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Doing in China Contents

Executive summary 4 Disclaimer

This document is issued by Foreword 6 HSBC Bank (China) Company Limited (the ‘Bank’) in China Introduction – Doing business in China 8 in partnership with PricewaterhouseCoopers (PwC). Conducting business in China 13 It is not intended as an offer or solicitation for business to anyone Taxation in China 18 in any jurisdiction. It is not intended for distribution to anyone located Audit and accountancy 32 in or resident in jurisdictions which restrict the distribution Human Resources and Employment Law 34 of this document. It shall not be copied, reproduced, transmitted or 38 further distributed by any recipient.

Banking in China 42 The information contained in this document is of a general nature only. HSBC in China 44 It is not meant to be comprehensive and does not constitute financial, Country overview 48 legal, or other professional advice. You should not act upon Contacts 50 the information contained in this publication without obtaining specific professional advice. This document is produced by the Bank together with PricewaterhouseCoopers (‘PwC’). Whilst every care has been taken in preparing this document, neither the Bank nor PwC makes any guarantee, representation or warranty (express or implied) as to its accuracy or completeness, and under no circumstances will the Bank or PwC be liable for any loss caused by reliance on any opinion or statement made in this document. Except as specifically indicated, the expressions of opinion are those of the Bank and/or PwC only and are subject to change without notice. This document is not a ‘Financial Promotion’.

The materials contained in this publication were assembled in August 2012 and were based on the law enforceable and information available at that time. Executive summary

Economic reforms in China • Preferential tax treatments such have led to an unprecedented as tax holidays and reduced change in the nature of the tax rates for enterprises in business environment and Special Economic Zones the opportunities available for have been removed with the foreign investors and privately implementation of a new owned companies. However, corporate income law effective there remain bureaucratic and from 1 January 2008. Incentives operational challenges and this are now available for High- guide presents an introduction New Technology Enterprises to some of the key areas that (‘HNTEs’), Small and should be aware Medium-Sized Enterprises of when setting up operations (‘SMSEs’), qualified and doing business in China. Technology Advanced Service Enterprises (‘TASE’), and Some key issues for foreign foreign investments in the investors are as follows: central and western regions.

• China joined the World Trade • There are market access and Organisation (WTO) in 2001 production controls, as well as and market access has been restrictions on operations. gradually phased in. • Distribution and some service • Despite considerable sectors are open to foreign bureaucracy, the government investors. is making efforts to promote foreign investment. • China’s new anti-monopoly law came into effect on 1 August • Although many industries 2008, and China will join other are largely state-owned, countries with anti-trust laws the non-state sector, made that regulate competition. of collectively-owned, foreign-owned and private • Despite the fact that managers companies, is rapidly and skilled labour are still in gaining importance in the short supply, the situation Chinese economy. is getting better with the millions of new fresh university • China has been proactive in graduates coming into the labour removing and non-tariff market every year. barriers for trade in goods through the negotiation and • Protection of intellectual property implementation of regional is an area of concern. agreements.

• Certain foreign exchange restrictions are in place. 4 Foreword

China has embarked on HSBC looks to be your trusted Helen Wong unprecedented economic partner while always seeking Group General Manager growth since its market ways to better support President & opened up three decades customers. We have produced Chief Executive Officer ago, rising to become the this booklet – ‘Doing Business HSBC Bank (China) world’s second-largest in China’ – in collaboration with Company Limited economy today. Thanks to its PricewaterhouseCoopers, to prudent management under guide you towards the right the 12th Five-Year Plan, a business decisions in China. new path towards sustainable and balanced development, HSBC and alongside a focus on boosting PricewaterhouseCoopers each domestic consumption, maintain wide presence across is opening new opportunities Greater China, well-established in China for continued to provide the financial services industrial innovation and and advice that offer your business expansion. company the best chance for success in this vibrant region. Elsewhere, China’s ‘going out’ strategy over the past decade On behalf of HSBC, may has spurred great promise, I wish you a prosperous with its dynamic enterprises future in China. investing overseas while expanding China’s economic influence worldwide – one that continues to be a lighthouse for growth in spite of a challenging global environment.

At HSBC, we are ideally positioned to help businesses with interests in and out of China. Having grown to 120 outlets (at June 2012), HSBC is the foreign bank with the largest network of outlets in China and the most comprehensive range of services. From here, we have cultivated our deep-seated local knowledge to help customers achieve their goals, as we leverage our unique global connectivity reaching out to over 80 countries and territories worldwide. 6 Introduction Doing business in China

General business climate materials sourcing for Foreign energy and water conservation Investment Enterprises (FIEs). are required. The coastal China officially joined the Now, FIEs are no longer areas have experienced a World Trade Organisation required to give priority to the greater degree of industrial (WTO) in November 2001, local market when purchasing development than the inland and foreign investment and raw materials, fuels and areas, offering improved trade has grown rapidly as a other materials. Similarly, infrastructural facilities. In result. Under the WTO, tariffs the requirement for WFOEs addition, the government on agreed products have been and CJVs on balancing foreign has issued a series of laws reduced, and market access exchange incomes and and regulations intended to to various regulated industries expenditures has been repealed. encourage foreign investment has been phased in gradually. in the central and western Industrial sectors opened up Large areas of China’s economy regions of China. in the past years are trade are increasingly becoming and distribution, including more market oriented, and Climate for foreign investors franchising, advertising a smaller range of sectors services, inspection services, and products is now under Incentives for freight forwarding agency administrative control. Current foreign investors services, for example. industrial policy places For the purpose of attracting A more open market will emphasis on strengthening foreign investment, the Chinese attract know-how, technology, basic industries, infrastructure, government has introduced services and materials. These energy, and transport. Market a number of benefits and imports, together with China’s forces are now playing a incentives towards overseas rich manpower, both skilled more dominant role in China, investors in particular industries, and unskilled, have turned and the business climate of which we set out a brief list China into one of the most is less subjected to state as follows: important manufacturing administrative guidance bases in the world. than before. Foreign • Qualified small and low-profit participation in investment enterprises and qualified high/ China still holds a number projects continues to be new-tech enterprises are of challenging areas for encouraged by the Chinese subject to reduced income foreign investors. Nevertheless, authorities, and measures tax rates. the government is making are being taken to make efforts to address some the investment climate • TASEs, which include of these areas in order to more favourable and less information technology encourage foreign investment. bureaucratic. The Chinese outsourcing (ITO), business For example, through the government gradually process outsourcing (BPO), and amendment of the ‘Law on delegated more foreign knowledge process outsourcing Wholly Foreign-owned investment approval authority (KPO), are subject to income Enterprises (WFOEs)’, the ‘Law to local governments. This tax benefits: entitled to a on Cooperative Joint Ventures is considered another step preferential Corporate Income (CJVs)’ and the ‘Law on Equity towards reducing bureaucracy. Tax (CIT) rate of 15% and a Joint Ventures (EJVs)’ in 2000 Priority areas for foreign higher education expense and 2001, China has relaxed investment remain those deduction cap of 8%. Income its requirements on foreign where modern technology, derived from the offshore exchange balancing and raw environmental protection, service contracts falling within 8 the scope of ITO, BPO and KPO Foreign exchange restrictions Local competitor attitude Key Markets and Trade this membership, China has are eligible to Business Tax There are certain restrictions toward foreign investment gradually lowered its tariff exemption. Meanwhile, qualified on foreign currency exchange In order to acquire foreign Framework of industry rates and eliminated non-tariff equipment obtained by TASE is in China. Foreign investment technology, capital and State-owned enterprises barriers to trade, including entitled to bonded treatment. enterprises are required by the know-how, Chinese domestic (SOEs) still maintain an quotas, import licences and State Administration of Foreign enterprises recognise the important role in the unwarranted inspection • Enterprises or projects Exchange (SAFE) to separate importance of entering into economy. Notwithstanding requirements. However, China with a focus on technological their foreign currency bank joint ventures with foreign this, the non-state sector, still needs to address the development, environmental accounts into capital accounts enterprises. However, there made up of collectively- issues of legal and regulatory protection, energy and/ and current accounts. are restrictions on the extent owned, foreign-owned and transparency, the protection or water conservation, For details please refer to of foreign participation allowed private companies, is rapidly of intellectual property production safety, for section ‘’. in certain sectors and in some gaining importance and now rights and the opening up of example, may be entitled sectors foreign investment accounts for the majority of telecommunications, security, to various types of income After years of strong economic is not permitted at all. Such gross industrial output value. and other service industries. tax incentives. growth and waves of foreign restrictions, however, are direct investment, a substantial gradually being phased out The private sector has become Regional free • Tax incentives for foreign foreign currency reserve with China’s accession to increasingly important as trade agreements investment enterprises of has been accumulated by the WTO. In addition to joint China transitioned towards a At the regional and bilateral a productive nature and the Chinese government. ventures, WFOEs are also . To level, China has been proactive most of the ‘geography-based’ With the sizeable reserve, allowed, provided the sectors enhance the growth of private in removing tariff and non-tariff incentives have been removed. the relevant foreign exchange in which they operate enterprises which have been barriers for trade in goods A grandfather period is available restrictions have also are not subject to 100% dominated by small and medium through the negotiation and for certain incentive policies. been relaxing gradually. equity restrictions. enterprises (SMEs), the Chinese implementation of free trade government has chosen several agreements (FTA). • Passive income derived by Anti-Trust Law impacts Labour attitude toward municipalities in which to launch foreign enterprises from foreign investment foreign investment SME-facilitating policies. SOEs China signed a FTA with ASEAN sources in China was previously China has passed an anti- The differences between still dominate in some sectors (Association of South East Asia subjected to a withholding tax monopoly law which came Chinese and western such as oil, power, tobacco, Nations) in November 2002 of 20%, which has since been into effect on 1 August 2008. management styles can often steel, petrochemical, automobile, which provides for enhanced reduced to a concessionary Foreign investors doing prove a problem for foreign joint communication, railway, aviation economic cooperation in the rate of 10%. However, an business in China need venture partners due more to and financial industries. trading of goods, services exemption is available under to consider the immediate cultural differences, language and in investment. The more certain circumstances. impact of this new law on and communications rather Both FIE and domestic important areas and sources their businesses. Merger and than prejudices against foreign enterprises are encouraged of preferential ASEAN market • Qualified projects may acquisition transactions in China management. The situation has to participate in high-tech access, in terms of fewer tariff enjoy certain VAT incentives. involving foreign parties will improved in recent years as a industries (including software, and non-tariff barriers have be subject to review and can pool of talented local staff is integrated circuit, R&D, come into effect at varying • Technology transfer, technology be halted due to anti-trust being developed in major cities for example). times beginning 1 January development and related reasons. Acquisitions of through training in modern 2005. The FTA represents services are exempt from domestic enterprises by management techniques and Overseas trade relations a significant opportunity for business tax (BT) subject foreign investors that may exposure to overseas work companies trading between to technical assessment of have implications for national experiences. Memberships in trade blocs ASEAN and China to reduce certain Science and Technology security shall be subject to China officially became a supply chain costs and increase Commission and approval of more stringent review. member of the WTO in overall price competitiveness related tax authority. November 2001. As part of and profitability.

