To support the implementation of the national strategy of mass entrepreneurship and innovation, and to promote the transformation and upgrading of China’s economic structure, 9 Moon 22 On [date], the Ministry of Finance and the State Administration of Taxation jointly issued the “Notice on Improving the Income Tax Policies Concerning Equity Incentives and Technology-Based Equity Investments” (Cai Shui [ 2016 ] 101 No.). To ensure that the public has a comprehensive and accurate understanding of the relevant policy content, officials from the Tax Policy Department of the Ministry of Finance and the Income Tax Department of the State Administration of Taxation answered questions from reporters on related issues.

　　1 Q: What is the overall development status of equity incentives in China?  

　　Answer: Equity incentives for Chinese enterprises originated in... 20 Century 90 Era, until 2005 It truly took off only after the shareholding reform of the year. 2005 The 20XX “Administrative Measures for Equity Incentive Plans of Listed Companies (Trial)” and 2014 The issuance of the “Guiding Opinions on Piloting Employee Stock Ownership Plans for Listed Companies” in [year] has spurred the rapid development of equity incentive systems. 2006 Only listed companies that disclosed equity incentive plans this year are: 44 Home, 2015 The year has grown to 557 Home. State-owned non-listed technology enterprises since... 2009 Starting from [year], pilot programs for equity and dividend incentives have been launched in regions including Zhongguancun, Donghu, Zhangjiang, and Hefei-Wuhu-Bengbu. 2014 Preliminary statistics from the pilot units at year-end indicate approximately... 230 Home. 2016 Year 3 Moon 1 The Chinese government has issued and implemented the "Provisional Measures for Equity and Dividend Incentives for State-Owned Science and Technology Enterprises" (Cai Zi). [2016]4 No.), in addition to listed companies and private enterprises, equity incentives for state-owned technology enterprises are also set to expand rapidly. Currently, the main types of equity incentive schemes in China include stock options, equity options, restricted stocks, equity awards, equity sales, employee stock ownership plans, and, in addition, equity investments made through contributions of technological achievements.

　　2 Q: What are the main tax policies currently in place in China regarding equity incentives?

　　Answer: For equity incentive plans such as stock options, equity options, restricted stocks, and equity awards, the general provision of the current tax policy is as follows: When exercising options, untying restrictions on restricted stocks, or receiving equity awards, the difference between the actual purchase price of the stock (equity) and its fair market price shall be treated as “income from wages and salaries” and taxed accordingly. 3-45% of the 7 Individual income tax is levied using a tiered progressive tax rate. When an individual transfers the aforementioned stocks (equity), the portion of the transfer income that exceeds the fair market price at the time the stocks (equity) were acquired shall be taxed under the “income from property transfer” item, applying the corresponding tax rates. 20% is taxed at a proportional tax rate. For enterprises or individuals investing in shares with technological achievements, the taxable income shall be determined based on the assessed appreciation of the technological achievements at the stage of equity investment, and corporate income tax or individual income tax shall be calculated and paid accordingly. At the same time, it is permitted to... 5 Pay taxes in installments throughout the year.

　　The current tax preferential policies mainly focus on two areas: equity incentives and technology-based equity contributions. Specifically, these include: 4 Policy Item 1: For scientific research institutions and universities that convert official scientific and technological achievements into equity rewards granted to individuals, individuals are allowed to defer tax payment until they receive dividends or transfer their equity. Policy Item 2: For personnel involved in the commercialization of scientific and technological achievements by high-tech enterprises nationwide, equity rewards will be granted in accordance with the following provisions: 5 Annual installment tax payment policy. Thirdly, 2014 Year -2015 This year, a pilot program is being launched in Zhongguancun to provide equity incentives for high-tech enterprises and technology-based small and medium-sized enterprises. , Tax payment can be deferred until the time of dividend distribution or equity transfer. Fourth, if enterprises or individuals invest in a company using non-monetary assets (including technological achievements), the gains derived from the appreciation in the assessed value of such assets are allowed to be taxed. 5 Pay taxes in installments throughout the year.

