In Chinese corporate practice, both cash-based incentives and equity-based incentives are used, but their prevalence and level of institutional sophistication vary depending on the type of enterprise, its size and its location. Equity incentives are particularly common among listed companies and larger enterprises with relatively well-developed governance structures, where such arrangements are usually subject to clearer regulatory frameworks and internal governance requirements. Some non-listed companies also adopt equity incentives, although the rules tend to be more flexible and largely determined by the company itself. Where a company has a clear intention to pursue a future listing, its equity incentive arrangements are often designed by reference to listed-company standards. In addition, where a company is also listed overseas, the structure of its equity incentive schemes is typically more complex. State-owned enterprises are further subject to state-asset supervision requirements, under which matters such as eligibility to implement equity incentives, sources of funding and the scope of beneficiaries are specifically regulated. By contrast, cash incentives are broadly applicable across enterprises of all types and ownership structures and are generally treated as part of employees’ remuneration.

From a regulatory perspective, long-term share-based incentives implemented by listed companies are expressly recognised and regulated. Under the Measures for the Administration of Equity Incentives of Listed Companies, listed companies may grant long-term incentives based on their own shares to directors, senior management and other eligible employees, primarily through restricted shares and share options. These schemes must comply with applicable laws, securities regulations and the company’s articles of association, and are typically designed with a strong emphasis on management personnel and key technical or business talent, with possible extension to a broader employee group depending on the company’s circumstances.

In practice, the most commonly adopted share-based incentive tools are share options and restricted shares, reflecting their relative maturity and regulatory acceptance. These instruments are typically used as medium- to long-term incentive mechanisms, with vesting conditions commonly tied to continued service, the achievement of specified performance targets, and, in many cases, the absence of misconduct or other compliance breaches.

Alongside equity incentives, cash-based incentives remain highly prevalent in the Chinese market. Annual bonuses and performance-based bonuses are the most widely used forms, often covering all or a substantial proportion of employees. In addition, many employers adopt longer-term cash incentive arrangements, such as sign-on bonuses, deferred bonuses and supplementary pension or retention-based cash plans, demonstrating the continued importance and flexibility of cash incentives within overall employee incentive structures.

In China, the key differences between listed companies and private companies in cash and share-based incentive practices primarily arise from the regulatory framework, implementation mechanisms and compliance obligations.

Equity incentives adopted by listed companies are governed by a dedicated regulatory regime. Article 2 of the Measures for the Administration of Equity Incentives of Listed Companies defines equity incentives as long-term incentive arrangements based on the company’s own shares, with restricted shares and share options as the principal forms. Listed companies must structure incentive plans strictly within this framework. By contrast, private companies are not subject to an equivalent unified regulation and typically design incentive arrangements under the general Company Law framework and contractual principles.

The source and issuance of incentive shares further distinguish listed companies from private companies. Article 12 of the Measures for the Administration of Equity Incentives of Listed Companies restricts listed companies to issuing new shares, using repurchased shares, or other legally permitted methods, all of which are closely tied to securities market rules and registration procedures. Private companies, which do not access public capital markets, usually implement equity incentives through shareholder equity transfers or capital increases, relying on corporate approvals and contractual execution rather than securities regulation.

Performance and vesting conditions also differ in practice. Listed companies are required to set clear grant, vesting or exercise conditions, including specific performance indicators, and to disclose such conditions in accordance with regulatory requirements. Private companies enjoy greater flexibility and typically determine service periods, performance targets and vesting arrangements through negotiated contracts, with enforcement depending primarily on contract performance rather than regulatory scrutiny.

Disclosure and compliance obligations represent a further area of divergence. Listed companies must make public disclosures and complete formal approval procedures, including board resolutions, remuneration committee review and legal opinions issued by qualified law firms, as reflected in Article 166 of the Company Law and Article 44 of the Measures for the Administration of Equity Incentives of Listed Companies. Private companies are not subject to listing-related disclosure obligations and generally rely on internal decision-making and contractual documentation.

Finally, listed companies are subject to explicit prohibitive circumstances. Article 7 of the Measures for the Administration of Equity Incentives of Listed Companies sets out situations where equity incentives may not be implemented, such as adverse audit or internal control opinions. Private companies do not face a comparable statutory negative list, although they remain subject to mandatory legal rules and general corporate governance principles.

Given that such incentive arrangements directly affect employees’ material interests, they are generally subject to the required democratic procedures, which involve soliciting employees’ views through the employees’ representative assembly and the trade union, and conducting consultation and negotiation before implementation.

Over the next 12 months, developments affecting cash and share incentives in China are expected to focus less on new legislation and more on stricter implementation, disclosure and tax execution. Several measures already in force will continue to shape market practice.

First, compliance and disclosure requirements for equity incentives of listed companies have been further reinforced. The Measures for the Administration of Equity Incentives of Listed Companies (2025 Revision) continue to emphasise full and continuous disclosure of key elements such as draft plans, participant lists, legal opinions and procedural compliance. In practice, this reduces flexibility for informal or accelerated implementation and increases both procedural complexity and timelines.

