China Clarifies Enterprise Income Tax Treatment of Equity Compensation Plans

(prHWY.com) September 5, 2012 - Sunnyvale, CA -- (Sunnyvale, CA)- Chinese tax authorities have clarified the Corporate Income Tax (CTI) treatment of equity incentive

compensation plans (EICP) taking effect from 1 July, 2012. The recent clarification dealing with executive compensations

is likely to improve the chances of business expansion in China and develop the country's securities market.

In the light of a developing Chinese market, a large number of companies have opted for incentive compensation programs

as an inclusion to their remuneration packages for corporate level management. However, the pre-existing legal and

accounting complexities involved in accounting rules and tax treatment have now been clarified and defined to a great

extent.

Chinese EICP taxation clarifications: Background

Until now, the Chinese tax authorities had not furnished detailed provisions governing the tax treatment of EICP related

expenses. Therefore, prior to the recent clarification from the Chinese Tax Authorities, local tax authorities had a varied

outlook; there was inconsistency and variation in the tax treatment of equity compensation expenses which resulted in

considerable difficulties for Foreign and Chinese companies operating in China.

Chinese EICP taxation clarifications: Key Highlights

These new clarifications which have been released by the State Administration of Taxation (SAT) have defined the scope

and extent of deductions for costs/ expenses related to equity compensations. Maintaining the principle of equality, the

new tax treatments would apply to both -Chinese resident companies listed outside country and non-listed Chinese

resident companies, if they satisfy the following conditions:

* Administrative measures are used to implement ECIPS.
* There are no differences between Chinese GAAP and the accounting policies implemented by the company.

Chinese ECIPS taxation clarifications: The Scope

* Equity Incentive compensation - Equity Incentive compensation is granted as a long term compensation by a

listed company as specified by the Administrative Measures. Such company awards its stocks to directors, supervisors,

senior executives and other employees. As defined by PRC's laws, it may also comprise of restrictive stocks, stock options

and other instruments.
* Restrictive Stock - Listed companies, as per Administrative Measures' specifications, can issue their own stock

to target employees in accordance with an EICP if the target employees satisfy the specified guidelines of the EICP.
* Stock Options - Listed companies, as per Administrative Measures' specifications, can issue a right to buy stock

options to target employees after meeting the parameters laid down by the EICP, at a prescribed price in accordance with

the EICP.

Chinese ECIP taxation clarifications: Extent of Deductions:

* Corporate Income tax usually allows deductions on equity compensation expenses.
* Tax deduction is not allowed during the vesting period. However, tax deduction can be availed at the time of

opting for stock option rights.
* Tax deduction is calculated by multiplying the following factors:
* Number of equity stock rights actually taken by the employee.
* Difference between the market price per share of the company and strike price (offered price of equity stock

compensation per share) of the share on the exercise date.
* Tax deduction is characterized as salary compensation.

Chinese ECIP taxation clarifications: Implication

* The move would help build positive business climate for growth of the securities market and business in the

country.
* Chinese tax authorities have defined two types of ECIPs for equity compensation:
* Equity compensation using equity settlement: there is still lack of clarity on this and various issues are

debatable.
* Equity compensation using cash settlement: the guidelines are clear on compensation expenses being

deductible.
* Tax treatment is unclear and complex for matters which involve subsidiaries of listed and unlisted companies.

Therefore, companies expanding business in China should seek expert advice from consultants to avoid tax complexities.
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