　　3 Q: What are the main considerations behind this adjustment and refinement of the equity incentive tax policy?

　　Answer: As the trend of mass entrepreneurship and innovation continues to gain momentum, activities related to the commercialization of scientific and technological achievements are becoming increasingly active. Consequently, tax policies—such as equity incentives—related to these activities are drawing growing public attention. Some non-listed companies, in an effort to attract talent, have also adopted equity incentive plans modeled after those used by listed companies. Compared with listed companies, non-listed companies generally have weaker liquidity for their equity, and their future business prospects and development remain more uncertain. Therefore, they are calling for further tax incentives, including adjusting the timing of taxation on equity incentives and lowering applicable tax rates, in order to ease their tax burden.

　　To thoroughly implement the spirit of the National Conference on Scientific and Technological Innovation, fully mobilize the enthusiasm of scientific researchers, promote the implementation of the national entrepreneurship and innovation strategy, and maximize the conversion of scientific and technological achievements into real productive forces, the fiscal and tax authorities, drawing on international best practices and taking into account China’s specific conditions and challenges in the commercialization of scientific and technological achievements, have adjusted and refined the existing equity incentive tax policies. First, drawing on the experiences of developed countries in Europe and the United States, equity incentives have been categorized into two major types: those eligible for tax benefits and those not eligible. Under strict regulatory conditions, a deferred taxation preferential policy will be applied to equity incentives provided by non-listed companies that meet the specified criteria. Second, the scope of the current preferential policies has been expanded—from universities, research institutions, high-tech enterprises, and other similar entities—to include other market players participating in innovation and entrepreneurship. Moreover, the types of equity incentives covered by these preferential policies have been broadened from the current equity awards to include stock (rights) options and restricted stocks, among other forms. Third, in terms of preferential treatment, a deferred taxation policy will be implemented for equity incentives that meet the eligibility requirements, while simultaneously reducing the applicable tax rate. These policy adjustments effectively reduce the tax burden associated with equity incentives, further stimulating and unleashing the creativity and enthusiasm of scientific researchers in innovation and entrepreneurship.

　　4 Q: What changes have been made to the equity incentive tax policy following this adjustment, and how will these changes affect taxpayers’ tax burden?

　　Answer: Under the tax policy prior to the adjustment, stock (rights) options, restricted stocks, equity awards, and other similar benefits provided by enterprises to employees should be treated as “wages and salaries” at the exercise or other relevant stages. 3-45% of the 7 Taxation is conducted using a progressive tax rate; for the capital gains realized by employees upon subsequent transfer of such equity interests, the applicable tax treatment shall be under the “income from property transfers” category. 20% The tax rate is applied for taxation.

　　To ease the tax burden on equity incentive recipients and address their current cash-flow shortages arising from tax payments, this policy adjustment makes two key changes: First, for eligible stock (rights) options, restricted stocks, and equity awards issued by non-listed companies, the taxation previously applied in two separate stages—“wages and salaries income” and “property transfer income”—will now be consolidated into a single-stage tax regime. Specifically, taxpayers will not be taxed when exercising stock (rights) options, unlocking restricted stocks, or receiving equity awards; instead, taxes will be levied in one lump sum at the time of future equity transfers, thereby resolving the issue of insufficient cash flow for tax payments during exercise and other similar stages. Second, the one-time tax at the transfer stage will be uniformly applied across the board. 20% The tax rate has been reduced compared to the original tax burden. 10-20 Percentage points—this effectively reduces the tax burden on taxpayers. The aforementioned policies further intensify support for innovation and entrepreneurship, playing a crucial role in encouraging scientific and technological personnel to engage in innovation and entrepreneurship, boosting economic vitality, and promoting the transformation and upgrading of China’s economic structure.

　　5 Q: How has the tax policy for investing technological achievements in equity been adjusted, and what are its positive implications?

　　Answer: According to the current tax policy, when enterprises or individuals invest in a company using technological achievements, they must pay income tax on the appreciated value portion of the assessment, and this tax is allowed to be deducted. 5 Tax payments can be made in installments throughout the year. To further strengthen support for innovation and entrepreneurship and encourage enterprises and individuals to commercialize scientific and technological achievements, the tax policy on investments in the form of technological achievements has been adjusted. Building on the existing policy, a new option for deferred taxation has been introduced. If an enterprise or individual opts for the deferred taxation policy when investing in the form of technological achievements, they may, after filing with the competent tax authority, temporarily defer tax payment at the time of investment. The tax liability can instead be deferred until the equity is transferred, at which point income tax will be calculated based on the difference between the proceeds from the equity transfer and the original value of the technological achievement plus reasonable taxes and fees. At the same time, it is stipulated that, regardless of which policy the investor chooses, the invested enterprise may record the technological achievement at its assessed value and deduct it as amortization expenses before tax. These preferential policies will significantly reduce the tax burden on enterprises and individuals investing in the form of technological achievements, thereby actively promoting the commercialization of scientific and technological results.

