Doing Business in China

General entry

Similar to EJVs and CJVs, a WFOE is allowed to have its registered capital contributed in instalments or a lump sum.

The highest authority of a WFOE is its investors’ meeting or the single investor. A board of directors is required to be established to implement the investors’ decisions.

The foreign investor may remit its profits abroad subject to certain conditions.

IP right owners have the right to lodge civil claims with the People's Courts for damages and injunctions for IP right infringement.

Although the ultimate forum for upholding IP rights in the PRC is the People's Court (IP Division), the most efficient and cost effective way of enforcing IP rights in the PRC is often by way of administrative enforcement action. IP right owners may request the relevant administrative bodies to conduct investigations on alleged IP infringement. Administrative bodies may commence administrative enforcement action as soon as infringing products are found, and such action may be completed within 2 to 3 months. The administrative bodies may seize and destroy infringing products. Fines may also be imposed upon infringers. In serious cases (such as large quantity of infringing products), criminal proceedings may be instituted against the infringer.

In order to comply with the IP protection standard under WTO, China's Supreme People's Court has promulgated several judicial interpretations setting out interim measures on the protection of IP rights available before lodging a formal legal action. Subject to certain requirements (including deposit of a security amount with the court), owners of IP rights, or related parties may petition to the People's Court for an order, provisional injunctions, or evidence retention order in respect of suspected activities involving infringement of the petitioners’ IP rights, before lodging a lawsuit with the court. The provisional injunctions will be cancelled by the court if the petitioner does not lodge a lawsuit within 15 days following the order of the interim measures. In addition, China has also established a customs system for protection of IP rights. Registered owners of IP rights may request the customs to forfeit suspected infringement products which are found by the customs or the IP rights owners.

The Franchise Regulations set out a number of stringent requirements which a franchisor and a franchisee must meet before they may enter into franchise agreements in the PRC. In particular, a franchisor must have directly operated 2 shops for at least 1 year before it may lawfully grant franchises to franchisees.

The Commercial Enterprise Measures govern the establishment of foreign-invested enterprises which engage in distribution activities (including wholesale, retail, and franchising) in China. A franchisee may be granted a right to use the franchiser's trademarks and charged a franchise royalty. A franchisee may also be granted a right to establish its own business. The Commercial Enterprise Measures require that companies engaging in distribution activities satisfy certain capital investment requirements and approval requirements and impose restrictions on the involvement of FIEs in the distribution of certain types of goods.

Competition regulations

China has enacted 2 basic competition laws: the Anti-Unfair Competition Law and the Anti-Monopoly Law.

The following activities are major unfair competition activities under the Anti-Unfair Competition Law:

1. counterfeiting registered trademarks of other persons;
2. unauthorized use of trade names of other persons and special design and packaging of famous products to mislead consumers;
3. forging the production place or quality verification marks;
4. restriction of use or purchase of appointed vendors by public utility enterprises or other operators having a monopoly status;
5. abuse of administrative power of local governments by restricting access to local markets for non-resident products;
6. commercial bribery;
7. dishonest advertising;
8. illegal infringement in commercial secrets of other persons ;and
9. dumping..

Parties who are involved in unfair competition activities may be subject to administrative punishment.

The Anti-Monopoly Law came into effect on 1 August, 2008. This law is applicable to domestic and overseas monopolistic activities having the effect of exclusion of and/or restriction on domestic market competition. The following activities are regarded as monopolistic activities under the Anti-Monopoly Law:

1. entering into a monopoly agreement between/among operators;
2. abuse of market monopoly status by 1 or several operators; and
3. the convergence of operators having or may have the effect of exclusion of or restriction on competition.

Suspected monopolistic activities are subject to the relevant authority's investigation. A confirmed monopoly activity will be subject to monetary penalties. An illegal monopoly agreement will be ordered to be terminated by the relevant authority. Income from illegal monopolistic activities will be confiscated. Illegal convergence of operators will be ordered to be terminated by the relevant authority and the assets obtained through the convergence may be ordered to be disposed of.