Second, the negative lists governing both eligibility to implement equity incentives and eligibility of incentive recipients have been maintained and refined. Circumstances such as adverse audit or internal control opinions, failure to meet profit distribution requirements, or other regulatory prohibitions continue to bar implementation. In parallel, restrictions on certain individuals, including major shareholders and persons subject to recent regulatory sanctions or market bans, narrow the pool of eligible participants and strengthen governance discipline.

Third, favourable individual income tax deferral treatment for equity incentives of listed companies remains in place. Under Announcement No 2 of 2024, employees may, after filing, defer payment of individual income tax for up to 36 months from the date of exercise, vesting or acquisition, with tax settlement required upon termination of employment. This significantly improves employee cash flow and enhances the retention effect of equity incentives.

Finally, the deductibility of remuneration for corporate income tax purposes has been further clarified. The Implementation Regulations of the Enterprise Income Tax Law (2024 Revision) confirm that reasonable salary and wage expenses, including both cash and non-cash remuneration, are deductible, providing a clearer basis for structuring combined remuneration packages, while requiring careful co-ordination of employee-side tax treatment.

Overall, the regulatory direction points toward higher compliance and disclosure standards for equity incentives, continued tax relief on the employee side, and clearer – but more rigorously scrutinised – tax treatment for employers.

Cash incentive plans are the most widely used form of employee incentives in China and typically cover all or a substantial proportion of the workforce. Annual bonuses and performance-based bonuses are the most common arrangements and are generally treated as part of employees’ remuneration. These plans are usually linked to company-wide, departmental or individual performance indicators and are designed to reward short-term performance and maintain general workforce stability. At the same time, in light of the government’s policy emphasis on “common prosperity”, judicial practice has increasingly scrutinised and constrained the legality and reasonableness of rules that deny year-end bonuses solely on the basis of an employee’s departure.

Equity-based incentive plans, by contrast, are more selectively applied and are primarily used for senior management and key employees. Under Article 2 of the Measures for the Administration of Equity Incentives of Listed Companies (2025 Revision), eligible participants include directors, senior management and other employees, reflecting a structurally tiered approach to participation. Article 10 further requires listed companies to impose performance conditions on directors and senior management as prerequisites for vesting or exercise, reinforcing the focus on management accountability and long-term alignment.

Among listed companies, the most common equity incentive tools are share options and restricted shares. These instruments are typically granted to senior executives and core technical or business personnel, and only in limited cases extended to a broader employee population. Vesting or exercise is commonly subject to both service period requirements and performance thresholds, making these plans less suitable for mass participation.

For pre-IPO companies, including those with offshore or red-chip structures, share options, restricted shares and restricted share units are widely used in practice. Share options are particularly popular due to their flexibility in pricing, vesting schedules and exit alignment. Restricted share units are also frequently adopted to bridge the period between pre-IPO incentives and post-listing equity settlement. In all cases, participation remains concentrated among core management and key contributors rather than ordinary employees.

Judicial approaches to both equity incentives and cash incentives have been evolving. Whether disputes arising from equity incentives fall within the scope of labour disputes has long been controversial. In the draft of the Supreme People’s Court Interpretation (II) on Issues Concerning the Application of Law in the Trial of Labour Dispute Cases, released for public consultation on 12 December 2023, Article 1 provided that disputes arising where an employer, based on the employment relationship, grants labour remuneration to employees in the form of equity incentives – and where employees seek delivery of the underlying equity or compensation for losses relating to such incentives – should be treated as labour disputes, except for disputes arising from the exercise of shareholder rights. Although this draft never took effect, many courts drew on its reasoning in practice. When the final Interpretation (II) formally came into effect on 1 September 2025, this provision was deleted, largely because the issue remained highly contentious in judicial practice. This change reflects the continuing debate, but in reality an increasing number of courts have been willing to accept such cases as labour disputes; in Beijing, for example, it has become common for equity incentive disputes to be accepted under the labour dispute framework.

With respect to cash incentives such as year-end bonuses, the Supreme People’s Court Guiding Case No. 183 (Fang Yue v. CML MetLife Insurance Co., Ltd.) illustrates the prevailing approach. Where an employer’s handbook provides that employees who leave before the distribution date are not entitled to a year-end bonus, courts have held that claims by employees who left before payment should be assessed holistically, taking into account the reasons for departure, timing of departure, work performance, and contribution to the employer. If the termination was not due to the employee’s fault or voluntary resignation, the employee has completed the annual work tasks, and the employer cannot prove that the employee failed to meet the bonus criteria, the employee’s claim for the year-end bonus should be supported notwithstanding internal rules to the contrary.

Overall, cash incentives primarily serve a broad-based, short-term motivational function, while equity incentives are more often used as long-term retention and alignment tools for selected personnel, with their scope closely linked to an employer’s level of corporate governance maturity and compliance capability. At the same time, as younger generations enter the workforce, incentive models that rely predominantly on monetary rewards are increasingly being challenged.

In China, whether grants, vesting, exercise or share issuance or transfer under an equity incentive plan trigger prospectus or similar securities law implications depends primarily on the source of the underlying shares, the scope of participants and the manner of offering.

