It is increasingly common for multinational corporations (“MNCs”) to offer equity-based incentive benefits to employees based in different countries, including China, to recruit and retain the best talent. To implement employee incentive plans in China, MNCs must comply with China's foreign currencies, taxation, and other related laws and regulations, which remain complicated and challenging.
Last year saw some important changes—some local offices of the State Administration of Foreign Exchange (“SAFE”) adopted a more business-friendly practice for MNCs to register their incentive plans in China, and the PRC State Taxation Administration (“STA”) tightened up its income tax collections in relation to equity incentive plans.
MNCs should adapt to the new changes to ensure that their employees can enjoy the benefits without unexpected compliance issues.
Before Implementing Incentive Plans
In China, providing awards in foreign currencies to employees will be subject to SAFE's regulation. For a MNC listed on a stock exchange outside of China, it is required to register the incentive plan(s) with SAFE through its subsidiary in the form of a foreign invested entity (“FIE”) in China, before offering equity awards to employees in China.
Prior to the initial filing for the SAFE registration, the MNC should consider, among others, i) the form and structure of the incentives in China; ii) the employees eligible to the plan; and iii) the employers of these eligible employees involved in the plan, as SAFE will focus on these questions during its review. The MNC will need to have its global team work closely with the FIE to come up with a practical approach. For instance, some MNCs would use common forms of incentives (e.g., stock options, RSUs, stock appreciation rights) for their employees in China that are familiar to, and are more likely to be approved by, SAFE.
In addition to foreign exchange regulations, the FIEs granting awards to employees are also subject to tax filing under PRC tax laws. For example, the FIEs are obligated to withhold individual income tax (“IIT”) for their employees who receive equity awards. However, the amount of IIT to be withheld is computed based on the specific form of incentives. The employees who are granted stock options will be subject to different IIT computation rules compared with the rules for those receiving RSUs.
In October 2021, the STA imposed a new requirement on employers—companies need to file an information reporting form within a limited time period to the local tax authority once the decision of implementing the equity plans has been made. This is a new requirement for MNCs in the early stage of initiating an incentive plan in China.
To Stay Compliant When Implementing Plans
A FIE that has obtained SAFE approval will be subject to further requirements from SAFE—it shall apply for the annual quota of funds to flow out of China prior to any remittance under the plan, and make quarterly filings to SAFE with the fund flow related data. In practice, some local counterparts of SAFE have started to require companies to apply for the quota based on their actual needs rather than a yearly basis, which is considered to be more business-friendly.
Further, SAFE requires any material changes to the initial registration, such as any revisions to the original plan, M&A transactions of the MNCs, or a change of broker, to be reported and filed with SAFE within 3 months from the date of such changes. Any violations of such requirements will not only impact the fund transfer under the incentive plan, but may also incur penalties upon the MNCs. STA, on the other hand, normally focuses on income tax of the individuals with respect to the incentive plans, and the employers must routinely withhold the relevant amount for those employees based on the actual grants.
In conclusion, it is important for MNCs to keep track of changes and new requirements for implementing equity incentive plans at different stages in China, to ensure compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.