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General principles 

The Chinese government has issued a wide range of rules and regulations to govern foreign investment in the country. Their purpose is to direct foreign investment into certain priority industry sectors while restricting or prohibiting investment in other sectors. The key national regulations for implementing China's foreign investment policy are the Regulations for Guiding the Direction of Foreign Investment (Guiding Regulations). The Guiding Regulations classify all foreign investment projects into 1 of 4 categories: encouraged projects, permitted projects, restricted projects, and prohibited projects. The classification of an investment project under the Guiding Regulations determines the feasibility and establishment method for the project. The principal difference between encouraged and permitted projects is that encouraged projects may be eligible for tax breaks on the import of capital goods under existing foreign investment promotion policies. Restricted projects must be examined and approved by the relevant provincial-level departments. A record of the projects must also be filed with the higher level competent authorities and with the authorities in charge of the industry invested in. If a restricted project exports 70% of its output, it may be treated as a permitted category project with the approval of the relevant state or provinciallevel authorities.

The Guiding Regulations provide for the publication of 2 catalogues, the Catalogue for Guiding Foreign Investment in Industries (Foreign Investment Catalogue) and the Catalogue of Priority Industries for Foreign Investment in the Central and Western Regions (Central and Western Region Catalogue). The Foreign Investment Catalogue, last updated in 2007, lists specific industries in which foreign investment in China is encouraged, restricted, or prohibited, whereas the Central and Western Region Catalogue, last updated in 2004, lists the industries in which foreign investment is specifically encouraged in the central and western regions of China. Projects not included in the Foreign Investment Catalogue are considered permitted. The 2 catalogues constitute the basis for the applicable policies regarding the examination and approval of foreign investment projects and FIEs.

Following its accession to the WTO, China has been gradually removing restrictions on foreign investment in a wide range of industries, although investment limits in certain sectors are expected to continue in existence for the time being.

Acquisition of Chinese enterprises by foreign investment

The establishment of an FIE by acquisition of equities in or assets of an existing Chinese enterprise is subject to specific regulations in addition to the Company Law and general regulations on foreign investment.

Purusant to the Regulations on the Acquisitions of Domestic Enterprises by Foreign Investors, there are 2 types of acquisition of domestic enterprises by foreign investors: a. acquisition of equities in domestic enterprises (Equity Acquisition) and b. acquisition of assets of domestic enterprises (Asset Acquisition).

Equity Acquisition

The value of the equity to be acquired by foreign investors must be appraised by a qualified valuation firm. Foreign investors cannot proceed with the acquisition if the consideration for the acquisition is lower than the appraised value.

Asset Acquisition

The value of the assets to be acquired by foreign investors must be appraised by qualified asset valuation firms. The consideration for the acquisition is required to be made by the foreign investors within 3 months after the issue of the new business licence. Subject to authority's approval, the consideration may be paid in instalments. Note that the foreign investors can only hold and use the assets via a commercial establishment in China. Foreign investors should also bear in mind additional statutory requirements that are applicable to specific type of assets and/or liabilities.

Acquisition by foreign investors may take the form of stock-swap which needs to satisfy the following conditions:

1. the stocks must be legally owned by the foreign investors as well as freely transferrable;
2. the stocks must be traded on an open stock market (exclusive of over the counter (OTC) markets); and
3. the price of the stocks must have been stable in the preceding year. The stock-swap acquisition is also subject to the approval of China's securities regulatory and foreign exchange administration. In practice, no stock-swap acquisition has ever been approved in China up to date.

Special attention should be drawn to acquisitions involving control of a famous trademark, a Chinese-Old trademark, a major sector or influence in the economic safety of the nation, as such acquisitions are subject to special review by relevant authorities. Acquisitions of domestic enterprises by foreign investors are also subject to the anti-monopoly review by relevant authorities if:

1. one of the parties of the acquisition has a business turnover of or more than RMB 150 million in China market in the current year;
2. the foreign investor has already acquired 10 or more enterprises in related industries in 1 year;
3. one of the parties has a market share of 20% or more in China; and
4. the acquisition will allow a party of the acquisition to own 25% or more market share in China.

Foreign exchange controls

China's currency, the Renminbi, is not currently a freely convertible currency. Foreign exchange controls are applicable to currency transactions in China. Under the foreign exchange controls currently in place, FIEs are required to treat their foreign exchange transactions differently depending on whether the transaction relates to a current account item or a capital account item.

A current account item is a transactional item which is of a recurrent nature and includes payments in the context of foreign trade, cross-border supply of services and the overseas remittance of profits and dividends. Foreign exchange revenue from current account items must be sold to or deposited in a foreign exchange account with a designated foreign exchange bank. In order to pay for current account items in foreign exchange, an FIE can use its foreign exchange savings or purchase foreign exchange at a designated foreign exchange bank. The FIE will need to show the bank relevant supporting materials of the underlying transaction for which the payment is made. For instance, if the payment is made for the import of goods, the purchase contract, invoice, and other such items must be produced.