10 Conducting business in China Forms of business

In addition, China has signed for cooperation between China The principal forms of instead of the unincorporated enterprises in China) that CEPA agreements (Closer and , ECFA forms a business open to foreign cooperative joint venture. have establishments or Economic Partnership new landscape for the three investors in China are The tax authorities in charge, places of business in China Arrangement) with areas to better cooperate and classified under the i.e. the relevant state or and engage in production Kong and which were communicate with each other in following headings: provincial tax authority, of the or business operations. originally implemented in 2004 achieving mutual development. unincorporated cooperative Foreign enterprises that and subsequently expanded 8 The ECFA was signed on 29 Equity joint ventures joint venture would determine do not have establishments times up to the end of 2011. In June, 2010 and went into effect how it or its partners are or places of business in China principle, China has agreed to on 12 September, 2010. The first An equity joint venture is being taxed. but derive certain China- grant zero tariffs to all goods of wave of policies went into force a separate legal entity and source income are also and Macau origin, on 1 January, 2011. takes the form of a limited Wholly foreign- included in this category. other than prohibited imports. liability company registered owned Enterprises More FTAs are under in China. The partners have Foreign enterprises include The implemented FTAs also negotiation including with joint management of the WFOEs are established representative offices, sites include the Asia-Pacific Trade Australia, Japan, South Korea, company and profit sharing is exclusively with the foreign for the exploitation of natural Agreement (APTA), formerly GCC (Gulf Cooperation Council), according to the ratio of each investor’s capital. They are resources, contracted project known as the Bangkok SACU (The Southern African partner’s capital contribution. limited liability companies. sites, and companies providing Agreement (consisting of Union) and Iceland labour services or employing members of China, India, South among others. Cooperative joint ventures Joint stock companies business agents. Korea, Sri Lanka, Bangladesh and Laos), the China and Chile The parties to cooperative Joint stock companies, also Branches of Agreement, and the Early With the exception of certain joint ventures may apply for known as companies limited foreign enterprises Harvest Programme of China items subject to state approval to have the company by shares, are established and Pakistan Agreement. restrictions, most products structured as a separate legal primarily in order to be able Under the Company Law In April 2008, New Zealand exported by foreign investment entity with limited liability. to list on Chinese or foreign of the People’s Republic of was recognised as the first enterprises are exempt from Profit sharing is defined in stock markets. The capital China, a foreign company developed nation to sign an export duties. The general the contract and can vary stock of a joint stock company may establish branches in FTA with China. rate for value-added tax (VAT) over the contract terms. In is made up of equal value China. A branch does not is 17%. By law, except for addition, there is a form of shares. Contributions are have the status of a Chinese Meanwhile, China has signed certain special products, exports unincorporated cooperative made by both domestic legal person, and the foreign an ECFA agreement (Economic are zero-rated, i.e. no VAT will joint venture which is not and foreign shareholders. company assumes the civil Cooperation Framework be levied on exports, and input a legal entity. Income liabilities of its branches in Agreement) with Taiwan in June VAT will be refunded. and expenses are shared Foreign enterprises China. However, in practice, 2010 which aims to promote amongst partners based on only foreign banks and economic, trade and investment With the pressure of persistent the contract terms. Income In general, foreign insurance companies have cooperation between the trade surpluses with major tax might be imposed on the enterprises are enterprises been granted licences to two parties, achieving further foreign trading partners and individual joint venture parties (other than foreign investment open branches. trade liberalisation in goods with concerns about resource and services, expanding the preservation and environmental fields of economic cooperation protection, there have been and building a cooperation adjustments (i.e. lowered mechanism. The signing of ECFA or eliminated) to the export brings cross-strait economic VAT refund rate since 2004, relationship into a new era. which increase exporters’ At the same time, with Hong operating costs. Kong serving as the platform 12 Setting up a business

Equity joint ventures industries where regulations • During the life of an equity is required to make allocations authority for examination Relationship of shareholders, require the Chinese joint venture, the foreign to three funds, namely, and approval. If approval is directors and officers Formation procedures partner’s share to give partner’s equity contribution a staff bonus and welfare fund, granted, the partners have • As with an equity joint venture, • Equity joint ventures are them dominant control. should normally not be repaid. an enterprise expansion fund 30 days in which to apply a cooperative joint venture governed by the Law of However, once the venture has and a general reserve fund. to the administrative authorities operating as a limited liability the People’s Republic of • Capital contributions of an been liquidated, the net assets The amount contributed to of industry and commerce company is required to appoint China on Joint Ventures equity joint venture can take (if any) are distributed according the three funds by the venture for registration and a business a board of directors or a joint Using Chinese and Foreign the form of cash, capital to the partners’ shareholdings. may be designated in the joint licence. The date on which managerial committee that Investment that was goods, industrial property venture contract or decided by the business licence is issued will make all major decisions promulgated in 1979. The rights and other assets. In Rela tionship of shareholders, the board of directors. All the is the date of the establishment and oversee the management latest amendments to the general, the Chinese partner directors and officers previous years’ losses must of the venture. The venture of the company. law were made in 2001. will contribute cash, land • The partners of an equity be cleared before the current then has 30 days in which to development or clearance fees joint venture share joint year’s profits can be distributed. register with the tax authorities. • The profits and losses of • The Ministry of Commerce and land use rights, while the management of the venture. a cooperative joint venture (MOFCOM) has overall foreign partner will contribute The board of directors has Cooperative joint ventures Capital structure would normally be distributed responsibility for approving cash, construction materials, the authority to make all • Capital contributed to the according to the ratio joint ventures and for issuing equipment and machinery. All major decisions concerning Formation procedures venture by the two parties established in the contract, the approval certificates. joint venture contracts should the financial position of the • Cooperative joint ventures may be in cash or in kind. which may vary over the The local MOFCOM contain a schedule for capital venture. The joint venture are governed by the Law Land use rights, industrial contract terms. While the authorities generally contributions. If the capital partners are responsible for of the People’s Republic property rights, and other total amount provided for undertake the examination contribution is to be a single appointing the board members, of China on Chinese-Foreign property rights are included the three reserve funds and approval procedures. payment, all partners must and representation generally Cooperative Joint Ventures, as capital contributions. The (staff welfare and bonus pay the full amount within matches the proportion of promulgated in April 1988 cooperative joint venture law fund, general reserve fund • Once the approval certificate 6 months of the date the ownership interest in the and revised in 2000. The law requires that both parties and enterprise expansion fund) has been received, the venture business licence is issued. venture. Also, the law requires provides that the venture can fulfil their investment and by an equity joint venture is has to register within one A temporary business licence that a meeting of the board operate as a ‘legal person’, cooperation requirements as set expressed as a percentage month with the administrative can be issued during the period be held at least once each which means that a limited out in the joint venture contract. of the after-tax profit, the total bureau of industry and in which capital contributions year. The board of directors is liability company can be Failure to do so within the amount provided for these commerce in the relevant are to be made. If the partners required to engage a general formed. Under the limited prescribed time limit will result funds by a cooperative joint locality to obtain a business do not make their contribution manager and deputy managers. liability structure the company in another time limit being set venture is expressed as a licence. Thirty days after the within the stipulated time The general manager is would own all of the venture’s by the relevant authorities, and percentage of pre-tax profit. business licence is issued, frame, the temporary business responsible for carrying out assets, but the liabilities of the further failure will be handled in the joint venture must register licence will not be renewed. board decisions and is in charge investors would be limited to accordance with the relevant Wholly foreign- with the local tax authorities. All capital contributions must of the daily management of their investment contributions. state provisions. owned enterprises be certified in a report from the venture. Capital structure a Chinese registered CPA • To establish a cooperative • Capital contributions by both Formation procedures • The equity joint venture law (Certified Public Accountant) • The profits and losses venture the Chinese and parties must be verified by • WFOEs are governed by the requires that the foreign partner firm (this may be either an of an equity joint venture foreign partner(s) must a Chinese-registered CPA Law of the People’s Republic to the venture contribute international accounting firm are distributed according submit documents such as firm (this may be either a of China on Enterprises generally at least 25% of the acting through a Sino-foreign to the ratio of each partner’s a project proposal, the signed Chinese CPA firm or a Operating Exclusively with registered capital. No upper joint venture or a Chinese investment. After the agreement, contract, and Sino-foreign joint venture Foreign Capital. Although this limit on the foreign partner’s CPA firm) as confirmation that payment of and articles of association to the accounting firm), which will law came into force in 1986, contributions has been set, the contributions listed in the before the distribution Department of Commerce or provide a verification certificate. it was subsequently amended except in some special contract have been received. of profits, the joint venture the relevant local government in 2000. A WFOE is a limited liability company.