Equity incentives are commonly implemented through the issuance of new shares to incentive participants, the use of repurchased shares, or other legally permitted methods. Where shares are granted or transferred on a targeted basis to specific incentive participants, such arrangements are generally regulated under the dedicated equity incentive regime rather than treated as a public offering to unspecified investors. Although these activities remain subject to securities law supervision, they do not automatically constitute circumstances requiring the preparation of a prospectus.

Whether the parent company or the local employer bears public offering obligations under securities laws hinges on whether the transaction amounts to a public issuance. A prospectus or other public offering disclosure document is required only where shares are offered to the general public or to non-specific investors. In contrast, routine equity incentive arrangements involving grants, vesting or exercise by a defined group of eligible participants do not, by themselves, trigger prospectus filing requirements.

For listed companies, equity incentive plans operate within a specialised regulatory framework. Companies are required to comply with specific disclosure and internal approval procedures, and to disclose existing equity incentive arrangements and their impact in initial public offering or refinancing documents where applicable. The disclosure obligations focus on grant terms, vesting or exercise conditions, lock-up arrangements and accounting impact, and are treated as ongoing disclosure and incentive-specific compliance, rather than as public offering documentation obligations.

Structural limitations also affect how equity incentives are implemented. A controlled subsidiary is generally prohibited from holding shares of its listed parent company and exercising voting rights. As a result, equity incentives are typically implemented at the listed company level, with issuance, repurchase and registration handled centrally, limiting the ability of a local employer to directly hold or transfer parent company shares. In addition, restrictions apply to the timing of grants or exercises, such as blackout periods surrounding board deliberations or material events. Breaches of these timing rules may give rise to regulatory risk, but do not, in themselves, convert equity incentive activities into prospectus-triggering events. Even where equity incentives are implemented during periods involving refinancing, restructuring or other significant transactions, they remain subject to parallel disclosure obligations rather than generating new prospectus requirements solely by virtue of the incentive plan.

In China, the promotion and communication of equity incentive plans to employees is subject to securities law constraints, primarily to prevent such activities from being characterised as public offerings or improper securities solicitation.

Under Article 9 of the Securities Law, offerings made to unspecified persons or to more than 200 specified persons constitute a public offering, although employees participating in legally implemented employee share ownership plans are excluded from this numerical threshold. As a result, targeted internal communication to eligible employees is generally permitted, provided it does not involve public advertising, public solicitation or any disguised form of public promotion.

Equity incentives are recognised as internal, long-term incentive arrangements under which listed companies grant shares to directors, senior management and other employees. Communications relating to such plans must remain within this internal framework and should not be framed in a manner that could be interpreted as promoting securities to the public.

Timing and eligibility restrictions also apply. During statutory blackout periods or other restricted windows for directors’ and senior management’s share trading, companies may not grant restricted shares or allow the exercise of equity rights. Internal communications should therefore avoid sensitive periods, such as around financial reporting or major corporate events. In addition, where statutory prohibitions apply, equity incentives may not be promoted or implemented at all.

Certain sectors face stricter policy constraints. State-owned and state-controlled financial institutions and insurance companies have, in specific periods, been required by regulatory policy to suspend equity incentives and employee share ownership plans, reflecting the possibility of sector-specific restrictions overriding general incentive rules in exceptional circumstances.

More recently, regulators have signalled a more facilitative approach in targeted areas. In April 2024, the China Securities Regulatory Commission issued policy measures supporting technology enterprises, including proposals to streamline equity incentive procedures and introduce exemptions from short-swing trading restrictions. This policy direction is expected to ease compliance burdens for equity incentive communications conducted within a lawful framework.

In China, a local employer may fund equity incentive plans, but the structure and approvals depend on whether the plan is implemented at the listed company level or within a group arrangement.

For listed companies, the use of company funds to implement equity incentives is permitted, provided the incentive plan clearly specifies the source of shares, pricing mechanism, quantity and financial impact. Shares may be sourced through new issuance, market purchases or share repurchases, subject to advance disclosure and compliance with regulatory procedures. Funding arrangements are constrained by statutory caps on total share usage and individual participation, as well as pricing rules tied to market reference prices. Plans may not be amended to accelerate vesting, reduce exercise prices or otherwise prejudice shareholder interests. Grants, vesting and unlocks must be completed within prescribed timeframes with proper registration and disclosure. State-controlled listed companies are subject to additional state-owned assets supervision and approval requirements, which may affect both funding sources and decision-making.

In group structures, equity is often granted by a parent company while the PRC subsidiary bears the employment cost. Such arrangements are generally treated as non-cash employment remuneration. The PRC employer may claim enterprise income tax deductions at the time of vesting or exercise, subject to compliance with tax rules. Internal cost-sharing is permissible but must align with the incentive plan, accounting treatment and disclosure obligations.

From a governance perspective, equity incentive plans are typically proposed by the remuneration committee, approved by the board with conflicted directors abstaining, and submitted to shareholders for approval following internal disclosure. Independent directors or supervisory bodies must issue opinions, and legal opinions are required. Material amendments after shareholder approval must be re-approved and cannot include accelerated vesting, early unlock or price reductions.

