Can a foreign company offer share options for its shares to the PRC employees employed by its related PRC incorporated company?

Yes, it can. However, it has to obtain the approval from the relevant PRC foreign exchange authority and follow the required filing process with the relevant PRC tax authority.

In 2008, P&G was the first to be approved as a foreign company to implement its share options scheme in China.

What application process must be followed?

A foreign company must submit an application (on behalf of the PRC employees) to the local State Administration of Foreign Exchange ("SAFE") (through its PRC entity or a domestic agency) on a yearly basis for approval of a certain amount of foreign exchange to be purchased or sold by the employees for the exercise of their rights under the share options scheme.

What filing process must be followed?

The PRC entity (or the entrusted agency) is required to file the proposed share options scheme and other related documents with the local tax bureau before it is implemented.

In addition, before the employees exercise their rights under the scheme, the PRC entity (or the entrusted agency) is also required to file the exercise notice and other related documents with the local tax bureau.

What are some other issues associated with the implementation of a share options scheme in China?

It is unclear under the PRC law whether the income realised by an employee under an employee share options scheme will be treated as salary.

If the income is regarded as salary, an employee’s realisation of his or her share options scheme will affect the salary related calculations such as contribution basis for social insurance and severance pay.

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