1. China Investment Environment
1.1 Brief Introduction of China's Geography
Located in East Asia, on the western shore of the Pacific Ocean, the People's Republic of China (PRC) has a land area of about 9.6 million sq km, and is the third-largest country in the world, next only to Russia and Canada. From north to south, the territory of China measures some 5,500 km, stretching from the center of the Heilongjiang River north of the town of Mohe (latitude 53° 30' N) to the Zengmu Reef at the southernmost tip of the Nansha Islands (latitude 4° N). When north China is still covered with snow, people in south China are busy with spring plowing. From west to east, the nation extends about 5,200 km from the Pamirs (longitude 73° 40'E) to the confluence of the Heilongjiang and Wusuli rivers (longitude 135° 05' E), with a time difference of over four hours. When the Pamirs are cloaked in night, the morning sun is shining brightly over east China. China has land borders 22,800 km long, with 15 contiguous countries: Korea to the east; the People's Republic of Mongolia to the north; Russia to the northeast; Kazakhstan, Kirghizstan and Tajikistan to the northwest; Afghanistan, Pakistan, India, Nepal, Sikkim and Bhutan to the west and southwest; and Vietnam, Laos and Myanmar to the south. Across the seas to the east and southeast are the Republic of Korea, Japan, the Philippines, Brunei, Malaysia and Indonesia. The Chinese mainland is flanked to the east and south by the Bohai, Yellow, East China and South China seas, with a total maritime area of 4.73 million sq km. The Bohai Sea is China's continental sea, while the Yellow, East China and South China seas are marginal seas of the Pacific Ocean. A total of 5,400 islands dot China's vast territorial waters. The largest of these, with an area of about 36,000 sq km, is Taiwan, followed by Hainan with an area of 34,000 sq km. Diaoyu and Chiwei islands, located to the northeast of Taiwan Island, are China's easternmost islands. The many islands, islets, reefs and shoals on the South China Sea, known collectively as the South China Sea Islands, are subdivided into the Dongsha, Xisha, Zhongsha and Nansha island groups.
1.2 Geographical Location of China in the World
Located in East Asia, on the western shore of the Pacific Ocean. China has land borders 22,800 km long, with 15 contiguous countries: Korea to the east; the People's Republic of Mongolia to the north; Russia to the northeast; Kazakhstan, Kirghizstan and Tajikistan to the northwest; Afghanistan, Pakistan, India, Nepal, Sikkim and Bhutan to the west and southwest; and Vietnam, Laos and Myanmar to the south. Across the seas to the east and southeast are the Republic of Korea, Japan, the Philippines, Brunei, Malaysia and Indonesia.
1.3 Finance and Foreign Exchange
1.3.1 .Chinese financial system
The present financial system in China is, under the leadership of the People's Bank of China and with exclusively State-owned commercial banks as the main body, a financial institution system allowing simultaneous co-existence, divide the work and coordination of the State policy-related banks, other commercial banks and various financial institutions.
*People's Bank of China
The People's Bank of China is China's central bank, which is responsible for establishing and implementing national financial policies, and regulating currency circulation and credit activities. It represents the country to the foreign countries and supervises and administers the entire financial activities at home.
*Commercial banks
Chinese commercial bank system is composed of three parts, namely exclusively State-owned commercial banks, other shareholding commercial banks and foreign-funded commercial banks, among which the exclusively State-owned banks constitute the main body of Chinese commercial bank system.
*Policy-related banks
Since 1994, China has constructed three policy-related banks directly under the State Council, namely the State Development Bank, Agriculture Development Bank of China and the Export-Import Bank of China.
*Non-bank financial organizations
Chinese non-bank financial organizations mainly include Trust & Investment Corporation, Securities Company, Insurance Company, Finance Company, Leasing Company and Credit Union.
1.3.2 Chinese foreign exchange control system
Chinese foreign exchange control system, basically belonging to partial foreign exchange control, implements convertibility on current accounts, certain control on capital items, and supervision and management on foreign exchange business of financial organizations.。
*The convertibility of Renminbi under current accounts
1).To implement banking settlement of exchange system on foreign exchange revenue of current accounts.
2).To lift limitations on the foreign exchange payment of current account
3).To carry out the system of cancel after verification on the exchange of import and export acceptance and payment.