A capital account item refers to a transactional item which either increases or reduces the capital or liability from the inflow or outflow of capital in the course of international receipts and payments. Items include direct investment, loans, and securities investments, amongst others. As opposed to current account transactions for which verification by a designated bank suffices, capital account transactions often require prior approval or verification by the foreign exchange authorities. In recent years, there has been a moderate relaxation of controls over capital account items.

Access to Chinese securities market

Under the current foreign exchange control and securities regulatory regime, except those Qualified Foreign Institutional Investors (QFII) and overseas strategic investors, foreign investors may only invest in B shares (denominated in foreign exchange and traded in Shanghai Stock Exchange and Shenzhen Stock Exchange). A shares (the majority of the openly traded stocks) and corporate bonds traded on the 2 local stock exchanges are not accessible to foreign investors in the sense that they are not allowed to open a securities account with local securities company, to transfer funds in foreign exchange, and to purchase local currency to invest in those securities.

In accordance with the Administration Rules for Domestic Investment in Securities by Qualified Foreign Institutional Investors, a QFII refers to an overseas fund management institution, insurance company, securities company or asset management institution that is approved by CSRC and has obtained an investment quota from the State Administration of Foreign Exchange (“SAFE”) in relation to its investment in Chinese securities markets. Major qualifications for a QFII are: the securities assets under the applicant's management should not be less than US$ 500 million (or US$10 billion for commercial banks and securities companies) and the applicant should have at least 5-year track record (or 30-year track record for securities companies). A QFII is allowed to invest in A shares, corporate bonds and other approved securities.

Pursuant to the Administration Rules for Strategic Investment in Listed Companies by Foreign Investors, after obtaining approval by the Ministry of Commerce, a foreign investor is allowed to acquire the A shares of listed companies by a mid/long term investment through an agreement. The stocks acquired by an overseas strategic investor are not allowed to be disposed of within 3 years.

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Government incentives to encourage foreign investment

National and local governments offer a wide range of incentives to attract foreign investment. The preferential treatments include income tax incentives (which, are subject to the new Enterprise Tax Law as detailed in Section "Enterprise Income Tax" below), exemption from certain import and export duties, simplified customs procedures, facilitation of visa and residence applications for overseas personnel, reduced land use fees, and simplified establishment procedures. Additional benefits are available in specified locations as set forth below. The type and extent of the preferential treatment available also differs depending on the industry. Most of these preferential treatments are only available to FIEs with at least 25% foreign equity ownership.

CEPA

Mainland China has entered into a separate Closer Economic Partnership Arrangement (CEPA) with its 2 special administrative regions, Hong Kong and Macau. Each CEPA is a free trade agreement that offers respectively Hong Kong and Macau products, companies, and residents preferential access to the mainland Chinese market. Many of the preferences go beyond China's WTO concessions. CEPA is not a closed agreement and both sides hold regular meetings on further concessions and implementation details.

CEPA covers 3 areas:

1. the removal of tariffs and other barriers on trade in goods;
2. the opening of the mainland Chinese market to Hong Kong and Macau service companies; and
3. measures for the promotion of trade and investment.

Trade in goods
CEPA permits the duty free import of all Hong Kong products into the Mainland provided the goods meet the specified rules of origin and are not subject to import prohibitions or restrictions in the Mainland, as certified by a CEPA Certificate of Origin.

Trade in services
CEPA provides for liberalised market access in a wide range of services sectors ahead of the liberalisation schedule under the Protocol, as well as facilitating the recognition of Hong Kong professional and technical qualifications. The sectors include:

The CEPA service benefits are of 4 main types:

1. earlier market access: Hong Kong and Macau service suppliers can enter the Chinese market between 1 to 5 years earlier than under the WTO timetable;
2. higher equity shares: Hong Kong and Macau service suppliers are permitted to hold a higher equity share (in certain service sectors even up to 100%) in mainland China service companies;
3. lower capital thresholds: capital requirements to establish a business in mainland China have been substantially reduced, thus opening the market to smaller players; and
4. recognition of Hong Kong and Macau qualifications: Hong Kong and Macau professionals such as legal practitioners, accountants and medical personnel are permitted to practise in the PRC, subject to passing any relevant local professional exams and satisfying any local traineeship requirements.

