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Doing business in China

China and its $10 trillion economy are growing rapidly at a rate of 7 percent annually. As a superpower, China is slowly reshaping the global economy. In the past three decades, the Chinese government has been opening its doors wide for international companies and foreign investors to help boost its economic growth.

Is it a wise decision to do business in China?

Recent reforms have made doing business in China easier and quicker for foreign investors. This is seen by China’s boosted ranking at 31 in the World Bank’s 2019 Ease of Doing Business Report. This is a huge leap from its 45th ranking position from the previous year. The improvement of ease in doing business ranking earned China to be recognized as one of the world’s most improved economies for ease of doing business for two consecutive years.

China has been working hard to improve its domestic business landscape for all-sized enterprises while maintaining an ongoing pace of reforms to attract more foreign investors in the long run.

China’s Constitution

The People’s Republic of China runs a socialist system government by its communist government.

China Legal System

Legislations created by the central and local governments at various levels are enforced through the national people’s congress and local people’s congress.

China’s judicial process consists of four levels of courts, starting at country level up to its Supreme Court, with various escalation and appeal processes. These courts are responsible for dealing with civil and criminal cases.

Financial Sources

China is the world’s most relevant country as its investment landscape attracts the biggest financial institutions. The present financial system is under direct leadership of the People’s Bank of China, with exclusively state-owned commercial banks as its main body but also allowing the presence and coordination with state policy-related financial institutions.

Various sources of financial includes commercial banks, policy banks, investment institutions, credit unions, and stock exchanges.

The Most Popular Investment Vehicles in China

Sino-Foreign Equity Joint Ventures ( EJVs)

A Sino-Foreign Equity Joint Venture (EJV) is established by an international entity (foreign companies, enterprises, private investors) together with a Chinese entity.

It is operated by entities that share the risk, as well as profits and losses according to the percentage of capital they contribute.

Set-Up Procedure

  1. Submission of documents that will be assessed and approved by concerned authorities:
  2. Sino-Foreign Equity Joint Ventures (EJV) set-up application form
  3. Feasibility study report
  4. Signed agreements, contracts and articles of association
  5. List of board member names
  6. other documentation required for assessment and approval

Approval by regulating authorities

  • The application to set-up a Sino-Foreign Equity Joint Ventures (EJV) must be made within three months.
  • Upon approval, the administration department in charge of foreign trade and economy will issue certificate of approval.
  • The Sino-Foreign Equity Joint Ventures (EJV) obtains a business license within one month of approval.
  • Capital and Total Investment
    • Registered capital is the total investments of all ventures and must meet the following criteria:

    Foreign capital investment no less than 25% of registered capital.

    During the contract term, it may not reduce its registered capital.

    Increasing foreign capital requires approval from the board and must be approved by   concerned authorities.

    Companies in certain industries need to adhere to special regulations issued by relevant authorities.

    • Total investment consists of registered capital and loans.
    • State Administration for Industry and Commerce issues registered capital as a percentage of total investments as follows:
    1. Up to $3M total investment – 70% registered capital
    2. $3M to $10M – 50% registered capital but not less than $1.2M
    3. $10M to $30M – 40% registered capital but not less than $5M
    4. Above $30M – One third but no less than $12M

    Wholly Foreign Owned Enterprises (WFOE)

    An enterprise set-up in China with all capital invested by foreign investors.

    • Categorized as a separate legal entity with an independent accounting system.
    • Responsible for its profits and losses and assumes all legal responsibilities.

    China’s Foreign Investment Law has little influence on Wholly Foreign Owned Enterprises (WFOE) since the old Wholly Foreign Owned Enterprises (WFOE) was repealed. Under the New Foreign Investment Law, a Wholly Foreign Owned Enterprises (WFOE) could take limited liability or joint-stock forms as per Company Law.

    Set-Up Procedure

    Submit the following to concerned authorities:

    1. Energy conditions and volume requirement
    2. Land area requirements
    3. Objectives of setting up a Wholly Foreign Owned Enterprises (WFOE).
    4. Products and services
    5. Requirements for community-based facilities
    6. Scope and scale of business
    7. Technical equipment

    The government will respond to an application within 30 days after receipt of application.

    Submit an application to concerned authorities with the following documents:

    • Feasibility study report
    • Official certificate and references of foreign investors
    • Responses of local government at county level or higher about the plan to set-up a Wholly Foreign Owned Enterprises (WFOE) and the list of goods to be imported.
    • Wholly Foreign Owned Enterprises (WFOE) application

    Evaluation and approval from authorities must be issued within 90 days upon submission.

