Macau Professional (Salaries) Tax: Guidelines on employers' and employees' obligations and taxability of share option benefits 

In brief
   
The current Macau Professional Tax Law, which governs the taxation of employment income and income from self-employment, has been effective since 1978.  The Law has not been significantly modified to cope with the rapid change in economic environment during the past decades.  Since the opening of Macau gaming industry a few years ago, share option benefit is not new in Macau.  Those foreign based gaming concessionaries have regularly offered share options to their Macau based employees to acquire shares of their listed parent companies or affiliates.  It has been a common misunderstanding that share option benefit is not taxable nor reportable under the current Professional Tax Law as current Professional Tax Law has not clearly stated that share option benefit is taxable and Macau Finance Bureau ('MFB') has not issued any guideline to stipulate employers' reporting obligations.  Nevertheless, we understand it has been the MFB's point of view that share option benefit is taxable as non-cash employment income under the current Professional Tax Law.
   
In order to eliminate the misunderstanding, the MFB issued Circular No. 02/Dir/2009 - Taxability of Employee Share Option Gain ('the Circular') on 7 January 2009.  The Circular outlines the MFB's view on taxability of share option benefit and specifies employers' and employees' reporting obligations in respect of the grant, exercise, sale and relinquishment of share options.
   
Taxability of share option benefit
   
The MFB's view is that share option benefit derived from exercise, sale or relinquishment of share options under an employment in Macau would be considered an employment income.  Hence, the share option benefit should be taxable as employment income pursuant to Article 3(1) of the Professional Tax Law.
   
Taxable amount of the benefit derived from the exercise, sale, and relinquishment of share options would be calculated as follows:

	Share option relinquishment
	Taxable amount = Amount received from employer for relinquishing the share options minus cost paid to acquire the share option
	The MFB reserves the right to adjust the taxable amount if the consideration for share option sale or relinquishment is considered as unreasonable and the market value of shares acquired from share option exercise is not available.
	If an employee has worked for an overseas affiliate during the period from date of grant to date of vest, the taxable amount would be calculated as follows:

Dividends received and capital gain derived from sale of shares acquired from share option exercise would not be subject to Professional Tax.
   
Generally speaking, share option benefit would be subject to Professional Tax in the tax year in which a share option is exercised, sold, or relinquished.  If an employee terminates an employment and the employee could have the rights to the share options after the termination of employment, the MFB could assess Professional Tax on the value of the share options at the time of the termination of employment.
   
Employers' reporting and withholding obligations
   
An employer is required to report details of share options granted to an employee to the MFB within 30 days from the date of grant.  An employer is also required to report details of share options exercised, sold, and relinquished by an employee to the MFB within 30 days from the date of exercise, sale, and relinquish.  In addition to these reporting requirements, an employer is required to withhold Professional Tax at an appropriate rate from share option benefit if an employee exercises a share option.  The amount of share option benefit received by employees is also required to be included in the annual Professional Tax return - M3/M4.
   
Employees' reporting obligations
   
An employee is normally not required to file an annual Professional Tax return - M/5 if the employee has only one employment and he/she has not derived any other income, which would be subject to Professional Tax, from other sources.  Pursuant to the new requirements stipulated in the Circular, an employee, who exercises, sells, or relinquishes a share option, is required to file the annual Professional Tax return to report the amount of share option benefit.  If an employee terminates his/her employment, the employee is required to file the M/5 with the MFB to report the amount of share option benefit derived in the year and the amount of share option benefit that could be derived from the outstanding share options which have not been exercised, sold, or relinquished.  The return would be due within 30 days before the date of termination of employment.
   
PwC's observation
   
Normally, a share option plan is administrated by an employer's overseas headquarter.  The local management may have no access to the information required to fulfill the employers' reporting and withholding obligations.  As such, employers should review current compensation and benefits ('C&B') reporting process carefully and determine if current reporting process is required to be modified to meet the new reporting and withholding requirements.
   
It is our understanding that the above-mentioned reporting and withholding requirements, as stated in the Circular, would be enforced by the MFB for the tax year 2009 and onwards.  However, it is also in the MFB's view that, which is consistent with the spirit of the current Professional Tax Law, the share option benefit would be subject to Professional Tax.  As such, employers may need to review their internal C&B records if their employees have exercised share options during the past 5 years (statute period of limitation) and determine if certain actions should be taken to assist their employees to report the under-reported share option income.  Moreover, employers should ensure that they are complying with the reporting obligations for the tax years 2009 and onwards.
   
The information contained in this publication is of a general nature only.  It is not meant to be comprehensive and does not constitute legal or tax advice.  PricewaterhouseCoopers (Macau) Limited ('PwC') has no obligation to update the information as law and practice change.  The application and impact of laws can vary widely based on the specific facts involved.  Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PwC service team or your other advisors.
    
The materials contained in this publication were assembled in February 2009 and were based on the law enforceable and information available at that time.