Guide to doing business in China
June, 2020
Ways to invest in China *People´s Republic of China (“PRC” or “China”, excluding the territories of Hong Kong, Taiwan and Macau.
A) Entities with independent legal person status (“Legal Personality”)
The most common foreign invested vehicle with Legal Personality are Limited Liability Companies (“LLC”).
On January 1st 2020 the Foreign Investment Law of the People’s Republic of China (“Foreign Investment Law”) entered into effect repealing simultaneously the present foreign investment legal framework and unifying the PRC foreign investment legal regime that will apply for both Wholly Foreign Owned Enterprises (“WOFEs”) and Equity Joint Ventures (“EJVs”).
Therefore LLC companies would include enterprises which are wholly owned by one or several foreign investors as well as companies jointly incorporated by one or several foreign investors and one or several Chinese companies.
- No minimum registered capital but it will depend on the business scope and local practice.
- Capital contribution in cash, in kind or with intellectual property rights, land use rights or other non-monetary assets the value of which may be assessed in financial terms and the ownership of which may be transferred in accordance with the law. License generally not accepted for foreign investors.
- The authoritative corporate body of a WFOE or EJV is the shareholders´ meeting.
- Shareholders exercise their voting rights at shareholders’ meetings in proportion to their respective capital contributions or by agreement between the shareholders as specified in the articles of association of the LLC.
- Shareholder´s liability is limited to their respective capital contributions. Profit can be allocated in accordance to the contribution in the capital or by agreement between the shareholders, if any.
B) Entities with no Legal Personality
The foreign invested vehicles with no Legal Personality are Representative Offices (“R.O.”) and Branches.
Common characteristics:
- Limitation to their business scope and activities to be performed.
- Head office ultimately responsible for liabilities and obligations arising from its activities in China.
R.O.: Have neither registered capital nor a Board of Directors. Engage employees through a qualified dispatch company. The activities of a R.O. in China are limited to intermediation, market surveys or marketing information.
Branches: Limited to a close number of industries and activities, mainly banking and insurance.
General formalities for the incorporation of a company
The following outlines are general formalities for company incorporations that can significantly vary depending on both the company type and other matters of practice.
- Enterprise name self-declaration (if applicable) and commercial registration before Administration for Market Regulation (“AMR”) to obtain the Business License;
- Record-filing/Approval of foreign investment by the Ministry of Commerce (“MOC”) to obtain the Record-filing receipts or Certificate of Approval;
- Registration before other relevant governmental authorities to obtain necessary certifications for daily operations, if any; and
- Other post-incorporation approvals and licenses.
General investment issues
A) Foreign Investment Control: There is a negative list for foreign investment launched on June 30th, 2019 in China, which specifies the encouraged, restricted and prohibited foreign investment industries.
Besides, another catalogue is applied in the Pilot Free Trade Zones, which establishes the special administrative measures for foreign investment access in those areas. There are a total of eighteen Pilot Free Trade Zones (Shanghai, Tianjin, Fujian, Guangdong, Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan, Shanxi, Hainan, Shandong, Jiangsu, Guangxi, Hebei, Yunnan and Heilongjiang).
Since the implementation of the Foreign Investment Law, the foreign investment outside the negative list will be given national treatment, which means that will receive the same treatment as a domestic investment.
B) Foreign Exchange Control: The Chinese government imposes controls on capital inflows and outflows. The direct investment-related foreign exchange registration will be reviewed and handled by banks and the State Administration of Foreign Exchange performs indirect regulation over such registration via banks. Recent changes in capital controls include the restriction on the repatriation of profits and outbound investment transfer.
Taxation
A) Direct Taxation
Enterprise Income Tax (“EIT”)
Nature: Direct tax that taxes the worldwide income of Chinese companies from production and business operations and from other sources within and outside China.
Residence: A company is deemed to be resident in China in case that it is established in China or its effective management is in China.
Taxable income: Total income less non-taxable income, exempt income, allowable deduction and losses of previous years that have not been compensated in the last 5 years.
Taxable income is calculated on an accrual basis.
Rate: Statutory rate of 25% on the taxable income sourced worldwide. Preferential EIT rates of 15% and 20% for high and new technology enterprises and qualified small enterprises with low profits, respectively.
Dividend and capital gain: Dividends paid from a PRC company to another PRC company are exempted of EIT.
Dividends paid abroad will be subject to EIT taxation at a withholding tax of 10%, without prejudice to the relevant tax treaties signed by China. Said withholding could qualify for a Tax deferral regime in case of reinvestment in China, under the related relevant requirements.
Capital gains will be taxed at the EIT statutory rate of 25% for Chinese tax resident company and 10% for non-Chinese tax resident company.
Special regime: In general, tax consolidation is not allowed in China. Companies should submit their tax returns separately, except for headquarters and its local branches.
Formal obligations: Quarterly EIT returns shall be filed based on the accounting records before the 15th day of the following month each quarter.
Individual Income Tax (“IIT”)
Nature: Taxes levied on Chinese nationals and residents in China for their worldwide income, as well as on non-residents for their China sourced income.
Residence: From January 1, 2019, an individual shall be deemed a Chinese tax resident, when: (a) the individual has a domicile in China; or (b) the individual does not have a domicile in China (“Non-Domiciled Individual”), but stays in China for over 183 days during the calendar year.
Rate: Employment income is subject to a progressive tax rate up to a maximum of 45%.
Investment income (such as dividends, interest and capital gains) might be taxable at a flat rate of 20%.
