China moved on Friday to standardize how individuals pay tax on the sale of restricted shares in listed companies, issuing a joint circular that fixes the applicable rate at 20%, tightens the calculation of cost basis, and establishes a unified settlement process for taxpayers.
The rules were published as Announcement No. 26 of 2026 by the Ministry of Finance, the State Taxation Administration and the China Securities Regulatory Commission, dated August 28. They take effect immediately and supersede any prior provisions that conflict with them.
Scope and the 20% rate
Under the new framework, income an individual earns from transferring restricted shares of a listed company is classified as “income from the transfer of property” and is subject to individual income tax at a flat rate of 20%.
The term “restricted shares” covers two categories: the types of locked-up stock already defined in the second article of the 2009 notice on the same subject (Cai Shui [2009] No. 167); and any bonus shares or shares issued through share splits that are generated after the lock-up period expires and for which equity registration is completed after the new announcement takes effect.
When a restricted share undergoes a share dividend, split, or consolidation, the securities depository and clearing institution must adjust the original cost basis in line with the relevant ratio.
Cost basis: a compliance incentive
The announcement places a compliance obligation on listed companies. When applying to the securities depository for the initial registration of shares, a company must submit detailed cost-basis information supplied by individual restricted-share holders, together with an attestation report on that information issued by an accounting firm, tax advisory firm or similar intermediary.
The rules draw a clear distinction between companies that comply and those that do not:
| Timing & Compliance Status | Treatment of Cost Basis |
|---|---|
| After implementation — initial registration handled, but cost basis not declared | Securities institution withholds tax on the full transfer income at 20%; taxpayer may later settle under Article 3. |
| Before implementation — initial registration already completed, cost basis not declared | Securities institution may deem cost basis plus reasonable fees at 15% of transfer income, then withhold; taxpayer settles under Article 3. |
In other words, failing to declare cost basis is punitive: the securities institution may withhold tax on the entire gross proceeds, leaving the holder to claim an adjustment only through subsequent settlement. By contrast, shares registered before the rules took effect and lacking a declared basis receive a presumptive 15% allowance, softening the impact for legacy holdings.
Annual settlement: “pay more if owed, refund if overpaid”
A taxpayer whose actual tax liability — calculated using the real transfer price and real cost — exceeds what the securities institution has already withheld, or whose liability is lower and who applies for a refund, must submit cost-basis documentation to the competent tax authority and complete a settlement declaration by June 30 of the year following the transfer. The process operates on a “pay the difference, refund the excess” basis.
Key facts at a glance
- Issuer: Ministry of Finance, State Taxation Administration, China Securities Regulatory Commission
- Document: Announcement No. 26 of 2026
- Date: August 28, 2026; effective immediately
- Tax rate: 20% (income from transfer of property)
- Settlement deadline: June 30 of the year after transfer
- Legacy allowance: 15% deemed cost basis for pre-implementation holdings
Applicable market and extension to the NEEQ and Beijing Stock Exchange
For the purposes of the announcement, a “listed company” is a joint-stock company whose shares trade on the Shanghai Stock Exchange or the Shenzhen Stock Exchange.
The rules also extend to two related settings. Individuals selling original shares in companies listed on the National Equities Exchange and Quotations (NEEQ) — the New Third Board — pay tax under the same framework. The same applies to original shares in companies listed on the Beijing Stock Exchange.
For a NEEQ company that completed initial registration before the announcement took effect without declaring a cost basis, any original shares that subsequently go public and list on the Beijing Stock Exchange are treated consistently: the securities institution may withhold tax on the basis of a deemed cost basis and reasonable fees equal to 15% of the transfer income, with settlement to follow under Article 3.
What changes
The practical shift is one of consistency and enforcement. By linking the withholding mechanism directly to whether a company has declared cost basis at initial registration — and by assigning a full-gross-withholding default to post-implementation non-compliance — the authorities create a strong incentive for accurate record-keeping at the point shares first enter the system. The 15% deemed-cost provision, meanwhile, offers a specific carve-out for older holdings whose basis was never documented.
The settlement mechanism rounds out the design: withholding is an interim step, while the annual declaration by June 30 is where the final liability is reconciled against the taxpayer’s actual figures.