4).To check the authenticity of trade through customs declaration net checking system on import and export.
* Foreign exchange control under capital items The basic principle for managing foreign exchange receipts and disbursements of Chinese capital items is to boost the exchange of Renminbi under capital items by perfecting foreign exchange control and creating conditions to while abandoning the limitations on the convertibility of current accounts.
*The formation mechanism of improved Renminbi exchange rate After the integration of the exchange rate with international level on January 1st, 1994, China begins to implement the single and managed floating exchange rate system based on the market supply and demand.
*The macro-management system of perfected international balance of payment The new "Declaration Ways for International Balance of Payments Statistics" was carried out in 1996. On the basis of indirect declaration on the international balance of payments through financial organizations in 1996, four declarations were put forward in 1997, including direct investment, securities investment, foreign balance sheet-income of financial organizations and exchange
* Enhancement of the supervision and management on the foreign exchange business of financial organizations During dealing with the business of exchange, settlement and sales, the bank must strictly check related receipts according to regulations to avoid interfusion of the foreign exchange receipts and disbursements under capital items into the exchange, settlement and sales under current account, and to prevent the lawless persons from kiting transaction foreign exchange through the channel of exchange, settlement and sale.
2. Establishing Foreign Investment
2.1 Principal Forms of Foreign Investment.
*Sino-Overseas Equity Joint Ventures (EJV).
*Sino-Overseas Cooperative Joint Venture (CJV)
The major difference between an EJV and a CJV is that the investment of foreign investors in the latter does not need to be converted into shares or even if the investment is converted into shares, the distribution of profit, the bearing of risk, the sharing of liability and the assignment of property do not need to be decided on the basis of the shares of investors. Moreover, investment payback ways and administration in a CJV is more flexible.
* Wholly Overseas Owned Enterprises
*Sino-Overseas Share Holding CompaniesSino-overseas share holding companies are those in which all investment is composed of equal valued shares. They are limited companies and overseas shareholders are required to take at least 25 percent of the company's total registered capital. These companies can be set up by public offering or private offering.
*Overseas Invested Financial InstitutionsForeign financial organizations applying to establish financial institutions in China should have total assets over some required standards. The home country of the head office must have a strict financial supervisory system. In addition, the head office should have established a representative office in China for more than 2 years. The application of a financial institution should strictly observe relative laws and regulations and should be approved by the People's Bank of China.
* Representative Offices
A foreign company may establish a presence in China by setting up a representative office. The representative office must confine its activities to promotion or acting as a liaison office on behalf of the parent company. And it must not engage in any trading or business activities directly or on behalf of the parent company.
2.2 Other Foreign Investment Forms
*BOTBOT (Build-Operate-Transfer) is mainly applied in such infrastructure projects as toll road, power plant, railway, wastewater processing facilities, and subways, etc.
*Compensatory Trade EnterprisesCompensatory trade enterprises are those in which overseas partners provide equipment and technology and are bound to purchase a certain quantity of the finished products. The equipment and technology provided by foreign investors can be purchased through installment. As agreed between both parties, loans for purchasing and importing equipment and technology can be paid by Chinese partners with other products as well as the finished products.
*Processing and Assembling Enterprises
Processing and assembling enterprises are those in which overseas partners are responsible to provide raw materials, components, designs as well as the equipment and technology. The finished products are then taken back by the overseas partners to sell on the overseas market. The Chinese partners earn income in the form of processing fees. When overseas partners wish to sell their equipment and technology, the Chinese partners are entitled to make payment by installment or using their processing fees. The raw material for processing and assembling are all imported and the finished products are all exported.
*Financial Leasing
2.3 Procedures to Establish an FIE
At present, the establishment procedures of an FIE is divided into two major steps: to obtain approval documents from relative authorities and to register with the relative Administration for Industry and Commerce. To be more specific, the procedures include: early-stage preparations, approval, business registration and other procedures.
*. Early-Stage Preparation
To select investment projects and cooperative partners, etc.
*. Obtaining Approval
All the Project Proposal, Feasibility Study Report and Articles of Association have to be approved by state level authorities or local authorities according to the project's nature, industry and investment volume.
*. Business Registration
An FIE must bring the Articles of Association, its contract and approval documents to the State Administration for Industry and Commerce or local AIC for business registration purpose and to obtain business license.