Hong Kong and Macau service providers can be individuals or juridical persons. Except in the legal sector, a juridical person must satisfy the following criteria to qualify as a “Hong Kong or Macau service supplier”:

1. it is incorporated or established in Hong Kong or Macau in accordance with the relevant laws and regulations;
2. it has obtained any licences or permits required by law to provide such services;
3. the nature and scope of its business in Hong Kong or Macau corresponds to the services to be provided in mainland China;
4. it pays profits tax in Hong Kong or Macau;
5. it has had substantive operations of at least 3 to 5 years (depending on the sector) in Hong Kong or Macau (no such requirement for real estate services);
6. it owns or leases business premises in Hong Kong or Macau commensurate with the scope and the scale of its business; and
7. 50% of its staff in Hong Kong or Macau are Hong Kong or Macau residents without limit of stay and persons (from the Mainland) permitted to reside in Hong Kong or Macau. 

An overseas service supplier can take advantage of CEPA through a merger with, or acquisition of, a Hong Kong or Macau service supplier. It must acquire at least 50% of the Hong Kong or Macau entity and is required to wait 1 year after the merger or acquisition before it will be eligible for any of the CEPA benefits.

Trade and investment facilitation
CEPA also contains provisions on Trade and Investment Facilitation between the governments of China and Hong Kong which have agreed to further strengthen economic and trade cooperation through trade and investment facilitation in the following areas:

1. trade and investment promotion;
2. customs clearance facilitation;
3. commodity inspection and quarantine, food safety, quality, and standardisation;
4. electronic business;
5. transparency in laws and regulations;
6. cooperation on small and medium enterprises;
7. cooperation in the Chinese traditional medicine and medical products sector; and
8. protection of intellectual property.

Deepening Economic and Trade Co-operation with Guangdong Province
On 29 July 2008, it was announced that in order to further deepen economic and trade co-operation between Guangdong Province and Hong Kong, the 2 governments agreed to launch 25 liberalisation and facilitation measures for early and pilot implementation in Guangdong Province. It is intended that similar liberalisation and facilitation measures would
be extended to the other parts of mainland China should the pilot implementation in Guangdong Province be successful.

Seventeen of the said liberalisation and facilitation measures are included in CEPA, covering accounting, construction and related engineering, medical, placement and supply services of personnel, environment, social service, tourism, maritime transport, road transport, and individually-owned stores. The remaining 8 measures cover tourism, education, environment, advertising and distribution services.

Tax incentives

General
Prior to the promulgation of the Enterprise Income Tax Law (Enterprise Tax Law) in March 2007 and its Implementing Regulations in December 2007, many of China's tax incentives were location-specific, e.g. Special Economic Zones, Open Coastal Economic Zones. The Enterprise Tax Law cancelled many of these location-specific tax policies and instead enacted industry-specific and technology-specific tax incentives, which are available to FIEs, foreign enterprises, and domestic enterprises alike. Tax incentives may take the form of and be a combination of:

1. reduced tax rates;
2. tax exemption and reduction periods;
3. reduction in taxable income;
4. extra deduction for certain types of expenses; and
5. tax refunds.

The major factors which determine the availability of tax incentives are:

1. the industry;
2. the technological level; and
3. the location.

China has also signed a number of tax treaties and arrangements to avoid double taxation which may offer residents of the countries or regions concerned certain tax benefits in addition to those available to FIEs or foreign residents generally. A recent arrangement with Hong Kong, for example, allows for lower withholding taxes in respect of the China source income from dividends, interest, and royalties in addition to the exemption from individual income tax (IIT) for Hong Kong residents who satisfy certain specified criteria.

The major tax incentives available under the Enterprise Tax Law and its Implementing Regulations include the following:

High-tech enterprises
Previously, high-tech enterprises had to be established in a specific location, i.e. high-tech parks, in order to enjoy preferential tax treatment. Under the Enterprise Tax Law, qualified high-tech enterprises are eligible to be taxed at 15%. A high-tech enterprise is qualified if it meets all of the following criteria:

1. it possesses core proprietary intellectual property rights;
2. its products and/or services fall within the scope of “high and new technology industries encouraged by the State”;
3. its research and development (R&D) expenses meet a prescribed percentage of total sales revenue;
4. its income from the high-tech products and/or services meets a prescribed percentage of total revenue;
5. the number of technicians employed by it meets a prescribed percentage of the enterprise's total work force;
6. it satisfies other criteria as prescribed in the administrative measures for assessing high-tech enterprises.