Eight benefits in kind might be IIT exempted upon the fulfilment of certain requirements for foreign individuals deriving employment income (“BIKs”), including housing allowances, meal allowances, laundry expenses, relocation costs, travel allowances, minors’ tuition fees and roundtrip flight tickets for home visits. The BIKs may remain valid until December 31, 2021.
Otherwise, the foreign individuals, who are Chinese tax residents, may abandon BIKs and choose to apply the additional special deductions (“Deductions”), including children’s education expenses, continuing education expenses, medical expenses for serious diseases, interest for housing loan, rental expenses and care for elderly.
BIKs and Deductions may not be applied simultaneously. Either BIKs or Deductions is selected by the forging individual, such method may not be changed within one tax year (i.e. from January 1, to December 31).
Formalities: IIT on the monthly employment income shall be withheld by the Chinese employer within 15th day following the end of the payment month.
If the China-sourced income is partially or fully paid by an overseas company, which is a related party of the Chinese employer, the Non-domiciled Individual could select to perform voluntary filing by himself (or herself) or entrust the Chinese employer to perform the withholding IIT filing. In the case that the withholding IIT filing is not entrusted by the Non-Domiciled Individual, the Chinese employer shall report the work arrangement of the individual, the income paid by the overseas company and the contact information of the individual etc. to the tax authority within 15 days following the end of the payment month.
Annual IIT filing shall be performed by the Chinese tax residents during the period from March 1 to June 30 of the following year. No annual IIT filing is required for the non-Chinese tax residents.
B) Indirect Taxation
Value Added Tax (“VAT”)
Nature and rates: Indirect tax that is levied on sales or import of goods and services, intangibles assets or immovable property within the territory of the PRC. VAT taxpayers are classified as general taxpayers or small-scale taxpayers and are subject to different tax calculation rules.
Different VAT rates are applied, subject to the nature of business activities. The below VAT rates are effective from April 1, 2019.
- 13% for the sales of goods, processing and repairing services, leasing services for tangible moveable property;
- 9% for agricultural products, transportation, postal basic telecommunication, construction, leasing of non-movable property, sales of non-movable property, and transfer of land use right, among others;
- 6% applies to all other services.
General taxpayers are entitled to deduct input tax on purchases and issue special VAT invoices. Small-scale VAT payers, who are subject to a lower tax rate of 3%, may request the relevant tax authority to issue the special VAT invoices in their name, but may not claim tax credit.
Formal obligations: Frequency of the VAT filing is determined by the competent tax authority. Most companies conduct monthly or quarterly VAT filings.
Other taxes
Local tax surcharges
Local tax surcharges are levied on VAT and consumption tax payables.
The tax base is the total amount of VAT payable and consumption tax. Tax rates are determined by local tax authorities.
Tax filing is consistent with the VAT and consumption tax filing dates.
Stamp duty (“SD”)
Stamp duty is levied on enterprises and individuals that execute or receive specific legal documents under the law of the PRC.
According to the scope of the legal documents the SD type could be a percentage rate.
Customs duties
Customs duties on imported goods, exported goods as well as incoming articles are calculated on the dutiable value.
The consignees of imported goods, the consignors of exported goods and the owners of incoming articles are taxpayers.
Import of goods will also be subject to import VAT and import consumption tax, which are calculated on the dutiable value plus customs duties.
Royalties related to imported goods, if they meet certain requirements, may be subject to custom duties.
Other taxes
Other taxes in China include, by way of example, consumption tax, land value-added tax, deed tax, farmland occupation tax, property tax and land use tax.
Social Security
Maximum contribution and rates to Social Security contributions shall be determined by the government of province level. Therefore, social security contributions may be different from one province to another.
Maximum contribution and rates to social security contributions in Beijing and Shanghai are as follows:
Maximum contribution:
- RMB 23,565in 2019 in Beijing.
- RMB 24,633 in 2019 in Shanghai.
Rates:
• Beijing
- Paid by employee: 10.2%+3 RMB
- Paid by employer: 30.8%-32.5% (depending on the different work-related risk categories).
• Shanghai
- Paid by employee: 10.5%
- Paid by employer: 31.2%-32.9% (depending on the different work-related risk categories).
Social Security Treaties: Exceptions to certain Social Security contributions may apply to foreign investors and foreign employees from countries which have concluded Social Security treaties with China.
Labor Issues
Local labor contract requirements:
A labor contract shall be concluded where a labor relationship is to be established. The term of a labor contract is classified into:
- Fixed term;
- Non-fixed term; and
- The completion of a specific assignment as a term.
Payroll and payment: Wages to be paid to employees by the employer shall not be lower than the local standards of minimum wages, which shall be determined by the provincial level governments. Regional governments are entitled to set their own minimum wages.
Considering the main investment destination cities in China; the minimum wage in 2019 in Beijing is RMB 12,18 per hour and RMB 2,120 per month, while in Shanghai in 2019 it is 22 RMB per hour and RMB 2,480 per month.
Working hours: No more than 8 hours per day and no more than 44 hours per week on the average.
Holiday and leaves
- The statutory holidays: 11 days
- The employee is entitled to 5-15 days of annual leave according to the working period.
Labor dispute resolution: If a labor dispute arises, the parties may apply for mediation or arbitration or take legal proceedings before the court. The labor arbitration is the pre-procedure for initiating a lawsuit in general. If an employee directly files a lawsuit at the court on the strength of a slip on wage default issued by the employer as evidence, and the claims do not involve any other dispute over labor relationship, the court will approve the case filing.
Employment of foreign workers: The foreign employees working in China are required to obtain a working visa and work permit.
Shangai