*. Other Procedures
Other procedures include tax registration, foreign exchange control registration, opening bank account, registration with statistic bureau, custom registration, fiscal registration, land use approval and capital verification, etc.
2.4 Procedures to Establish a Representative Office
*. Examination and Approval
Foreign traders, manufacturers, shipping agents, economic organizations and other groups shall report, according to their nature of business, to the Ministry of Commerce (MOFCOM) or other relevant ministries, committees or bureaus which are authorized to examine and approve the establishment of resident offices.
*. Business Registration
After receiving the approval documents, the representative office as well as its representatives should complete the registration with the relative Administration for Industry and Commerce.
*. Other Procedures
After obtaining business certificate, the representative offices should complete tax registration, open bank account , get customs approval for importing office equipment and daily necessities, get approval for employing Chinese personnel and approval for the residence of expatriate representative, etc.
*Merger and Acquisition
China has established a legal and regulative system concerning transaction and transfer of property right on enterprise, includes Company Law and Bankruptcy Law. Foreign investors can carry out M&A in China upon approval of government authorities.
2.5 Statutory Requirements of Accounting and Auditing
*. Accounting
An FIE is required to maintain a complete accounting system and prepare financial statements. Three kinds of primary accounting books should be set up: journals, general ledger and subsidiary ledgers and their supporting documents. Computerized accounting records are also allowed. All supporting documents, accounting books and financial statements should be prepared in Chinese. However, foreign language can also be adopted along with Chinese. Generally, PMB is adopted as the base bookkeeping currency. If a foreign currency is used , the financial statements must be converted into RMB at the year-end.
In China, the accounting year is the calendar year, i.e., January 1 to December 31. However, if an FIE experiences difficulties in computing its taxable income according to the calendar year, other fiscal year is also allowed upon the approval of tax authorities. Enterprises that commence its business in the middle of a year or have operated for less than 12 months in a tax year may treat the actual operating period as a tax year.
The accounting system is based on accrual basis instead of cash basis.
*Auditing
An FIE is required to entrust a Chinese CPA firm to audit its annual financial statements, accounting records and to issue auditor's report. All vouchers, accounting records and financial statements should be provided to the auditors. The auditing is carried out in accordance with Company Law, accounting regulations and tax laws. The statutory annual auditing of an FIE's financial statements is mainly for the purpose of tax authorities. The annual financial statements and auditor's report should be filed within 4 months after the end of the year.
3. Taxation in China
3.1 Categorization of TaxationThe major tax categories applicable to FIEs can be divided into 2 groups according to their respective levying authorities.
Taxes Levied by Tax Bureau
a. A turn over tax system on business transactions, including:
* Value-added tax;
* Consumption (excise) tax;
* Business tax.
b. Taxes on income, including:
* Income tax for foreign investment enterprises and foreign enterprises;
* Individual income tax.
c. Taxes on property and behavior, including:
* Urban real estate tax;
* Vehicle and vessel usage and license plate tax;
* Stamp taxes;* Land appreciation tax.
d. Taxes on natural resources, including:
* Resources tax.
Taxes Levied by Customs
a. Customs duty;
b. Vessel tonnage tax.
3.2 Tax Items and Tax Rates
3.2.1. Value Added Tax (VAT)There are three tiers of rates for VAT:
* For taxpayers selling or importing goods, or providing services of processing, replacement and repairs, the tax rate is 17%.
* For taxpayers selling or importing grains, edible vegetable oil, coal gas, natural gas, coal or charcoal products for household use, books, newspapers, magazines, chemical fertilizers, agricultural chemicals, agricultural machinery, etc., the tax rate is 13%.
* For taxpayers exporting goods, except as otherwise stipulated by the State Council, the tax rate is 0.For enterprises and individuals engaged in production or providing taxable labor service with an annual sales volume under RMB 1 million, those engaged in wholesale and retailing with an annual sales volume under RMB 1.8 million, and those designated by the tax authority as small VAT payers, the tax rate is 6% on a tax-in-price basis
3.2.2. Consumption Tax
The computation o f tax payable for Consumption Tax shall follow either the rate on value method or the amount on volume method. 11 taxable items and 25 tax rates ranging from 3% to 20% are formulated. Taxpayers selling or importing taxable consumer goods shall pay tax upon the sales or importation of these goods. The taxable export consumer goods, except for those subject to special State provisions, should be exempted from consumption tax.
