(Apr. 5, 2012) On March 16, 2012, the State Administration of Foreign Exchange (SAFE) publicized on its website a Notice on Issues Concerning Foreign Exchange Administration of [Domestic] Individuals' Participation in Share-Based Incentive Plans of Overseas Companies (Circular 7). (Guojia Waihui Zongju Guanyu Geren Canyu Jingwai Shangshi Gongsi Guquan Jili Jihua Waihui Guanli Youguan Wenti de Tongzhi, Hui Fa  No. 7, SAFE website.) Circular 7 replaces the Operating Rules Concerning Foreign Exchange Administration of Domestic Individuals' Participation in Employee Stock Ownership Plans and Stock Option Plans of Overseas Listed Companies (Circular 78), which were issued by SAFE in 2007.
Circular 7 differs from Circular 78 in several significant respects:
1. Standardization of critical terms and expansion of their scope.
· The term “shared-based incentive plan (SIP)” refers to an incentive plan that involves an Overseas Listed Company (OLC) providing shares to Domestic Individuals who have an employment relationship with the OLC's Domestic Companies. Employee ownership plans and stock option plans, among other SIPs permitted under Chinese laws and regulations, fall within the SIP category. (Circular 7, art. 1.)
· The abovementioned “Domestic Companies” include OLCs registered within the territory of China; domestic branches (or representative offices) of OLCs; and the parent companies, subsidiary companies, partnerships, or other domestic institutions that directly or indirectly control or are controlled by an OLC. (Id.)
· “Domestic Individuals” (Individuals) consist of the directors, supervisors, officials, and other employees of a Domestic Company. Both Chinese and foreign employees are included in this definition, as long as their status is consistent with article 52 of the Regulations on Foreign Exchange Administration. (Id.)
2. Enhancement of practical procedures to set up SIP accounts and transfer the funds (or for other SIP activities) and enhancement of the level of monitoring of SIP-related activities.
· Individuals participating in SIPs offered by the same OLCs are required to collectively through the Domestic Companies they serve entrust one single Domestic Agency to take care of foreign exchange registration, account opening, funds transfer, and remittance and deal with SAFE's local offices or its foreign exchange department.
Individuals will also entrust one Overseas Institution with the handling of such issues as the exercise of options, purchase and sale of related stocks, and transfers of stocks and funds. (Id.art. 2.)
· Circular 7 has reduced to five the number of types of filing materials that had been stipulated in Circular 78 for foreign exchange registration, focusing on a proven real existence of a SIP, the employment relationship between a Domestic Company and its employees, and the entrustment relationship between the Domestic Company and a Domestic Agency. The local offices of SAFE are authorized to request supplementary materials on the basis of questionable authenticity of the submitted materials or related transactions. (Id. art 3.)
· Significant changes of SIPs, such as amendments of key provisions, addition of new plans, and changes to plans that arise from the annexation or reorganization of OLCs or Domestic Companies, must be reported to the local offices of SAFE by the Domestic Agencies or Overseas Institutions. (Id. art. 8.)
· In the first three days of each quarter, Domestic Agencies are required to file with the local SAFE offices a record of the status of the SIPs. Their deposit banks are also required to report monthly on the condition of opening and closure of special accounts related to individual-participated SIPs and the accounts' balance. (Id. art. 10.)
3. It is noteworthy that under Circular 7, Individuals are able to use their own foreign currency funds in their personal foreign currency deposit accounts, RMB funds, or other legal domestic funds to participate in SIPs. (Id. art. 4.) Individuals can transfer the foreign currency funds directly through a bank. In order to transfer domestic RMB funds abroad, however, they are required to first transfer the RMB funds to the accounts of the Domestic Agencies, which will then apply to the local SAFE offices for a foreign exchange payment quota on a yearly basis. (Id. arts. 4 & 5.)
Circular 7 came into force on February 15, 2012.
Prepared by Rong Xiang, Foreign Law Research Consultant, under the guidance of Kelly Buchanan, Chief, Foreign, Comparative and International Law (FCIL) I. Ms. Xiang has a Bachelor of Laws degree from Nanjing University in China and an LL.M degree from the City University of Hong Kong. She recently earned an LL.M. in International Business Law from The American University Washington College of Law.