14 • The law and regulations prohibit increases must receive prior allocations to a reserve fund into effect on 1 June 2007. representative offices include chief representative should or restrict the establishment approval from the authorities. and a bonus and welfare fund According to the 2006 version the following: visit the office in person to of WFOEs in certain industries. for its employees from its of the Partnership Enterprise - Investigating and collecting receive the business registration • Foreign investors may after-tax profits. The reserve Law, a partnership in China is market information; certificate and complete some • MOFCOM is responsible for contribute capital in the fund allocations must be not a general partnership enterprise - Providing introductory services additional forms to formalise the the examination and approval form of freely convertible less than 10% of the after-tax or a limited partnership to potential buyers and sellers, registration. of WFOEs. Local governments foreign currencies or profits. Profits may not be enterprise established by such as setting up meetings are also authorised to approve certified RMB profits distributed until the prior years’ natural persons, legal persons and passing on price and • The representative office is these enterprises, provided from other FIEs. Subject to losses have been cleared. and/or other organisations technical information to required to submit the annual certain conditions are met. certain requirements set out within China. The profit Chinese customers; report to the SAIC during the in the regulations, such items Joint stock companies distribution or loss allocation - Assisting in making period of 1 March to 30 June • Before applying to establish as machinery, equipment, of the partnership enterprise arrangements for trade annually. a WFOE, the investor must industrial property and Joint stock companies, also is made according to the visits to China; submit a report, which must proprietary technology may known as companies limited partnership agreement or as - Coordinating with the parent • The immediate head office include specific information be capitalised according by shares, are governed by the regulated by the Partnership company and other associated of the representative office requested under the to their monetary value. ‘Company Law of the People’s Enterprise Law. companies or affiliates. must have been established regulations, to the relevant Republic of China’ issued in for at least two years before government authority in • The time limit within which December 1993 and amended In November 2009, the • In practice, many representative the application. the location in which the the capital contributions in October 2005. In addition Administrative Measures offices provide services that enterprise is to be established. are to be made must be to the Company Law, joint for Foreign Corporations are outside this legal scope. • The number of representatives The investor will receive a specified in the application stock companies are governed and Individuals to Establish Local branches of the State (including Chief Representative) written response within 30 and articles of association. by the provisional regulations Partnership in China (‘Measures’) Administration of Industry is limited to 4. Representative days of submitting the report. The contributions can be regarding certain issues relating was released, coming into and Commerce (SAIC) are offices with more than 4 made in instalments. The to the establishment of a effect on 1 March 2010. empowered to penalise the existing representatives may • The investor must apply first instalment representing foreign investment company The Measures set forth the representative office for only apply for de-registration for registration and obtain no less than 15% of the limited by shares, promulgated administrative rules and operating without a business representatives, but not add a business licence within total registered capital must on 10 January 1995. The procedures for foreign investors licence, if the representative new ones. 30 days of receiving approval, be made within 90 days and provisional regulations add to establish partnerships in office should be regarded as or the approval certificate the last instalment within certain requirements for the China which provided a new engaging in operating activities • The company is required will automatically become three years of the issuance formation of a joint stock form for foreign investors to and collecting funds through to register with the local void. The date the business of the business licence. company, including requiring make their investments in China. various means.. tax authorities within 30 licence is issued will be the Other contributions must a minimum of 25% of the days of receiving the business date of the establishment of be made pursuant to capital to be invested by Representative offices • With the circular issued by registration certificate. the enterprise. Tax registration the published schedule. foreign investors and a the State Council in May must be performed within minimum capital requirement • Foreign enterprises (including 2004, representative offices • The registration certificate 30 days of establishment. • After all the capital of RMB30 million. enterprises in Hong Kong, do not need to be approved is valid for one year only, which contributions have been Macao and Taiwan) are by MOFCOM or other is subject to annual renewal. Capital structure made, a Chinese-registered Partnerships permitted to open representative relevant authorities except for • The amount of registered accountant must be engaged offices in China. Legally, these representative offices whose • Local branches of SAIC are capital of a WFOE should to verify the contributions Partnerships have traditionally are to be established purely head offices are engaging required to inspect the office be consistent with the scale and issue an investment not been commonly used in for liaison purposes, and their in some special industries. premises of a representative of intended operations. verification report. China. The first version of activities are limited to the Representative offices are office within 3 months of issue The registered capital cannot the Partnership Enterprise provision of services that do required to register with the of the registration certificate. be reduced during the term Relationship of shareholders, Law came into effect on not give rise to any earnings. SAIC. Upon approval of the of operation unless special directors and officers 1 August 1997. In August 2006, The permissible activities of representative office, the approval is received, and • WFOEs are required to make the law was revised, coming 16 Taxation in China

Key messages Principal taxes • Amortisation of intangible assets is allowed. • Starting from 1 January 2008, The main applicable taxes when a unified CIT system doing business in China are • In principle, the accrual method is applicable to foreign as follows: of accounting is required. investment enterprises and 1. Taxes on income: foreign enterprises, as well • CIT • is levied at a flat as domestic enterprises. • IIT rate of 25%. 2. Taxes on transactions – • Tax resident enterprises system: • Dividends paid between in China are taxed on their • Value-added tax (VAT) qualified tax resident worldwide income. Non-tax • Business tax (BT) enterprises are exempt from resident enterprises are taxed • (CT) CIT. However, non-tax resident on China sourced income. 3. Other taxes: enterprises are subject to a 10% • Customs duties withholding CIT (unless reduced • CIT is at a flat rate of 25%. • Stamp tax under a ) on dividend • Vehicle and vessel tax income derived from China. • Starting from 1 September • Motor vehicle acquisition tax 2011, amended China individual • Deed tax • Foreign tax credits are available. income will take effect. • Land appreciation tax • Real estate tax • Qualifying high and new • Individuals domiciled in China are • Urban and township technology enterprises are subject to IIT on their worldwide land-use tax eligible for a reduced income. • Resources tax of 15%. Other forms of tax • Urban Construction and incentives, which are in the • Foreign individuals who are Maintenance Fee and forms of tax holidays, reduced not domiciled in China and Education Surtax tax rate, reduction of revenue, have not resided in China for • Other surtaxes and levies investment , etc. are more than five years may also available for enterprises reduce their IIT liabilities on that are engaged in encouraged employment income under Corporate income tax industries or which invest in certain conditions. Employment research and development and income is subject to the Key messages specific equipment. progressive rates from 3% to 45% (effective 1 September • Tax resident enterprises, which • Qualifying advanced technology 2011). Individuals carrying include enterprises incorporated service enterprises are able to out sole-proprietary business in China and foreign enterprises enjoy certain preferential tax in China are subject to IIT at whose effective management treatment and other support. progressive rates from 5% to is located in China, are liable to In certain areas, various local 35%. Other incomes received CIT on their worldwide income. financial subsidies are available by individuals are subject to IIT for foreign investment. at a flat rate of 20%. • Accelerated depreciation is acceptable under • Arm’s length prices must be • relief is offered certain circumstances. used for transactions conducted through credit, exemption or between related parties. reduction provided under national 18 statutes and tax treaties. Corporate income To avoid double taxation of facilities attached thereto, • Tax-exempt income tax system foreign sourced income, a foreign a land appreciation tax is Tax-exempt income includes: tax credit is allowed for income also levied. Dividends paid interest on state treasury Residence concept taxes paid to other countries on between qualified tax resident bonds; dividends paid Enterprises incorporated foreign-sourced income. enterprises are CIT exempt between qualified tax resident in China are automatically tax under the CIT law. enterprises; after-tax profit resident enterprises. A foreign Gross income distributions derived by a enterprise with its effective • Service fees non-tax resident enterprise management located in China • Inter-company transactions Service fees generated from which has an establishment is also regarded as a tax In principle, the CIT law consultation, management, or place of business in China resident enterprise. The requires an enterprise to training and other labour services from a tax resident enterprise effective management refers conduct business transactions by a tax resident enterprise are and the said dividends are to the place where the overall with its related parties in taxable as part of worldwide effectively connected with management and control over accordance with the arm’s income, irrespective of the the establishment or place of the business and production, length principle. If a related- locality in which the services business; income derived by personnel, accounting, party transaction is not are performed. qualified non-profit-seeking properties, etc, of an enterprise conducted at arm’s length organisations; and financial is, in substance, exercised. Tax and there is a reduction of • Exchange gains and losses subsidies, approved by the resident enterprises are subject gross income or taxable Exchange gains and losses State Council and received by to CIT on worldwide income. income, the Chinese tax incurred during business the enterprises, which are to be authorities are authorised transactions and year-end used for specific purposes. A non-tax resident enterprise, to make the appropriate tax translation in respect of which has an establishment adjustment under general monetary assets and liabilities Deductions or place of business in China, anti-avoidance rules. denominated in foreign is subject to CIT on the income currencies should generally be • Business expenses derived by the establishment • Capital gains, interest, accounted for in the current In principle, unless specifically or place of business. royalties and dividends year and are taxed or deducted excluded under the CIT law Capital gains, interest and accordingly. and other tax regulations, For a non-tax resident royalty income derived by a reasonable business enterprise that has no tax resident enterprise are • Donation and debt release expenditures including costs, establishment or place of taxable as ordinary income. Unless otherwise prescribed in expenses, taxes and losses, business in China, or that The aforementioned capital the tax regulations, tax resident that are actually incurred by has an establishment or place gains refers to the gains from enterprises should include a tax resident enterprise and of business in China but the the disposal of property, donations received and releases relevant to the generation of income derived from there including residential property, from debt as . income, are deductible. is not effectively connected buildings, structures, and with the establishment or attached facilities located in • Non-taxable income • Depreciation place of business, is subject China, and from the assignment Fiscal appropriation, The straight-line method of to withholding CIT on China of land-use rights and the governmental administration depreciation has to be followed source income (generally direct or indirect transfer of charges and governmental and there is a minimum includes passive income, the equity interests in Chinese funds that are collected depreciation period for different such as, dividends, interest, enterprises. For any gain and administered as treasury types of fixed assets. Certain royalties, rental income, derived from the transfer of management of the state fixed assets, for example capital gains, etc.). land-use rights, buildings are non-taxable income and premises and related under the CIT law.