For an issuer incorporated in China, equity grants under an incentive plan must follow a formal corporate governance process. Grants cannot be effected solely by contract and must be supported by valid corporate resolutions and, where applicable, regulatory procedures.

For listed companies, the process starts with the board of directors (typically through the remuneration and appraisal committee) formulating an equity incentive plan. The plan sets out core terms such as eligible participants, share source, grant or exercise mechanism, pricing or pricing methodology, vesting or exercise conditions, performance criteria, validity period and adjustment rules. The board reviews and approves the draft plan, with conflicted directors abstaining, and the plan is disclosed.

The plan must then be approved by the shareholders’ meeting by a supermajority of at least two-thirds of the voting rights of shareholders present. Shareholders who are proposed incentive participants or are connected with them must abstain from voting. Independent directors are required to solicit proxy votes from minority shareholders.

After shareholder approval, the board is authorised to implement the plan. This includes determining specific grant matters (such as grant date and final participant list), effecting grants of restricted shares or option awards, and handling vesting, exercise, repurchase or cancellation in accordance with the approved plan. Grants and exercises must generally be completed within prescribed time limits (commonly within 60 days after shareholder approval) and are subject to registration and settlement through the stock exchange and the securities registration and clearing institution.

Before each grant or exercise, the board must confirm that vesting or exercise conditions have been satisfied. Independent directors, supervisory bodies and legal advisers are required to issue compliance opinions. The overall validity period of an equity incentive plan may not exceed ten years from the date of the first grant.

Material amendments after shareholder approval must be re-approved by shareholders and may not involve accelerated vesting, early unlock or price reductions. If a grant is not completed within the statutory timeframe, the plan must be terminated and is subject to a cooling-off period.

For non-listed public companies (such as NEEQ-listed companies), a broadly similar structure applies: board proposal, shareholder approval by a two-thirds majority, abstention by interested parties, and board-led implementation.

In all cases, the issuer must enter into grant agreements with participants to reflect individual rights and obligations, but such agreements do not replace the required corporate resolutions and registration procedures, which remain the legal basis for the grant.

In China, cross-border payments and receipts arising from equity incentive plans are subject to foreign exchange control, with different requirements depending on the direction and nature of the fund flows.

Employees Remitting Funds Offshore to Purchase Shares or Pay Exercise Prices

Where employees remit funds offshore to purchase shares or pay option exercise prices, such payments constitute cross-border foreign exchange transactions. Under Articles 12 and 14 of the Regulations on Foreign Exchange Administration (2008 Revision), employees must use their own foreign exchange or purchase foreign exchange through qualified banks, supported by genuine transaction documents. Banks are required to review the authenticity and consistency of the underlying transactions. PRC resident individuals must also complete the required foreign exchange registration for overseas securities or derivative investments. Individual purchases remain subject to annual quota limits, and transaction splitting to circumvent quotas is prohibited.

Employees Remitting Proceeds From Offshore Share Disposals Into China

Proceeds from the sale of offshore shares remitted into China are treated as current account foreign exchange receipts and must have a lawful transaction basis. Banks conduct authenticity reviews and perform balance of payments reporting. In practice, foreign exchange proceeds from equity incentive-related share disposals are generally required to be fully repatriated and settled or credited in accordance with approved arrangements, without the need for central-level approval on a transaction-by-transaction basis.

Local Employers Remitting Funds Offshore to Support Incentive Plans

Where a PRC employer remits funds offshore to support an equity incentive plan, additional compliance steps apply. Approved structures often require the employer or a designated domestic agent to open a special foreign exchange account with local foreign exchange authority approval. Employee funds are commonly pooled through the domestic agent, which applies for annual foreign exchange quotas and remits funds offshore within approved limits. Offshore sale proceeds are then repatriated for distribution or settlement. Capital account transactions remain subject to prior approval or filing, and under pilot schemes, employees must centrally entrust a domestic institution to manage offshore share purchases and disposals, with mandatory repatriation of proceeds.

In China, employee tax and social security treatment of equity incentives depends on the stage at which economic benefits are realised.

Grant of Options, Awards or RSUs

At the grant stage, no individual income tax or social security contributions are generally triggered. Under PRC tax law, taxable income arises only when an individual has actually obtained income. The mere grant of options, awards or RSUs that have not vested or been exercised does not constitute realised income and therefore does not give rise to tax or social security obligations.

Vesting or Exercise

Tax liability is typically triggered at vesting or exercise. Where an employee exercises share options or RSUs vest, the resulting economic benefit is treated as income derived from employment. The taxable amount is generally calculated as the fair market value of the shares at the time of vesting or exercise minus the exercise price (if any), multiplied by the number of shares.

Pursuant to the Implementation Regulations of the Individual Income Tax Law (2018 Revision), where income is received in the form of marketable securities or other economic benefits, tax is assessed based on market value. For restricted shares, the taxable income is determined by reference to the market price on the date the restrictions are lifted. Such income is usually categorised as comprehensive income and taxed at progressive rates, subject to the applicable administrative practice.

Sale of Shares

The subsequent sale of shares gives rise to separate tax consequences. Gains realised on the disposal of shares are treated as income from the transfer of property. The taxable income is calculated as the sale proceeds minus the original cost base and reasonable expenses. Amounts previously taxed at vesting or exercise are generally treated as part of the cost base for this purpose. Dividends and distributions received from shareholdings are taxed separately as dividend income, typically at a flat rate of 20%.

