Types of Stock Plans

　1) Employee Stock Option Plan – allows employees to acquire
　　company stock
　2) Restricted Stock Plan (or Units) – company gives employee
　　stock with certain conditions for the employee (such as must be with
　　company for 3 years) but gives employees voting rights from the
　　beginning (units = no rights until conditions are fulfilled)
　3) Employee Stock Purchase Plan – allows employees to buy stock at
　　a discount; this is not taxed in US but is taxed in China
　4) Stock Appreciation Plan – company gives employee the monetary
　　amount of stock growth after in a certain time period without employee ever
　　owning the stock

　Benefits

　•　Employees have same goals as stockholders.
　•　Retain employee and increase performance.

　Disadvantages

　•　There is a danger of employee getting too focused on performance.
　•　In China, some laws prevent these programs from being carried out.
　　 Chinese companies prefer type 2 or 4.
　•　With very fast growing companies, stock value may increase so much
　　 that the employee makes enough money to retire early.

　Taxation

　•　Stock options are not taxed at the time of vest - tax only happens once
　　 stock is sold at fair market value.
　•　Restricted Stock is taxed at the time of vesting.
　•　Employee Stock Purchase is taxed at time of purchase.

　Social Security Implications

　•　Most Expatriates are subject to Chinese Social Security Tax but not
　　 yet implemented.
　•　No significant effect on Social Security benefits.
　•　Just like income tax, tax on stock option plans should be withheld and
　　 paid monthly.

　Plan Registration Requirement

　•　As of July 2005, all employee stock option plans must be registered
　　 with the local Tax Bureau via submission of all related documents.
　•　In registering, there are benefits such as favored tax treatment and
　　 lowered tax rate on stocks.

　SAFE (State Administration of Foreign Exchange) Registration

　•　SAFE registration is necessary for PRC national to hold company stock.
　•　To register, company must set up foreign exchange account so that
　　 when the stocks are sold, the money will be transferred back to RMB.
　•　Procedure is similar to tax registration and takes 3-4 months.
　•　All documentation and communication plans need to be reported for
　　 SAFE registration.

　SAFE Ongoing Requirements

　•　Quarterly reporting of foreign account status and exercise share
　　 purchase under plan.
　•　Remit proceeds back in foreign exchange account.

　Problems with SAFE Registration

　•　Local SAFE may differ in requirement and process
　•　SAFE staff are relatively inexperienced in this process and has many
　　 other priorities
　•　Procedure is long and tedious

　Suggestions

　•　Follow rules and register with SAFE and local tax bureau
　•　Set up internal withholding, reporting procedures and communicate
　　 process to local admin and employees clearly

　Procedures for Asian Countries

　•　Pay "exit" taxes (when employee leaves the country)
　•　Can optimize plan to get the most tax benefits for that country

　Additional Related Items

　Circular 78 – not published – is the government document on the pilot
　program SAFE ran to allow PRC nationals to hold overseas stock.

　Phantom Stock Plan – Employee gets the money from the appreciation of
　company as if holding company stock - operates almost like a bonus.

For more information please contact:
Luke Wardle, Senior Partner at lukew@hcgchina.com
　or Anna Tang, Consultant at annat@hcgchina.com
+86 21.5237.2121