Tax on discount at purchase.
*Notice 35 treatment generally not available for ESPP. If Notice 9 tax treatment is applied to the taxable amount as annual bonus (limited to once every year), tax may be calculated under a favorable formula which generally results in reduction of taxation.
However, not all tax bureaus allow favorable treatment under Notice 9 for ESPP. Further, Notice 9 is set to expire on 31 December 2027.
Tax on sale.
Income Tax
Withholding and reporting required at the taxable event.
Social Insurance Contribution
Although uncertain, social insurance contributions are likely not required.
Offers of listed shares under an employee share plan will not be deemed to be a public offering.
Offers of unlisted shares technically require approval from the China Securities Regulatory Commission ("CSRC") is required as a technical matter, but compliance is not feasible due to current lack of procedures.
Under Circular 7 issued by the Central Bank and State Administration of Foreign Exchange (SAFE), non-PRC public companies granting equity awards to PRC employees must register plan with local SAFE office where PRC entity is located.
Such companies must ensure all funds related to stock plan (e.g., sale proceeds, dividends) are repatriated to China and must establish a special onshore bank account approved by SAFE through which all such funds are funneled.
Once registration is completed, quarterly reporting requirements apply in most provinces.
In addition, companies must request approval for an outbound quota which establishes the maximum amount that can be sent out of China through the approved onshore bank account to purchase shares.
Finally, an amendment registration is required within 3 months of any material change (e.g., new/amended plan). Shorter deadlines may apply in certain circumstances.
Interpretations of Circular 7 by local SAFE offices are inconsistent and change frequently.
Please contact Baker McKenzie for details.
NOTE: Non-PRC private companies cannot register their equity plans pursuant to Circular 7.
Labor law regulations prohibit PRC employers from making deductions from employees' salaries unless authorized under law; therefore, payroll deductions are technically problematic.
However, these restrictions are unlikely to be enforced in the context of an ESPP. The risk may be reduced if employees expressly consent to payroll deductions, and it is made clear that the ESPP contributions do not reduce overall remuneration.
Generally not, if the right to modify or terminate is stated in the plan and employees agree to such terms in writing.
Regulations require that part-time employees be given benefits based on the number of hours they work. This could be interpreted to apply to participation in an equity plan.
There is a risk that equity awards could be deemed a payment of wages "in-kind" or in "negotiable securities," thereby constituting an illegal payment of wages in China.
However, it is unlikely that local labor authorities would object to the issuance of equity awards or stock under an employee stock plan, which are in the form of bonuses and are in addition to regular wages.
A valid basis is required to collect, process and transfer personal data.
The Personal Information Protection Law of the PRC (PIPL) became effective on 1 November 2021 and introduced new requirements. In February 2023, the Cyberspace Administration of China (CAC) released the final version of the Standard Contractual Clauses (SCCs) and SCC Measures for the cross-border transfer of personal data under the PIPL. As an alternative to the SCCs, organizations may instead be subject to a security assessment by the CAC or certification by designated institutions, depending on certain facts.
Accordingly, companies should review their approach to data privacy compliance in the context of equity plan administration, consider on which basis they may be able to rely to collect, process and transfer data and assess whether a security assessment or certification is required.