Staff Salary Structure, Tax Planning - The Idea Of ​​the Introduction Of Stock Options

Nowadays, along with the transition of China economic structure as well as the developing of human resources, China is transformed from a low labor cost country to a high labor cost country. In order to attract or retain the talents, many companies have to invest a lot in the employee's compensation to enhance the attraction. However, since the Individual Income Tax is taxed on a progressive rate with overall high tax liability, especially for the medium or high income taxpayer, the increase of gross salary could not bring proportional increase of the net income. As such, without any Individual Income Tax planning, although many companies make a lot of investment in the employee's compensation cost, the employee's income at their deposit are not effectively increased.As the development of the prevailing Individual Income Tax system in China, the planning room is gradually increased. From 2005 to 2007, China has issued several circulars regarding the taxation on stock option income. Thus, we are getting a better idea on how to tax the stock option income from Individual Income Tax perspective. In this regard, the purpose of this paper is to research on the Individual Income Tax planning with focus on whether the introduction of stock option could effectively increase the net income of employee which will result in the lower employment cost of a company.Throughout the research, this paper firstly presents the concept of stock option as well as introduces some common stock option plans in other countries. Then this paper will study on the common compensation structure and the development of the current taxation on stock option income in China. By setting up models, this paper will further illustrate that under the same annual income, the introduction of stock option will be more tax efficient from Individual Income Tax perspectives. In addition, this paper demonstrates that the higher the annual earnings, the more tax efficient to introduce the stock option. For those that annual earning below RMB 140,000, the tax saving may not so much to cover relevant administration cost. Finally, this paper will also address some other practical considerations in the adoption of stock option.