Rules for assessing the status, including defining the undefined “prescribed percentages”, are to be jointly formulated by the departments in charge of technology, finance, and taxation of the State Council, as well as other relevant departments.

Technology and development
Extra deduction is allowed for R&D expenses incurred for developing new technology, products, and craftsmanship and have not given rise to an intangible asset. The enterprise may claim an additional deduction of 50% of the R&D expenses after deduction of the actual amount of R&D expenses incurred. If such R&D expenses have given rise to an intangible asset, they shall be amortized at 150% of the intangible asset costs.

Environmental protection
Ten percent of an enterprise's investment in purchasing specialised equipment for environmental protection, energy and water conservation and safe production may be set off against the tax payable and any excess amount may be carried forward and deductible for the following 5 tax years.

Enterprises deriving income from certain qualified environmental conservation and energy and water conservation projects, including public sewage and waste treatment and seawater desalination, are also eligible for full tax exemption for the first 3 years, starting with the first year that income is generated. Such enterprises are further eligible for 50% exemption from enterprise income tax for the fourth to sixth year for income derived from the said projects.

Small businesses
Qualified small businesses with low profit margins are eligible to receive the lower income tax rate of 20% under the Enterprise Tax Law. An enterprise must not engage in business which is within the restricted or prohibited category and its annual taxable income, number of employees, and total asset value must not exceed the following criteria in order to qualify:

Encouraged sectors
The Enterprise Tax Law sets out that enterprises in certain encouraged sectors will be able to continue to enjoy their current preferential tax policies. Although this is not stated in the Enterprise Tax Law or its Implementing Regulations, the official summary of the Enterprise Tax Law released prior to its passing notes that this is applicable to those enterprises located in the Western Region which fall under the “encouraged” category in the Catalogue for Guiding Investment in the Central and Western Regions. Encouraged enterprises in the Western Region which currently enjoy a preferential tax rate of 15% can continue to enjoy the rate until expiry in 2010.

Venture capital enterprises investing in an unlisted small-to-medium sized high-tech enterprise may deduct 70% of the equity investment amount from their taxable income for the year upon the expiry of 2 years of the investment in the relevant high-tech enterprise. Any portion not deducted in that year may be carried forward and deductible in the following years.

Income derived from certain agriculture, forestry, animal husbandry, and fishing projects, such as the cultivation of vegetables, fruits, and forestry products, may be tax exempt. Income from related projects, including the cultivation of flowers, tea, and other such items for spices and drink and aquatic farming, will be eligible for a 50% tax exemption.

Income from basic infrastructure projects encouraged by the State, including harbour docks, airports, and electricity and water projects, will enjoy a tax holiday of 3-year full exemption and 3-year 50% exemption, with the holiday commencing from the first income-generating year.

In addition, the portion of income derived by a tax resident enterprise from the transfer of technology that does not exceed RMB 5 million will be exempt from income tax. The portion of income that exceeds RMB 5 million will be eligible for a 50% reduction.

Grandfathering of preferential policies
Enterprises whose business registration was completed on or before the date of passing of the Enterprise Tax Law on 16 March 2007 and which enjoyed a tax rate of lower than 25% under the old tax regime are allowed to continue enjoying a preferential tax rate while gradually increasing their tax rate to 25% during the 5 years following the implementation of the Enterprise Tax Law. Enterprises whose tax rate was 15% before the passing of the Enterprise Tax Law are subject to a phasing-in of the income tax rate in the following manner: 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011, 25% in 2012. Enterprises whose tax rate was 24% under the previous tax regime are subject to the new statutory rate of 25% under the Enterprise Tax Law from 1 January 2008.

Enterprises which enjoyed tax holidays under the old tax regime may continue to enjoy the concession until the expiry of the tax holidays. If an enterprise was entitled to a tax holiday under the old tax regime but such tax holiday has not yet commenced due to lack of profit, its tax holiday is deemed to commence when the Enterprise Tax Law came into effect on 1 January 2008.

