Equity based awards, such as stock options, are regarded as an effective means to motivate and retain staff. This form of incentive is now being adopted on the mainland where domestic companies are replacing traditional cash rewards with shares for employees. According to Stacy Kwok, partner at PricewaterhouseCoopers (PwC), 'Companies want to encourage ownership. The [central] government knows that stock options are used by multinationals operating in China and that mainland companies are also increasingly using stock options to attract, reward and retain employees. 'This stock option gain is employment income, why not tax it? Since the introduction of Circular 35 in mid-2005, there has also been an administrative burden for the companies that have to register their stock plan and other details with the relevant authorities in order to gain this preferential individual income tax treatment.' Adding to its regulations regarding the preferential tax treatment of such stock options, the Ministry of Finance and State Administration of Taxation in January announced further regulations extending the existing preferential treatment of stock options to share appreciation rights plans, and restricted share units plans granted to employees by domestic listed companies. A literal reading of the interpretation seems to impose the tax registration and individual income tax withholding requirements only to companies listed on the mainland. The latest circular did not mention the treatment of these options in overseas listed companies, which doesn't mean that they are not included, according to Dawn Foo, KPMG tax partner based in Beijing. 'The authorities may have been silent in the circular on what happens to those share appreciation rights plans and restricted stock units plans where the shares are listed overseas but, in practice, some tax bureaus at a local level are saying that foreign listed companies also need to register these share plans,' she said. Among other things, the circular issued in January requires the registration of share appreciation rights plans and restricted share units plans with local tax bureaus on the mainland, a requirement similar to those for existing stock option plans. In fact, according to PwC, there is an increasing trend among mainland tax bureaus to tighten the enforcement of the tax registration requirements on share option plans. In some locations, tax bureaus have refused to accept the earlier circular that permitted preferential individual income tax treatment on share option income, unless the share plan has been registered with them. As the application of the preferential individual income tax treatment on these plans will in most cases give rise to tax savings to employees, accountants are advising companies to ensure that their share appreciation rights plans and restricted stock units plans comply with the necessary tax registration requirements to secure the use of the preferential individual income tax treatment. 'We find that the practices of every local tax bureau are very different and most don't follow the circular. So the best approach is to ask the local tax bureau what their method of treatment is,' Ms Foo said.