Global Share Option Plans
China
Securities laws and regulation
Exchange control
Company law
Employment law
Plan communications
Data protection
Governing law
Tax treatment
Non-employee options
Other
Securities laws and regulation
Red flags
What are the key securities laws and regulatory obligations or restrictions in relation to granting options, exercising options, selling resulting shares or other relevant events? For example, would a prospectus or any filings be required?
Response
There are no specific requirements in securities laws or regulations addressing share option programmes offered by a foreign company to its Chinese employees (which is currently the most popular form offered by international companies).
For an onshore scheme (ie a scheme offered by a Foreign Invested Enterprise, which is not yet as popular but is becoming increasingly popular), regulatory obligations or restrictions mainly apply to schemes offered by public companies and state-owned companies.
Exchange control
Red flags
Are there any exchange control restrictions, notification/filing, or approval requirements related to the exercise of options or sale of shares?
Response
State foreign exchange control applies, and an employee of a Chinese subsidiary is only allowed to participate in an offshore share-based scheme where the offshore provider is a public company.
Participation must be registered with the State Administration of Foreign Exchange and is subject to regular reporting.
Company law
Red flags
Are there any red flag company law and corporate governance considerations, for example, shareholder approval requirements or financial assistance restrictions?
Response
There are generally no company law or corporate governance concerns related to granting options.
Employment law
Red flags
Are there any material employment law issues to be aware of, for example the requirement to consult employees?
Response
There are no specific requirements from an employment law perspective in relation to the grant, vesting or exercise of options or the sale of the resulting shares.
Plan communications
Red flags
Are there any requirements for the communications, for example, a translation into any language(s), and if so, which?
Response
A Chinese version of the option plan, award agreement and/or other related documents will be required by the State Administration of Foreign Exchange for foreign exchange registration of an offshore share incentive plan offered by an overseas listed company.
Data protection
Red flags
What are the key data protection requirements, if any?
Response
Transparency requirements apply and the employees should be informed of how their personal information is collected, processed and disclosed. It is also very likely that the so-called ‘separate consents’ from the employees participating in the plan will be required in this context.
Other data protection obligations will also apply, including but not limited to technical security measures, transfer impact assessments, record keeping and regular audits.
Governing law
Red flags
Will governing law and jurisdiction clauses be effective?
Response
Foreign law governing is feasible while Chinese courts may still claim jurisdiction over local matters such as an employment dispute.
Tax treatment
Red flags
What is the tax and social security treatment (including other employee and employer levies)? Are there any red flag issues, for example tax on grant, filings or notifications?
Response
Generally, there are no tax implications at the time of grant or vesting, while individual income tax will be due on exercise.
Tax-favoured plans (applicable to onshore schemes only): Subject to registration with the local tax bureau and meeting certain criteria as described in the relevant regulations, corresponding preferential tax treatment may be available.
Where available, for companies listed on SH, SZ and BJ Stock Exchanges, this preferential tax treatment would allow income from incentive plans to be taxed separately from the employee's salary and be spread over a maximum of 36 months to calculate the applicable tax rate. For other onshore companies, tax can be deferred until the equity is transferred and be taxed at a flat rate of 20%.
Non-employee options
Red flags
Are there any issues with granting options to non-group employees, eg advisers/consultants or PEO employees?
Response
Generally, it is not feasible to grant options to non-employees and cash-based schemes are more flexible.
Other
Red flags
Are there any other red flags, for example, is a sub-plan required?
Response
A specific review is required on a case-by-case basis to determine any red flags or whether a sub-plan is required.