    • Foreign investors must file registration with the Industrial and Commercial Bureau.
    • Obtain a business license 30 days upon receipt of approval certificate.
    • Significant changes such as separation and consolidation must be examined by a Chinese accountant.

    Registered capital as a percentage of total investment will be in accordance with existing regulations:

    1. Up to $3M total investment – 70% registered capital
    2. $3M to $10M – 50% registered capital but not less than $1.2M
    3. $10M to $30M – 40% registered capital but not less than $5M
    4. Above $30M – One third but no less than $12M

    Representative Office

    A representative office may only engage in non-operating activities in China. As the name implies, a representative office will exclusively act on behalf of their parents companies. This includes making communications, extending the volume of products, researching, marketing, and technical exchanges within the known business scope of foreign companies. A representative company in China may engage in activities such as signing business contracts that are crucial to maintain smooth flow of operations in China.

    Set-Up Procedure

    There are no fixed laws or provisions created at the national level regarding the establishment procedures for representative offices in China. For a more comprehensive set-up procedure, you can retrieve information from the local authorities.

    The general step-by-step process involves the following steps:

    • Filing an application with the Administration of Industry and Commerce Office. Registration must be completed within 30 days upon obtaining the certificate of approval.
    • Submission of certificate of approval
    • Application form signed by the Chairman of the Board or General Manager of the representative office.
    • An application for must include all pertinent information, including office name, officer in charge, business scope, residency period, and location, to name a few.
    • Official license to do business in China provider by concerned local authorities.
    • Capital credit certificate issued by concerned financial institutions
    • Authorization letter for permanent representative issued by the parent company and the resume of its permanent representative.

    Tax Payment and Registration

    • A representative office is deemed to declare its Value Added Tax (VAT) on a quarterly basis. VAT should be paid within 15 days of the end of the quarter.
    • A service representative office involved in agency and trade should calculate deemed revenue and tax based on gross costs and expenses.
    • Accounting books are necessary for any consulting representative office that engages in commerce, accounting, law, tax, and audit. This will ensure accurate calculation, declaration, and payment of taxable income.
    • All other representative offices in China may declare tax-based revenue from operating activities. In case there is no operation income, an office must declare its operating circumstances one month after year-end.
    • Enterprise Income Tax is ideally prepaid within 15 days at the end of a quarter, while the remaining tax balance must be paid within four months before the end of the year.

    Branches

    Only foreign invested enterprises (FIEs), foreign insurance companies, foreign legal practices, and foreign banks are able to open a branch office in China with the approval of concerned authorities. A foreign company must appoint a representative who will be in charge of the branch. The parent company must be allocated operational funds to the branch.

    A branch office operating in China will not gain the status as  Chinese legal entity, but the foreign company itself will assume fill liability for the operational activities of its branch or branches in China.

    Branch Office Tax Payments

    Income Tax

    If the head office of a foreign enterprise in China with all of its branches, including the head office are located in the same city, it is the responsibility of the head office to declare, calculate, and file the income tax on behalf of the foreign enterprise based on profits and losses of branch-sourced income within China.

    Business Tax and Value Added Tax

    Branches should pay Value Added Tax and business tax to concerned local authorities. Unless the head office and its branches are in the same city, it is the responsibility of the branch to pay Value Added Tax.

    Trusts

    In China, trusts are categorized as public investment vehicles or for private charitable funds. Funds are not generally used for business reasons. There is no equivalent entity in China of private trust funds that are present in other countries to hold assets for beneficiaries.

    Public investment trusts may invest in bonds, listed stocks, and other types of securities approved by the country’s securities regulatory authority.

    Registration Requirements and Set-Up Procedures for Public Securities (Shares)

    A company may only be allowed to list its stocks provided they submit the following requirements:

    • Company must not show any record of irregularity in recent years or false record on its financial statements.
    • Publicly issued shares must be more than 25% of the total shares, where the total amount exceeds RMB 0.4 billion. Publicly issued shares must be no less than 10%.
    • The stock is subject to assessment and approval by the securities regulatory authority and considered to be publicly issued.
    • Total capital amount of at least RMB 30 million

    Application to list securities must be filed with a stock exchange and is subject to assessment and approval of the stock exchange. A listing agreement must then be reached by both parties.

    Regulations for Overseas Cash Withdrawal

    Individuals, including foreign investors, holding domestic bank cards withdrawing cash from abroad must not exceed a total amount of RMB 100,000 per year. If the annual amount goes beyond RMB 100,000, the domestic bank card will be automatically suspended for cash withdrawal outside the country for the next two years.

