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. But how effective are equity incentives? There is great variation in practice. How to achieve good equity incentive effect is a problem that every equity incentive party has to think about. Factors such as incentive mode, shareholding mode and tax burden cost all affect the effect of equity incentive to some extent. China's tax law on equity incentive related tax burden is relatively scattered, the improper design of incentive scheme will not only increase the tax burden cost of incentive object, affect the incentive effect, but also bring tax risk in certain circumstances. Therefore, enterprises must consider the tax burden cost when formulating the equity incentive scheme, in order to maximize the effect of equity incentive. Jiao Hanwei, lawyer of Shanghai Guolinghouse Law Firm, will discuss the tax burden of the incentive object under the equity or stock (hereinafter referred to as equity) incentive model of non-listed companies' virtual equity incentive and direct shareholding, based on practical experience, so as to provide reference for operators in the development of equity incentive schemes.

On the tax burden of virtual equity incentive model

Virtual equity incentive means that the company grants a virtual equity to the incentive object, according to which the incentive object can enjoy a certain amount of dividend rights, but the incentive object is not the real sense of the company's shareholders, and does not enjoy ownership, voting rights, transfer rights, inheritance rights and other shareholder rights, and no longer enjoy the virtual stock rights when he leaves the company. Because virtual equity is essentially a right to dividend, not equity, so the incentive object tax burden problem mainly occurs in the dividend acquisition link. The bonus obtained by the incentive object based on the virtual equity is essentially a part of the salary of the employee, and it is a personal "salary and salary income" project, which belongs to the category of comprehensive income. According to China's individual income tax law, individual comprehensive income is subject to a progressive tax rate of three to forty-five percent. The Individual Income Tax Law of China also provides that individual residents who obtain comprehensive income from wages and salaries shall calculate individual income tax on a consolidated basis in the tax year; The individual income tax on wages and salaries obtained by non-resident individuals shall be calculated on a monthly or itemized basis. The term "resident individual" refers to an individual who has a domicile in China or who has no domicile and has resided in China for a total of 183 days in a tax year; Non-resident individuals refer to individuals who have neither domicile nor reside in China, or who have no domicile and have resided in China for less than 183 days in a tax year. To sum up, under the virtual equity incentive model, the tax burden of the incentive object mainly occurs in the personal income items when the dividend is obtained, and the 7-level excess progressive tax rate of 3% to 45% is applicable.

On the tax burden of equity incentive model of direct shareholding

The so-called equity incentive model of direct shareholding means that the incentive party directly grants the equity of the company to the incentive object when implementing the equity incentive. The incentive object is directly registered as the shareholder of the incentive company and enjoys the rights of the shareholder. Compared with virtual equity incentive, the equity incentive mode of direct shareholding involves many links such as equity authorization, exercise, dividend and sale, and the tax burden is more complicated. In general, there are three tax-related links in direct shareholding incentive: acquisition, dividend and transfer. Among them, employees should pay personal income tax when they obtain dividends based on equity. According to China's individual income tax law, individual dividend income is subject to a proportional tax rate of 20%. The tax burden of the dividend link is relatively simple, and will not be repeated here. The tax burden of acquisition and transfer is more complicated, which can be divided into two types: deferred tax payment and non-deferred tax payment, as follows:

(1) Tax deferral

In the practice of equity incentive, the incentive object often has no capital inflow in the process of obtaining equity. On the one hand, the incentive object needs to pay a certain consideration for equity incentive, on the other hand, it also needs to pay personal income tax, and often faces greater cash flow pressure. In order to support the implementation of the national strategy of mass entrepreneurship and innovation and promote the transformation and upgrading of China's economic structure, in 2016, the Ministry of Finance and the State Administration of Taxation issued the Notice on Improving the Income Tax Policy on Equity Incentive and technology Investment [2016] 101]. According to the notice, if the stock options, equity options, restricted shares and equity awards granted by the non-listed company to the employees of the company meet certain conditions, the tax deferral policy may be implemented after filing with the competent tax authorities, that is, the employees may suspend tax payment when they obtain the equity incentive and defer 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, if the equity incentive plan conforms to the deferred tax policy, the incentive object does not pay income tax temporarily when it obtains the equity interest, and only needs to pay 20% income tax according to the "property transfer income" item when it transfers the equity. However, the equity incentive of non-listed companies enjoying the deferred tax policy must meet the following conditions at the same time: (1) Equity incentive plan of a domestic resident enterprise. (2) The equity incentive plan shall be reviewed and approved by the Board of Directors and the 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 (option) 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 are not included in the Catalogue of Industries subject to Preferential Tax Policies on Equity Awards, specifically mining, tobacco products, real estate, catering and accommodation industries. To sum up, in the equity incentive model of direct shareholding, if the incentive plan conforms to the deferred tax policy in Article 101, it can well reduce the financial pressure of the incentive object and play a good incentive effect.

(2) Non-deferred tax payment

If the equity incentive plan does not comply with the deferred tax policy stipulated in Article 101, the incentive object shall pay individual income tax separately in the process of acquiring and transferring equity in accordance with the individual Income Tax law. In the acquisition process, the incentive object shall pay individual income tax according to the "wage and salary income" item according to the difference between the actual purchase price of the equity and the open market price when it obtains the equity, the restricted equity is released or the equity option is exercised, and the applicable tax rate is 3-45%. Among them, if the incentive object is a resident individual, the individual income tax should be calculated according to the tax year; If the incentive target is non-resident individuals, individual income tax shall be calculated on a monthly or itemized basis. In the transfer link, when the incentive object transfers the above equity, it shall pay individual income tax based on the value-added part between the transfer income and the price at the time of acquisition of the equity, and the transfer link income tax shall be applied to the "property transfer income" item at a proportional tax rate of 20%.

After the above analysis, the incentive party should realize that under the equity incentive mode of direct shareholding, how to make the incentive plan conform to the deferred tax policy stipulated in Document 101 is a major issue to be considered, which directly affects the effect of equity incentive.