One question that I have encountered almost weekly in the last year is whether companies should offer their ESPP in China.  The companies that ask this question usually have already registered their equity incentive plan(s) with the China State Administration of Exchange (SAFE) and are granting options and/or RSUs to employees in China.  Typically, they have held off on registering the ESPP due to administrative concerns and the fact that a SAFE registration used to be difficult enough just for one type of plan.


But, times have changed and registering plans with SAFE is no longer as painful as it used to be (exceptions can apply, but that is a topic for another blog…..).  Several companies that recently completed their SAFE registration have successfully registered both an ESPP and an equity incentive plan at the same time.  Chinese employees have taken note and are often pressuring their employers to also offer the ESPP, on the basis that Company X across the street is doing so.  And, although the Chinese employees do not always have the facts straight about which company is offering what type of award, some companies have caved under the pressure and registered the ESPP, which is now producing a snowball effect. 

So, should you go ahead and register your ESPP?

On the one hand, it is true that an amendment registration to cover the ESPP (for companies that have already registered their equity incentive plan) is almost always easier than the original registration.  The SAFE offices seem to apply less scrutiny to companies that are already operating a plan in China and have an established track record with SAFE. 

On the other hand, there are a number of considerations that are specific to the implementation of an ESPP, and some of them can be quite tricky. 

The most significant considerations are as follows:

Treatment of Non-PRC Nationals 

If a company has non-PRC nationals on Chinese payroll who would like to participate in the ESPP but who are not covered by the SAFE registration, it will not be possible to remit their payroll deductions through the dedicated account (as is required for the covered employees) and there is no other way for the Chinese entity to remit these funds to the parent company’s home country.  This means that these employees would have to remit the funds personally to the parent to purchase shares.  If the company decides to cover these employees under the SAFE registration, this problem goes away, but it means that these individuals now have to be treated like the PRC nationals for all other purposes.  In particular, the company will be required to repatriate all of their proceeds to China (both under the ESPP and the equity incentive plan).   Especially for temporary assignees, this can be undesirable. 

Opening of Separate Account 

Circular 7 implies that a separate SAFE account has to be opened for each plan that is offered in China.  At least Beijing SAFE follows this interpretation.  This means that funds related to the ESPP would have to be routed through a different account than funds related to the equity incentive plan. 

Multiple Brokers 

In case a company uses different brokers for the administration of the ESPP and the incentive plan, SAFE may object and allow only one broker to administer all of the plans offered in China. 

Fund Flow  

The accumulated payroll deductions will need to be deposited into the SAFE account, converted and remitted to the parent company’s country prior to the purchase date.  SAFE approval is not required to effect the conversion or remittance.  Instead, the bank will handle these steps, but may require certain documentation to do so.  Companies will need to work with the bank to ensure that the conversion and remittance can be effected in a timely manner to avoid that the funds arrive in the parent’s country only after the purchase date (which would require the company to “front” the purchase price, which could cause accounting issues). 

In addition, companies should be aware that SAFE will require that the accumulated payroll deductions be sent to the broker first, before being delivered to the parent.  The company will need to work with the broker to ensure that the broker is willing to receive the funds and transfer them to the company.   

Annual Quota Application 

If companies have offered only options restricted to a cashless exercise and/or RSUs, they have not had to deal with the outward remittance of funds from China.  With the ESPP, funds are now flowing out of China and the company will need to (both in the initial application and on an annual basis) estimate the funds that will be remitted to purchase shares under the ESPP.  If the estimated quota is not sufficient, SAFE will not allow the funds to be remitted from China unless the company has made an application to increase the quota. 

More Complex Quarterly Reports 

Companies have to report, on a quarterly basis, the inflow of funds related to the sale of shares and the receipt of dividends to on a prescribed form.  These reports will be more complicated with the addition of the ESPP, as companies will now also need to report the outflow of funds under the ESPP. 

Increased Securities Law Risk 

This may currently only be a theoretical risk, but companies should keep in mind that Chinese securities laws technically do not allow a foreign company to offer an employee equity plan without prior registration (which is impossible to complete in practice).  The Chinese securities authorities have informally advised that they do not intend to take any action against companies offering such plans, so again, the risk for companies currently is small.  However, if the securities authorities ever change their mind, we believe companies may have more exposure with an ESPP given that employees are contributing their own funds and therefore have greater financial risk.  The risk could be mitigated if employees are required to immediately sell their shares at purchase, but this may not be desirable for companies that wish to foster employee share ownership.

Finally, please note that the offering of an ESPP will trigger Notice 35 filing requirements (i.e., tax filing requirements), both when the ESPP is first offered and on an ongoing basis (i.e., at purchase).  These filings are not very complicated, but can be time consuming and expensive (due to extensive translation requirements). 

Despite all of the issues noted above, I predict that more and more companies will start offering the ESPP in China, because Chinese employees lobby hard for such plans and will increasingly be able to claim that the company needs to offer the ESPP to keep up with the competition.