20 fixed asset replacements • Employee remuneration business entertainment due to advancement of Ac tual paid remuneration for expenses are deductible. technology or fixed assets that employees of a reasonable In addition, the total amount are subject to constant vibration amount can generally be is capped at 0.05% of the or severe corrosion may be deducted as an expense. total sales (business) revenue depreciated over a shorter of the subject tax year. period or under accelerated • Staff welfare expenses depreciation methods. Expenses incurred for basic - Bad or doubtful debts social security contributions, En terprises other than • Leasing agreements supplementary pension commercial banks are not Le ased fixed assets are generally insurance and supplementary allowed to deduct bad debt consistent with the accounting medical insurance for local provisions for CIT purpose. treatments under China Chinese staff are deductible, Financial institutions can deduct Accounting Standards 2006. subject to caps stipulated by bad debt provisions up to 1% the government. of the incremental loan assets • Interest during the year for CIT purposes. Int erest on loans is generally Othe r staff welfare expenditure Bad debt losses are deductible deductible. On borrowings from is deductible subject to wage only when the loss is actually non-financial institutions by bill cap of 14% of the total incurred and approved by the in- a non-financial institution, the wage bill of an enterprise. charge tax bureau. deductible interest expense cannot exceed commercial • Insurance premiums - Amortisation of intangible assets interest rate. Interest related Premiums paid for The straight-line method is to capital expenditure on assets commercial insurance allowed with a minimum before they are put into use for investors or employees amortisation period of not less should be capitalised, while are generally not deductible, than 10 years, or pursuant to the interest incurred subsequently with a few exceptions. useful life prescribed in the laws is deductible in the current or agreed in the contracts. period. However, the deduction • Inter-company charges of interest paid to related R easonable inter-company - Advertising and parties is subject to the thin charges that represent specific promotional expenses capitalisation rule under the CIT and active services provided Th e deduction is limited to 15% Law. The thin capitalisation ratio by affiliated companies for of the annual sales revenue. for the financial industry is 5:1 the day-to-day operations The cap is raised to 30% for and for other industries is 2:1. of an enterprise in China certain specified industries. are generally deductible, but The remaining expenses can • Royalties and service fees subject to certain restrictions. then be carried forward and Royalties and service fees deducted in future years. paid by tax resident enterprises • Other deductions are generally allowed as a - Business entertainment deduction, provided they expenses are of a reasonable amount. On ly 60% of actual incurred

22 - Research and 5. Donations to institutions with that establishment or Tax rates Tax reporting withhold the proper tax development (R&D) other than qualified place of business, will be The standard CIT rate is a flat and remit the tax to the tax Subject to approval, a tax charitable institutions subject to withholding CIT at rate of 25% for all tax resident Tax returns authorities once payments to resident enterprise that incurs 6. Sponsorship expenditures a concessionary rate of 10% enterprises and non-tax resident The tax year for enterprises is non-tax resident enterprises qualifying R&D expenses 7. Provisions (though the statutory standard enterprises, which derive income the calendar year. Tax resident are made or accrued as for the development of new 8. Other expenditure that is rate is 20%) on such income effectively connected with their enterprises are required to file deductible expenses in techniques, new products and irrelevant to the generation sourced in China unless establishments or places of their annual income tax returns the account of the payers new craftsmanship is entitled of income reduced under a tax treaty. business in China. and annual financial statements for CIT purposes. Under to an extra 50% deduction of Nevertheless, dividends within five months after the certain circumstances, if the R&D spending. Losses distributed by a foreign Foreign Tax credits end of a tax year, together the withholding agent has investment enterprise out A tax resident enterprise that with an audit report issued failed to fulfil the withholding - Donation • Tax loss of its pre-2008 profit are still generates foreign source by a Chinese-registered CPA obligation, the non-resident Donation to qualifying charitable Tax losses sustained by a tax exempted from withholding tax. income, may deduct the firm, or a verification report enterprises are required to institutions is deductible up resident enterprise could be foreign income tax paid from issued by a Chinese registered perform the withholding tax to 12% of the annual profit. carried forward and deducted The non-tax resident the amount of CIT payable. CTA firm. Generally, non-tax procedure by themselves. from the succeeding five years’ enterprises that are eligible to However, the deductible amount resident enterprises with their - Commission fee taxable income. Tax loss carry- enjoy favourable income tax may not exceed the amount establishment or place of Assessments and handling charges backs are not allowed. treatment under Double Tax of CIT otherwise payable in business in China shall file the Enterprises are required to The typical deductible rate is Treaties agreed by China with respect of the foreign source annual CIT documents within make provisional assessments up to 5% of the corresponding • Asset loss the countries/regions where income. If the foreign tax paid five months after the end of and file CIT returns on a income. Insurance companies are Asset losses incurred by the foreign enterprises are tax exceeds the limit, the unrelieved the calendar year. There are monthly or quarterly basis. subject to higher deduction caps. enterprises shall be deductible resident, are required to follow balance of the foreign tax paid exceptions such that certain The returns are generally before tax after being declared certain formalities to claim the may be offset against the tax non-tax resident enterprises prepared on a self-assessment - Pre-operating expenses with the in-charge tax authority in treaty treatments. payable in subsequent years, may not need to perform the basis and the provisional These could be deducted for accordance with the prescribed up to a maximum of five years. annual CIT filings. payments are reconciled after CIT purpose at the start-up of procedures and requirements. Tax computation An enterprise applying for a the year-end in an annual return the business. Any losses which are not must submit There is a late payment for final tax settlement. Any tax declared shall not be deducted Taxable income the original tax receipts to surcharge of 0.05% of the discrepancy shall be paid within Non-deductible items before tax. Taxable income is defined support its claim for a foreign unpaid tax balance for each day five months after the year-end as the amount from the gross tax credit. the income tax is in arrears. If and any tax overpayment may The CIT law states that Withholding CIT income in a tax year after the taxpayer fails to file a return be refunded upon approval by the items listed below are deduction of non-taxable income, Consolidation or pay the tax due, an additional the tax authorities. non-deductible in calculating Non-tax resident enterprises tax exempt income, various A tax resident enterprise fine may be assessed. the taxable income of a tax that do not have an deductions and allowable should make combined CIT resident enterprise: establishment or place of losses brought forward from filings for its branches. Except As withholding agents, the 1. Payments in the nature of business in China, or those that previous years. for rules otherwise prescribed payers who make payments equity investment returns have a by the State Council, affiliated of dividends, interest, to investors such as dividends or place of business but Taxable income in foreign companies are not permitted rent, royalties or other 2. CIT payments earn China sourced income currency should be converted to file consolidated returns income to non-tax resident 3. Tax surcharges such as dividends, interest, into RMB to arrive at the on a group basis. enterprises are required to 4. Penalties, fines and losses due rent and royalties, that are taxable income. file a withholding tax return, to the confiscation of property not effectively connected