3.2.3 .Business Tax
9 taxable items are subject to Business Tax, whose tax rates range from 3% to 20%.
3.2.4. Enterprises Income Tax
The income tax for enterprises with foreign investment and the income tax which shall be paid by foreign enterprises on the income of their establishments or places set up in China to engage in production or business operations shall be computed on taxable income at the rate of 30%; local income tax shall be computed an taxable income at the rate of 3%.
Any foreign enterprise which has no establishment or place in China but which derives profits, interest, rent, royalties or other income from sources in China, or which, though it has an establishment or place in China, derives such income and the income is not effectively connected with such establishment or place, shall pay a withholding tax of 20% on such income.
FIEs of production natures and FIEs in coastal open cities, Special Economic Zones (SEZ) and Economic and Technological Development Zones may enjoy tax exemptions or reductions of income tax.
3.2.5. Land Appreciation Tax
The appreciation amount shall be the balance of proceeds received by the taxpayer on the transfer of real estate, after deducting the sum of deductible items as prescribed by law.
Land Appreciation Tax adopts four levels progressive rate ranging from 30% to 60% on the basis of the appreciation amount and deductible amount.
3.2.6. Urban Real State Tax
The owner or renter (agent and user, in case it is unidentifiable) is the taxpayer.
And this tax is levied in 2 parts and levied annually.
* The first part, tax on buildings, is calculated on 1% of the buildings' standard price.
* The second part, tax on land, is calculated on 1.5% of the land's standard price.
* If it is difficult to separate the buildings' standards price and the land's standards price, then use the mixed price for the real estate at the rate of 1.5%.
* If it is difficult to get the mixed price for the real estate, then use the standard annual rent price at the rate of 15%.
3.2.7. Stamp Duty
The following categories of documents are regarded as taxable documents:
* contracts or documents in the nature of a contract with regard to: purchases and sales, the undertaking of processing, contracting for construction projects, property leasing, commodity transport, warehousing, loans, property insurance, technology contracts;
* documents transferring property rights;
* business account books;
* certificates evidencing right or licenses; and
* other documents which the MOF determines to be taxable.
According to the nature of the taxable documents, taxpayers shall calculate the amount of tax due on the basis of a percentage tax rate or a fixed amount per document.
3.2.8. License Fare of Vehicles and Vessels
Users of automobiles and vessels are taxpayers and should register and pay the subject tax.
3.2.9. Individual Income Tax (IIT)
a. Tax Payer
Individuals who are neither domiciled nor resident in China, or who are domiciled or reside in China for less than one year shall pay IIT on income derived from sources within China.
For income derived from sources outside the PRC of individuals not domiciled in the PRC, but resident for more than one year and less than five years, subject to the approval of the tax authorities-in-charge, individual income tax may be paid on only that part which was paid by companies, enterprises or other economic organizations or individuals which are inside the PRC.
Individuals who reside for more than five years shall, commencing from the sixth year, pay IIT on the whole amount of income derived from sources outside the PRC.
For individuals who are not domiciled in the PRC, but who reside inside the PRC consecutively or accumulatively for more than 90 days (183 days for those from countries with which China has taxation agreement) in any one tax year, their income derived from sources inside the PRC which is paid by an employer outside the PRC, and which is borne by the employer's establishment or business place within the PRC, shall pay IIT.
For individuals who are not domiciled in the PRC, but who reside inside the PRC consecutively or accumulatively for not more than 90 days (183 days for those from countries with which China has taxation agreement) in any one tax year, their income derived from sources inside the PRC which is paid by an employer outside the PRC, and which is not borne by the employer's establishment or business place within the PRC, shall be exempt from IIT.
b. Taxable Income
Individual income tax shall be levied on the following categories: income from wages and salaries; income from production or business operation derived by individual industrial and commercial households; income from contracted or leased operation of enterprises or institutions; income from remuneration for personal service; income from author's remuneration; income from royalties; income from interest, dividends and bonuses; income from lease of property; income from transfer of property; contingent income and other income specified as taxable by MOF.
c. Tax Rates
Income from wages and salaries is taxed at 9 progressive rates, ranging from 5% to 45%. For foreign taxpayers, the monthly deduction is RMB 4,000 Yuan (RMB 840 Yuan for domestic employees). Income from compensation for personal services, royalties, interest, dividends, bonus, lease of property, transfer of property, contingent income and other kinds of income shall be taxed at a proportional rate of 20%.
