"Top stock" is a set of effective equity incentive methods that Shanxi merchants have explored and perfected in the course of doing business for hundreds of years. It is through this equity incentive system that Jin businessmen will push their business, especially the ticket number business to the whole country, which has far-reaching influence. In modern enterprise management, equity incentive is one of the most important means for enterprises to attract and retain talents. Many companies are planning or implementing equity incentive plans. In the practice of equity incentive, incentive objects often have no capital inflow in the process of obtaining equity, but at this time, individuals need to pay a certain consideration for equity incentive on the one hand, and on the other hand, personal income tax issues will be involved, and incentive objects often face greater cash flow pressure. This dilemma affects the incentive effect of equity incentive to a certain extent. How to reduce the tax burden cost caused by equity incentive plan in the initial stage of incentive is a problem that enterprises must consider when formulating equity incentive plan. At the same time, many enterprises also have doubts about whether their equity incentive plans apply the deferred tax policy. Jiao Hanwei, lawyer of Shanghai Guolinghouse Law Firm, will discuss the issue of income tax deferral in equity (stock, hereinafter referred to as equity) incentive of non-listed companies in combination with practical experience, so as to provide reference for operators when formulating equity incentive schemes.

What is the deferred tax policy of stock incentive?

In order to promote the implementation of the strategy of mass entrepreneurship and innovation, and promote the transformation and upgrading of China's economic structure, the tax burden of incentive objects in the practice of equity incentives is unreasonable. In 2016, the Ministry of Finance and the State Administration of Taxation promulgated the Notice on Improving the Income Tax Policy on Equity Incentive and Technology Investment [Finance and Taxation [2016] No. 101] (hereinafter referred to as the "No. 101"). The notice is clear: If the stock options, equity options, restricted shares and equity awards granted by the non-listed company to the company's employees meet certain conditions, the tax deferred policy may be implemented after filing with the competent tax authorities, that is, the employees may temporarily not pay tax when they obtain the equity incentive, and defer the tax payment until the transfer of the equity; At the time of equity transfer, the difference of equity transfer income less equity acquisition costs and reasonable taxes shall apply to the item "property transfer income", which shall be calculated and paid individual income tax at a tax rate of 20%. Therefore, the qualified equity incentive program can defer tax income tax, and the incentive object does not pay income tax when it obtains the equity interest, but only needs to pay 20% income tax in accordance with the "property transfer income" project when the equity is transferred. After the introduction of the policy, if the incentive program applies the deferred tax policy stipulated in document 101, the financial pressure of the incentive object can be reduced in the process of obtaining equity, the tax burden can be reduced, and the incentive effect can be well improved.

What kind of equity incentive plan is eligible for tax deferred policy?

According to Document 101, a non-listed company's equity incentive plan must meet the following conditions in order to enjoy the deferred tax policy:

1. Equity incentive plans belonging to domestic resident enterprises. The term "resident enterprise" refers to an enterprise established in China according to law, or an enterprise established in accordance with the laws of a foreign country (region) but with its actual management organization in China. The tax deferral policy shall not apply to non-resident enterprises established in accordance with the laws of foreign countries (regions) and whose actual management institutions are not in China, but which have established institutions or establishments in China, or non-resident enterprises which have not established institutions or establishments in China but have income derived from sources in China.

2. The equity incentive plan has been reviewed and approved by the Board of Directors and shareholders (general) meeting of the company. A state-owned unit without a shareholders' (big) meeting shall be examined and approved by the competent department at a higher level. The equity incentive plan shall specify the incentive purpose, object, subject, validity period, determination method of various prices, conditions and procedures for the incentive object to obtain rights and interests.

3. The incentive object shall be the equity of the Company of the domestic resident enterprise. The object of the equity award may be the equity obtained from the investment of technological achievements into other domestic resident enterprises. The incentive underlying shares (rights) include shares (rights) granted to the incentive object through additional issuance, direct transfer by major shareholders and other reasonable ways permitted by laws and regulations.

4. The object of incentive shall be the technical backbone and senior management personnel decided by the board of directors or shareholders (large) meeting of the company, and the cumulative number of incentive objects shall not exceed 30% of the average number of employees in the company in the last 6 months.