Enterprises which are eligible for both the grandfathered preferential policies and the new preferential policies under the Enterprise Tax Law may choose which policy they would rather follow based on which they consider more beneficial. Enterprises may not enjoy both old and new preferential policies and may not change to the other policy after making their decision.

Enterprises established after 16 March 2007 which were subject to 33% income tax rate under the old tax regime are subject to the new rate of 25% beginning 1 January 2008.

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Tax collection system

Over the past decades, China has made efforts to establish a modern, rational and efficient tax system that keeps pace with the transformation of a command economy into a marketoriented economy. China has developed a two-tier system for levying taxes whereby certain taxes are collected by State Tax Bureau and others by Local Tax Bureau. Every tax levied in the PRC can be classified as a central tax, local tax, or a shared tax. Generally speaking, the State Tax Bureau is responsible for the levy and collection of the central taxes which constitute the revenue of the central government and the shared taxes which are revenue shared between the central and local governments. The Local Tax Bureau is responsible for the collection of local taxes which constitute the revenue for the local governments concerned. The State Tax Bureau will directly pay the portion of taxes shared by the local governments collected by it into the local government treasury. Introduction to major heads of taxes which may have implications on FIEs and foreigners is set out in section "Enterprise income tax" to section "Consumption tax" below.

Enterprise income tax

While the previous enterprise income tax laws made a distinction between domestic enterprises and FIEs and foreign enterprises, the new Enterprise Tax Law has introduced the distinction between “resident enterprises” and “non-resident enterprises”. Resident enterprises, including domestic enterprises, FIEs, and foreign enterprises registered abroad but effectively managed in China, are taxed on their worldwide income sourced in and outside China. Non-resident enterprises, including foreign enterprises established and effectively managed outside of China but which have establishments in China (such as representative offices), or which do not have any establishment in China but have income sourced from China, are taxed on income derived from China or connected to their establishment in China. The Enterprise Tax Law unifies the tax rate of resident and non-resident enterprises at 25%, lowered from the previous 33%.

Under the Enterprise Tax Law, enterprise income tax in China is calculated and payable based on the balance of the total income received by an enterprise in a tax year after deducting the tax-free income (e.g. governmental funding), the tax-exempted income (e.g. qualified investment income such as dividends and bonuses generated between resident enterprises), various deductible items, and the permitted remedies for losses of previous year(s). An enterprise's total income refers to all monetary and non-monetary incomes generated from various sources and include revenue generated from sales of goods and provision of services, as well as income derived from dividends, interest, rental and assignment of property, royalties, and revenue from donations.

Withholding tax

In general, income derived from China by a non-resident enterprise which has no establishment in China or income derived from China by a non-resident enterprise which is unrelated to its establishment in China is subject to enterprise income tax on a withholding basis at the rate of 10%. Such 10% withholding tax rate is applicable to rentals, royalties, capital gains, dividends etc. which are sourced from China.

Individual income tax

Chinese and foreign individuals are subject to the same IIT regime. IIT is computed at different tax rates depending on the type of taxable income. Income from salaries and wages is taxed at progressive rates, with a highest rate of 45%, whereas the tax rate for income from production and business activities of individual industrialists and income from contracting operations of enterprises and institutions ranges from 5% to 35%. Other taxable income, such as from author's remuneration, personal services remuneration, and royalties, is generally taxed at a flat rate of 20%.

Individual tax payers are allowed a standard deduction of RMB 2,000 per month for the IIT on wages and salaries. Expatriates enjoy a higher deduction of RMB 4,800 per month.

Table. Scale of IIT Rates for Expatriates

Although IIT is payable by the employee, the employer generally has the obligation to withhold the IIT amount and pay it to the tax authorities. If the employer fails to withhold part of the income for IIT purposes, the employer will be imposed a fine up to 3 times of such payment.

An essential element in determining IIT liability is whether an individual is domiciled or resident in the PRC. Persons who habitually reside in China due to family or economic interest relationships or registration of permanent residency are considered to be taxpayers domiciled in the PRC. They are subject to IIT on their worldwide income. In most cases, a foreigner working in China is not deemed to be domiciled in China but only resident.

Individuals who are domiciled or resident to China are required to self-declare IIT if (i) they have an annual income of more than RMB120,000; or (ii) they have earned wages or stipends from 2 or more sources within China; or (iii) they have income earned outside China; or (iv) they have acquired any taxable income without withholding agent; or (v) under other circumstances stipulated by the State Council. These individuals must file their taxes with a local tax bureau or through an approved tax agency within the specified time limit.

