The NASPP Blog

If your company provides equity compensation to employees in China, then you are likely grappling with the complexity of obtaining and maintaining compliance with your company’s SAFE filing. One important ongoing issue is the requirement that proceeds from the sale of shares be repatriated. China isn’t the only country that has a repatriation requirement. However, it does, to my knowledge, have the most rigorous enforcement of it.

China puts the onerous on the company to repatriate proceeds from the sale of shares acquired through equity compensation programs. In order to maintain compliance, companies need to tackle creating a process for ensuring repatriation.

Immediate Sale

One way to ensure that proceeds from sales are sent back to China is to force an immediate sale of shares at the original acquisition (e.g., at option exercise or RSU vest). By doing this, the company does not need to worry about tracking shares after they are acquired by the employee. Depending on the functionality provided by your designated broker, this approach may also make quarterly reporting easier, which I’ll address below. However, forcing the immediate sale of shares denies Chinese employees the ability to capitalize on any future increase in the value of those shares. Arguably, the value of this arrangement is no more advantageous to the employee than cash compensation that is tied to share value. In addition, the terms of outstanding grants may not give the company the flexibility to require the immediate sale.

Tracking Shares

Many brokers now have the ability to place a hold on proceeds from sales made through specific employee accounts and remit those funds back to a corporate account. This makes it possible for China plan participants to hold shares and sell them at a date of their choosing and still comply with the repatriation requirement. Of course, you will need to confirm that employees can’t transfer the shares out of the employee account at any time, even after termination. You’ll also want to fully understand how employees are identified as subject to the hold and have appropriate safeguards in place to make certain those identification markers are accurate.

Converting to RMB

Regardless of the method in which proceeds from sales are repatriated to China, funds are sent to the company’s bank account in China in U.S. dollars and must be converted to RMB. Your company must decide if this conversion is done by the company or by the employees individually. If the company is transacting the exchange through the dedicated bank account, the RMB can be distributed to the employee through individual bank accounts or through payroll. However, the company may need to receive approval from the local SAFE office for each conversion and there may be limitations on the number of times that the currency may be exchanged each year. If the company will be disbursing U.S. dollars, then employees must have a U.S. dollar account.

Quarterly Reporting

Regardless of your approach, SAFE offices require information about the source of the incoming funds, including the original acquisition date of the shares, to be reported on a quarterly basis. Some brokers have the functionality to provide this data to clients already. At a minimum, you will need to know the total proceeds net of broker fees associated with each employee and the number of shares sold, in which case you must create a policy and procedure on associating the sales with specific acquisitions (e.g. option exercises or RSU vests). Talk with your broker to understand what information can be provided at this time.

Additional Information

SAFE filing and the ongoing compliance requirements can be difficult and time consuming. For more information on equity compensation in China, visit the China Country Guide and alerts on the NASPP Global Stock Plans portal. We also had a fantastic panel at our Conference this year: Equity Compensation in China: Tales from the PRC. To listen to the audio from that session, order your audio package today.