    Grants, Incentives, and Protections

    Favorable Policies for Investing in Special Regions in China

    Some regions in China, especially those with large ethnic minorities, enjoy a greater degree of autonomy. In these places, local governments have the authority to enforce preferential enterprise income tax policies, such as tax-free periods and reduced rate policies.

    For instance, in the special economic zones of Shantou, Xiamen, Hainan, Zhuhai, Shenzhen, and Shanghai Pudong New Area, certain tech enterprises enjoy preferential income tax policies.

    Any income generated in the above-mentioned areas is tax-free for the first two years of operations. Additionally, they are assessed at half the standards rate in the following three years.

    Hainan Free Trade Port

    The State Council promulgated the Overall Plan for China Pilot Free Trade Zone or the Hainan Free Trade Port. Subsequent laws, regulations, and government policies were enacted to grant preferential treatment and incentives to registered and incorporated enterprises.

    Some of the major incentives are as follows:

    • Less restrictions on foreign entry
    • Lower corporate income tax
    • One-off subsidy for specific enterprises
    • Preferential treatment for high-skilled workers
    • Relaxed foreign currency regulations.
    • Tariff related to preferential policies, including low or no tariff

    It also enforces favorable policies for investing in certain industries. VAT-free industries include the following industries:

    • agricultural primary products (self-grown)
    • airlines engaged in direct shipping or flight business across the Taiwan Strait
    • construction materials produced by waste residue conforming to national regulations
    • education services provided by schools engaged in diploma education
    • elderly care services provided by elderly service institutions
    • equipment and raw materials donated by foreign governments or international organisations
    • international freight transportation agency services provided by taxpayers directly or indirectly
    • medical services provided by medical institutions
    • nursing and education services provided by nurseries and kindergartens
    • personal (not including self-employed) sale of self-used goods
    • re-export of goods processed with imported material
    • special imported goods conforming to national regulations for the disabled
    • technology transfer and research and development and technology consulting and technical services.

    transportation income obtained from the Mainland by Taiwan shipping companies

    Additional Income Tax Preferential Treatment for Special Industries:
    • Approved high-tech companies enjoy 15% income tax rate.
    • The following industries are exempt from income tax:
    1. Agriculture, forestry, and related industries
    2. Distant water fisheries
    3. Livestock and poultry
    • The following industries are taxable at half the standard rate:
    1. Flower, tea, or other beverage crop, spice crops
    2. Inland aquaculture
    3. Sea culture
    • Income from conditional protection, energy- and water-saving projects are tax-free for the next three years from making operational profit. They will be then tax at half the standard rate for the following three years.
    • China’s corporate income tax law and regulations include tax exemption provisions and a reduction in income tax. The first RMB 5 million resident enterprise technology transfer will be tax-free, and the excess will be taxable at half the standard rate.
    • The income tax rate for small, low-profit enterprises is at 20%, and including the following:
    1. Industrial undertakings- if the taxable profits do not exceed RMB 1 million, employee count is less than 100, and total assets do not go beyond RMB 30 million.
    2. For other undertakings, taxable profits do not exceed RMB 1 million, employee count is less than 80, and total assets do not go beyond RMB 10 million.

    Incentives on Research and Development (R&D)

    • 175% of research and development costs may be deducted in arriving at taxable profit.
    • Capitalized research and development can be amortized on the basis of 175% of total costs.

    Export Incentives

    China has enforced preferential policies for exported goods. Exported goods are assessed a VAT export refund set at various rates and are free from consumption tax.

    Protection of Industrial and Intellectual Properties

    Intellectual property is a valuable asset for foreign investors. China has made recent developments in recent years to improve its Intellectual Property protection such as amendments made to its IP Laws, as well as enforcing a new national Intellectual Property Appeals Court.

    Copyrights

    In China, copyrights are protected by the Copyright Law. The Copyright Law was enforced in 1990 and was amended three times since then. The most recent amendment was last made on November 11, 2020. The Standing Committee of the National People’s Congress delineates the latest provisions to the Copyright Law.

    The fundamental concept of Copyright Law essentially belongs to the author. Rights of authorship, alterations, and integrity of an author are unlimited in time.

    The new changes to the Copyright Law further enhance protection towards copyright for the following reasons:

    • Better standards regulation burden of proof
    • Conferring to copyright authorities’ additional powers when investigated suspected infringements
    • Identifies a list of activities that are considered to be copyright infringements
    • Increase statutory damages
    • Introduction of punitive damages
    • New provisions related to technological protection initiatives
    • New set of criteria for calculating compensation for damages

    Trademarks

    Certain goods are deemed by law to feature a trademark in China. If no trademark has been granted, such products cannot be sold to the public. In China, there is a comprehensive yet complex rules regarding trademark application. Including distinguishability of trademarks, legitimate words, symbols, and more.

