Individual Income Tax Payable on Assignment of Trade-Restricted Shares
By: Stephen Nelson and King & Wood's Tax Group
Recently, China clarifies that individuals shall be liable for individual income tax (‘IIT’) on income derived from assignment of trade-restricted shares. According to the Supplementary Notice on Individual Income Tax Issues regarding Transfer of Trade-Restricted Shares (Caishui [2010] No. 70) (“Circular 70”), “trade-restricted shares” refers to shares which have been locked up during initial public offerings and notably, the following shares would be classified as trade-restricted shares:
- Trade-restricted shares received by assignees in inheritance or property divisions;
- Trade-restricted shares assigned by private agreement;
- Trade-restricted shares assigned by court judgment;
- In listed companies’ absorption mergers, the shares of the surviving company received by the individual shareholders who originally held trade-restricted shares of the absorbed company;
- In listed companies’ divisions, the shares of the surviving company received by the individual shareholders who originally held trade-restricted shares of the divided company;
- Other trade-restricted shares.
Capital gains from the transfer of trade-restricted shares should be subject to IIT at the rate of 20%. Capital gains are calculated as the transfer proceeds minus the original costs and reasonable expenses and taxes. Further, Circular 70 sets forth specific rules to determine the transfer proceeds and original costs for particular types of transfers of trade-restricted shares as listed above.