Valuation Principles and Social Security

Across all stages, where income is received in the form of securities or other non-cash benefits, the tax base is determined by reference to fair market value. Where pricing evidence is unavailable or manifestly unreasonable, tax authorities may assess income by reference to market prices.

Equity incentives do not, in principle, change an employee’s social security obligations. Employees remain subject to mandatory social insurance contributions based on statutory contribution bases, which are generally linked to wages and salaries. Equity incentive income is typically not included in the social insurance contribution base unless expressly required by local practice.

In China, the tax and social security treatment of restricted shares depends on whether the employee has obtained a realised and freely disposable economic benefit.

Acquisition of Restricted Shares

At the time restricted shares are granted or registered in the employee’s name, individual income tax is generally not triggered. Although restricted shares are granted as part of an employment relationship, the shares are subject to vesting conditions and transfer restrictions, and the employee has not yet obtained an economic benefit that can be freely disposed of. As a result, the acquisition of restricted shares at grant is not treated as taxable income.

The grant of restricted shares does not alter the employee’s statutory social security obligations. Social insurance contributions continue to be calculated based on wages and salaries in accordance with applicable rules, and the grant itself does not trigger additional social security contributions.

Lifting of Restrictions (Vesting)

Tax liability typically arises when restrictions on the shares are lifted. At vesting, the employee obtains a realised economic benefit, which is treated as employment-related income and generally categorised as wages and salaries under the comprehensive income regime.

The taxable amount is calculated as the fair market value of the shares on the vesting date minus the actual amount paid by the employee (if any). As the income is received in the form of marketable securities, valuation is based on the market price on the vesting date. For equity incentives implemented by PRC listed companies, eligible employees may, subject to applicable policies, defer payment of individual income tax for up to 36 months following vesting, provided that tax is fully settled before termination of employment.

From a social security perspective, the vesting of restricted shares does not change the statutory scope or rates of social insurance contributions. While the income at vesting is employment-related for tax purposes, restricted shares do not themselves give rise to a separate or share-based social security contribution obligation.

Sale of the Shares

The sale of restricted shares gives rise to income from the transfer of property. The taxable gain is calculated as the sale proceeds minus the cost base and reasonable expenses, and is subject to a flat tax rate of 20%. The fair market value taxed at the vesting stage, together with any actual acquisition cost, generally forms the cost base for this calculation.

Gains from the sale of shares are capital in nature and do not constitute wages or salaries. Accordingly, no social security contributions are payable in connection with the disposal of restricted shares.

Income Tax Withholding

Under PRC tax law, the individual is the taxpayer and the entity paying the income is the withholding agent. Where a local employer provides employees with taxable income in cash, securities or other economic benefits, it must withhold and remit individual income tax. Income arising from share options, awards, RSUs or restricted shares falls within the scope of taxable individual income.

Equity incentive income derived from employment performed in China is generally treated as China-sourced income, regardless of where the shares are issued or paid. In practice, the local employer withholds tax when the income is realised, typically at vesting or exercise. If the employer advances tax on behalf of employees, it may seek reimbursement under civil law principles. For qualifying equity incentives of PRC listed companies, preferential “separate taxation” treatment may apply; otherwise, the income is included in comprehensive income and taxed at progressive rates from 3% to 45%. The taxable amount is usually calculated as the fair market value at vesting or exercise minus any amount paid by the employee.

Employer Social Security Contributions

Employers must register for social insurance and withhold and pay social security contributions based on statutory contribution bases, generally linked to wages and salaries. Current rules do not expressly include equity incentive income in the social insurance contribution base. As a result, employers are generally not required to pay additional employer social security contributions solely due to the grant, vesting or exercise of equity incentives.

Corporate Income Tax Deduction

Under the Enterprise Income Tax Law regime, reasonable expenses actually incurred and related to income generation are deductible. Article 34 of the Implementation Regulations of the Enterprise Income Tax Law confirms that reasonable wages and salaries, including cash and non-cash remuneration paid in connection with employment, are deductible. For resident enterprises implementing equity incentives, deductions are generally available at vesting or exercise, based on the fair market value minus the employee’s payment. Accounting expenses recognised during the vesting period are not deductible until vesting or exercise occurs. In group structures, deductibility depends on whether the PRC entity actually bears the cost and whether the arrangement is reasonable and income-related; payments with dividend or shareholder distribution characteristics are not deductible.

In China, certain incentive arrangements and supporting tax policies may lead to more favourable tax outcomes for employees and/or the local employer. These advantages arise not from elective “tax-favoured plans”, but from meeting specific statutory conditions and complying with prescribed procedures.

From the employer’s perspective, favourable treatment mainly derives from general corporate income tax incentives and equity incentive-specific deduction rules. Article 30 of the Enterprise Income Tax Law permits additional deductions for qualifying research and development expenses and for wages paid to disabled employees or other encouraged employment categories. Article 28 provides reduced tax rates for qualifying small and low-profit enterprises (20%) and state-supported high and new technology enterprises (15%), while Article 27 grants exemptions or reductions for income from encouraged sectors such as public infrastructure, environmental protection and qualifying technology transfers. Although not incentive plans in themselves, these regimes reduce the overall tax burden and support long-term incentive structures.