24 Personal Income Tax

The scope of Chinese • Compensation for hardship and foreign service In other words, the individual individual income tax (IIT) personal services; allowance, and insurance, etc. will generally be exempted from Taxable income can be in the PRC IIT if his/her cumulative The basic rules governing • Income from authorship; form of cash, in-kind benefits, stay in the PRC does not exceed expatriate taxation in the marketable securities and 183 days in a calendar year People’s Republic of China • Royalties; any other forms of economic concerned or in any 12-month (PRC) are set out in the benefits. Reimbursements of period (this base period varies ‘Individual Income Tax • Interest and dividends; business-related expenses to from one treaty to another) and Law of the PRC’ and in the employees and certain non- his/her remuneration is not paid ‘Detailed Regulations for • Income from the lease taxable fringe benefits provided for by any PRC enterprise or a the Implementation of the of property; to foreign individuals, if the permanent establishment. Individual Income Tax Law amount is reasonable and of the PRC’. These rules are • Income from the transfer supported by valid receipts, Individual treaties may differ and supplemented by various of property; are not taxable. a review of the relevant treaty is administrative rulings of the therefore recommended. [Note: Ministry of Finance and the • Incidental income; and Liability to tax: Less than For the purpose of counting the State Administration of Taxation 90 days (or 183 days for 90/183-day threshold, any part which, although not codified, • Other kinds of income specified treaty countries) of a day in the PRC is counted do have the force of law. by the Ministry of Finance. as one day in the PRC.] In general, non-domiciled International assignees coming Taxation of individuals (e.g. foreign To enjoy 183 days treaty to work in the PRC are generally employment income individuals) who derive income exemption, foreign individuals liable to Chinese income tax on from work and services are required to make record- employment or self-employed Foreign individuals are liable to performed in the PRC are subject filing. Treaty benefits are not income related to their work in PRC IIT on employment income to PRC IIT unless they are granted automatically unless the PRC. They are also liable based on: present in the PRC for not more proper record-filing is accepted to IIT on any interest and rental than 90 days in the calendar year by local tax bureaus. income earned in the PRC. • Residence status – the concerned and their income is Capital gains derived from the term ‘residence’ is generally not paid or borne by any PRC Liability to tax: More than 90 sale of property in the PRC are interpreted as ‘physical stay’ or entity/establishment. days (or 183 days for treaty also liable to IIT. There is currently ‘temporary stay’; countries) but less than one no inheritance or . The term ‘domiciled’ normally full year • The source of their income; and refers to the place where the Taxable income individual habitually resides by For a foreign individual who • Whether or not they are reason of household registration, has resided in the PRC for a Individual income is connected to a PRC employer. family or economic benefits. period or periods exceeding in categorised as follows: the aggregate 90 days (or 183 The source of employment If the foreign individual is a tax days where a tax treaty applies) • Wages and salaries; income is normally determined resident of a country/region but less than one full year, his by the location where the which has entered into an China sourced income will be • Production or business income service is provided. income tax treaty/agreement subject to PRC IIT regardless of derived from individual industrial with the PRC, the said 90-day whether the salary is borne by a or commercial enterprise; Taxable employment income threshold may be extended PRC or foreign entity. However, under this ‘wages and salaries’ to 183 days within the base his non-China sourced income • Income from sub- category includes basic wage/ period as specified in the will not be liable to PRC IIT. contracted operations; salaries, awards, bonuses, income tax treaty/agreement. 26 A ‘full year’ of residence in the will be subject to the PRC IIT Double-taxation relief 1 September 2011, the standard on work-related assignments in employment, consultancy, PRC means individuals having on his worldwide income for monthly deduction for foreigners the PRC for more than 90 days interest and dividend, gain of stayed in the PRC in a calendar every subsequent full year of A foreign individual who is remains at RMB4,800. The new or 183 days for a tax resident of a disposal of property etc.). This year with temporary absences residence in the PRC. subject to PRC IIT on his/her tax rate table effective from treaty country in a year) provided annual tax return should be filed from the PRC for not more than worldwide income may claim 1 September 2011 is set out his/her income is not paid/borne within 3 months after the end of 30 consecutive days or 90 days However, regardless of the a foreign tax credit on non-PRC as opposite. by any PRC entity/establishment. the tax year (i.e. 31 March). in total. length of the stay in the sourced income that is subject PRC and the location of the to tax in another tax jurisdiction. Other income A fine of up to RMB2,000 may Tax filing For example, an individual with payment, the PRC sourced The amount of the credit is, be imposed on an individual one 35-day trip outside the income (see examples below) however, limited to the amount Income other than employment who fails to perform the tax If your tax has been remitted PRC during the year will not be is taxable according to the PRC of PRC IIT payable on the same income is generally taxed registration. Further fines may or withheld by your employer considered as having a full year IIT law and regulations: income. Excess credits may differently depending on the be imposed if the taxpayer fails who files monthly withholding of residence for that calendar be carried forward for not income category. to remedy the situation within tax returns for you, you do not year. Similarly, an individual with • Bank interest derived from more than five years. prescribed time limits. need to file monthly income cumulative absences of 100 deposits in a bank located in Administration of tax returns again unless you days during the year (even if the PRC (effective from 15 Tax rates and calculation the regime Tax filing frequency have other categories of income any single trip is for less than 30 September 2008 onwards, of tax liability earned during the month. days) will also not be considered bank interest income is The PRC tax year runs from Monthly tax returns are normally Annual tax returns should also as having a full year of residence exempted from PRC IIT until The PRC IIT rates vary 1 January to 31 December. due on the 15th of the following be filed by certain individuals. for that calendar year. further notice); depending on the category of month and the tax is normally income. For salaries and wages The tax filing is administered payable upon submission of the The regular due date for filing a Liability to tax: More than • Fees for the use of proprietary (i.e. employment income), the on a monthly basis. monthly tax returns. In practice, monthly individual income tax 1 year but less than 5 rights within the PRC; applicable IIT rate is based on the tax filing due date varies return in the PRC and payment consecutive full years a progressive scale ranging Registration with the from one location to another and of tax due is the fifteenth day • Rental income related to the from 3% to 45% (effective 1 Chinese tax authorities there are also circumstances of the following month. The A foreign individual who has lease of property within the September 2011). Although where the tax filing is done on said due date may be different resided in the PRC for one full PRC; and the standard monthly deduction Subject to the practice an annual basis instead. Also, depending on the local practice. year or more but not more than (i.e., taxable income threshold) of the competent local tax except for certain circumstances Annual tax returns, if required, five consecutive full years is • Interest paid by the Chinese is increased from RMB2,000 bureaus, foreign individuals as stipulated by the law, the should normally be filed within subject to PRC IIT regardless of government or enterprises in to RMB3,500 for Chinese who are liable to PRC IIT employing entity in the PRC is 3 months after the end of the whether the salary is borne by a the PRC. individuals effective from may be required to register the statutory tax year. PRC or foreign entity. In addition, with the local tax authorities. agent for the employees/ his non-China sourced income Amended tax rates and brackets Registration should be made assignees. In addition, starting Your local tax authority will will also be subject to PRC IIT Grade Monthly taxable income** (RMB) Tax rate (%) with the local tax bureau in from the calendar year 2006, verify the correctness of but only to the extent that such the location where the individuals whose annual your returns. Evidence of the income is borne by a PRC entity. 1 1,500 or less 3 individual usually works. income exceeds RMB120,000, salary and other remuneration 2 The part > 1,500 and ≤ 4,500 10 or US$19,113 converted at details (e.g. confirmation letter Liability to tax: More than Registration, if required, usually the exchange rate of 6.2787, issued by the employer) may 5 consecutive full years 3 The part > 4,500 and ≤ 9,000 20 takes place upon arrival in the (except for foreign individuals be required. This document, 4 The part > 9,000 and ≤ 35,000 25 PRC for employees of foreign who are physically away from sometimes referred to as an A foreign individual who has investment enterprises and the PRC for more than 30 days ‘income certificate’, is also resided in the PRC for more 5 The part > 35,000 and ≤ 55,000 30 for resident representatives of in a single trip or for more than required for tax registration and than five consecutive full years 6 The part > 55,000 and ≤ 80,000 35 representative offices of foreign 90 days in total in the calendar whenever there is a change in companies. Other individuals year concerned) are required the remuneration details. In the 7 The part > 80,000 45 should register at such time as to file annual tax returns to case of tax audits, a copy of the ** The monthly taxable income from wages and salaries shall be the balance after the standard they become liable to tax (i.e. an declare their personal income employment contract or copies 28 deduction (local Chinese [RMB3,500] / foreigner [RMB4,800]) from the monthly income employee of a foreign employer from all sorts (e.g. income from of tax returns filed in the home country may also be required. The Ministry of Human arising from the aforementioned • Rates Transportation and certain It also applies to the transfer A consolidated tax receipt will Resources and Social Security regulations that affected General VAT payers are ‘Modern Service Industry’. of intangible assets such as normally be issued by the tax in China has invited comments foreigners participating in the subject to the standard rate ‘Modern Service Industry’ goodwill, patents and the sale authority to the withholding from the public on its draft social security scheme. of 17% which applies to most includes the business activities of real estate properties in agent, i.e., the employer, for interim measures for the Following this, some cities, taxable goods and services of providing technology or China. BT and VAT are mutually total tax withheld and paid by all participation of foreigners such as Beijing, Tianjin, and the lower rate of 13% expertise-based services for the exclusive. However, some its employees after the monthly employed in China (‘Draft and Guangzhou, have released which applies to certain manufacturing industry, cultural lines of certain industries withholding tax return has been Interim Measure’) in the the local implementation/ goods. Small-scale VAT industry and modern logistics may be exempt from the BT. filed and verified. Chinese social security system. practice details. payers are levied at the rate industry, including research, A tax payment certificate may The salient points in the Draft of 3%. The sale of certain development and technological • Rates be issued by the tax bureau Interim Measures are as follows: goods is exempted from VAT. services, information technology BT rates are 3% or 5%, to the individual taxpayer on an Turnover Taxes services, cultural innovation except for the leisure and annual basis or upon request. • The draft rules are applicable to • Basis of taxation services, logistics supports, entertainment industry foreigners (including residents Key messages VAT is levied and collected lease of corporeal movables, which may attract a rate Extensions of Hong Kong, Macau and on the basis of the value attestation and consulting. of up to 20%. For qualified Taiwan) lawfully working in • Nearly all transactions added to the taxable goods foreign institutional investors, Extensions for monthly tax China and holding appropriate in China are subject to or services at each stage of The VAT Reform Pilot an exemption to BT is granted filing and tax settlement may be work permits. They may be a turnover tax, either value a production chain, i.e. from Program may extend to other on their income derived from granted only upon application locally employed or employed added tax (VAT) or business the acquisition of raw materials industries such as the financial securities trading through and approval by your local tax overseas and on secondment tax (BT). Certain categories by producers to the purchase services industry when the domestic securities companies. authority. In practice, it would to work in China. of consumable goods are of finished goods or services circumstances warrant it. It is not recoverable but may be very difficult to secure the also subject to consumption by consumers. At each stage, be deductible for income approval from the tax authority • Similar to Chinese national, tax (CT). VAT on sales (output tax) is In addition to the existing VAT tax purpose. for such extension. foreigners working in mainland collected by the seller from rates of 13% and 17%, the China should contribute to the • The standard rate of VAT the purchaser. With the support VAT Reform Pilot Program • Registration Penalties and surcharges following social security is 17%. Reduced rates and of a valid VAT invoice, the introduced two additional VAT Enterprises that provide insurance: exemptions are available. general VAT payer can usually rates of 11% and 6%. The services or sell intangible Late payment surcharge deduct the VAT that has been transportation industry and assets or properties within computed at the rate of 0.05% – Basic pension fund • BT rates range from 3% to 20%. paid on the purchase of goods Modern Service industry are the scope of BT should per day will be imposed on – Basic medical insurance (including fixed assets) that covered by the VAT Pilot Reform voluntarily register for business the amount of tax in arrears. – Work-related injury insurance Value-added tax (VAT) are used for the taxable sales Program are subject to 11% and tax with the local tax authority. A penalty of up to RMB2,000 – Unemployment insurance (input tax) and account for the 6% respectively. may be imposed for failure to – Maternity insurance • Scope difference to the authorities. • Basis of taxation file a return and pay tax within The sale of taxable goods Foreign enterprises which fall Unlike VAT, business tax is not the prescribed time limits. • If foreigners leave China before and the provision of labour • VAT on exports within the scope of ‘Modern a creditable tax and is generally A further fine of RMB2,000 the mandated date for drawing services in relation to the Exporters of goods from China Service Industry’ receiving levied on the gross income. to RMB10,000 may be imposed pensions, their accounts can processing of goods and may be entitled to a refund payments from enterprises Business taxpayers in certain if the taxpayer or withholding either be maintained, as they of repair and replacement of input VAT incurred on the located in Shanghai should be specified industries are allowed agent fails to remedy the may return to work in China, or services within China are exported goods. As the refund subject to 6% withholding VAT to compute BT liabilities on a situation. In addition, in the terminated. If terminated, the subject to VAT. ‘Taxable rates ranges from 0% to 17%, instead of the 5% BT. The net basis. case of , tax amount accumulated in the goods’ refers to tangible exporters may not be able payers in China should be the authorities can impose a account may be withdrawn in a goods as well as certain to enjoy the full refund of withholding agents. • Tax reporting penalty ranging from 0.5 lump sum upon approval by the utilities such as electricity, input VAT incurred and suffer As withholding agents, the to 5 times the amount of relevant authority. thermal power and gas, but a certain degree of VAT costs Business tax (BT) payers who make service fee tax overdue on the taxpayer the term excludes real estate on exports. payments to non-resident or the withholding agent. • Foreigners holding citizenship properties. VAT is also levied • Scope enterprises are required to of countries with which on the import of taxable goods • VAT Reform Pilot Program Service income shall be withhold BT before the outbound Tax de-registration mainland China has entered into into China unless the imports China is transforming the BT taxable for BT purpose, remittance could be made. bilateral or multi-lateral are specifically exempt under regime to VAT regime with an regardless of whether the When you leave the PRC, you Totalization Agreements could special rules. aim to repeal BT over a period services are rendered onshore Consumption tax (CT) may need to de-register with the be exempted from contribution of time. A VAT Reform Pilot or offshore China (excluding local tax bureau for tax purposes. to specific types of social • Registration Program was introduced on processing services and repair CT is imposed on 14 categories security in accordance with the Enterprises that make sales 16 November 2011. Shanghai is and replacement services, of goods, including cigarettes, Social security relevant agreements. taxable for VAT purposes the first city to participate in the which are taxed under the alcoholic beverages, certain in China should voluntarily VAT Reform Pilot Program and VAT regime). In addition, luxury and environmentally The long-awaited PRC Social On 2 December 2011, the register for VAT with the local Beijing will be the next city to certain specified services in harmful items. It is not Security Law (‘the Law’) has Ministry of Human Resources tax authority. VAT payers are join the program in 2012. culture and sport industry, recoverable but is deductible been taken effect from 1 July and Social Security issued generally classified into two entertainment industry, other as expenses for income tax 2011. The Law will have circular Renshetingfa [2011] categories: general VAT payer The current VAT Reform Pilot special services etc rendered purposes. CT is computed implications to Chinese No 113 to further clarify some and small-scale VAT payer. Program in Shanghai only covers offshore are exempt from BT. based on the sales amount and/ individuals as well as foreigners points of concern/uncertainty or the sales volume depending 30 working in the PRC. on the goods concerned. Audit and accountancy

