How are stock appreciation rights taxed?

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The right to stock appreciation refers to the right granted by a listed company to its employees to obtain the benefits brought by the increase in the price of a specified number of shares in a certain period of time and under agreed conditions in the future.

As an important tool for enterprise equity incentives, equity appreciation rights and (shared before, can be clicked to view) have many common features, but also have essential differences.

01 Advantages and disadvantages

1 Pros

1. The incentive recipient does not need to pay cash. If the company's stock price rises, the incentive object can obtain a corresponding amount of stock price appreciation income through the exercise, and the incentive object does not need to pay cash for the exercise, and the incentive object will get cash after exercising.

2. Do not dilute equity. The right to increase the value of the stock is not actually granted to the stock, but to enjoy the appreciation of the stock by simulating the price change of the stock market. It will not affect the existing corporate governance and will not weaken the shareholders' control over the company's equity.

3. The pricing is flexible and easy to operate. According to the Measures for the Administration of Equity Incentives of Listed Companies, the grant and exercise price of restricted shares and stock options are clearly stipulated. When the stock appreciation right is exercised, the appreciation part of the stock is directly cashed out.

2 Cons

1. The incentive effect is limited. The incentive recipients cannot obtain shares in the real sense, and the incentive recipients have a poor sense of belonging. When stocks fall, they may not be motivated.

2. There is a lot of pressure on cash payment. When employees exercise their rights, they are paid by the company in cash, which has very high requirements for the company's cash flow.

02 Tax treatment

1. Taxes are paid according to the income from wages and salaries

Cai Shui [2009] No. 5 clearly put forward the concept of stock appreciation rights for the first time, stipulating that the income of stock appreciation rights obtained by individuals from listed companies (including domestic and foreign listed companies, the same below) shall be calculated and levied in accordance with the relevant provisions of Cai Shui [2005] No. 35 and Guo Shui Han [2006] No. 902.

According to Guo Shui Han [2006] No. 902, if an employee who obtains a stock option does not actually buy or sell the stock on the exercise date, but directly obtains the price difference income from the authorized enterprise according to the difference between the market price and the exercise price of the stock option specified on the exercise date, the price difference income shall be regarded as the employee's income from wages and salaries, and the individual income tax shall be calculated and paid with reference to the relevant provisions of Cai Shui [2005] No. 35 when the stock option is exercised.

Although the above provisions do not use the concept of stock appreciation rights, the object to which the policy applies is actually stock appreciation rights.

2. The basis for calculating the right to increase the value of shares

The time when the individual income tax liability of the stock appreciation right is incurred is the date on which the listed company redeems the income from the stock appreciation right to the authorized person.

According to Guo Shui Han [2009] No. 461, the income obtained by the authorized person of the stock appreciation right is the cash paid directly by the listed company to the authorized person according to the difference between the stock price on the date of authorization and the date of exercise multiplied by the number of authorized shares. The listed company shall withhold the individual income tax of the authorized person of the stock appreciation right in accordance with the law when it is redeemed to the authorized person of the stock appreciation right. The formula for calculating the taxable income of the grantee's stock appreciation right is as follows:

Taxable income from a certain exercise of stock appreciation right = (stock price on the exercise date - stock price on the authorization date) × number of shares exercised

According to Announcement No. 25 of 2023 of the State Administration of Taxation of the Ministry of Finance, before December 31, 2027, the equity incentive income obtained from the exercise of stock appreciation rights will not be included in the comprehensive income of the current year, and the full amount will be separately applied to the comprehensive income tax rate table for tax calculation. It is calculated as follows:

Tax payable = applicable tax rate × equity incentive income - quick deduction

If a resident individual obtains more than two equity incentives in a tax year, the equity incentive income shall be calculated on a consolidated basis.

3. The preferential policy of deferred tax period cannot be applied

According to Cai Shui [2016] No. 101, Circular No. 101 only lists three types of equity incentives, namely: stock (right) options, restricted shares and equity awards. If the right to appreciation of shares is not within the scope of the types of equity incentives listed in Circular 101, it should not be eligible for the deferred tax policy stipulated in Circular 101 in principle.

Therefore, the income from the price difference obtained from the exercise of the stock appreciation right shall be subject to individual income tax in the month in which the exercise date is located.

A domestic listed company that implements a stock appreciation right plan shall, at the same time as filing with the CSRC, submit the company's stock option plan or implementation plan, stock option agreement, authorization notice and other materials to the in-charge tax authorities before the implementation of the stock option plan, and shall submit the notice of exercise of stock options and the notice of exercise adjustment to the in-charge tax authorities before the exercise of the rights of employees.

When withholding agents and individuals who file tax returns or withholds taxes, they shall, within the tax filing period stipulated in the tax law, report to the in-charge tax authorities the stock options accepted or transferred by the individuals and the stocks subscribed (including the type, quantity, exercise price, exercise price, market price, transfer price, etc.).

03 Summary

In this regard, when formulating the implementation plan of the equity incentive plan, the relevant enterprises must consider the tax issues in depth in advance, so as not to let the tax risk affect the play of the equity incentive effect. It is recommended to seek the assistance of professional institutions as soon as possible and comprehensively consider the implementation of the best landing plan.

Written by: Caizi

Typesetting: Chen Wen

头条抖音公众号：大公Tax

The content of this article is for general information purposes only and does not constitute the provision of any professional advice or services. Nothing provided herein should be construed as formal tax, accounting, or legal advice.