Foreign Exchange Compliance | In-Depth Analysis of Foreign Employees Participating in Equity Incentive Plans of Domestic Listed Companies

As Chinese companies continue to expand into international markets, the recruitment and incentivization of foreign employees have garnered widespread attention among domestic firms, particularly those listed on the stock market. In recent years, regulations and policies related to equity incentives for foreign employees in listed companies have been gradually relaxed and improved.

Regulatory Policy Evolution:

In the early 2006 version of the "Management Measures for Stock Incentives of Listed Companies (Trial)", there was no specific provision regarding foreign employees' participation in equity incentives for domestic listed companies. While foreign employees were not explicitly included in the scope of eligible participants, they were also not explicitly excluded. However, in practice, due to the inability of foreign individuals to open A-share securities accounts, they were unable to participate in equity incentives.

On August 13, 2016, the "Management Measures for Stock Incentives of Listed Companies" was officially implemented, and equity incentives for foreign employees of listed companies were limitedly relaxed. Foreign employees working in China, serving as directors, senior management personnel, core technical or business personnel of listed companies, could become eligible for incentives. Foreign employees participating in the company's equity incentives could open securities accounts, but the accounts were only allowed for holding or selling equity incentive rights and not for engaging in other securities trading activities.

On August 15, 2018, the China Securities Regulatory Commission announced the amendment of the "Management Measures for Stock Incentives of Listed Companies," expanding the scope of eligible foreign employees for equity incentives from those working in China to all foreign employees. The commission also modified the "Measures for the Administration of Securities Registration and Settlement," adding "qualified foreigners" as one of the investor categories, allowing foreign natural persons working overseas to open A-share securities accounts.

On February 12, 2019, the People's Bank of China and the State Administration of Foreign Exchange jointly issued the "Notice on the Issuance of the Management Measures for Foreign Employees' Participation in Equity Incentives of Domestic Listed Companies" (hereinafter referred to as the "Fund Management Measures"). The notice clearly stipulated cross-border receipts and payments, fund transfers, and foreign exchange transactions for foreign employees participating in equity incentives, resolving a critical issue in implementing equity incentives for foreign employees of domestic listed companies.

Specific Operational Procedures:

Regarding specific operational procedures, equity incentives for foreign employees should be handled by domestic listed companies that uniformly implement registration. After the announcement of the equity incentive plan, listed companies should register foreign employees who wish to participate in the equity incentive plan within 30 days at the local branch of the State Administration of Foreign Exchange or the foreign exchange department.

Required materials include a written application, registration form, proof of the authenticity of the equity incentive plan, commitment letter from foreign employees, and employment or labor relationship with the company. After the local foreign exchange bureau verifies the materials, they will issue relevant business registration certificates for domestic listed companies to handle cross-border receipts and payments, fund transfers, and foreign exchange transactions. Foreign employees can handle related matters with a copy of the business registration certificate.

The funds required to participate in the equity incentive plan can be sourced by foreign employees from their legal income in China or remitted from overseas to China. If the funds are remitted from overseas, foreign employees should remit the funds to the domestic listed company's account or their personal bank settlement account. If foreign employees use funds in their domestic and foreign currency accounts, they should convert the funds into the domestic account after settlement. After the bank reviews the business registration certificate, they will handle the account entry or settlement entry procedures based on the relevant control information table of the National Foreign Exchange Administration's capital project information system.

Other Matters after Equity Incentives:

After participating in the equity incentives, foreign employees should handle the remittance or transfer of funds from the sale of stocks or equity incentive dividends to their overseas accounts at the bank. The required materials include the business registration certificate, foreign employee identification, and documents from securities companies proving the foreign employees' domestic transactions under the equity incentive or dividends entered into the securities account.

If domestic listed companies receive funds from foreign employees' remittances for participating in the equity incentive plan, but the conditions for unlocking restricted stocks or exercising stock options are not met, the domestic listed companies or foreign employees can return the funds to overseas with relevant documents.

Caution:

Regarding equity incentives for foreign employees of domestic listed companies, it is essential to note the following:

Foreign employees are not allowed to engage in other cross-border transactions under the guise of participating in equity incentives.

If the implementation of the equity incentives is terminated, and no foreign employee exercises their rights, the domestic listed company should deregister at the local foreign exchange bureau within 30 days after the announcement.

The type and number of identification documents submitted by foreign employees should be consistent with those provided by the domestic listed company when registering on the "Registration Form for Foreign Employees' Participation in Equity Incentives of Domestic Listed Companies."

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