EMPLOYEE STOCK PURCHASE PLANS

EMPLOYEE STOCK PURCHASE PLANS: EMPLOYMENT

Labor Concerns

The requirement that employers in China remunerate employees in cash only, rather than in negotiable securities, is unlikely to be problematic, provided that purchase rights are clearly designated as bonuses paid alongside regular cash wages.

Communications

The translation of Plan documents is recommended but not required. Government filings must be in Mandarin.

EMPLOYEE STOCK PURCHASE PLANS: REGULATORY

Securities Compliance

There are generally no specific laws or regulations that address equity incentive programs offered by foreign issuers to their Chinese resident-employees. As an exception, the Securities Law applies to all entities engaged in the issuance of securities in China. Under the Securities Law, if securities are issued to more than 200 specified persons, the issuance may constitute a "public offering" of securities.

A "public offering" is subject to approval from the China Securities Regulatory Commission (the "CSRC Approval"). However, there is currently no formal process in place to obtain CSRC Approval for stock-based equity awards issued by a foreign company to its Chinese resident employees.

Foreign Exchange

Operating the Plan in China is likely to require the approval of the State Administration of Foreign Exchange ("SAFE"), which operates a specific regime dealing with the withdrawal, outflow and conversion of foreign currencies in relation to equity-based compensation plans. The regime will involve the Subsidiary or another agent establishing a special onshore account through which all Plan-related payments must be made. Obtaining approval for the Plan may be time-consuming and costly, with many documents requiring translation. Following the initial approval, quarterly reports are required on the status of the Plan.

Data Protection

It is recommended that an employer discloses its data processing activities to all employees and obtains employee consent prior to transferring his or her personal data outside of China.

EMPLOYEE STOCK PURCHASE PLANS: TAX

Employee Tax Treatment

Employees are subject to income tax on the spread on purchasing the Stock. Such employees are also subject to individual income tax on the gain realized from the sale of the Stock.

Social Insurance Contributions

Income from the exercise of purchase rights may be subject to social insurance contributions, including the Unified Pension Fund, depending on the practice and position taken by the local labor and social insurance bureau.

Tax Favored Program

In certain circumstances, employees may be able to defer the payment of tax upon approval from the local tax authorities over a period of up to six months.

Withholding and Reporting

If the Subsidiary is involved in the offer of benefits to its employees, and is charged for the related costs incurred, it is likely withholding and reporting are required.

Employer Tax Treatment

The Subsidiary should be able to claim a deduction for the reasonable costs it incurs due to its involvement in the Plan, provided the recipients are employees of the Subsidiary and those costs are related to its business operations.

Tax Rates

Individual income tax on employment income, including the spread on purchasing the Stock, is calculated on a monthly basis at marginal progressive rates ranging from 3% to 45%.

Social security and housing fund contributions should be made by the employer and employee on a monthly basis, calculated based on the employee's average monthly salary received during the past twelve months, including benefits enjoyed under the equity incentive programs. The income base for calculation is subject to a ceiling which is usually equivalent to three times the average monthly income of the local city for the last year. As an example, the prevailing ceiling for Beijing for 2016 is RMB 21,258.

Any gain made on the sale of shares is taxed at a rate of 20%.

RESTRICTED STOCK and RSUs

RESTRICTED STOCK and RSUs: EMPLOYMENT

Labor Concerns

The requirement that employers in China remunerate employees in cash only, rather than in negotiable securities, is unlikely to be problematic, provided that restricted stock or RSU awards are clearly designated as bonuses paid alongside regular cash wages.

Communications

The translation of Plan documents is recommended but not required. Government filings must be in Mandarin.

RESTRICTED STOCK and RSUs: REGULATORY

Securities Compliance

Provided that the restricted stock and RSUs are granted to a limited number of employees of the same company for no cost and are not assignable by the employees, then the receipt of restricted stock or RSUs, as a matter of current practice by the China Securities Regulatory Commission (the "CSRC"), should not be subject to Chinese securities regulatory formalities.

Under the Securities Law, if securities are issued to more than 200 specified persons, the issuance may constitute a "public offering" of securities, which is subject to approval from the CSRC (the "CSRC Approval"). Therefore, if a foreign company issues stock-based equity awards to a large number of Chinese employees, such awards may be subject to the CSRC Approval. However, at present, there is no formal process in place to obtain such CSRC Approval for the issuance of stock-based equity awards issued by a foreign company to its Chinese resident-employees.

Foreign Exchange

Operating the Plan in China is likely to require the approval of the State Administration of Foreign Exchange ("SAFE"), which operates a specific regime dealing with the withdrawal, outflow and conversion of foreign currencies in relation to equity-based compensation plans. The regime will involve the Subsidiary or another agent establishing a special onshore account through which all Plan-related payments must be made. Obtaining approval for the Plan may be time-consuming and costly, with many documents requiring translation. Following the initial approval, quarterly reports are required on the status of the Plan.

Data Protection

It is recommended that an employer discloses its data processing activities to employees and obtains its employees' consent prior to transferring their personal data outside of China.

RESTRICTED STOCK and RSUs: TAX

Employee Tax Treatment

Employees will be subject to tax on the fair market value of the Stock, which is taxed as employment income, when the restricted stock or RSU award vests. Such employees are also subject to Chinese income tax on the gain realized from the sale of Stock.

Social Insurance Contributions

Income from the restricted stock or RSUs may be subject to social insurance contributions, including the Unified Pension Fund, depending on the practice and position taken by the local labor and social insurance bureau.

