To accelerate the implementation of the innovation-driven development strategy, further stimulate the enthusiasm and creativity of technical and managerial personnel, and promote the sustainable development of state-owned science and technology enterprises, with the approval of the State Council, on February 26, 2016, the Ministry of Finance, the Ministry of Science and Technology, and the State-owned Assets Supervision and Administration Commission jointly issued the "Provisional Measures for Equity and Dividend Incentives for State-owned Science and Technology Enterprises" (Cai Zi [2016] No. 4, hereinafter referred to as the "Measures"), which came into effect nationwide as of March 1, 2016. Since the issuance of the "Measures," they have attracted widespread attention from all sectors of society. Various organizations have attached great importance to them, made careful arrangements, and carried out a series of effective initiatives. At the same time, some prominent issues in implementation have been brought to light. To help organizations gain a deeper understanding of the policy’s implications and to guide and encourage enterprises in carrying out incentive programs, the Ministry of Finance, the Ministry of Science and Technology, and the State-owned Assets Supervision and Administration Commission have provided answers to questions concerning such aspects as the eligibility criteria for enterprises under the "Measures," requirements for incentive recipients, conditions for implementing incentives, and management of incentive plans.

I. Eligibility Criteria for Enterprises

　　 1. How should we define enterprises transformed from research institutes?

　　Answer: Transformation-oriented research institutes and enterprises refer to those institutions that, in accordance with the “Notice from the General Office of the State Council Forwarding the Implementation Opinions of the Ministry of Science and Technology and Other Departments on Deepening the Reform of the Management System of Scientific Research Institutions” (Guobanfa [2000] No. 38), have been transformed into enterprises or have entered enterprises—specifically, institutions under the administrative departments (units) of the State Council that primarily engage in scientific research and technological development—as well as institutions under the provincial, autonomous region, municipality directly under the central government, and cities designated for separate planning that have likewise been transformed into enterprises or have entered enterprises and are primarily engaged in scientific research and technological development.

　 　2. How are nationally recognized high-tech enterprises defined?

　　Answer: High-tech enterprises recognized in accordance with the “Notice from the Ministry of Science and Technology, the Ministry of Finance, and the State Administration of Taxation on Revising and Issuing the ‘Administrative Measures for the Recognition of High-tech Enterprises’” (Guo Ke Fa Huo [2016] No. 32) and the “Notice from the Ministry of Science and Technology, the Ministry of Finance, and the State Administration of Taxation on Revising and Issuing the ‘Guidelines for the Management of the Recognition of High-tech Enterprises’” (Guo Ke Fa Huo [2016] No. 195).

　　 3. How should we define science and technology enterprises invested in by higher education institutions and research institutes?

　　Answer: There are two types of cases involved: first, technology enterprises directly invested in by higher education institutions and research institutes; second, technology enterprises invested in by asset management companies wholly owned by higher education institutions and research institutes.

　　 4. How should we define science and technology service institutions recognized at the national and provincial levels?

　　Answer: The primary business activities of science and technology service institutions fall within the scope specified in the “Several Opinions of the State Council on Accelerating the Development of the Science and Technology Service Industry” (Guofa [2014] No. 49), including research and development and related services, technology transfer services, inspection, testing, and certification services, entrepreneurship incubation services, intellectual property services, science and technology consulting services, science and technology financial services, and science and technology popularization services, among others. Such institutions must also be recognized by relevant ministries and commissions of the State Council, directly affiliated agencies, or competent authorities of provinces (autonomous regions, municipalities directly under the central government, and cities under separate planning).

　　 5. Can branches and subsidiaries implement equity and dividend-based incentives?

　　Answer: A branch does not have corporate legal personality and therefore does not meet the requirements of Article 2 of the “Measures,” meaning it cannot implement equity and dividend incentives in accordance with the “Measures.” A subsidiary, however, has independent legal personality and, provided it meets the implementation conditions stipulated in the “Measures,” may implement equity and dividend incentives.

　　 6. Can enterprises under the system of all-people ownership implement equity or dividend incentives in accordance with the “Measures”?

　　Answer: Article 44 of the Measures stipulates that state-owned enterprises that have not yet undergone corporate reform may, by reference to these Measures, implement project-based profit-sharing and post-based profit-sharing incentive policies; however, they may not implement equity-based incentive policies.

　 　7. Can entities included in the pilot program for employee stock ownership in state-controlled mixed-ownership enterprises carry out equity incentives?