Tax treatment of non-domiciliary individuals varies depending on the duration of their residency in China in a calendar year. Individuals who are not residents in China, or were residents in China for less than 1 year, are subject to tax only on their income derived within China. Residents who reside in China for at least 1 year are taxed on their worldwide income just as domiciled individuals. However, residents who have resided in China for more than 1 year but less than 5 years are exempted from IIT on foreign source income paid outside China. Residents for more than 5 years are subject to their worldwide income, irrespective of whether derived in or outside China. It should be noted that for the 5-year residency rule, any absence from China of 30 days or more on a single trip or for a cumulative period of 90 days or more on a number of trips within the same tax year will break the 5-year period. Directors and senior managers of FIEs in China are taxed on the income paid by the FIE, regardless of the length of their residence in China and even if the work is performed outside China. Whether the income paid to the directors and senior managers by a foreign enterprise abroad will be subject to IIT will depend on the length of residence of the directors and senior managers in China.

An expatriate who is physically present in China for more than 90 days in a particular calendar year, or, in the case of a resident of a country or region with which China has entered into a double taxation avoidance treaty or arrangement, more than 183 days within a time period stipulated in the relevant tax agreement, will be subject to IIT on the portion of the wages and salaries which is deemed China-sourced. A Hong Kong resident, for example, who spends more than 183 days in China over a period of 12 months will be subject to IIT on the portion of his wages and salaries which is deemed China-sourced.

A foreign representative of a representative office is taxed as a resident in China irrespective of whether the representative actually resides in China. Therefore, the representative is taxed on the salary attributable to the services rendered in China.

Business tax

Business tax is normally payable on the income derived from the provision of certain types of labour services, the assignment of intangible assets or the sale of immovable property. FIEs and foreign enterprises which engage in these taxable activities in China are also subject to business tax. The tax is levied on gross turnover, with deduction of expenses or costs only permitted in limited instances. Nevertheless, foreign enterprises (non-resident enterprises) may deduct the business tax amount from its taxable amount of enterprise income tax.

The applicable tax rates are as follows:

Exemptions from business tax are available for:

1. nursing services provided by nurseries, kindergartens, homes for the aged, and welfare institutions for the handicapped;
2. medical services provided by hospitals, clinics, and other medical institutions;
3. educational services provided by schools and other educational institutions, as well as services provided by students participating in work-study programmes;
4. agricultural services, such as mechanical cultivation, irrigation, and drainage;
5. admission fees for certain cultural activities, such as those organised by memorial halls, museums, cultural centres, and art galleries; and
6. admission fees for cultural and religious activities conducted at places of religious worship.

Reductions or exemptions from business tax are not dependent on the location of the FIE or its business activities.

Value-added tax

Value-added tax (VAT) is levied on the sale of tangible movable property, the provision of processing or repair and replacement services and the import of taxable goods into China.

The principal applicable tax rates are as follows:

VAT is levied and collected on the basis of the value added to the taxable goods and services at each stage of the production cycle.  

VAT may be refunded in a number of circumstances. VAT paid on the inputs to manufacture goods which are subsequently exported may be partially refunded. A VAT refund is also available when goods are returned by the buyer.

Consumption tax

Consumption tax is imposed upon manufacturers and importers of consumer goods, as well as businesses which entrust third parties to process such goods. The tax also applies to FIEs and foreign enterprises which engage in these taxable activities in China. The consumption tax is levied on 14 categories of goods, including tobacco, liquor and alcohol, cosmetics, jewellery, fireworks, processed oil, automobile tires, motorcycles, motor cars, golf and golf equipment, luxury watch, yacht, one-off wooden chopsticks, and solid wooden parquet. The rate of the tax varies and is sometimes expressed as a percentage of the sales value (with rates up to 45%) and/or as a fixed amount per volume of the product. For instance, the tax rate applicable to cosmetics is 30%, whereas the tax amount payable on diesel oil is RMB 0.1 per litre.

Unlike VAT, consumption tax is levied only when goods are imported from overseas or sold to the wholesaler, retailer, or directly to the end-user and not on any further on-sale of the goods thereafter. Taxable consumer goods used in the continuous production of other taxable consumer goods may be exempted from consumption tax. Goods manufactured for exports are generally exempted.

