(Yicai Global) Jan. 17 -- China announced today that two capital market-related preferential policies on individual income tax will be extended for another year to help firms cultivate talent and open up the Chinese mainland market.

The policy of separate taxation of equity incentives for listed companies, which expired at the end of last year, will continue until the end of this year, according to the Ministry of Finance. It means the incentives will not be included in taxpayers’ comprehensive annual income, but will be taxed separately, thereby reducing the marginal tax rate.

China implemented a new personal income tax system in 2019. It combines various incomes, including wages and labor remuneration, and calculates tax on an annual basis at seven progressive rates from 3 percent to 45 percent. The maximum rate is applied to the portion of annual income exceeding CNY960,000 (USD141,984).

To encourage corporate innovation and talent development, the Chinese government decided to temporarily exclude equity incentives of listed companies from comprehensive income when implementing the new tax system. The exemption has been rolled over several times since then.

Compared with developed countries, China’s personal income tax regime is more favorable to ordinary wage earners, Tian Zhiwei, vice president of Shanghai University of Finance and Economics’ public policy and governance institute, told Yicai Global.

But the tax burden is high for management and high-tech talent, Tian added, so rolling out separate taxation for equity incentives can narrow the talent-attraction gap with developed countries and is conducive to national scientific and technological progress.

Investment income earned by individual Chinese mainland residents investing in Hong Kong-listed stocks and trading Hong Kong funds through the Stock Connect program will continue to be exempted from income tax this year, the ministry added. This policy is mainly intended to match Hong Kong’s capital gains tax exemption.

Editors: Dou Shicong, Peter Thomas