　　Answer: State-owned technology enterprises that meet the requirements of both the employee stock ownership pilot program for state-controlled mixed-ownership enterprises and the equity incentive policies outlined in the “Measures” may independently choose to implement either one, but not both simultaneously. The primary consideration is that the employee stock ownership pilot program for state-controlled mixed-ownership enterprises essentially allows employees to purchase shares in the enterprise—thus aligning with the source of equity incentives under the “Measures,” which also involves enterprise equity. Therefore, enterprises may adopt different policies according to their own development needs and strategic objectives; however, they are prohibited from conducting both the employee stock ownership pilot program and equity incentives at the same time, in order to avoid duplicate incentives.

　　 8. Can state-owned technology enterprises listed on the National SME Share Transfer System implement equity or dividend-based incentive plans?

　　Answer: In 2006, non-listed joint-stock companies in the Zhongguancun Science Park began trading their shares through an agency transfer system—specifically, by listing on the National SME Share Transfer System, commonly known as the “New Third Board.” The “Measures” apply to state-owned and state-controlled, unlisted technology enterprises within China that have corporate legal status, including state-owned enterprises listed on the National SME Share Transfer System.

　　 9. How are incentive policies for non-state-owned enterprises implemented?

　　Answer: With regard to incentive policies for non-state-owned enterprises, those that are listed companies shall be governed by the “Administrative Measures for Equity Incentives of Listed Companies” (Order No. 126 of the China Securities Regulatory Commission); for those that are not listed companies, incentive policies may be implemented by reference to relevant provisions such as the “Law of the People’s Republic of China on Promoting the Transformation of Scientific and Technological Achievements” and the “Measures,” or may be decided upon independently.

II. Requirements for Incentive Recipients

　　 10. How should we understand the condition of “entering into a labor contract” as stipulated in Article 7 of the Measures?

　　Answer: The purpose of the “Measures” is to establish a medium- and long-term incentive and distribution mechanism for independent innovation and technology transfer in state-owned science and technology enterprises, thereby motivating the enthusiasm and creativity of the enterprise’s technical and managerial personnel. Therefore, the recipients of incentives must be employees who have “signed labor contracts” with the enterprise.

　　 11. Can equity or dividend incentives be granted if key technical personnel and management personnel simultaneously serve as employee representatives on the supervisory board?

　　Answer: The “Measures” explicitly stipulate that “company supervisors and independent directors may not participate in equity or dividend incentive plans.” Considering the requirement for independence in performing specific duties, key technical personnel and management personnel who concurrently serve as employee representative supervisors cannot be included in the scope of incentive recipients.

　　 12. Can the same incentive recipient be subject to multiple, diverse incentives?

　　Answer: According to Article 31 of the Measures, for the same scientific and technological achievement or industrialization project related to a particular position, an enterprise may adopt only one type of incentive and provide such incentive once to the same incentive recipient. For incentive recipients who have been granted equity incentives under these Measures, the enterprise shall not offer them any further equity incentives within five years from the date on which this equity incentive plan takes effect.

III. Conditions for Implementing Incentives

　　 13. What are the prerequisites for equity or dividend-based incentives?

　　Answer: According to Article 6 of the Measures, enterprises shall establish standardized internal financial management systems and employee performance appraisal and evaluation systems. The annual financial accounting reports must be audited by a qualified intermediary agency in accordance with the law, and the incentive plans formulated within the past three years must not have been subject to administrative or criminal penalties for violations of financial or tax laws and regulations. For enterprises established less than three years ago, the calculation shall be based on their actual operating period. The financial indicators required for the past three years are as follows:

　　 Note: Assume the company formulated the year 2017. The annual incentive program refers to the period from 2014 to 2016 over the past three years. The preceding year for the formulation of the incentive program is 2016.

　　 14. Can enterprises established within the past three years implement equity and dividend-based incentives?

　　Answer: To support and encourage start-up state-owned technology enterprises in implementing equity and dividend-based incentive programs, the “Measures” have relaxed the time restrictions for implementing such incentives. For enterprises established within the past three years, incentive methods such as equity sales, stock options, and profit-sharing based on project returns may be adopted; the relevant indicators shall be calculated based on the actual length of operation. However, equity awards and job-based profit-sharing incentives are not permitted.

　　 15. Regarding enterprises transformed from research institutes, does the “past three years” indicator mentioned in Article 6 of the Measures start from the time the institute was transformed into an enterprise, or from the time the institute was established?

