In the current business scenario that is extremely competitive, it is imporatant to retain talented professionals. It is noted that foreign companies in China often offer their best employees with stock options and shares as a form of remuneration. This practice is called Share Incentive Plan that is quite an effective way to keep the finest resources with the organization for a long period of time and appreciating their service and dedication. Foreign listed multinationals have always sought to grant rights to their foreign listed shares as part of their employee share and option plans in China.
A share incentive plan (SIP) is a tax-advantaged savings vehicle under which shares are held by a trustee on behalf of an employee under the terms of a special type of employee benefit trust. All employees and executive directors must be eligible to participate in the plan provided that certain criteria are met. There are a number of tax advantages for the employer and employee available.
The Wide-Ranging Benefits of SIP-
- SIP helps to align employee and shareholder interest
- Incentivizing staff without any immediate cash flow requirement
- SIP is an excellent way to encourage staff loyalty
- Reaping the financial rewards due to income tax and capital gains tax treatment
The SIP works by keeping the shares in a trust until the employee leaves their job or takes the shares from the plan. The plan itself uses a trust structure. An employee trust will purchase, or subscribe for, the shares to be used for the purposes of the plan, and will hold the shares on behalf of the participants. The shares must be kept in the plan trust for a specified number of years to yield the full tax benefits.
Types of SIP are:
- Free Shares
- Partnership Shares
- Matching Shares
- Dividend Shares
A foreign listed company can offer SIPs to its PRC subsidiary’s employees in China via an incentive plan. The incentive plan must be registered with the local SAFE office where the foreign company’s domestic agent is located. The Domestic Agency must engage a domestic Chinese financial institution qualified for foreign asset management and foreign securities exchange to purchase and sell the employee’s stock under the stock incentive plan. The Domestic Agency must engage a qualified foreign bank to act as a custodian for the stock held by the employee under the stock incentive plan.
For a non-public joint-stock company, in order to get shares to be provided as incentives, it needs to repurchase shares or cause transfer of shares, or it may launch a private placement to incentive receivers. The current PRC tax laws treat non-listed and listed companies differently in regard to the IIT treatment of income derived from equity incentive plans.