The 2nd largest economy in the world trailing USA
The People’s Republic of China is the world’s second largest economy and one of the only five remaining communist states in the world. Major cities are the capital Beijing, which is the political and cultural centre, and Shanghai, which is the largest industrial, commercial and financial centre.
China is situated in East Asia covering an area of approximately 9,600,000 square kilometres. It borders in the north by Russia, Mongolia; in the northwest by Kazakhstan; in the west by Tajikistan; in the south by Afghanistan, Pakistan, India, Vietnam, and Nepal; in the northeast by Korea.
The establishment of all types of Foreign Investment Enterprise (FIE) requires review and approval by the relevant regulatory authorities including the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM).
Wholly Foreign-Owned Enterprise
An enterprise that is established in China, without any investment from China, by one or more foreigners is a WFOE. They are generally in the form of Limited Liability Companies. The main benefit of a WFOE is that,
However, there are a few limitations such as,
Foreign Invested Commercial Enterprise
Foreign parties are allowed to set up wholly owned entities, known as foreign-invested commercial enterprises (FICEs), which may act as a retailer, wholesaler or commission agent and engage in franchising activities.
Equity Joint Venture
An EJV is a company with joint People Republic of China and foreign ownership that is incorporated with Limited Liability, registered in China and established for a specific purpose.
The shareholders have joint management of the company and profits and losses are distributed in proportion with the capital contribution of each party. Investors interested in this form of investment vehicle should be aware that the lowest registered capital is RMB 30,000.
EJVs may present difficulties with finding a suitable local partner, liquidating investments and protecting intellectual property. Other disadvantages include the limited term, no flow through taxation and higher establishment requirements. During the term, parties may not withdraw their capital contributions or transfer or assign their interests in the EJV without prior government approval, if a party wishes to assign its EJV equity, the other party or parties have a right of first refusal.
Cooperative Joint Venture
CJV is the desired investment channel for joint construction and management of hotels, commercial complexes, infrastructure and mining projects. Specific types of projects where the foreign partners successfully earn out, while the Chinese partner owns the assets at the end of the project or projects in which a partner is unable to contribute assets to the joint venture but can allow the joint venture to use the assets for the project.
The EJV is generally the preferred investment vehicle in China, as the authorities are more familiar with this vehicle than the CJV.
Joint Stock Companies
This form is incorporated for the purpose of listing on foreign or Chinese stock exchanges. Both the Chinese and the foreign investor contribute equal value shares. Such companies are opted when the emphasis is on Capital raising, free transferability of shares and the limited liability of shareholders.
The disadvantage of such companies includes, high establishment requirements, wherein the minimum capital for a company is RMB 5,000,000 with no flow through taxation.
Foreign enterprises (including enterprises in Hong Kong, Macao and Taiwan) are permitted to open representative offices in China. Legally, these are to be established purely for liaison purposes, and their activities are limited to the provision of services that do not give rise to any earnings.
The permissible activities of representative offices include the following:
Free Trade Zone - Shanghai Special Economic Zone
Shanghai Pilot Free Trade Zone is the first free zone in Mainland China. A law was passed earlier in July 2014 that covers regulations on supervision, investment, trade, financial services and taxation. The enactment of the law ensures reforms and innovation in the zone that will be carried out in a legal framework.
Benefits of registering in a Shanghai SEZ are:
Incorporation and registration takes about 30 days.
Reforms include the registration system for setting up a business in the zone, the negative list for foreign investment, measures to facilitate customs clearance procedures and rules to boost financial liberalisation in the zone are legalised in the law.
Foreign investors are not permitted to directly submit the application documents of incorporation of a WFOE to the relevant authority in China. They must retain a PRC entity that is authorised or permitted by relevant authorities to act as a sponsor. The sponsor will submit all the documents to the examination and approval authorities on behalf of the foreign investor.
No minimum registered capital is required for WFOEs with scope of business of consulting, trading, retailing, information technology etc. in China. There is a minimum registered capital that is still required for some industries, for instance: banking, forwarding etc.
Documents required for a Wholly Foreign-Owned Enterprise:
|No.||Type of Tax||Tax Rates|
|1||On monthly-earned income over RMB 80,000||vary between 5% and 45%|
|3||Net wealth tax, inheritance tax||Nil|
|4||Real estate tax||12% (rental Income), 4% (residential property)|
|6||Business Tax||3% to 20%|
|No.||Type of Tax||Tax Rates|
|1||Corporate income tax||25%|
|2||Special rates for small and thin-profit enterprises||20%|
|3||State-encouraged new high technology enterprise||15%|
|4||Withholding tax on salaries, employers||20%|
|5||Withholding tax on dividends, interests, royalties and capital gains||10%|
|6||Consumption tax||1 to 45%|
The Corporate Income Tax Law (CIT Law) was promulgated in March 2007 and came into effect on 1st January 2008. The Foreign Enterprise Income Tax (FEIT Law), that was applicable to FIEs and foreign enterprises; and the Enterprise Income Tax Law, which was applicable to domestic enterprises, were both replaced by the CIT Law.
The tax year for establishments is the calendar year. Tax resident establishments are required to file their annual income tax returns and annual financial statements within five months after the end of a tax year, together with an audit report issued by a Chinese-registered CPA (Certified Public Accounts) firm, or a verification report issued by a Chinese registered CTA (Certified Tax Advisor) firm.
Generally, non-tax resident enterprises with their establishment or place of business in China shall file the annual CIT documents within five months after the end of the calendar year. There are exceptions such that certain non-tax resident enterprises may not need to perform the annual CIT filings.
Late payment surcharge of 0.05% of the unpaid tax balance for each day the income tax is in arrears. If the taxpayer fails to file a return or pay the tax due, an additional fine may be assessed.
It is obligatory to obtain Visas before arriving in to the country. It may be for single entry or multiple entries. Commonly used visas are as follows:
Foreign employees are also required to apply for work permits from the local Labour Bureau and residence permits from the Public Security Bureau. These applications must be supported by evidence of sponsorship from the employing organisations in China. Work and residence permits are usually valid for one to five years and may be renewed for an unspecified number of times.Compare Jurisdictions Talk to a consultant