General accounting An enterprise shall adopt the Books and records Audited financial statements Audits are required under principles and regulations accrual basis of accounting company law, accounting in performing recognition, The accounting year of an FIEs are required to engage regulations and income tax laws In 2006, the Ministry of measurement and reporting enterprise shall start on a Chinese-registered CPA firm in China, and audited financial Finance issued new Chinese for accounting purposes. All 1 January and end on (including an approved Sino- statements should be filed with Accounting Standards (CAS income realised and expenses 31 December. foreign joint venture CPA firm) the tax authorities, together 2006). It is expected that these incurred or attributable to to audit their statutory annual with the annual income tax new accounting standards may the current period should The accountancy law stipulates financial statements. It is returns. FIEs are required to become a requirement for be recognised as income or that companies must keep three generally the of the board provide the auditors with all the FIEs in the next few years. expenses in the current period kinds of primary accounting of directors of a FIE to appoint enterprise’s documents, books In general, these new regardless of when the income records: journals, a general the auditor. A foreign CPA firm and reports. The accounting standards reflect all IFRS is received or expenses are paid. ledger and subsidiary ledgers, may also be engaged alongside statements to be submitted principles, although several as well as appropriate a local CPA firm in performing for an annual audit include differences exist to reflect An enterprise shall disclose the supplementary memorandum auditing or related work, but the balance sheet, income unique circumstances in China. following information related to records. Computerised the Chinese-registered CPA statement, statement of cash its parent and subsidiaries in the accounting systems, if utilised, firm must issue the report. flows and relevant supporting CAS 2006 is effective from notes, irrespective of whether can be regarded as the venture’s notes. The audited financial 1 January 2007 for all listed there have been transactions accounting records. statements must be submitted companies; other companies with those related parties: to a number of government are encouraged to adopt All accounting documents, authorities, including the local CAS 2006, but they still have • Names of the enterprise’s books and statements prepared offices of the SAIC, SAT, other alternatives. parent and subsidiaries. by a FIE must be written in the local Finance Bureau and Chinese, however, they may the SAFE. Audited financial The Ministry of Finance in late • Nature of business of the also be written concurrently statements must be submitted 2011 issued the Accounting subsidiaries, place of registration in a foreign language. to the relevant authorities Standards for Smaller Business and registered capital (or paid-in within four to six months of the Enterprise with a view to capital or share capital) and Books and records should be year end, depending on local simplifying and standardizing changes therein. recorded in (RMB), government requirements. the accounting standards for unless agreed otherwise smaller business enterprises. • Proportion of shareholdings and by relevant authorities and The Accounting Standards for voting power of the parent over partners. If a foreign currency Smaller Business Enterprises the enterprise, and that of the is used, the financial statements are supplement to CAS 2006. enterprise over the subsidiaries. must be converted into RMB This will become effective from at year-end for the preparation 1 January 2013 for companies • Where there have been related- and auditing of the annual that fall within the category of party transactions between financial statements. Typically, ‘small business enterprise’. an enterprise and its related most foreign-invested parties, the enterprise shall enterprises choose to record According to CAS 2006, basic disclose the nature of the their books in RMB because financial statements such related- party relationships, the their income and expenses as balance sheet, income types of transactions and the are largely denominated in statement (profit and loss essential elements of the the local currency. account), statement of changes transactions in the notes. in equity, cash flow statement, and notes to financial statements are all required 32 according to CAS 2006. Human Resources and Employment Law Contracts and Unions