5. Stock (right) options shall be held for at least 3 years from the grant date, and at least 1 year from the discretionary date; Restricted shares shall be held for at least 3 years from the grant date, and at least 1 year after the lifting of the ban; Equity awards shall be held for three years from the date of award. The above time conditions shall be set out in the share incentive plan.

6. The period from the grant date to the exercise date of stock options shall not exceed 10 years.

7. The industries of the companies implementing equity awards and the target companies of equity awards do not belong to the Catalogue of Industries subject to Preferential Tax Policies on Equity Awards, specifically mining, tobacco products, real estate, catering and accommodation, etc.

Among the above conditions, the provision in article (3) that "the object of incentive shall be the equity of the company of the domestic resident enterprise" has brought great challenges to many incentive schemes, and is also a pain point for many enterprises to generate confusion. Because in the practice of equity incentive of non-listed companies, the mainstream equity incentive model is the equity incentive scheme of indirect shareholding, and the object of many enterprises' incentive is not the equity of domestic resident enterprises in the strict sense, but the equity or partnership equity of the incentive platform.

Is the tax deferred policy applicable to the share incentive scheme based on indirect shareholding?

In the practice of equity incentive, there are two ways of holding stock: direct holding and indirect holding. The so-called direct shareholding refers to the equity or stock directly granted to the incentive object by the incentive party (hereinafter referred to as equity) when the incentive party implements the equity incentive; The incentive object is directly registered as the incentive shareholder and enjoys the rights of the shareholder. In the direct shareholding method, the subject of the incentive is the equity of the company, and of course, No. 101 is applicable. The so-called indirect shareholding means that when the incentive party implements the equity incentive, it does not directly grant the equity or stocks of the incentive party, but sets up an incentive platform to grant the company equity or partnership interests of the incentive platform, and the incentive object enjoys the property rights and interests of the incentive party through the incentive platform. Under the indirect shareholding model, the incentive object is not directly registered as the incentive shareholder, and does not enjoy the rights of the shareholder. Compared with the direct shareholding mode, the indirect shareholding mode can not only motivate employees well, but also isolate the risks of equity incentive well, taking into account the needs of both operation and law, so it is the mainstream shareholding mode in the practice of equity incentive. At present, in the practice of equity incentive, 90% of non-listed companies use indirect shareholding. The key to the problem is that under the equity incentive model of indirect shareholding, the incentive object obtains the equity of the incentive platform or partnership, but not the equity of the incentive party's company. Does this situation comply with the deferred tax policy of Article 101? This involves how to interpret the "incentive object should be the equity of the company of the domestic resident enterprise" in document No. 101? From the perspective of textual interpretation, the equity of domestic resident enterprises should only refer to the equity incentive in the form of direct shareholding, because only in the form of direct shareholding, the object of incentive is the equity of the motivating enterprise itself. However, from the perspective of legislative purposes, indirect shareholding should also be applicable. Because direct shareholding or indirect shareholding, it is only a technical problem, in essence, the object of incentive in the two shareholding methods is the company's technical equity and senior managers, the value of the incentive target is ultimately related to the value of the incentive side, the purpose is to improve the enthusiasm of mass entrepreneurship and innovation, and there is no substantial difference between the two shareholding methods. In terms of the understanding of this condition, in practice, the conclusion of the tax part of each region will be different, but the mainstream opinion of the tax department adopts a strict interpretation of the text, and the indirect shareholding method does not apply to the 101 document. This means that 90% of the current equity incentive schemes of unlisted companies will face significant challenges in applying Article 101.

In summary, based on the provisions of Document 101 and the mainstream tax practice, in most regions, the deferred tax policy stipulated in Document 101 is only applicable to the equity incentive scheme of direct shareholding. This means that until the tax and finance departments have clarified the issue, tax deferral is only a beautiful dream for the vast majority of non-listed companies with equity incentive schemes using indirect shareholding.

Jiao Hanwei

Chief partner and lawyer of Shanghai Guohillhouse Law Firm

More than 10 years of legal service experience and more than five years of business experience, familiar with law, familiar with business, He is good at providing enterprises with legal counsel, brand management, business compliance, business negotiation, intellectual property management, tax planning, equity transfer, corporate structure design, equity incentive, investment and financing, restructuring and merger, dispute resolution and other solutions for the whole stage of enterprise development from the perspective of law and business operation.