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China may offer personal tax relief to help companies, startups hang on to executive talent

The top rate of personal tax in China is 45 per cent, compared with 17 per cent in Hong Kong and 20 per cent in Singapore

PUBLISHED : Sunday, 02 July, 2017, 6:24pm
UPDATED : Monday, 03 July, 2017, 9:30am

China is expected to roll out new personal tax relief policies for top executives, in an effort to help its biggest and most successful firms, and start-ups, hold onto their best talent.

Business consultancies now expect top corporate officials to be offered tax relief on more non-cash types of remuneration, which are becoming increasingly popular within executive pay packages, as Beijing steps up its effort to gain an edge in keeping its most-promising executives from leaving the country to work overseas.

As in many countries, China’s biggest earners also face the highest tax burden – but the levels of personal tax levied in the mainland have now overtaken many rival markets. The top rate of personal tax in China is 45 per cent, compared with 17 per cent in Hong Kong and 20 per cent in Singapore.

“We have seen an unprecedented offering of preferential tax policies on equity incentives, as the government tries to speed up innovation, entrepreneurship and economic upgrading, which can’t be done without much-needed elite talent,” said Freeman Bu, a partner at professional services giant EY.

Businesses have been eagerly studying the policies and working out how best to reward their top, and most-important staffers, he said.

Last year, the government cut taxes on equity-based incentive plans, such as stock options, at non-listed companies. They are now taxed only when or if they cash in those holdings, whereas previously they were taxed yearly as earnable income.

In addition qualified executives can apply a flat tax rate of 20 per cent on gains from equity incentives because the income they earn is classified as capital gains, not salary.

That change, effective since last September can trim an executive’s tax burden considerably, Bu noted.

The mainland adopts a seven-bracket progressive personal income tax regime, and the expected new tax breaks are expected to ease the burden on the top 45 per cent earners, who could conceivably be tempted elsewhere to tax rates regimes.

“The latest moves in tinkering with China’s individual tax regime are seen as a strong leap forward to hold onto the best talent,” said Ma Fei, managing director, greater China executive compensation solution, at consultancy Willis Towers Watson.

Tax cuts on gains from equity incentives, for instance, is seen as a good start in helping stem any potential brain drain due to the country’s higher income taxes
Ma Fei, managing director, greater China executive compensation solution, Willis Towers Watson

“Tax cuts on gains from equity incentives, for instance, is seen as a good start in helping stem any potential brain drain due to the country’s higher income taxes,” said Ma, but he thinks a lot more could still be done, especially at slightly lower executive levels, and in sectors which have seen the strongest growth.

One example might be for internet companies, where no more than 30 per cent of staff are allowed to enjoy equity-based incentives and where the average could easily be increased to 60 per cent, Ma said.

Simon Lance, managing director at recruiting firm Hays in China, said for Chinese start-ups, too, equity incentives have proved a very effective way of attracting top talent from established multinationals, “particularly those with an entrepreneurial mindset”.

A recent Deloitte report showed that executive equity incentive levels at A-share companies have now risen seven years in a row, with an annual compound growth of 42 per cent.

Some 723 firms listed in Shanghai and Shenzhen had implemented equity incentive schemes by the end of May, 2016, a quarter of the total, according to separate data from Willis Towers Watson.

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