companies, being companies listed on the Shanghai, Shenzhen or Beijing Stock Exchanges, can defer payment of IIT on qualifying equity incentives for up to 36 months from the date of exercise of stock options, the lifting of restrictions on restricted shares, or the date of obtaining equity incentives.

To qualify, the equity incentive plan must be registered with the relevant tax authority and the income must be derived between 2024 and 2027. The deferral may also apply to income derived after 1 January 2023 where IIT has not yet been fully settled, with instalment payments commencing from the date of exercise or vesting. This replaces the previous 12-month deferral period that applied under Cai Shui No. 101 (2016).

The extended payment period applies only to domestic listed companies. No equivalent deferral is currently available for equity incentives granted by overseas listed companies to employees in China. Expats employed by overseas listed companies should also consider whether an applicable double-tax agreement affects their overall IIT position in China.

If a taxpayer leaves employment during the deferred payment period, all outstanding IIT relating to the equity incentive must be settled before departure.

IIT treatment on transfer of shares

When employees subsequently transfer shares acquired through an equity incentive, any gain arising after acquisition is generally treated under the rules for income from property transfer. Under the Notice of the Ministry of Finance and the State Administration of Taxation on the Temporary Exemption of Individual Income Tax on Individual Transfer of Stocks (Cai Shui No. 61 (1998), income derived from the transfer of listed company shares by individuals remains temporarily exempt from IIT. Accordingly, foreign employees who dispose of listed shares acquired through equity incentives may benefit from this exemption when trading on the stock market.

For example, where an employee exercises an option at 70 when the market value is 80 and later sells the share at 100, the difference of 10 between the exercise price and market value is treated as equity incentive income for IIT purposes. The subsequent gain of 20 may qualify for the temporary IIT exemption on the transfer of listed shares.

General tips for submitting tax

Tax authorities have increased enforcement and inspection of IIT compliance relating to equity incentive income in recent years. Companies with equity incentive plans and participating individuals should ensure that tax registration, withholding and filing obligations are met accurately and on time with the State Administration of Taxation.

Expats being serviced by a withholding agent will not have to submit their tax, as the withholding agent is responsible for prepaying tax every month or upon each payment earned. In the case the taxpayer receives taxable income but does not have a withholding agent, they can submit their tax returns with the tax authorities within the first 15 days of the following month after obtaining the income and pay tax.

Tax payable on income from wages and salaries derived by a non-resident individual shall be withheld and prepaid by the withholding agent, if any, every month or based on each income item.

However, if there is a need to deliver a final settlement and payment, the taxpayer can do so from 1 March until 30 June of the following year after obtaining the income. Expats who are registered as residents in China with consolidated income can submit IIT yearly.

Conclusion

IIT treatment of equity incentives in China depends significantly on an individual’s residency status and the type of company granting the incentives. Resident individuals benefit from the preferential separate taxation method, currently confirmed through 31 December 2027, while non-resident individuals are taxed only on the portion of income attributable to their time in China. The extended 36-month IIT payment deferral for domestic listed companies provides additional flexibility for eligible employees, though this does not apply to overseas listed companies. Given the increasing focus by tax authorities on compliance in this area, it is advisable to review equity plan structures, registration requirements and filing obligations carefully. Where the rules feel unclear or the circumstances are complex, seeking specialist advice can help avoid penalties and ensure all available preferential treatments are applied correctly.

How Acclime can help with IIT on equity incentives in China

Acclime China provides tax compliance and advisory support for individuals and businesses managing equity incentive arrangements in China. From determining residency status and calculating IIT on stock options or restricted shares through to withholding obligations, plan registration and annual reconciliation filings, our tax specialists advise on the most practical approach for your situation.

By working with Acclime, expats and their employers can reduce compliance risk, apply preferential treatments correctly and avoid costly filing errors. Contact us to discuss your specific needs and get a clear recommended next step.