SUNNYVALE, Calif.--(BUSINESS WIRE)--China’s State Administration of Taxation (SAT) has clarified the individual income tax treatment of stock appreciation rights, stock options and restricted stocks, which could result in companies revisiting their existing equity-based incentive plans, Vyoma Nair, co-founder of Nair & Co., said on Wednesday.

In a late August notice, the SAT stated that income derived from stock appreciation rights and restricted stocks granted by listed companies to their employees will be classified as employment income subject to individual income tax. The employing company is required to withhold the taxes.

“A formula is provided for the calculation of the income arising from stock appreciation rights and a separate formula for income arising from restricted stock,” Vyoma said.

The notice also states that where an individual receives stock options, stock appreciation rights or restricted stocks for the first time in a certain tax year, the income from the stock plan is allowed to be calculated separately from the monthly employment income. However, if an individual receives these twice or more within a tax year, the income from such plans must be aggregated and taxed as such.

The tax liability for stock appreciation rights arises at the time the listed companies pay out the rights. The liability for restricted stocks arises when the terms and conditions are fulfilled and the stock becomes unrestricted, Vyoma added. Income derived from restricted stocks must be recognized when ownership of the underlying stocks is transferred to the recipient.

Listed companies implementing the plans above must submit the relevant documentation to the tax authorities and must act as the withholding tax agent.

Individual Income Tax

The tax rules provided that the extra month salary was to be added to normal employment income and taxed but without any additional monthly personal allowance. This tax treatment of the extra month salary ceases to apply, Vyoma said.

“Additionally, directors’ fees must be taxed as employment income except where the individual is holding the post of board member or supervisor and has no employment relationship with the company,” she added.

Treatment of Royalties

In September, the SAT clarified that payments received for the use of equipment as defined under the royalty article of the relevant tax treaty will be treated as royalties and if the tax treaty rate is lower than the domestic rate, then the lower rate will apply.

Service fees for providing guidance for use of proprietary technologies, which have been transferred or licensed, will be treated as royalties if the provision of the services does not amount to a permanent establishment. If not, income from such services will be treated as business profits.

“However, certain types of services will always be treated as business profits, such as after sales services for goods, professional services, services provided during a warranty period or other remuneration designated as such by the SAT,” Vyoma said.

Award-winning Nair & Co. provides businesses with an integrated solution in the HR, finance, tax, compliance and legal arenas making a company’s move overseas less risky, stress free and more strategic. Headquartered in U.K., it currently has 700+ client operations in over 40 countries with offices in India, China, U.S. and Japan. In 2009, Nair & Co. was named among the top 100 outsourcing services providers in the world by the International Association of Outsourcing Professionals (IAOP).

Learn more at www.nair-co.com.

Nair & Co.
Diana Rohini LaVigne, 408-515-9048
Nandita Verma, 408-501-8867
media@nair-co.com