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Why China ?

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.

Population
population
1,365,630,000
Currency
population
Renminbi (RMB)
GNI Per Capita
population
US$ 11,850
Region
population
East Asia
Political Overview
population
Communist Party, Civil Law

Fiscal Advantages

  • Double taxation relief
  • No capital tax
  • No branch remittance tax
  • China does not levy transfer tax


Regulatory Advantages

  • Qualified small and low-profit enterprises and qualified high / new-tech enterprises are subject to reduced income tax rates
  • An Equity Joint Venture (EJV), established as a limited liability company, has some advantages as an investment vehicle including:
    • Limited liability
    • Free transferability
    • An EJV is allowed to operate in more sectors (e.g. insurance, telecommunications, transport, education, construction) than other investment models.
    • An EJV also enables the investor to leverage on existing useful connections, market share, distribution networks and financial arrangements, through the Chinese partner


Limitations

  • Restrictions on permitted areas and levels of foreign investment
  • Determination of the appropriate investment vehicle
  • Complex central and local regulatory environments and investment approval processes
  • Restrictive foreign exchange controls
  • Labour law requirements including employment permits for expatriates (and exemptions), social insurance, protection for special classes of employees and an employee termination regime which can differ from what they are used to in their own jurisdictions
  • Issues regarding enforceability of Chinese and foreign court judgments and arbitral awards
  • Foreign investment enterprises are required by the State Administration of Foreign Exchange (SAFE) to separate their foreign currency bank accounts into capital accounts and current accounts
  • Merger and acquisition transactions in China involving foreign parties will be subject to review and can be halted due to anti-trust reasons

Company Formation

  • The Wholly Foreign-Owned Enterprise (WFOE)
  • The Foreign-Invested Commercial Enterprise (FICE)
  • The Joint Venture (JV)
    • Equity Joint Ventures (EJV)
    • Cooperative Joint Ventures
  • Joint Stock Companies (Companies Limited by Shares)
  • Representative Office
  • Partnership
  • Holding Company
  • Free Trade Zone

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,

  • The investor has complete control over the management and the board of the company
  • Faster establishment procedures
  • Greater protection of Intellectual Properties
  • Easier liquidation process


However, there are a few limitations such as,

  • Investor requiring to make its own market share
  • Restrictions on operations in certain areas, in the absence of a Chinese partner


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.

Representative Office

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:

  • Investigating and collecting market information
  • Providing introductory services to potential buyers and sellers, such as setting up meetings and passing on price and technical information to Chinese customers
  • Assisting in making arrangements for trade visits to China
  • Coordinating with the parent company and other associated companies or affiliates


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:

  • Quick set-up
  • Avail 10% tax back
  • Real address is not required
  • Low registered capital


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:

  • Certificate of Incorporation
  • Articles of Formation
  • Bank reference letters from the investor’s bank
  • Passport copy of 
    • Parent Company’s Director 
    • Chinese Company Legal Representative 
    • Chinese Company Supervisor
  • CV of the China Company’s legal representative
  • Registered Capital
  • Scope of Business
  • Names of the proposed members of the China Company
  • Office address in China
  • Letter of Authorisation
  • Recent Annual Audit Report from the parent company provided by a Certified Public Accountant and Customs HS Code of proposed import / export products in China (only for trading WFOE’s)

Taxation, Laws & Regulations

No.Type of TaxTax Rates
1On monthly-earned income over RMB 80,000vary between 5% and 45%
2Capital gains 20%
3Net wealth tax, inheritance taxNil
4Real estate tax 12% (rental Income), 4% (residential property)
5VAT17%
6Business Tax3% to 20%
No.Type of TaxTax Rates
1Corporate income tax25%
2Special rates for small and thin-profit enterprises20%
3State-encouraged new high technology enterprise15%
4Withholding tax on salaries, employers20%
5Withholding tax on dividends, interests, royalties and capital gains10%
6Consumption tax1 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 corporate income tax rate for both domestic enterprises and FIEs has been unified at 25%
  • Companies entitled to a reduced tax rate under the FEIT Law are transitioned to a complete 25% corporate income tax rate over a five year transitional period
  • The withholding tax rate on dividend (10%) remittance may be reduced or even exempted under tax treaties between China and the investor’s country of tax residence
  • If a resident entity receives income from a country that has not concluded a tax treaty with China, the resident is entitled to a tax credit for foreign income tax actually paid on the income
  • China has a broad tax treaty network, with most treaties generally following the OECD model treaty
  • Enterprises normally are required to file provisional EIT returns with the local tax authorities within 15 days of the end of each quarter
  • The Special Economic Zones of Shenzhen, Shantou, Zhuhai, Xiamen and Hainan, 14 coastal cities, dozens of development zones and designated inland cities all promote investment with unique packages of tax incentives


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.

Immigration & Visa Requirements

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:

  • F Visa: for short-term business visits
  • Z Visa: for people taking up employment, and their family members
  • D Visa: for long-term foreign residents

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.

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