Tax Favored Program

Under current PRC tax rules, it is understood that the proceeds derived from the vesting of RSUs are treated as employment income and can be taxed separately from monthly salary income and therefore a lower marginal tax may apply to the equity based gains subject to certain registration requirements with the local tax bureau. If the Subsidiary fails to comply with these registration requirements, any income related to RSUs will be taxed together with the participant's salary for that month so that participants will potentially be taxed at a higher marginal tax bracket on the total proceeds.

Withholding and Reporting

If the Subsidiary is involved in the offer of Plan benefits to its employees and is charged for the related costs incurred, the Subsidiary shall withhold and pay the relevant individual income tax and file individual income tax returns with the tax authorities when the restricted stock or RSU award vests. Upon the implementation of the Plan, the Subsidiary may also be required to submit the Plan to the local tax bureau.

Employer Tax Treatment

The Subsidiary is likely to be eligible for deduction of any reasonable costs that it incurs due to its involvement in the Plan, provided the recipients are employees of the Subsidiary and those costs are related to its business operations.

Tax Rates

Individual income tax on employment income, including income from RSUs vesting, is calculated on a monthly basis at marginal progressive rates ranging from 3% to 45%.

Social security and housing fund contributions should be made by the employer and employee on a monthly basis, calculated based on the employee's average monthly salary received during the past twelve months including benefits enjoyed under the equity incentive programs. The income base for calculation is subject to a ceiling which is usually equivalent to three times the average monthly income of the local city for the last year. As an example, the prevailing ceiling for Beijing for 2016 is RMB 21258.

Any gain made on the sale of shares is taxed at a rate of 20%.

STOCK OPTIONS PLANS

STOCK OPTIONS PLANS: EMPLOYMENT

Labor Concerns

The requirement that employers in China remunerate employees in cash only, rather than in negotiable securities, is unlikely to be problematic, provided that options are clearly designated as bonuses paid alongside regular cash wages.

Communications

The translation of Plan documents may be required (see "Withholding and Reporting" below). Government filings must be in Mandarin.

STOCK OPTIONS PLANS: REGULATORY

Securities Compliance

At present, there are no specific laws or regulations that address equity incentive programs offered by foreign issuers to their Chinese resident-employees.

The only exception is the Securities Law. This applies to all entities engaged in the issuance of securities in China. If the securities are issued to more than 200 specified persons, the issuance may constitute a "public offering" of securities.

A "public offering" is subject to approval from the China Securities Regulatory Commission (the "CSRC Approval"). However, in practice there is currently no formal process in place to obtain CSRC Approval for stock-based equity awards issued by a foreign company to its Chinese resident employees.

Foreign Exchange

Operating the Plan in China is likely to require the approval of the State Administration of Foreign Exchange ("SAFE"), which operates a specific regime dealing with the withdrawal, outflow and conversion of foreign currencies in relation to equity-based compensation plans. The regime will involve the Subsidiary or another agent establishing a special onshore account through which all Plan-related payments must be made. Obtaining approval for the Plan may be time-consuming and costly, with many documents requiring translation. Following the initial approval, quarterly reports are required on the status of the Plan.

Data Protection

It is recommended that an employer discloses its data processing activities to employees and obtains employee consent prior to transferring his or her personal data outside of China.

STOCK OPTIONS PLANS: TAX

Employee Tax Treatment

Employees are subject to income tax on the spread, as employment income, on exercise. As taxable employment income received through a Plan is taxed separately from regular monthly employment income, it may be taxed at a lower marginal tax bracket. Employees are also subject to income tax on the gain realized from the sale of Stock.

Social Insurance Contributions

Income from the exercise of options may be subject to social insurance contributions, depending on the practice and position taken by the local labour and social insurance bureau.

Tax Favored Program

Under current PRC tax rules, the proceeds derived from the exercise of stock options are treated as employment income and can be taxed separately from monthly salary income and therefore a lower marginal tax may apply to the equity based gains, subject to certain registration requirements with the local tax bureau. If the Subsidiary fails to comply with these registration requirements, any income related to options will be taxed together with the participant's salary income for that month so that participants will potentially be taxed at a higher marginal tax bracket on the total proceeds.

Withholding and Reporting

For Issuers offering options through Plans implemented on or after 1 July 2005, withholding and reporting obligations apply on taxable employment income arising on the exercise of options.

These obligations apply if the Subsidiary is involved in implementing the Plan. The Issuer is required to translate into Mandarin and submit the following documents (wherever applicable) to the local tax bureau:

  • rules of the relevant Plan;
  • option agreement;
  • grant notice;
  • exercise notice; and
  • exercise adjustment notice.

The penalty for non-compliance is a monetary fine (of approximately US$250- US$1,200). Upon the exercise of options, the employer must withhold and pay the relevant individual income tax and file individual income tax returns with the tax authorities as the withholding agent. Failure to file and pay taxes is subject to penalty ranging from 50% to 3 times the tax due.

Employer Tax Treatment

The Subsidiary is likely to be eligible for a deduction of the reasonable costs that it incurs due to its involvement in the Plan, including the option value charged back to the Subsidiary. The Subsidiary may qualify for the deduction provided the recipients are employees of the Subsidiary and those costs are related to its business operations.

Tax Rates

Individual income tax on employment income, including income from the exercise of options, is calculated on a monthly basis at marginal progressive rates of between 3% and 45%.

Social security and housing fund contributions should be made by the employer and employee on a monthly basis, calculated based on the employee's average monthly salary received during the past twelve months including benefits enjoyed under the equity incentive programs. The income base for calculation is subject to a ceiling which is usually equivalent to three times the average monthly income of the local city for the last year. As an example, the prevailing ceiling for Beijing for 2016 is RMB 21,258.

Any gain made on the sale of shares is taxed at a rate of 20%.