For equity incentives, resident enterprises implementing share option or restricted share plans may claim corporate income tax deductions at vesting or exercise. The deductible amount is generally the difference between the fair market value of the shares and the amount paid by the employee, multiplied by the number of shares. Accounting expenses recognised during the vesting period are not deductible until the equity becomes exercisable or vested.

From the employee’s perspective, preferential treatment mainly applies to qualifying equity incentives implemented by listed companies or entities applying equivalent standards. Eligible share options, restricted shares and equity awards may benefit from tax deferral or extended payment arrangements after required filings. In certain cases, taxation at exercise or vesting may be deferred or effectively postponed until share transfer, when gains are taxed as property transfer income. These benefits are subject to strict eligibility criteria and quantitative limits.

Overall, favourable tax outcomes in China depend on compliance-driven structuring, with benefits available only where statutory conditions are met.

In China, malus and claw-back mechanisms may be applied to both equity-based and cash-based incentives, including bonuses. While the legal basis exists across sectors, enforceability in practice depends heavily on industry context, plan design and evidentiary support. Judicial attitudes are most developed in regulated financial sectors and significantly more cautious elsewhere.

From a structural perspective, malus is typically implemented through conditional grants, staged vesting or deferred payment arrangements, while claw-back is effected through contractual recovery or cancellation mechanisms. Equity incentive gains are generally not characterised as statutory wages, and disputes relating to forfeiture, recovery or repurchase are often treated as civil or contractual disputes rather than labour disputes. This provides a legal pathway for enforcement, but does not lower the employer’s burden of proof.

Chinese courts apply a consistently high evidentiary threshold. Courts do not accept claw-back merely because an institution has suffered losses or because an employee held a senior position. Employers must prove a direct and specific causal link between the employee’s conduct and the relevant risk exposure, violation or loss. This typically requires regulatory findings, internal investigation conclusions, or documentary evidence showing the employee’s approval, decision-making authority or breach of duty.

In practice, claims fail where the employer cannot demonstrate the employee’s personal responsibility with clear evidence. General references to collective decision-making, organisational failure or post-event risk outcomes are rarely sufficient. Courts also scrutinise whether the claw-back mechanism was designed as a company right rather than an automatic obligation, and whether the relevant rules were in place and properly disclosed before the incentive was granted.

Our limited successful cases have involved scenarios where regulators had imposed penalties or issued formal findings, and where the employer could show that the employee directly participated in or approved the misconduct. Even in the financial sector, such outcomes are the exception rather than the norm.

With respect to malus, courts are more receptive to withholding unpaid deferred bonuses where employers can demonstrate that payment was expressly subject to performance and risk review, and that the relevant risk events or compliance failures occurred within the deferral period. However, clauses providing for forfeiture solely upon resignation or non-renewal, without any risk or performance-related justification, are frequently rejected.

Courts also place significant weight on procedural integrity. Deferred pay and claw-back rules should be adopted through proper internal procedures, clearly define applicable personnel, triggering events, scope and calculation methods, and be supported by investigation, employee notification and opportunity to respond. Delayed accountability actions or retroactive rule-making are commonly found unenforceable.

Overall, malus and claw-back are well established in regulated financial institutions and listed company governance frameworks, but outside these contexts, enforceability remains highly fact-specific and evidence-driven.

Cash and share-based incentive plans in China can give rise to material labour law issues if not properly designed or implemented. The key risks typically relate to acquired rights, entitlement upon termination of employment and whether incentive amounts should be included in statutory compensation calculations.

Labour Law Implications

Cash incentives, including bonuses, are typically regarded as remuneration arrangements that are closely linked to employees’ core interests. Where a cash incentive is structured as part of remuneration management and is linked to service period and performance assessment, disputes are usually treated as labour disputes. Once an employee has satisfied the agreed conditions (such as completing the service period and passing the assessment), the employer is required to pay the incentive in accordance with the plan. Unjustified delay may result in liability for late payment interest.

Equity incentives are more flexible in structure. Employers may lawfully impose vesting conditions, lock-up periods, continued employment requirements and forfeiture rules. Where an employee is lawfully dismissed for serious misconduct, unvested equity interests or awards subject to unmet conditions may generally be cancelled. Equity incentives granted on an “in-service” basis do not automatically give rise to full entitlement after termination, and plans commonly provide for pro-rata vesting or forfeiture depending on the timing and reason for departure. Interest on deferred payments may be claimed if the entitlement is confirmed but payment is delayed.

Termination of employment does not, by itself, trigger additional statutory severance solely due to the existence of an incentive plan. Statutory severance is payable only where termination or expiry falls within the circumstances prescribed by law and is calculated based on years of service and statutory wage bases, subject to caps. Incentive arrangements may, however, affect whether employees can claim unpaid bonuses or vested equity upon termination, depending on plan terms and whether conditions have been met. Employees reaching statutory retirement age generally are not entitled to severance, and entitlement to pre-retirement bonuses or equity awards depends on express agreement and satisfaction of vesting conditions.