　　6 Q: The equity incentive policy implementing the deferred tax preferential policy stipulates that participants must “meet certain conditions.” Could you please specify what those conditions are?

　　Answer: Based on the common practices in developed countries such as Europe and the United States, equity incentives that enjoy deferred tax benefits are subject to very strict conditions. The purpose of these stringent requirements is to standardize equity incentive practices, encourage long-term investment, and prevent tax evasion. Drawing on international experience, the tax policy introduced this time sets forth the following requirements for equity incentives eligible for deferred tax benefits: 7 Restrictions in this aspect:

　　First, the entity responsible for implementing the equity incentive plan. Referring to common practices in countries around the world and taking into account the general principles of China’s tax preferential policies, it is stipulated that only equity incentive plans implemented by resident enterprises within China are eligible for tax preferential treatment.

　　Second, the review and approval of equity incentive plans. To ensure the compliance of equity incentive plans and prevent any covert operations by enterprises, it is stipulated that equity incentive plans must be reviewed and approved by the company’s board of directors and the shareholders’ (general) meeting. For state-owned entities that have not established a shareholders’ (general) meeting, such plans must be reviewed and approved by their superior competent authorities.

　　Third, the equity awards must be tied to the company’s equity. To reflect the alignment of interests between the recipients and the company and to inspire employees’ entrepreneurial enthusiasm, it is stipulated that the equity awards must be shares of the company itself; equity awards granted in the form of shares held by affiliated companies will not be eligible for preferential treatment. At the same time, given that some research institutions and enterprises often invest their technological achievements into other enterprises and then use the equity of these invested enterprises as equity awards, it is also provided that the equity awards may include equity acquired through investments of technological achievements in other resident enterprises within China.

　　Fourth, the scope of eligible recipients. To reflect support for enterprises engaged in innovation and entrepreneurship and to prevent companies from using equity incentives as a disguised form of general employee benefits, it is stipulated that the eligible recipients should be the company’s technical backbone and senior management personnel. The specific individuals shall be determined by the company’s board of directors or the shareholders’ (general) meeting. The total number of eligible recipients shall not exceed the company’s most recent... 6 Average number of employees on the job for the month 30%。

　　Fifth, the holding period for equity. To achieve the goal of long-term, shared development between employees and the company and to encourage employees to benefit from the company’s growth and development rather than engaging in short-term arbitrage, we have set a minimum holding period for equity incentives: options must be held for at least [duration not specified in original text] from the date of grant. 3 year, and have held it for at least [number] days from the date of exercise. 1 Year; restricted stock must be held for at least [number of] years from the date of grant. 3 year, and held for at least from the date on which the restriction on sale is lifted. 1 Year; equity awards must be held for at least [number of] years from the date they are granted. 3 Year.

　　Sixth is the exercise period. To reflect the binding nature of the equity incentive plan and facilitate tax administration, drawing on international experience, the time from the grant date to the exercise date for stock (rights) options shall not exceed— 10 Year.

　　Seventh, the scope of industries subject to restrictions on equity incentives. Given the flexibility inherent in equity incentives, and to prevent companies from using this method to evade taxes and truly reflect the preferential treatment afforded to enterprises that grant equity incentives for the commercialization of scientific and technological achievements, it is necessary to impose appropriate restrictions on the industries eligible for such equity incentives. Considering that it is currently difficult to establish uniform standards for technology-based enterprises, making their review and confirmation particularly challenging, we have drawn on internationally accepted practices and adopted a negative-list approach. Specifically, enterprises operating in sectors clearly not classified as technology-related—such as accommodation and catering, real estate, and wholesale and retail trade—will be barred from enjoying the tax incentives associated with equity incentives. However, equity incentives granted by enterprises not listed on the negative list will continue to qualify for the deferred tax treatment policy.

