The Chinese government is expected to implement personal tax relief policies that were designed to attract top executives to the country. The government also hopes that the new policies will benefit both large corporations and fast-growing startups to retain their brightest executive talent.
Business insiders in China expect a tax relief on noncash types of compensation to be offered to top corporate executives. It is one of the steps that Beijing is willing to take in order to keep highly qualified executives from leaving the country to pursue better opportunities overseas.
Just like in many other countries, the top earners in China have the biggest tax burden. However, the tax rates in mainland China are among the highest in the region. The highest rate of personal income tax in China is 45%, compared to 20% in Singapore and 17% in Hong Kong.
The Chinese government wants to improve the growth rate of entrepreneurship, economy, and innovation, but improvement can’t be achieved without world class executive talent leading China’s corporations. Businesses in China are now waiting for the tax relief policies so that they can create attractive compensation plans for their top executives.
Tax Cuts on Equity-based Incentive Plans
China reduced taxes on equity-based incentive plans in 2016. Stock options and other assets are now taxed only if the individual cashes them in. Before the policy was implemented the assets were taxed annually as earnable income.
The government also allowed qualified executives to apply a flat tax rate of 20% on the gains earned from equity incentives, which are now classified as capital gains and not salary. The tax cut on equity incentives was effective since September 2016 and had reduced executives’ tax burdens.
Tax Reforms for Executives
China has a personal income tax scheme of seven brackets, and the new tax cuts will ease the burden on the top 45% earners. The government hopes that these earners will not be tempted to leave the country because of lower taxes overseas.
The tax cuts on gains from equity based incentives were a good start in preventing the potential brain drain because of high taxes. Corporations want more cuts, especially at the lower executive levels, in order to stop rising executive talent from leaving.
For instance, internet companies in China only have around 30% of employees qualified for equity based incentives. They hope that new policies will increase that percentage to 60% of their internet company staff.
Chinese startups have attracted top executives from multinational companies due to equity incentives. At present the level of incentive plans for executives has increased for seven straight years. Their yearly compound growth is 42%. A quarter of the total number of firms that implemented equity incentive plans is located in Shenzhen and Shanghai.
The tax cuts are good for preventing the brain drain. They allow corporations in China to remain competitive. Companies hope that the new tax cut policies will make top executives remain in the country instead of looking for better opportunities overseas.
If you are interested in learning more about executive compensation in China please also read Executive Compensation in China: an Overview on Ginkgo Search.