Employee Consultation and Approval Requirements

Before implementing incentive plans that directly affect employees’ remuneration or benefits, employers are required to follow statutory democratic procedures. Article 4 of the Labour Contract Law requires that rules or major matters directly involving employees’ vital interests (including remuneration and benefits) be discussed by the employee representative congress or all employees, negotiated on an equal basis with the trade union or employee representatives, and publicly announced or notified to employees.

Trade unions are entitled to require correction where employers fail to comply with employee representative procedures, and matters that are legally required to be submitted to the employee representative congress must be handled accordingly, as reflected in Article 20 of the Trade Union Law.

These consultation requirements do not require individual employee consent, but failure to complete the democratic process may render incentive rules unenforceable in labour disputes. In addition, listed companies implementing equity incentive plans must also comply with corporate governance and disclosure procedures, including board and shareholder approvals and public disclosure, which operate in parallel with, rather than replace, labour law consultation requirements.

There is no general statutory requirement in China mandating a post-vesting or post-termination holding period for equity incentives. Any restriction on holding or disposing of shares after vesting or following termination of employment is primarily a matter of contractual arrangement under the relevant incentive plan, rather than a mandatory legal rule.

In practice, courts recognise that unvested equity interests may be cancelled upon termination of employment where this is clearly provided for in the plan or agreement. By contrast, there is no uniform legal requirement for employees to continue holding equity that has already vested. Whether vested shares are subject to further holding or lock-up periods depends on the terms of the plan, the shareholding structure and any applicable securities regulation.

Post-vesting or lock-up arrangements most commonly arise in listed company equity incentive plans (particularly restricted share schemes subject to regulatory lock-ups), employee shareholding platforms structured as limited partnerships, and industries with a high reliance on key talent such as technology, biotechnology, advanced manufacturing and financial services.

For employees in sensitive or core positions, post-termination non-compete obligations may also apply. These restrict conduct rather than ownership, but are often co-ordinated with equity incentives to support retention and confidentiality.

Overall, post-vesting or post-termination holding mechanisms are common in practice but are driven by plan design and contractual agreement, not by a general statutory requirement.

In China, employee consent is not always required for the collection and transfer of personal data in connection with cash or share-based incentive plans. Whether consent is required depends on the legal basis relied upon for data processing.

Processing Without Employee Consent

Under the Personal Information Protection Law, employers may process employee personal information without consent where this is necessary for the conclusion or performance of an employment contract, the lawful implementation of human resources management rules or collective contracts, or the fulfilment of statutory duties or legal obligations. Incentive-related activities such as payroll administration, bonus payments, individual income tax withholding and social insurance or housing fund administration generally fall within these necessity-based grounds. Where processing is limited to what is reasonably required to implement incentives and comply with law, separate employee consent is not required.

Processing Based on Consent

If an employer relies on consent as the legal basis, consent must be voluntary, explicit and informed. Any change to the purpose, method or scope of processing requires renewed consent, and employees may withdraw consent at any time. Processing must comply with principles of lawfulness, legitimacy and necessity.

Disclosure or Transfer to Third Parties

Where employee data is provided to independent third parties (such as payroll providers, securities registration or custody platforms, or employee shareholding vehicles), Article 23 of the Personal Information Protection Law requires prior notification of the recipient and processing details, and the obtaining of separate consent. Public disclosure of employee personal information is prohibited without such consent.

Application to Equity Incentive Plans

Equity incentive plans commonly involve transferring employee data to registration institutions, trustees or holding platforms. In these cases, separate consent is generally required. In all scenarios, data processing must be limited to the minimum scope necessary, with clear purposes and appropriate safeguards.

In China, cash or share incentive plan documents are not universally required by law to be translated into Chinese. Whether a Chinese version is mandatory depends on how and where the documents are used.

At a purely contractual level, PRC law does not require incentive plans or grant agreements to be executed in Chinese. Plans drafted solely in a foreign language remain valid, and the absence of a Chinese version does not in itself affect contractual validity. However, if a dispute arises or documents are submitted in judicial or administrative proceedings, courts and authorities typically require a Chinese translation as a procedural requirement for review and enforcement.

Chinese-language requirements apply more strictly in regulatory and official contexts. In practice, Chinese versions are mandatory, and usually prevail in case of inconsistency, in situations such as foreign exchange registration for offshore equity incentive plans, securities regulation and information disclosure filings, securities registration and settlement procedures, and submissions to administrative authorities or courts. Foreign-language documents must generally be accompanied by certified Chinese translations, and it is common to include an express “Chinese version prevailing” clause.

Labour laws do not expressly require employment or incentive documents to be in Chinese. Nonetheless, where incentive arrangements form part of remuneration or employee benefits and later become subject to labour dispute resolution or regulatory scrutiny, a Chinese version or certified translation is typically required in practice.

In summary, Chinese translations are not mandatory in all cases, but they are effectively required whenever incentive plan documents are used for regulatory filings, official procedures or dispute resolution. As a result, employers commonly prepare Chinese or bilingual versions of incentive plan documents for implementation in China.

