A question that frequently arises is whether a foreign holding company can grant shares directly to a Chinese employee working for its PRC subsidiary. Equity incentives are one of the most powerful ways to align employees with company success. But when it comes to granting shares to a China-based employee, the rules are not as straightforward as they seem, especially if your foreign holding company is not listed.
1. Context
From a foreign corporate law perspective, most jurisdictions — such as Delaware, Luxembourg, or the Cayman Islands — allow shares to be issued to non-resident individuals without nationality restrictions. The challenge is not the grant itself, but the compliance that follows.
When a Chinese tax resident acquires shares in a foreign company, it’s considered an overseas investment. Under SAFE Circular 37, this individual must register the ownership with the State Administration of Foreign Exchange (SAFE) before receiving the shares.
This registration allows the employee to legally hold the offshore shares, to repatriate dividends or sale proceeds to China or to stay compliant with China’s foreign exchange rules. Without it, those shares may be impossible to sell or transfer through legal banking channels.
According to China’s Individual Income Tax Law, the employee may owe tax when the shares are granted (if discounted), when the dividends are paid and when the shares are sold at a gain.
The Chinese subsidiary usually acts as the withholding agent, even if the shares come from the foreign parent company. Missing that obligation can lead to penalties, so coordination between the parent and subsidiary is essential.
2. Consequences of non compliance
For the employee:
Failure to register or report income properly could lead to back taxes, penalties, and interest. The IIT regime is actively enforced for overseas equity incentives and automatic sharing of banking information combined with tech improvements allow the Chinese tax bureau to identify offshore accounts transactions.
For the Chinese subsidiary:
Risk of non-compliance with tax or foreign exchange rules, plus administrative burden managing filings.
For the foreign holding company:
The incentive may lose value if employees can’t realize their gains, reducing its motivational impact.
3. Common Alternatives that work better
Because of these challenges, many foreign groups use simpler, compliant alternatives:
Phantom Share or Cash-Settled Plans. Employees receive RMB bonuses tied to the group’s valuation. No foreign exchange or registration needed.
Share Appreciation Rights (SAR). Employees gain from the value increase of shares, paid out in cash. This contractual arrangement can be designed to be exercisable at the time of trade sale or any other liquidation event.
Performance-Based Bonuses. Straightforward cash incentives linked to individual or group KPIs. These structures avoid most of the FX and tax complexities while still aligning interests.
Conclusions and takeaways
Granting shares to China-based employees is possible but triggers compliance risks.
Without proper SAFE registration and tax planning, the incentive may create risk for the employee and their employer.
For most companies, a well-designed cash or phantom share plan offers the same alignment with far less regulatory friction. Other contractual arrangements can be designed to replace a non-compliant equity incentive plan and avoid liabilities in the context a LBO or a Trade sale of the employing company. If your company is exploring global incentive plans for Chinese employees, let’s discuss with Peggy Wu (p.wu@leaf-legal.com) and Bruno Grangier (b.grangier@leaf-legal.com).
This publication is for informational purposes only and does not constitute legal advice. It is based on publicly available laws and regulations.
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