by Zsuzsanna Blau
EDITORIAL - It seems that China is following other OECD country trends in the treatment of stock options - on accrual of an appreciated sum, or realization of growth in the stock.
In late August 2009, China’s State Administration of Taxation (SAT) has issued Guo Shui Han No. 461, the ‘Notice on Individual Income Tax Issues Concerning Stock Incentives’. The SAT, together with the Ministry of Finance had previously issued a number of tax circulars (such as Cai Shui  No. 35, Guo Shui Han  No. 902 and Cai Shui  No. 5) concerning the individual income tax treatment of stock options, restricted stock and stock appreciation rights.
The new tax circular, Guo Shui Han No. 461, stipulates that an individual is taxed at the time he or she receives payment from his or her employer with respect to a stock appreciation right.
‘Stock appreciation right’ is the right to receive a cash payment based on the appreciation of stock. A company will pay the employee in cash equal to the difference between the grant price and market price of stock when employees exercise their stock appreciation right.
The taxable income of restricted stock is computed using a specific formula: taxable income equals (closing share price on share registration date plus closing share price on vesting date for current installment) divided by 2 times the number of shares vested in current installment minus total payment by employee times (number of shares vested in current installment divided by total number of shares received).
The tax treatment of restricted stock appears more favorable than that of stock options. However, the favorable computation formula is not applicable in the following situations–the stock appreciation rights, stock options, and restricted stock are awarded by a non-listed company; the incentive plan is adopted by a company before listing and employees receive incentive income after the company is listed; the company fails to file the required data with the tax authority in charge; or an individual is an employee of an affiliate of the listing company issuing stock and the listing company directly or indirectly owns less than 30 percent stock of the affiliate, or the affiliate is not a first-tier or second-tier subsidiary.