Since 2007, non-PRC listed companies that wish to offer share incentive plans to their employees within the People’s Republic of China (PRC), must receive approval from the State Administration of Foreign Exchange (SAFE) in connection with certain types of equity awards and share plan offers to Chinese employees within Mainland China.
In February 2012, SAFE Circular 7 was released and became effective immediately. SAFE Circular 7 is formally known as the Circular of the State Administration of Foreign Exchange on Issues of Foreign Exchange Administration of Domestic Individual Participation in Share Incentive Plans of Companies Listed Overseas.
Circular 7 updated the SAFE registration process and ongoing compliance requirements, providing a clearer regulatory framework for non-PRC listed companies wishing to offer share incentive plans to their employees in the PRC. Its purpose is to enable the SAFE authority to ensure that all dividends and sale proceeds received by individuals participating in the share incentive plans of non-PRC listed companies, are immediately returned to the PRC through a dedicated foreign exchange account. This also applies to funds remitted outside of PRC in relation to share incentive plans, such as the exercise or purchase price paid by employees to acquire shares.
Below are the definitions of some key terms relating to SAFE Circular 7.
What is the definition of a “domestic company”?
“Domestic company” refers to an overseas listed company registered in PRC, a branch office (including a representative office), or a domestic parent, subsidiary or partnership at all levels that has a holding relationship or actual control relationship with an overseas listed company.
What is the definition of a “domestic individual”?
“Domestic individual” refers to a share incentive plan participant who is employed by a domestic company. This includes directors, supervisors, senior management, and other employees. This includes both Chinese citizens (including Hong Kong, Macao and Taiwan citizens) and foreign individuals.
Here is a list of some commonly asked questions related to SAFE Circular 7.
What is the registration procedure for SAFE Circular 7?
Domestic individuals who participate in the share incentive plans of non-PRC listed companies must authorise their domestic company to handle all SAFE matters. An overseas agency, or overseas entrusted institution, will be responsible for handling matters such as individual exercise of shares, purchase and sale of relevant shares and the transfer of relevant funds.
Do all domestic subsidiaries participating in the share incentive plan need to go to their local SAFE for the registration of SAFE Circular 7?
No. Individuals who participate in the share incentive plan of a non-PRC listed company, through their domestic company, only need to appoint one domestic agency to handle relevant SAFE matters. The domestic agency shall be one of the domestic companies participating in the share incentive plan or other domestic institutions legally selected by the domestic company that can handle asset custody business.
When can companies open a domestic SAFE account?
After completing the SAFE initial registration, the domestic agency shall open a dedicated SAFE account in the domestic bank with the SAFE approval issued by the local SAFE authority.
What types of funds can be transferred in and out of it?
After completing the SAFE initial registration, the domestic agency shall open a dedicated SAFE account through their domestic bank with the SAFE approval issued by the local SAFE authority.
Only funds related to share incentive plans can be transferred through domestic SAFE accounts. Below are the types of funds that can be transferred into the account:
- SAFE funds transferred from the individual’s foreign exchange savings account
- SAFE funds obtained from the unified foreign exchange purchase by domestic agencies
- Principal and income repatriated by individuals after selling shares under the share incentive plan
- Dividend funds repatriated and,
- Any other income approved by the local SAFE authority.
Below are the types of funds can be transferred out of the account:
- Overseas payment of funds required for participation in the share incentive plan
- Settlement of foreign exchange repatriation funds or,
- Transfer of funds to personal foreign exchange savings accounts and,
- Any other expenditures approved by the local SAFE authority.
Once the share incentive plan has been approved, what are the ongoing SAFE registration requirements?
- The domestic agency shall submit the Record Form of Domestic Individuals' Participation in Share Incentive Plans of Overseas Listed Companies at the beginning of each quarter
- When there is a material change in the share incentive plan of an overseas listed company, handle the SAFE amendment registration with the relevant documents
- When the share incentive plan is terminated due to the expiration of the plan and other matters, handle the SAFE de-registration with the relevant materials
- If you need to remit funds from China, you should apply for foreign exchange payment on an annual basis with relevant documents.
In practice, local SAFE authorities have different requirements for subsequent SAFE registration, and it is recommended that companies consult and communicate with the in-charge SAFE authorities before registration.
What are the deadlines for SAFE filing/registration in SAFE Circular 7?
There are multiple deadlines for SAFE filing/registration in SAFE Circular 7. Below is a summary:
- SAFE quarterly filing: The Record Form of Domestic Individuals' Participation in the Share Incentive Plan of Overseas Listed Companies must be submitted to the local SAFE authority within three working days at the beginning of each quarter
- SAFE amendment registration must be filed within three months of material changes occurring
- SAFE de-registration: shall be handled within 20 working days after the termination of the plan.
When do I need to submit a SAFE amendment registration?
The domestic agency must submit a SAFE amendment registration when the share incentive plan of the overseas listed company is significantly changed, such as the revision of key provisions of the original plan and the addition of new plans, and the change of the original plan caused by major events such as the merger and reorganization of the overseas listed company or the domestic company.
What are the non-compliance risks with SAFE Circular 7?
The SAFE authority will supervise, administer and inspect individuals' participation in foreign exchange business related to non-PRC listed companies. If individuals, domestic companies, domestic agencies or banks violate this notice, the SAFE authority may take corresponding regulatory action and deliver administrative penalties according to law.
It’s important for non-PRC listed companies to be able to offer share incentive plans to their PRC staff, so they can remain competitive in the battle for talent. However, the registration process can be overwhelming and time consuming. That’s why Computershare has our China Share Plan Solution, to help companies streamline the application process and remain compliant in a complex landscape.