3.2.10. Customs Duty
*. Import Tariff
Imported goods are taxed at its normal C.I.F. The custom has authority to determine the taxable price if the goods' C.I.F. isn't quotable. The tariff rates are set in a detailed name list and for some special imported goods, tariff is exempted.
*. Export Tariff
Export products produced by the FIEs itself, except those prohibited from exportation by the State and those subject to other State regulations, shall be exempted from export tariff.
*. Bonded Commodities
The necessary import goods, such as raw materials, fuel, parts and components, accessories or packaging materials for FIEs to produce export products, are regarded as bonded commodities and are supervised by the customs.
3.3 Taxation Administration
The Law of People's Republic of China on Taxation Administration is the basic law on taxation administration and is also a procedural law. All enterprises, no matter domestic or foreign, should be treated equally by this law.
3.3.1. Taxation AuthoritiesIn China, a separate tax system was set up in 1994, i.e., taxes were divided into central taxes, local taxes and central-local share Taxes. The Ministry of Finance (MOF) and the State Tax Bureau are the executive authorities in charge of taxation. The State Tax Bureau is responsible for taxation administration. Two tax bureaus are set up at each administrative level all over the country, one is in charge of the collection of central taxes and central-local share taxes, such as the VAT, Consumption Tax and FIEs' Income Tax, etc., the other is in charge of the collection of local taxes, such as Individual Income Tax, Business Tax, Land Appreciation Tax, Stamp Tax and Urban Real Estate Tax, etc.
3.3.2. Taxation Control
FIEs should complete tax registration, file tax returns, maintain accounting records and correctly use invoices in accordance with related policies. The major policies on the filing of tax returns are as follows:
a. Tax Year
The tax year is the calendar year, i.e., from January 1 to December 31. If a foreign enterprise experiences difficulties in computing its taxable income on the calendar-year basis, it may apply to the tax authorities to adopt its own fiscal year as the tax year. An enterprise that commences business within a calendar year or has operated for less than 12 months in a calendar year treats the actual operating period as the tax year.
b. Filing Tax Returns
An FIE is required to file its annual tax returns, audited financial statements and the auditor's report to the tax bureaus within 4 months after the end of the year. The application for deferring the filing of the above documents should also be submitted within this period of time. The penalty for failure to file the above documents within the prescribed time limit is 0.2 percent per day on the tax amount overdue.
c. Tax payment and collection
FIEs are required to pay their provisional taxes within the require time limit.
d. Penalties
Any taxpayer or withholding agent who fails to perform tax registration procedures, fails to set up accounting system and fails to keep its business records within a prescribed time limit is required to redress within a prescribed time limit. Any failure to redress will be subject to a fine of up to RMB 2,000 Yuan; if the violation is serious, a fine up to RMB 10,000 Yuan will be imposed.
Any taxpayer or withholding agent who fails to file tax returns within the prescribed time limit is required to redress and will be imposed a fine of RMB 2,000 Yuan. A fine over RMB2,000 Yuan but under RMB10,000 Yuan will be imposed if the taxpayer or withholding agent fails to meet the due date a second time.
The fine for tax evasion which involves such unlawful activities as forgery, falsifying or concealing relevant information, fraud, or failure again to pay tax within the prescribed time period is up to but not more than 500 percent of the tax due. In most of the above cases, serious offenders will be prosecuted.
3.4 International Taxation
Since FIEs with their head office in China are taxed on their worldwide income, double taxation of foreign-source income may be avoided by way of a foreign tax credit. Foreign income tax paid abroad in respect of foreign-source income can be claimed against the Chinese tax payable in respect of the same income. The unutilized foreign tax credit can be carried forward for not more than five years under local tax statutes. China has signed double taxation agreements with over 90 countries by the end of 2004.
4．Useful Official Websites
www.mofcom.gov.cn
www.fdi.gov.cn
www.gov.cn
www.chinadaily.com.cn
(Edited by Minghui Li,Economic and Commercial Counsellor’s Office,Chinese Embassy In the UK,12TH January 2006)
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