New Tax Reporting Requirement for Equity Awards in China

Companies with stock plans in China need to be aware of additional grant filing tax reporting requirements for equity awards that may require action before the end of 2021.

In a recent alert, Baker McKenzie describes recent actions of the PRC State Taxation Administration:

On October 12, 2021, the PRC State Taxation Administration published Shui Zong Zheng Ke Fa [2021] No. 69 ("Notice 69"), which imposes additional grant filing requirements for equity awards in China. 
 
Under the existing Cai Shui [2005] No. 35 ("Notice 35"), there are already requirements to make recordal filings for grant and vesting / exercise of equity awards, but local practice varies, with some tax bureaus focusing more on the reporting of taxable events (i.e., exercise of stock options and vesting of RSUs).   Under the new Notice 69, going forward, all companies granting equity awards in China are required to file an information reporting form (in a prescribed format) within 15 days after the end of the month in which the equity awards (e.g., stock options, RSUs) are granted to employees in China.  
 
Furthermore, companies which have previously granted equity awards to current employees in China (which have not been cancelled or settled yet) are required to report such prior grants (regardless of when made) on the prescribed information reporting form to the local tax bureaus by the end of 2021.
 
The information to be reported on the prescribed form includes the issuer company name and address, employer name and address, and employee names and ID numbers.  For each equity award, the form also needs to specify the equity award type, grant date, vesting schedule, and the number of shares underlying the award.  Notice 69 does not appear to require the reporting of equity awards which have already been exercised or settled, or are held by terminated employees.  Notice 69 is still quite new and how the notice will be implemented may crystalize and change over time. Nevertheless, companies should act quickly to ensure that any required reports for new or outstanding grants are submitted in a timely manner.
 
Finally, Notice 69 does not appear to replace the existing filing requirements for equity awards set forth under Notice 35.  The preferential tax treatment under Notice 35 is currently scheduled to expire on December 31, 2021.  It is still not clear whether such treatment will be extended or further modified after the end of the year.

This timing doesn't leave a lot of space for companies to ramp up filings to be compliant by year end. Organizations offering equity awards in China should check with their advisors on what actions to take and when.