　　Answer: According to the requirements set forth in the “Notice from the General Office of the State Council Forwarding the Implementation Opinions of the Ministry of Science and Technology and Other Departments on Deepening the Reform of the Management System of Scientific Research Institutions” (Guobanfa [2000] No. 38), for technology development-oriented research institutions that have been reorganized from public institutions into enterprises, the “recent three years” criteria used in implementing incentives shall be calculated starting from the initial point when the institution was reorganized into an enterprise. If the period since the institution’s reorganization into an enterprise is less than three years, in accordance with the “Measures,” it is prohibited to adopt equity-based rewards or job-based profit-sharing as incentive methods.

　　 16. Both the Group and its subsidiaries, as independent corporate entities, meet the eligibility criteria for incentives. When implementing these incentives, can the financial indicators required for the incentives exclude the subsidiaries’ respective figures?

　　Answer: The financial indicators specified in the implementation conditions of Chapter 2 of the Measures shall be calculated and confirmed based on the relevant data from the annual financial accounting reports of enterprises that have been legally audited by intermediary agencies. When a group company or its subsidiary implements incentives, the annual financial accounting report of the enterprise refers to the consolidated financial report of the enterprise itself, including the data of its respective subsidiaries.

　　 17. Are large, medium, small, and micro-sized state-owned technology enterprises all eligible to implement equity incentives in accordance with the “Measures”?

　　Answer: According to the “Measures,” equity incentives include three types: equity sale, equity awards, and stock options. Large- and medium-sized state-owned technology enterprises may adopt equity sale and equity award incentive methods but are prohibited from using stock options as an incentive method. The criteria for classifying enterprise types shall be implemented in accordance with relevant provisions, such as the “Notice on Issuing the Measures for the Classification of Large, Medium, Small, and Micro Enterprises for Statistical Purposes” (Guotongzi [2011] No. 75) issued by the National Bureau of Statistics.

　　 18. Can state-owned technology enterprises that meet the eligibility requirements use shares held in their controlling subsidiaries to provide equity incentives to their own employees?

　　Answer: According to Article 3 of the Measures, state-owned science and technology enterprises that meet the relevant conditions and wish to implement equity incentives shall base such incentives on their own equity holdings and may not use shares held in their controlled subsidiaries to provide equity incentives to their employees.

　　 19. Is an on-exchange transaction required for the sale of equity?

　　Answer: According to Article 11 of the Measures, when a company carries out equity sales, it shall sell its equity to incentive recipients via an agreement at a price no lower than the assessed value of the equity. No on-exchange trading is required for such equity sales.

　　 20. How should we understand the requirement that, when implementing equity incentives, “the cumulative increase in net assets generated by after-tax profits over the past three years must account for more than 20% of the total net assets at the beginning of the most recent three-year period”?

　　Answer: According to Article 12 of the Measures, “the cumulative increase in net assets formed by after-tax profits over the past three years refers to the increase in book value of net assets at the end of the year preceding the formulation of the incentive plan, relative to the book value of net assets at the beginning of the first year of the past three years; it does not include net assets formed through various forms of investment or subsidies from the government and corporate shareholders, nor does it include profits already distributed to shareholders.” The total net assets at the beginning of each of the past three years refers to the total net assets at the beginning of the first year of those three years.

　　Here’s an example to illustrate this point: Suppose Company A plans to implement an equity incentive program for the year 2017. The net assets generated from after-tax profits in the years 2014–2016 were RMB 600,000, RMB 700,000, and RMB 800,000, respectively. At the beginning of 2014, the total net assets amounted to RMB 10 million. The increase in net assets is calculated as follows: 210 (60 + 70 + 80) > 200 (10 million × 20%). Therefore, Company A meets the financial criteria required for implementing the equity incentive program.

　　 21. Can state-owned enterprises that have received special financial subsidies implement equity and dividend incentives?

　　Answer: According to Article 12 of the Measures, “The increase in net assets accumulated from after-tax profits over the past three years shall not include net assets formed through various forms of investment or subsidies provided by the fiscal authorities and corporate shareholders, nor shall it include profits already distributed to shareholders.” In other words, special fiscal subsidies received by state-owned enterprises do not affect the enterprises’ ability to implement equity and dividend incentive schemes. However, when calculating specific financial indicators related to the “increase in net assets accumulated from after-tax profits over the past three years,” the special fiscal subsidies received by the enterprise must be deducted. That is, the indicators used for calculation must reflect profits generated solely through the enterprise’s own business operations and development.

　　 22. What are the mandatory requirements for the exercise date of stock options?

　　Answer: The interval between the grant date of equity options and the first exercisable date of the granted equity options (i.e., the vesting period) shall not be less than one year, and the validity period for exercising equity options shall not exceed five years. The procedure is as follows: