On 22 September 2016, the Ministry of Finance and the State Administration of Taxation (SAT) jointly issued Caishui [2016] No. 101 (Circular 101), which discusses preferential PRC individual income tax (IIT) treatment on certain employee equity incentive awards granted by private companies, and capital contributions to PRC resident enterprises through technology investment. This circular sets out the qualifying criteria for enjoyment of the favourable tax treatment, and is supplemented by SAT Announcement 62 which provides for the administrative guidelines and detailed implementation rules. The new rules came into effect on 1 September 2016.

These circulars underpin governmental support for national mass entrepreneurship and innovation to promote economic structural transformation. The preferential tax treatments apply solely to unlisted domestic resident enterprises, which should stimulate interest of those private companies and pre-Shanghai and Shenzhen Stock Exchange IPO companies in the market for wider deployment of equity awards.

Following the release of Circular 101 and Announcement 62, KPMG proactively reached out to various local tax authorities to seek clarifications on some of the practical implications of the circulars and we share some of the key points in this alert.