Stock Plans in China
(Updated as of August 2023)
Before offering any stock awards to employees in China, companies should thoroughly research their registration and filing requirements. Although it can be costly to comply, noncompliance can be even costlier. Public companies must register their plans with the State Administration of Foreign Exchange (“SAFE”) and establish a bank account for remittances related to the stock plan. In addition, registration with the relevant local tax bureau(s) is required as well as a disclosure document reporting grants and transactions.
Private companies are generally prohibited from offering stock awards, although some SAFE offices allow registration with the understanding that no awards will be settled prior to listing.
Overview of Stock Plans in China
Stock options: No tax on grant. The difference between value at the date of exercise and the exercise price is taxable as salary income upon exercise.
Restricted stock: Generally, taxable at vesting as salary income.
Restricted stock units: Generally, taxable at vesting as salary income.
Performance stock: Generally, taxable at vesting as salary income.
Bonus stock: Taxable upon receipt as salary income.
Stock purchase plans: Any discount is taxable upon receipt as salary income.
Retirement savings plans: If PRC employees were able to participate, which would be unlikely, both employer and employee contributions would be treated as current taxable salary income.
Subject to certain qualifications, special tax treatment may apply to taxable salary income in connection with stock options, restricted stock, restricted stock units, performance stock, and bonus stock where a discount was granted. For qualified taxable income derived from stock-based benefits plans prior to December 31, 2027, such qualified incentive income is not included in the comprehensive income of the current tax year, and tax payable on qualified incentive income is calculated separately from salary income, to effect a more favorable tax result.
The disposition of shares received upon exercise or vesting by China tax residents is generally subject to capital gains tax treatment.
Employers are generally required to act as the withholding agent for individual income taxes on salary income.
A PRC entity, as the employer, should withhold and pay individual income tax on the salary income on behalf of its employees who have been granted stock benefits under the plan of its Parent. Generally speaking, the participating entity is not required to withhold individual income taxes on capital gains realized from the disposal of shares received upon exercise or vesting.
|PRC entities participating in a Parent stock benefit plan must submit plan documents to their local tax authorities in accordance with relevant tax regulations. In addition, reports are typically due at the time of grant and exercise
as well as when the PRC entity withholds and pays taxes on stock-based benefits.|
New plan implementation reporting requirements have recently been introduced that require PRC participating entities to file an Equity Incentive Details Disclosure Form with their local tax authority by the 15th of the month following the date on which a new equity plan is approved, or, for those PRC entities that are participating in a plan for the first time, by the 15th of the month following the date on which a decision is made for the PRC entity to participate in the plan.
SOCIAL SECURITY TAXES
|Both employer and employee must contribute to social insurance funds. However, some local authorities have confirmed that stock-based benefits will not be treated as part of the base for the purpose of calculating the contributions required.|
All public offerings of securities must be approved by the CSRC (China Securities Regulatory Commission). The PRC Securities Law’s definition of public offering includes offerings to “more than 200 specified persons.” However, recent amendments to the Securities Law have clarified that the offer of shares to employees under a stock benefit plan implemented in accordance with the law will not be considered a public offering.
|Exchange control regulations (Circular 7) require the appointment of an onshore agent (usually the local PRC employer) and an offshore agent to assist with implementing stock-based plans. Employees who wish to sell shares must first notify an onshore agent, which in turn causes an offshore agent to execute the buy or sell order. The onshore agent must apply to SAFE to open a dedicated bank account with an onshore bank. Any remittance of currency related to stock-based plans (e.g., sale proceeds) must flow through the dedicated account. The onshore agent must also complete and file specified forms with SAFE on a quarterly basis.|
Labor laws generally prohibit discrimination based on nationality, race, sex, or religious belief, and women’s employment rights must equal those of men.
Although no laws specifically restrict the withdrawal of stock-based benefits, unilateral withdrawal, when done other than in accordance with agreed terms and conditions, could give rise to claims for breach of contract.
Employers generally must make a lump-sum payment to employees terminated under prescribed conditions, following a schedule based on grounds of termination and length of service. It is not clear whether stock-based benefits are included in the base for this purpose under the regulations of most municipalities or provinces in the PRC, but governmental guidance issued by the Shanghai authorities expressly excludes them.
Stamp duty clearly applies for PRC securities, but the application to foreign stock is uncertain; it may depend on the documentation being used.
Foreign companies with representative offices in China (and sometimes even those with subsidiaries in China) obtain the services of PRC nationals through authorized Chinese labor agencies. Such individuals are employees of the agency, not the foreign company. Provision of stock-based benefits can be complicated by the legal nature of the relationship with these individuals.