Summary of Key Points
The new individual income tax regulations on restricted shares, jointly issued by three departments on August 28, are not simply about raising taxes. Instead, they aim to address three major shortcomings in the past transfer of restricted shares:
1. It is now clear that shares granted after the restriction is lifted (registered after the announcement takes effect) are subject to taxation.
2. The method for determining the cost of shares has been changed to distinguish between "new" and "old" shares. New shares without cost documentation will have the full amount withheld in advance, while old shares will still be taxed at a rate of 15%.
3. The process for reporting costs has been moved forward to the share registration stage. The purpose of these changes is to close tax loopholes and ensure a fair tax burden. The impact on compliant shareholders is minimal, while providing a buffer for existing shares, which is beneficial for market stability in the long term.
What Exactly Does the New Regulation Change?
Here are the three main changes:
1. Shares Granted After the Restriction is Lifted Are Also Taxable
Previously, shares granted by a company after the restriction was lifted (for example, a 10-for-10 bonus) were not considered restricted shares and were not subject to a 20% tax when sold. The new regulation states that shares granted after the restriction is lifted, or those resulting from a capitalization gain (registered after August 28), are subject to the same tax as restricted shares. However, changes made before this date will not be retroactively applied. For instance, if you have 1 million restricted shares and the company grants you an additional 1 million shares after the restriction is lifted, you will have to pay tax on the new shares when you sell them; the shares granted before the new regulation does not require taxation.
2. Distinguished Cost Calculation for "New" and "Old" Shares
For restricted shares without cost documentation, the cost was previously calculated at 15% of the selling price. For example, if you sell shares for 1 million yuan, the cost would be calculated as 150,000 yuan, and the tax base would be 850,000 yuan. With the new regulation:
- New shares (registered after the announcement): If the company does not provide a cost statement, the securities institution will withhold the full amount of tax at the selling price (e.g., 200,000 yuan). However, if you can provide a cost statement later, you can apply for a refund of the over-withheld amount the following year.
- Old shares (registered before the announcement): The cost will still be calculated at 15%, so there is no need to worry.
3. Early Cost Reporting
Previously, cost documentation might only be required when selling shares. Now, companies are required to submit shareholders' cost information (such as purchase invoices and tax receipts) and intermediary verification reports at the time of share registration. This means that you need to prepare the cost documentation in advance to avoid any issues with tax withholding.
Why Were These Changes Made?
There were two main issues with the previous regulations:
- Large Shareholders Using "High Bonus Issues" to Avoid Taxes
For example, a large shareholder with 1 million restricted shares could promote a 10-for-10 bonus issue, increasing the number of shares to 2 million. The previously granted shares would not be taxed when sold, allowing the shareholder to avoid paying 20% in taxes. Only large shareholders had the power to initiate such bonus issues, which was unfair to the tax system.
- Abuse of the 15% Cost Calculation
Initially, the 15% cost calculation was designed for shares with no cost documentation. However, this led to situations where high-value shares were taxed based on a lower cost, resulting in a higher tax burden than the actual cost. The new regulation aims to correct this abuse and ensure a more equitable tax system.
Will the Tax Burden Increase?
The impact on taxpayers depends on their situation:
- Shareholders with Complete Cost Documentation: The tax rate remains 20%, but the method of withholding has changed (e.g., a full amount may be withheld initially, but a refund can be claimed later). The actual tax burden remains the same.
- Shareholders of New Shares Without Cost Documentation: You may have to pay more in withholding initially, but you can get a refund the following year, with the final tax calculated based on the actual cost.
- Old Shareholders: The cost calculation remains at 15%, so there is no change for them.
In summary, as long as you comply with the new regulations, your tax burden will not increase. Only those who relied on tax loopholes will be affected, but there is a transition period in place.
What Should Shareholders Do?
To prepare for the new regulations, you should:
1. Organize Your Cost Documentation: Gather all relevant documents (purchase invoices, tax receipts, capital contribution proofs, intermediary reports, etc.) to ensure they can be submitted when the company registers the shares, avoiding over-withholding of taxes.
2. Communicate with the Company and Relevant Institutions: Verify whether the cost documentation has been submitted correctly and clarify the process with the company and tax professionals to avoid any issues.
3. Avoid Panic When Selling Shares: The new regulation does not require immediate sales. The tax burden is just one factor to consider; other factors such as the company's fundamentals, market conditions, and your own financial needs should also be taken into account. Old shares still have a buffer period, so there is no need to rush to sell.
Long-Term Benefits of the Regulation for the Market
- Fairer Tax System: Both large and small shareholders will face the same tax rate for the transfer of shares, eliminating unfair advantages for those who exploited loopholes.
- Stable Expectations: With clear rules, investors are more likely to invest in the market due to the transparency of the tax system.
- No Impact on Liquidity: Although some may adjust their selling strategies in the short term, compliant shareholders will not be affected, and the market will not experience sustained pressure to sell shares.
In conclusion, the core of the new regulation is to standardize the tax system, not to increase taxes. For those who follow the rules, it reduces uncertainty; for those who exploited loopholes, there is a transition period to make necessary adjustments. Compliance is the most cost-effective option.