China has an established framework of corporate governance and disclosure requirements applicable to incentive arrangements, with the most detailed and stringent rules applying to share-based incentives of listed companies, regulated financial institutions and state-controlled enterprises.

Corporate Governance

At the governance level, medium- and long-term incentive arrangements are subject to enhanced internal decision-making. For listed companies, equity incentive plans must be reviewed by the board of directors (typically through the remuneration and appraisal committee) and approved by the shareholders’ meeting, with conflicted directors and shareholders abstaining where required.

In regulated sectors, additional oversight applies. Participation by directors, senior management or employees of securities companies in equity-based incentive plans generally requires shareholder approval and, in some cases, regulatory approval or filing with the securities regulator. For state-controlled listed companies, equity incentives must also be reviewed by the competent state-owned assets authority, reflecting heightened governance and supervision requirements.

The revised Listed Company Governance Code, effective from 2026, further strengthens remuneration governance by requiring sound pay management systems, closer alignment between pay and performance, and the use of deferred payment, malus and claw-back mechanisms, supported by internal controls and transparency.

Disclosure

Listed companies are subject to continuous disclosure obligations for equity incentive plans. Plans must disclose key terms such as the purpose, eligible participants, share type and source, grant size, vesting or exercise arrangements, pricing methodology, performance conditions, plan term, adjustment or termination mechanisms, and accounting and financial impact.

Implementation progress and changes must be disclosed through periodic and ad hoc reports. Annual reports require detailed disclosure of equity incentives and employee shareholding arrangements, including separate disclosure for directors and senior management of vested and unvested awards, exercisable options, exercise prices and market values. Interim reports must also disclose material developments.

Failure to disclose, or false or misleading disclosure, may result in regulatory measures or administrative penalties under securities laws.

Statutory Limits

Equity incentives are further constrained by company law principles such as fair issuance and equal rights for shares of the same class, quantitative caps on total incentives, individual participation limits, and transfer restrictions prior to vesting or lifting of restrictions.

Overall, equity incentives in China are subject to detailed governance and disclosure rules, while cash incentives are primarily governed by internal remuneration systems and general disclosure principles.

China has remuneration regulation and reporting requirements, but these are not universal wage controls. Instead, they operate through corporate governance, securities regulation and industry-specific supervision, and apply primarily to directors, senior management and other key personnel, rather than to the general workforce.

Scope of Application

Remuneration regulation is most developed for:

• listed companies, where directors and senior management are subject to governance-based remuneration oversight and disclosure;
• regulated financial institutions (including banks, securities firms, fund managers and insurers), where performance-based pay is subject to prudential supervision; and
• state-owned or state-controlled enterprises, where remuneration of responsible persons is subject to ownership-based supervision.

Ordinary employees are generally not subject to statutory remuneration caps or reporting requirements, except where industry-specific rules apply.

How the Regime Operates

For listed companies, the board of directors is required to report to shareholders on directors’ performance evaluation and remuneration. Companies must establish remuneration management systems covering pay structure, performance assessment, payment timing and mechanisms for deferral, malus and claw-back. In practice, remuneration of directors and senior management typically consists of fixed pay, performance-based pay and medium- to long-term incentives, with performance-linked elements forming a substantial proportion.

Disclosure is implemented primarily through periodic reporting. Annual reports must disclose remuneration paid to directors, supervisors and senior management, and explain remuneration policies and decision-making procedures. Updated reporting formats require enhanced disclosure of deferred remuneration arrangements, performance assessment criteria, fulfilment status and any suspension or claw-back of pay. Interim reports may also be required to disclose material changes.

In the securities sector, annual reports must further disclose details of remuneration governance, including accrued versus actually paid amounts, deferred payments and non-cash remuneration for directors, supervisors and senior management.

In regulated financial institutions, supervisory rules require performance-based remuneration deferral, as well as suspension or claw-back in cases of excessive risk exposure, regulatory breaches or material misstatement. These requirements typically apply to senior management and key risk-taking positions, with specified deferral ratios and periods. Many banks publicly disclose the implementation and amounts of deferred and clawed-back remuneration.

Courts have recognised the relevance of industry regulatory rules in remuneration disputes, particularly where employment contracts or internal policies expressly incorporate regulatory requirements. While deferred or reduced performance pay has been upheld in cases involving losses, risk events or regulatory penalties, courts scrutinise contractual basis, procedural compliance and evidence, especially where termination of employment is involved.

For state-owned and state-controlled enterprises, remuneration of responsible persons is subject to ongoing supervision, focusing on pay structure, linkage to performance evaluation, payment compliance and disclosure. Supervision is carried out through self-inspection, comprehensive review and targeted audits. In addition, remuneration is increasingly linked to management accountability, with pay claw-back and recovery mechanisms being used as disciplinary measures where managers are found to have engaged in improper or inadequate performance of their duties in the course of business operations.

Overall Assessment

In summary, China’s remuneration regulation is selective and governance-driven, rather than a general labour law restriction. It targets individuals whose remuneration has governance, market or systemic risk implications, and operates through mandatory disclosure, internal control requirements and supervisory oversight, rather than across-the-board salary regulation.