　　7 Q: During the deferred tax period, if the circumstances of an enterprise implementing equity incentives change and it no longer “meets the requirements,” how will the tax policy handle this situation?

　　Answer: If, during the deferral period for tax benefits enjoyed under an equity incentive plan implemented by an enterprise, the enterprise’s relevant circumstances change and it no longer meets the conditions specified in the policy documents for qualifying for the deferred tax benefit, then... 4 Item (Scope of Incentive Recipients), Article 5 Item (Equity Holding Period) or No. 6 Item (Exercise Period): The equity incentive plan can no longer benefit from the deferred tax policy, and the corresponding taxes must be paid promptly. During the deferred tax period, if the industry to which the company’s core business belongs changes and the company enters an industry listed on the negative list, the equity incentive plans already implemented may continue to enjoy the deferred tax policy; however, any newly implemented equity incentive plans starting from the date of the industry change shall no longer be eligible for the deferred tax preferential treatment.

　　8 Q: The preferential policy for deferred taxation of equity incentives applies only to non-listed companies. So, how are equity incentive tax policies handled for listed companies?

　　Answer: According to current tax policies, for individual investors who acquire shares of listed companies from the secondary market, the income derived from the transfer of these shares as well as their holdings... 1 Dividends and bonus income earned over the past several years have all been eligible for a preferential policy exempting them from personal income tax, and the extent of this preferential treatment is quite substantial. At the same time, given the high liquidity and quick convertibility of shares in listed companies, equity incentives granted by listed companies will no longer be deferred until the shares are transferred; instead, they will continue to be taxed according to the current policy. Specifically, income recognized upon exercise of stock options, release of restrictions on restricted stocks, and receipt of equity awards will be treated as “wages and salaries” for tax calculation purposes. Considering that the Company Law and other relevant laws impose certain time constraints on senior executives of listed companies regarding the transfer of their own company’s shares, and in order to address the timing difficulties faced by those receiving equity incentives in listed companies, this policy adjustment further extends the tax payment deadline for equity incentives in listed companies—beyond the deadline stipulated under the current policy. 6 months extended to 12 months.

　　In addition, for companies listed on the National SME Share Transfer System (commonly known as the “New Third Board”), given that they are non-listed companies with relatively weak stock liquidity, the deferred tax policy applicable to equity incentives for non-listed companies shall be applied.

　　9 Q: The current pilot policy for deferred tax on equity awards in Zhongguancun has expired. How will the new policy be aligned with the Zhongguancun policy?

　　Answer: With the approval of the State Council, 2014-2015 This year, a pilot policy for deferred taxation of equity rewards was launched in Zhongguancun. Under this policy, equity rewards granted to relevant personnel of high-tech enterprises and technology-based small and medium-sized enterprises for the commercialization of scientific and technological achievements are allowed to be deferred until the recipients actually receive dividends or transfer their equity interests. This pilot policy was implemented... 2015 Expires at the end of the year. This adjustment to the tax policy on equity incentives takes effect from: 2016 Year 9 Moon 1 Effective from the date of issuance, Zhongguancun will uniformly implement the new policy; meanwhile, regarding Zhongguancun... 2016 Year 1 Moon 1 Date to 8 Moon 31 Equity award transactions that occurred within the past day and have not yet been taxed may be subject to the new policy if they meet the relevant conditions.

　　10 Q: What supporting tax administration measures are needed to implement the deferred tax policy for equity incentives?

　　Answer: The deferred tax policy for equity incentives defers the tax liability until the point of equity transfer. Given the high mobility of individuals, subsequent tax administration becomes extremely challenging and places stringent demands on the timeliness of information. To safeguard national interests and ensure effective tax collection and revenue generation, the following complementary administrative measures will be implemented: First, enterprises implementing equity incentive plans that qualify for tax benefits must file a record with the competent tax authority; without such filing, they will not be eligible for the tax incentives. Second, enterprises implementing equity incentives are responsible for withholding and remitting taxes on behalf of employees and providing tax-related information to the tax authorities. Each year, these enterprises must report to the tax authorities on the status of equity holdings and transfers related to the incentive plans. Third, inter-departmental collaboration will be strengthened. The Administration for Market Regulation and the tax authorities will share data on equity change registrations, enabling the tax authorities to carry out tax collection more effectively.