Employee Stock Options in China: Legal Guide

Offering stock options to employees in China involves complex legal, tax, and foreign exchange considerations. Here's what companies and employees need to know.

Types of Equity Compensation

Stock Options

• Right to purchase shares at set price
• Vesting period typically required
• Exercise triggers tax obligations

Restricted Stock Units (RSUs)

• Promise of shares upon vesting
• No purchase required
• Taxed at vesting

Employee Stock Purchase Plans (ESPP)

• Discounted share purchases
• Regular payroll deductions
• Tax treatment varies

SAFE Registration Requirements

When Required

• Employees of China subsidiaries
• Receiving equity in overseas parent
• Applies to most multinational plans

Registration Process

1. Domestic agent (usually WFOE) applies
2. Submit plan documents and employee list
3. Open special foreign exchange account
4. Annual reporting requirements

Consequences of Non-Registration

• Employees cannot legally remit funds
• Cannot receive sale proceeds in China
• Potential penalties for company

Tax Implications

For Employees

• Grant: Generally no tax
• Vesting/Exercise: Taxed as employment income
• Sale: Capital gains tax may apply

Tax Rates

• Employment income: up to 45%
• Special calculation method available
• Can spread income over 12 months

Withholding Obligations

• Employer must withhold and remit
• Report to tax authorities
• Penalties for non-compliance

Common Issues

For Companies

• SAFE registration delays
• Withholding calculation complexity
• Currency conversion restrictions
• Reporting requirements

For Employees

• Unable to exercise without SAFE registration
• High tax burden at exercise
• Difficulty repatriating proceeds
• Leaving company before vesting

Best Practices

• Complete SAFE registration before grants
• Clear communication with employees
• Proper tax withholding procedures
• Regular compliance reviews
• Consider China-specific plan modifications