China to tax transfer of restricted shares
Comments (0) China will impose a 20 percent tax on income from the sale of restricted shares, effective Jan. 1, the official Xinhua news agency reported on Thursday, in a move that could offer stability to the stock market.
Income from the sale of ordinary shares, including those in public offerings and secondary trading, would continue to be exempt from taxation, it added.
http://business.asiaone.com/Business/News/My%2BMoney/Story/A1Story20091231-189121.html
I didnt mention this news when it was first released primarily because it is not a significant issue that affects my particular practice and, to be honest, it is really not that newsworthy once you look at the issue properly. However, I have heard an amusing tale behind the policy change that I thought I would share. Also, a lot of the news on this issue has not been very clear, and in some cases somewhat misleading, so I thought I would try and to clarify the issue. For example, from the same article as above it is stated:
China has not taxed income from share sales by individuals since 1994 as it has sought to encourage the development of its capital market, Xinhua said.
This suggests that the exemption for tax applies to the sale of all shares by individuals in China when in reality the exemption is limited to shares listed on the stock exchange (Caishui [1998] 61). Secondly, the exemption has never applied in respect of income from employee stock options (either through the accretion in value derived or through tranfser of the shares) as such income is considered to be related to employment and therefore is characterised as employment income (for example, see Guoshuihan [2009] 461). This is actually very important to note, because this is when restricted shares are primarily used. In other words, restricted shares have, in many cases, not been exempt from tax in China.
A colleague of mine had an interesting story of why he thinks this exemption has been lifted. This story is one that can only happen in China.
As China has developed over the past 15 years one of the problems faced has been the acquisition of land for development. As a lot of the land in the outlying was effectively “owned” by farmers. The cost of paying market rate for such land would have added a very significant capital burden for the developments. Accordingly, rather than pay the farmers money for this land, it was decided to grant them shares in publicly listed real estate holding companies. The government forced the farmers to accept this deal. The shares were restricted so that they could not be sold. At the time these shares were effectively worthless and accordingly there was a lot of anger over this issue. However, in 2008 the government removed the restrictions on the sale of these shares and overnight they became extremely valuable. Many of these farmers are now very wealthy. Obviously, many of them decided to cash in on their shares. The problem for the government was that the transfer of the shares would have been tax free under the exemption – hence the reasoning behind the new circular.
Interesting story. Is it the true explanation of the reasoning behind the change? I have no idea.