    The latest amendment of the Trademark Law was on 23 April 2019. In this latest amendment, it mainly tackled the bad faith trademark application issues and further intensify the punishments for trademark infringement.

     Patents

    Patents in China are protected by the Patents Law. On 12 October 2020, China approved the fourth amendment to the China Patent Law. Notable changes to the Patent Law are as follows:

    • Administrative protection of patents
    • Extension of design patent term to 15 years.
    • Formal introduction of partial design.
    • Introduction of pharmaceutical patent term compensation.
    • Introduction of punitive damages up to five times the original damages.
    • Introduction of the open license system.

    Patent application requires the assistance of professional advice. The basic premise is that any invention or utility model for which a patent right may be granted must possess novelty, inventiveness, and practical applications.

     

    China Taxation Framework

    Tax on Income

    1. Corporate Income Tax
    • 25% standard rate
    • Reduced to 15% for qualified enterprises engaged in certain industries promoted by the Chinese government (tech and integrated circuits production enterprises)
    1. Withholding Income Tax on Payments to Non-Residents
    • 10% concessionary rate applicable to interests, rental, royalty, and passive income.
    1. Individual Income Tax
    • Progressive rates between 3% and 45%.

    Turnover Tax (Tax on Transactions)

    1. Value Added Tax
    • Applicable to the sale of goods, except real estate and provision of labor services in relation to the manufacturing of goods, repair and replacement services within China
    • Standard rate is 17%, within certain necessities assessed at 13%.
    1. Consumption Tax
    • Applicable to 14 consumable goods, such as alcoholic drinks, tobacco, cosmetics, fireworks, jewelry, diesel oil, gasoline, tires, wooden floorboard, motorcycles, automobiles, luxury watches, yacht, automobiles, golf equipment, and disposable chopsticks.
    • Tax is calculated based on price and/sales volume.
    1. Business Tax
    • Applicable to provision of services, with the exemption of processing services, repair, and replacement services, as well as transfer of intangible properties and real estate sales in China.
    • Business tax ranges between 3% and 20%.

    Tax on Specific Objective

    1. Land Appreciation Tax
    • Tax is assessed on the gains obtained from real estate property transactions at rates between 30% and 60%.
    • Gain is calculated based in land value appreciation amount, referring to the excess of consideration received from the transfer or sale over the total deductible amount.

    Tax on Resources

    1. Resources Tax
    • Tax assessed on natural resources by tonnage or volume basis at rates provided by the Ministry of Finance.
    • Taxable natural resources include natural gas, coal, crude oil, raw non-metallic materials, raw ferrous materials, and liquid and solid salt.

    Property Tax

    1. Real Estate Tax
    • Tax is imposed on the owners, users, and custodians of residential properties and commercial buildings at a rate of 1.2% of the original deduction or 12% of the rental value.

    Tax on Behavior

    1. Vehicle and Vessel Tax
    • Tax assessed at a fixed annual amount on owners of vehicles and vessels used in China.
    1. Motor Vehicle Acquisition Tax
    • 10% of taxable consideration will be assessed on the importation and purchase of motorcycles, cars, trams, trailer, cart, electrical buses, and certain types of trucks.
    1. Stamp Tax
    • Tax assessed on individuals and enterprises who execute and receive specified documentation in China and may vary between 0.005% and 0.1%.

    Customs Tax

    1. Custom Duties
    • Duties imposed on goods imported into China and are assessed on the cost, insurance, and freight value (CIF). The rate of duty depends on the nature and country of origin of imported goods.

    Tax Levied by the Finance Department

    1. Deed Tax

    Tax levied on the assignees and transferees on the gift, purchase, or exchange of ownership of land used rights or real estate properties, with tax rates between 3% and 5%.

    As an international consulting firm, Damalion offers a comprehensive company incorporation and formation solution in China. Our service includes assistance with bank account opening, company formation services, preparation of significant documents, and many more. We have the local expertise and knowledge to help foreign investors navigate the process of doing business in China. Whether you want to set up in Mainland China or want to streamline your business operations, our Damalion experts will be more than happy to discuss the best solutions for your specific needs. With our experience and global service network, Damalion delivers solutions that you will need to keep you fully compliant as you do business in China. Call us today to learn more.

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