Tax Treatment of Stock Options and Restricted Shares for Foreign Employees in China

Marie Lefèvre, a French product director, moved to Shanghai in 2021. Her employer, a biotech startup, grew fast. By the time it listed on the Shanghai STAR Market in 2024, Marie held two types of equity compensation: stock options granted in her first year, and restricted shares awarded after a promotion. The listing triggered a moment she had not planned for: figuring out how to report the shares to China’s tax authority. This article works through her story to explain the stock option and restricted share tax rules that apply to foreign employees in China, when tax is due, and how to file.

Foreign employees living in China are usually Chinese tax residents if they stay more than 183 days in a calendar year. Under China’s Individual Income Tax (IIT) law, stock options, restricted shares and similar equity incentives received from a Chinese employer are treated differently from dividends. The shares are recharacterized as income from wages and salaries and taxed according to the person’s IIT bracket. The exact tax year depends on the event that makes the reward available.

When Tax Is Triggered

For stock options, the taxable event is the exercise date — the day the employee buys shares at the agreed option price. Until then, there is no tax. When an employee exercises options, the taxable income equals the fair market value of the shares on the exercise date minus the exercise price. For restricted shares (including restricted stock units, or RSUs), the taxable event is the date the shares are released from the restriction. The taxable amount equals the market value at release date minus the amount paid for the shares (if any). If the restricted shares have not vested, no tax is due.

Salary-Income Tax Rates and How to Calculate

Income from equity incentives is taxed at the same progressive rates used for comprehensive income in China: rates from 3% to 45% apply, with the amount divided into brackets. For a China tax resident, the equity incentive amount does not combine with annual salary and bonus, due to a preferential policy that separates equity incentive income. As of writing, this separate treatment is available for income received before the end of 2027.

To calculate the tax, you first calculate the total equity incentive income. Then you apply the annual tax bracket and subtract the quick deduction. This method is easier than calculating each bracket separately, and Chinese tax software automatically uses it.

Marie’s Example: A STAR Market Listing

In May 2024, Marie exercised stock options to buy 5,000 shares. The exercise price was ¥10; the share price on the STAR Market that day was ¥60. Her taxable gain was 5,000 × (¥60 – ¥10) = ¥250,000.

In August 2024, 3,000 restricted shares were released. Those shares had a grant price of ¥20 and the market price on release day was ¥80. The taxable gain was 3,000 × (¥80 – ¥20) = ¥180,000.

Because both gains came from the same employer in the same tax year, Marie combined them: ¥250,000 + ¥180,000 = ¥430,000. With the annual rate schedule, the applicable rate for ¥430,000 is 30% and quick deduction is ¥52,920. Tax to withhold or report: ¥430,000 × 30% – ¥52,920 = ¥76,080.

That amount is significant, and in most cases her employer had to withhold tax and submit it. If the employer did not withhold, Marie would have to file a self-assessment. The annual filing window is from March 1 to June 30 of the following year, and the process is normally done through the official Individual Income Tax app.

Capital Gains on Shares You Later Sell

Once the shares are legally hers, Marie can hold or sell them. A common point of confusion is whether the eventual sale creates additional tax. For shares listed on a Chinese exchange, including the STAR Market, current rules give individuals an exemption on capital gains from selling shares. So the gain above the amount already taxed at exercise or release is not taxed at the time of sale.

That exemption applies mainly to shares sold through Shanghai or Shenzhen exchanges. If the shares are listed abroad — for example, options from a foreign-parent company— the picture can be different. In that case, Marie might be subject to capital gains tax in the country where the shares are listed, or to China’s income tax on worldwide income if she remains a Chinese tax resident. The exact answer is affected by double-tax treaties and by whether the shares are issued by a Chinese tax-resident company. It is best to get professional advice before making large transfers.

Cross-Border Reporting and Avoiding Double Taxation

Marie is a French citizen and could also owe tax in France on the same equity compensation. China’s tax treaty with France, like many Chinese tax treaties, usually gives China the primary right to tax employment-related income earned in China. France then gives a foreign tax credit for tax paid in China. Similar relief provisions are embedded in most bilateral tax treaties that China has signed.

If that describes your situation, keep these points in mind:

• Check whether you are a resident in China or in your home country under the treaty’s tie-breaker clause.
• Learn whether your equity income is considered China-source or foreign-source. The source often depends on where you performed the work and where the shares are issued.
• When you prepare your home-country tax return, list the tax already withheld in China and claim the credit.

On the China side, if you pay tax overseas on income also taxed by China, you may legally claim a foreign tax credit on the Chinese annual IIT return, up to the Chinese tax computed for that income. The paperwork can be complex, so work with a cross-border accountant if you have foreign employment or share plans.

Practical Steps for Foreign Employees

Do not wait until the shares are sold to think about tax. China taxes stock-based pay at exercise or release, not at the moment of sale. Know your residence status, because it determines whether China taxes you on a worldwide basis. Treat your payroll team or tax advisor as your first stop: many Chinese employers can withhold income tax directly, but you are ultimately responsible for verifying that all income appears in your tax records.

Equity compensation can be a significant part of a foreign employee’s total package. The rules are precise, and they change over time. A well-planned filing ensures that you keep more of the reward and stay compliant with Chinese tax administration.