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- Human Resources and Payroll in China 2016-2017 (5th Edition)
IIT on Annual Bonuses
Chinese tax law allows a yearly one-off lump sum bonus to be calculated and taxed separately from
other taxable salary income, according to the following formula:
Tax payable on year-end bonus = Taxable annual bonus amount x Applicable tax rate – Quick
deduction
You can arrive at the applicable tax rate and quick deduction by dividing the bonus figure by 12,
and entering that amount into the“Individual Income Tax Rates and Quick Deductions”table above.
For example, the applicable tax rate for a bonus of RMB 120,000 is 25 percent (RMB 120,000 ÷ 12
months = RMB 10,000).
In most cases, deductions are not permitted to be applied to one’s taxable bonus income, as these
will have already been offset against the individual’s normal monthly salary.
This separate calculation can only be done once a year per individual employee. Any additional
bonuses, such as half-year, quarterly, overtime, senior employee, and work attendance bonuses,
must be considered as part of the employee’s monthly salary.
IIT on Stock Options
Stock options are a type of remuneration where companies that are listed on the stock exchange
give their employees the right to buy stocks in the company. After one year, the options become
exercisable and the employee may buy the shares at the set price. It is a way of compensation that
allows the company’s interests to align with the employee’s.
As with annual bonuses, tax on stock options is calculated separately fromnormal monthly income.
The grant of stock options becomes taxable on the day that 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 the annual bonus, you arrive at
the tax rate and quick deduction by dividing the taxable income by 12.
Taxable income = (Market price of shares - Option price in contract) x Number of shares