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General

By way of background, there is no concept of private land ownership under Chinese law. “Land use rights” (i.e. rights to use certain land for a fixed period of time), rather than land ownership, is the relevant legal concept. In the PRC, subject to specific laws to the otherwise, land in urban areas is owned by the State (stated-owned land), whereas agricultural land and the like in the suburban and rural areas are owned by rural collectives (collectively-owned land).

The collectively-owned land may be used for construction purposes or subject to the requisition by the Chinese government with the consent from the collectives and compensation payable pursuant to relevant legal requirements. Foreign investors rarely deal with this kind of land which may involve complicated issues.

Chinese law permits Chinese government to grant, lease or allocate land use rights in stateowned land to relevant land users. The entity or individual who has obtained the right to use a piece of land can legally own the title to the buildings on such land. Land users must obtain land use right certificates and property owners must obtain property ownership certificates from relevant authorities. In some major cities in China, a single certificate is issued to evidence the ownership of both land use rights and the buildings on the land. Land use rights are generally divided into 2 categories, namely allocated land use rights and granted land use rights.

Allocated land use rights

Allocated land use rights can be obtained from the state without paying any or paying a low land premium, which is very common in the case of state-owned enterprises. Allocated land use rights cannot be transferred, mortgaged or leased without first converting to granted land use rights and paying the land premium. The land bureau may resume the land and impose a fine if the allocated land use rights are assigned without prior approval.

Granted land use rights

To obtain granted land use rights, the land user should enter into a land grant contract with the local land bureau and pay a land grant premium according to the land grant contract. The land user will enjoy a fixed land grant term and should utilize and develop the land according to the terms of the land grant contract. A granted land use right can be transferred, mortgaged or leased subject to certain conditions.

1. direct recruitment through advertisement, head hunters, or other agencies such as a foreign service corporation;
2. recommendation of local staff by the Chinese joint venture partner; and
3. recommendation by the local labour authorities or local employment centres.

1. the employee's disability because of non-work related illness or accident;
2. lack of qualification for work, even after a re-allocation of job or retraining; or 
3. material change in the objective circumstances of employment which renders the labour contract incapable of being performed.

DISPUTE RESOLUTION

1. a District People's Court has jurisdiction to hear civil and commercial cases with a dispute amount of less than RMB 50 million if it only involves domestic interests and of less than RMB 20 million if it involves foreign interests;
2. an Intermediate People's Court has jurisdiction to hear civil and commercial cases with a dispute amount of between RMB 50 million to RMB 200 million if it only involves domestic interests and of between RMB 20 million to RMB 100 million if it involves foreign interests; and
3. a Higher People's Court has jurisdiction to hear civil and commercial cases with a dispute amount of more than RMB 200 million if it only involves domestic interests and of more than RMB 100 million if it involves foreign interests.

Arbitration in the PRC

Previously, many foreign parties to contracts in China have chosen to resolve their disputes with Chinese parties by arbitration in an overseas location such as Stockholm. Overseas arbitral awards are enforceable in China under the New York Convention framework. Majortrading partners of China such as the United States, the United Kingdom and Japan are member states to the New York Convention. In recent years, owing to the relatively higher costs involved, Stockholm has been a less popular choice and foreign parties have increasingly been willing to refer such disputes for arbitration to China's leading arbitrationinstitution, the China International Economic and Trade Arbitration Commission (CIETAC).

CIETAC is one of the busiest international business arbitration institutions in the world. Located in Beijing, CIETAC has established sub-commissions in Shanghai and Shenzhen. It has adopted 2 sets of arbitration rules, one governing general disputes and the other governing financial disputes. CIETAC is served by panels of PRC and foreign arbitrators, but parties may also appoint arbitrators outside the panels subject to the confirmation of the CIETAC chairman. The parties may also select alternative arbitration rules such as UNCITRAL arbitration rules to govern the arbitration proceedings. The enforcement of arbitral awards in the PRC is governed by the New York Convention or the Chinese Arbitration Law, depending on the nature of the arbitral awards.

Another international arbitration tribunal which is popular for resolving China-related disputes is the Hong Kong International Arbitration Centre (HKIAC). The HKIAC recommends the use of the UNCITRAL Arbitration Rules to govern international arbitrations, but this is not mandatory. Pursuant to the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region (Arrangement), an arbitral award made in Hong Kong may be enforced in a PRC court according to the provisions of the Arrangement.

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Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.