How Foreign Companies Can Implement SIP in China

Approved Employee Share Ownership Plans (AESOPs) today better known as Share Incentive Plans or SIPs was introduced to encourage the existing employees of an organization at all levels to acquire shares in the company. Share incentive plans (Sips) are a low-cost way to boost employee engagement by inviting staff to become shareholders in their organization, and provide a useful workplace savings vehicle.

What Exactly Share Incentive Plans is

Your employer can give you up to 2 free matching shares for each partnership share you buy. You may be able to buy more shares with the dividends you get from free, partnership or matching shares but only if your employer’s scheme allows it. No tax is payable on dividends that are then reinvested into further shares, subject to limits. An SIP is an all-employee scheme, and must therefore be offered to all employees on the same terms. A period of qualifying employment of up to 18 months may be possible.

Types of share can be used in an SIP-

  • Free Shares
  • Partnership Shares
  • Matching Shares
  • Dividend Shares

Share Incentive Plans in China-

PRC citizen employees participating in a foreign company’s SIP come from the Circular on Foreign Exchange Administration of Domestic Individuals Participating in Share Incentive Plans of Foreign Listed Companies [2012] No.7 (“Circular 7”, issued by the State Administration of Foreign Exchange (“SAFE”). This notice clarified the procedural requirements on SAFE registration of share-based incentive plans previously stipulated by Circular Huizongfa (2007) No.78 (“Circular [2007] 78”). This article sets out the key points of Circular [2012] 7, as well as certain accounting and tax issues still faced by companies in China offering share-based incentive plans to Chinese employees.

In regard to the IIT treatment of income derived from equity incentive plans, the existing PRC tax laws treat non-listed and listed companies in a different way. Taxable income of a participant shall include cash and non-cash income; therefore individuals will be subject to IIT when they receive cash or equity income from equity incentive plans. Employees are exempt from paying income tax and national insurance (NI) contributions on Sip shares as long as the shares remain in the Sip for a minimum of five years.

A foreign company with a concrete plan to become publicly listed in the near future can enter into an agreement with its employees in China to offer stock option or other awards. Foreign enterprises wishing to evaluate their current stock incentive plans in the peoples republic of China or those that want to implement such plans to remain competitive, must look for legal counsel in order to remain compliant with Chinese law.

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