On 17 January 2019, the Chinese Ministry of Finance and State Administration of Taxation jointly issued a circular Cai Shui (2019) No.13 that sets out the new preferential tax policy available to qualified SMEs for the period from 1 January 2019 to 31 December 2021. The salient points of the new policy are as follows:
Corporate Income Tax (CIT)
For qualified SMEs, the first RMB1 million of annual taxable income is eligible for 75% reduction when calculating CIT and the income between RMB1 million and RMB3 million is eligible for 50% reduction. The applicable CIT rate is 20%. That is, the effective tax rates for the first RMB1 million taxable income band and the second RMB1-to-3 million taxable income band are 5% and 10% respectively. The old policy provided a 10% effective tax rate for annual taxable income of RMB500,000 or less and the applicable CIT rate was also 20%.
The Chinese Ministry of Finance and State Administration of Taxation recently issued a circular regarding the Individual Income Tax (“IIT”) preferential policy for the Guangdong-Hong Kong-Macau Greater Bay Area. Since the tax difference between Mainland China and Hong Kong is quite significant, the implementation of the IIT preferential policy will make the Greater Bay Area more attractive to talents and will boost the construction and development of the area.
The salient features of the IIT preferential policy are as follows:
Eligible individuals: Foreign high-end talents and talents in shortage including Hong Kong, Macau and Taiwanese citizens that work in the Greater Bay Area.
Eligible area: 9 cities in the area – Guangzhou, Shenzhen, Zhuhai, Zhongshan, Dongguan, Huizhou, Foshan, Jiangmen and Zhaoqing.
How does ESOP work?
Employee Share Option Plan (ESOP) refers to the mechanism by which a company (which can be either private or listed) offers to one of more employee(s) the right to buy a specific number (or a specific percentage) of shares in the company, at a specific price (the exercise price) and during a specified period, usually within a number of years (the exercise period).
During such exercise period, the employee is free to exercise or not such option at a price which is determined by the company at the time of the grant. This is an option given to the employee, not an obligation.
From an employee perspective, he/she is expecting to make a profit equivalent to the difference between (i) the future valuation of the company and (ii) the exercise price.