Q&A

Stock options are a type of remuneration where companies that are listed on a stock exchange give their employees the right to buy stocks in the company at a certain price. After one year, the options become exercisable and the employee may choose to buy the shares at a set price. It is a method of compensation that lets the company’s interests align with the employee’s. Like with annual bonuses, tax on stock options is calculated separately from the normal monthly income. The grant of stock options becomes taxable on the day the employee exercises the options, i.e. buys the shares. The taxable income is the difference between the option price set in the contract, and the market price of the shares at the end of that day. As with annual bonuses, you can arrive at the tax rate and quick deduction by dividing the taxable income by twelve.

Taxable income = (Market price of shares - Option price in contract) x Number of shares 

Tax payable = (Taxable income ÷ Employee’s number of months in China x Applicable tax rate – Quick deduction) x Employee’s number of months in China