Legal environment Chinese partner or the local Termination of employment authorities. Staff from the original Effective from 1 January manufacturing plant of the Unlike practices in many 2008, a new Labour Contract Chinese partner will often be other countries, ‘employment Law was enforced in China. employed by the joint venture. at will’ is not permitted This Labour Contract Law WFOEs normally have a free in China. Employers have is formulated with the purpose hand in recruiting staff locally. to follow certain procedures of governing the establishment However, due to a lack of local and conditions to terminate of employment relationships, networking, they will often the employment with the staff, and the conclusion, need to rely on professional e.g. upon contract expiration, performance, amendment firms, mass media, or other or where the employee is and termination of labour methods to recruit managerial proved to be unqualified, contracts between the level staff. violates the enterprise’s rules employer and the employee. and regulations or discloses Recruiting local staff is different criminal convictions. In addition, This Law encourages for ROs, which are required to staff may be made redundant as employers to enter into hire staff through an authorised a result of production or technical long-term or non-fixed term labour agency. There are changes. However, it is not employment contracts with several available authorised permitted to dismiss staff who employees, and sets more labour agencies in China, such undergo stipulated medical strict regulations for the as the Foreign Enterprise Service treatment, who lose their ability termination of employment, Corporation (FESCO) and to work due to an occupational stipulating conditions of China International Intellectech disease or a work-related injury, termination and increasing any Corporation (CIIC). The labour or who are on pregnancy or relevant costs. It also increases agency is the legal employer maternity leave or who are the penalties for violation of of the staff and seconds them breast-feeding their children. the Labour Contract Law and to the representative office To terminate an employment other related regulations. to provide agreed services. relationship with staff, In practice, representative enterprises may need to give Recruitment offices need to establish a statutory termination notice a contractual relationship and provide required severance Recruitment methods differ with the labour agency and payment. By law, the severance for FIEs and representative pay the required service payment is calculated based on offices (ROs) of foreign fee. As the staff working for the actual service years and the companies in China. representative offices are the salary level of the staff. employees of the agency, FIEs, for instance, joint many representative offices in In China, ROs are also able to ventures and WFOEs, are China choose to enter into a terminate their staff. As they able to employ staff from the separate agreement with the do not have an employment local workforce directly. Joint staff stipulating the terms and relationship with the seconded ventures normally do so through conditions of the engagement. staff, representative offices recommendations from their may terminate the service of these staff through their engaged agency.

34

The service agreement to take up employment in the representative office has already • Working Card/ In terms of payroll, salary To participate in social insurance between representative offices PRC. An initial ‘Z’ visa cannot hired 4 expatriates, it is not Employment Licence; shall be disbursed to the programmes, enterprises need to and the labour agency serves as be issued within the PRC. allowable to hire more. • Employment Permit; staff at least once a month register with the relevant labour the guidance of the termination. International assignees who • Photographs; in local currency. The date bureau, set up an account with have entered into the PRC Employment Licence • Physical examination report of disbursement can be a social insurance management Employer/employee with visas other than ‘Z’ visas for anyone over 18 years old; decided through an agreement authority and pay the required relations must leave the PRC to apply An entity in the PRC which • A Registration form of between the company and insurance premiums on a monthly for ‘Z’ visas and then re-enter employs a foreign individual Temporary Residence is staff. The wage paid to staff basis. Apart from employer The Chinese government into the PRC again. To take up is required to obtain an required for all non-Chinese shall not be deducted or premiums, companies shall is now enforcing the Trade employment in the PRC, an Employment Licence from residents which should be delayed without justification. withhold the premiums of Union Law. According to international assignee must the local Labour Bureau. applied for within 24 hours after Delayed payroll disbursement employees from their monthly the Trade Union Law, apply for employment permit arrival – you may get it from may lead to a financial penalty. salary and make the payment companies are required to and residence permit. Employment Permit hotel/serviced apartment after In addition, the company to the relevant authority. For support employees to set your check-in; and is responsible for withholding representative offices, because up a trade union and provide To obtain an initial ‘Z’ visa, one All international assignees • Marriage certificate or birth PRC individual income tax they are not legal entities, funds equivalent to 2% would normally be required are required to obtain a certificate for accompanying that is payable from staff premiums should be paid via of the company’s total salary to submit an ‘invitation letter’ Employment Permit from family members. gross compensation. the authorised labour agency. costs for the activities of issued by a sponsoring entity the local Labour Bureau. the trade union. For activities in the PRC. Other required Fringe benefits In addition to statutory social related to employees, for documents may vary depending Registration with the Public Working conditions insurance, enterprises in China example, re-organisations upon the type of visa to apply. Security Bureau/Foreigner In China, employers and also provide supplementary and layoffs, the company An employment licence is Residence Permit Wages and salaries employees are required benefit schemes to their shall notify the trade union required to apply for Z visa to participate in a social employees as a way to attract and heed its comments ‘invitation letter’ from the duly If you are an international In China, enterprises have benefits system. As a result, and retain local talent. before taking action. authorised unit in PRC. assignee working in the the right to set their own they are obliged to make PRC, you and each of your remuneration package, contributions to the statutory Working hours Immigration Rules Working Card accompanying family members including compensation social insurance programmes over 18 years old must first and benefits. Pursuant to based on the schemes for The working hours per week Visas Registered representatives of obtain a health certificate PRC Labour Contract Law, different locations. For a were reduced from 48 to 44 a representative office need from the local International the wages of staff shall not majority of the workforce, hours in March 1994, then As an international assignee to apply for a Working Card Travel and Health Care Centre. be lower than the minimum whose salary level falls further reduced to 40 hours in coming to the PRC to take with the local Administration After the certificate has been wage in the location where within the local social insurance May 1995 by the State Council. up an employment, one is for Industry and Commerce. obtained, you can register the company is registered. contribution base, the social In general, overtime is not required to apply for a work Foreign employees who are not with the Public Security insurance contribution could encouraged, though permissible visa; i.e., single entry ‘Z’ visa. registered under a representative Bureau and apply for a In addition to compensation, be between 35-40% of their under special circumstances. Within 30 days after arrival, office are not required to apply Foreigner Residence Permit enterprises may also salary cost. The social insurance an international assignee is for a Working Card, but instead to be affixed on your passport. implement effective programmes cover the following Overtime pay is higher than required to apply for a foreign they will need to apply for an The following documents incentive programmes, social insurance and funds: that for normal working hours, resident permit (formerly employment permit with the are normally needed when e.g. sales incentives, ranging from 150% up to 300% known as ‘multi-entry ‘Z’ visa’) local Labour Bureau. In light of applying for a foreigner performance bonuses, • Pensions; of normal wages, depending with the local Public Security China immigration criteria, the residence permit: stock options, and the like, • Medical insurance; on whether the overtime is Bureau. Chinese visas may limitation of non-local hiring in order to attract talent. • Unemployment insurance; during weekdays, rest days be obtained from a Chinese under one representative • ‘Z’ visa; This is of great importance • Work-related injury insurance; or statutory holidays. embassy or consulate in any office is 4 (take Shanghai for • Copy of business licence for positions in management • Maternity insurance; and foreign country with which the instance), including foreigner or business registration and sales, which are often • Housing fund. PRC has diplomatic relations. and Hong Kong/Macau/Taiwan certificate of your employer; the driving force behind 36 ‘Z’ visa holders are allowed residents. In other words, if your • Passport; company performance. Trade

Key messages and Harmonisation of Tariff rates Asia-Pacific , covered by the Information for Foreign Investments or Customs Procedures. China-Pakistan Free Trade Technology Agreement (ITA). the Catalogue of Goods of • China’s accession to the Tariff rates shall be determined Agreement, China-Chile Free Non-Exemption for WTO had a great impact Under the Customs Law per the tariff codes, which Trade Agreement, China- Duty exemption and Domestic Investments. on regulations and practices of the PRC, importers and are known as the Harmonised ASEAN Free Trade Agreement, duty reduction in terms of customs and exporters must register with Commodity Description and the Closer Economic Equipment and machinery trade laws. Customs before filing customs Coding System (HS), and the Partnership Arrangement with China has issued various imported but exempt from • Approved foreign-invested declarations. Importers should origin of the goods. China the Hong Kong and the Macau regulations to stimulate foreign customs duty and import VAT enterprises, for example, can file declarations to Customs adopted the HS coding system special administrative regions investment and development of is under the supervision of now import and export directly at the port of entry within with effect from 1 January and Economic Cooperation certain sectors of the economy. Customs for a period of 5 years and in their own name, without 14 days of the goods’ arrival. 1992. China adopted the 2007 Framework Agreement with from the date of importation. the use of a local import/export Exporters should file the version of the HS on 1 January Taiwan. The list of countries in Exemptions from customs duty During the supervision period, agent or a trade corporation. declaration within 24 hours 2007. Imported and exported which a preferential tariff rate is and import VAT are granted the equipment and machinery • Many imports are regulated before the goods are loaded. goods should be classified applicable will continue to grow, for machinery and equipment should not be transferred, through a licensing system Customs will review the according to the corresponding as China is actively negotiating imported by an enterprise if sold or otherwise disposed and by commodity inspection. documents submitted and will HS codes. free trade agreements with the project is recognised as of without the pre-approval • Some items are restricted randomly perform examinations several trading partners. encouraged industry per the from Customs. by the Chinese government. of the goods. The maximum Since WTO accession, China Foreign Investment Industry • Most imported goods are period for examination on has lowered the tariff rate The general tariff rate is the Guidance Catalogue and the Anti-dumping subject to customs duty imports should be around 48 gradually. By 2007, all of China’s highest tariff rate and it is Most Encouraging Industry, and import VAT. hours. The majority of goods multilateral WTO tariff reduction applicable to imported goods Products and Technology China will utilise trade remedy • Various exemptions and are cleared within 48 hours. commitments had been whose place of origin is Catalogue. The Catalogue measures, i.e. levying an anti- reductions from customs duty However, in practice, it may fulfilled. Further unilateral tariff unknown. In practice, the place has been updated several dumping duty, countervailing and import VAT are available. take longer for importers reductions are unlikely. of origin is usually known. This times. The latest Foreign duty or safeguard duty, to to clear goods from the means that the MFN tariff will Investment Industry Guidance protect the domestic industry Customs procedures port due to restrictions The PRC tariff book sets out be applicable, unless a lower Catalogue was issued in 2007 from material injury or the in Customs resources. different types of tariff rates: preferential or interim tariff can by the National Development threat of material injury. Of The Customs Law of the most-favoured-nation tariff be used. and Reform Commission these three trade remedy People’s Republic of China Customs duty must be paid rates, preferential tariff rates, (NDRC) and the Ministry of measures, anti-dumping is was first issued in July 1987. to a designated Customs bank general tariff rates and interim The interim tariff rate is Commerce. The latest Most most frequently used. Amendments were approved account within 15 days after tariff rates. applicable to selected imported Encouraging Industry, Products by the National People’s the duty memo is issued. goods and it is reviewed and Technology Catalogue According to Chinese regulations, Congress Standing Surcharges will be imposed The most-favoured-nation tariff annually by the Tariff Committee was issued in 2005. anti-dumping complaints may Committee on 8 July 2000 for late payments, which will rate is applicable to imported under the State Council. An be brought to the MOFCOM and it took effect on 1 January be calculated at the rate of goods whose place of origin is interim tariff rate is normally There are other restrictions in writing by any natural person, 2001. The revisions aim to 0.05% per day on the total a member country of the WTO. 0%, 1% or 3% and is set to around this preferential policy, legal person or organisation from empower Customs with more amount of customs duty and support the country’s industry namely the machinery and the domestic industry or on administrative authority, promote import VAT due. The preferential tariff rate is policy. For example, most equipment to be imported shall behalf of the domestic industry. the transparency of customs applicable to imported goods commodities and aviation be within the total investment procedures, and make customs whose place of origin is a parts are subject to an interim or the self-generated funds The application should contain practices more consistent with country or region that has tariff rate of either 0% or 1%. of the importer, restricted for details such as the full international best practices, as concluded a bilateral or regional ‘self-use’, and the equipment description of the products, the embodied in the Revised Kyoto free trade agreement. Currently, China has applied a 0% tariff should not fall into the Catalogue volume and price of domestic Convention for the Simplification prominent examples include the rate since 2003 for goods of Goods of Non-Exemption production of the product.

38 The volume and price of the The primary valuation method Customs bonded zones similar processing only (fully then become subject to both imports and the impact of the is the Transaction Value fledged manufacturing is not customs duty and import VAT. imports on the domestic method and this is applied There is now an increasing allowed). There are eight BLP The cost of bonded storage can industry should also be stated. over 95% of the time. Where number and variety of bonded located in selected coastal be included in the customs value Evidence should be presented the Transaction Value method zones throughout China. These cities, generally adjacent to for duty assessment purposes. to justify the existence of cannot be used, the customs bonded zones allow different the port areas. BLP are also dumping, the damage caused value shall be assessed types of activities to be favourable for export VAT RMB Trade to the domestic industry, and by applying the alternative performed and carry different refund purposes. the causal link between the methods sequentially. conditions from a customs, The Pilot RMB Trade dumping and the injury. tax and foreign exchange point Bonded Logistic Centres Settlement Scheme was China has applied the of view. These special bonded (BLC) are also another announced in April 2009, MOFCOM is responsible provisions of the decision zones are routinely available newly-introduced bonded coming into effect in July for investigating and on the treatment of interest to foreign-invested enterprises. zone. The most prominent 2009. The trial locations in determining dumping and charges for customs valuation The special bonded zones are public BLC is located in the PRC may opt to use RMB injury. Investigations should purposes and the decision summarised below. Bonded Suzhou. It is expected that settlement when conducting be completed within 12 on the valuation of Carrier warehouses have been new public and private BLC cross-border trade with months from the date that Media Bearing Software for established for a long time will be introduced throughout overseas companies. the case is established. Data Processing Equipment and can be used to temporarily China in the years ahead. Cross-border RMB settlement The period can be extended (G/VAL/5). store imported and exported and clearance can be done by six months in special cases. goods. Bonded warehouses The Zhuhai Cross-Border through designated banks Valuation remains one of can be ‘public’ or ‘private’ Industrial Park is another in certain area. Anti-dumping duty rates can the more complex areas in nature. newly-introduced facility, be imposed for a period as long of customs law. Since which consolidates the bonded as five years, unless the period implementation of the Free Trade Zones (FTZ) have logistics, bonded manufacturing is extended for special reasons. WTO-based customs valuation also been established for a and international trade functions. rules in 2001, this area remains long time, and can be used This bonded zone also allows Customs valuation one of the most controversial for bonded manufacturing repair and CEPA privileges. from an importer’s perspective. as well as other operations, The customs value is It is an area of focus for such as a bonded regional Export Supervision determined following Customs, and re-assessments distribution centre. Warehouses (ESW) are also the customs valuation in the declared value result in new and are designed for the methodologies as set out additional customs duty and Export Processing Zones temporary storage of exported in PRC Customs Valuation import VAT liabilities. (EPZ) are well established, goods. Pilot programmes are Measures. These measures and have been historically used being carried out for selected essentially implement the For example, royalty and for bonded manufacturing for ESW in Shenzhen and Xiamen. Agreement on Implementation licence fees, which are export. The allowable business Exporters can claim an export of Article VII of the General related to imported goods activity in an EPZ is now being VAT refund upon exporting into Agreement on Tariffs and and paid as a condition of expanded to include activities the ESW. Trade 1994. the import sale, are dutiable like research and development, for customs valuation purposes. testing and repair. For all bonded zones, customs The value for customs duty duties and import VAT will calculation purposes is the Bonded Logistics Parks not be levied on imported CIF (Carriage, Insurance (BLP) were newly introduced goods that enter the facility. and Freight) price. in 2004 and 2005 to promote If imported goods are sold on the logistics industry, and the domestic market, they will feature bonded stored and Banking in China

Types of Accounts

Depending on its structure, of account cannot issue checks. verification of processing directors authorised personnel local regulations. Same users Entrusted Loan a company needs to set up Only one RMB basic account banks on a transaction-by- and principal shareholders and can be set up for accounts in different types of accounts. is allowed per customer across transaction basis. Foreign beneficial owners. different cities. Direct inter-company Joint Ventures and Wholly banks in China, however, there currency capital accounts are 6. Company seal/chop and special lending is prohibited in China. foreign-owned Enterprises is no restriction on the number subject to SAFE’s approval. seal/chop for finance. Companies are only allowed must have certain book of General accounts a corporate All foreign currency inflows 7. Account application and other Local financing to carry out entrusted loan accounts, including FCY can operate. The banks need and outflows must go through relevant documents provided activities, in which a bank Accounts, RMB Basic to report customers’ account the specific related accounts. by the bank. Foreign Debt acts as an intermediary Accounts, and RMB General openings to People’s Bank of Funds cannot be freely 8. State and Local Tax in the lending/borrowing Accounts. General Accounts China in a timely fashion. transferred between any Registration Certificate Foreign investment arrangement. cannot be opened with the capital item account and the (original) enterprises (‘FIE’) can borrow same bank that hold the basic Foreign currency accounts settlement account. 9. Memorandum/Articles of foreign loan with due foreign The State Administrative of accounts. Banks can open Association and amending debt registration with SAFE. Foreign Exchange also issued both RMB and foreign Companies need to open Documents needed supplements However, FIE should follow the Circular which allows the currency accounts, depending different foreign currency 10.List of directors (with the the ratio of registered capital fund flow within qualified on the usage. accounts for different The documents required company’s official chop or to total investment (‘D-E ratio’) Multinational Companies purposes and uses. Upon to open a bank account may signature/chop of the legal requirements in structuring (‘MNC’) in China and with their RMB corporate accounts the requirement of State vary depending on each representative) their initial total investment. member companies aboard. Administrative of Foreign banks’ rules. Nonetheless, 11. Completed mandate/board The total amount of investment The initiative aims to decrease • Basic account: used to handle Exchange (SAFE), the foreign some basic documents are resolution includes the registered capital MNCs’ financing costs and daily fund transfers, payment currency bank accounts commonly required: 12. An organization chart showing as well as loans borrowed facilitate companies to better of employee salaries and should be separated into 1. Approval Certificate issued shareholding percentage of by the FIE. According to use and allocate their capital. bonuses as well as cash capital accounts and current by government bodies each entity and each stage Provisional Rule on the In which case, bank (entrustee) deposits and withdrawals. accounts. The capital authorised by the State in the ownership chain of the Management of Foreign Debt, acting as agent between the • General account: for customer accounts (including capital Council, i.e., Ministry of corporate structure. the accumulated balance of cash surplus group company cash management needs, account and foreign debt Commerce or the relevant 13.Basic information for long- and medium-term foreign (lender, entrustor) and the mainly used to deposit loan account, etc.) hold the provincial or municipal enterprises issued by State debt plus short-term foreign cash deficit group company proceeds, repay loan and other capital funds or shareholder’s people’s government. Administration for Foreign debt borrowed by an FIE (borrower). settlements. Cash withdrawal loan etc. injected by an 2. Legal Person Business Exchange with company’s should not exceed the is not allowed. enterprise’s foreign investors. Licence issued by the State official chop (for the enterprise difference between the Restriction on • Special account: for special The current accounts hold Administration for Industry required to conduct Balance of FIE’s approved total investment purposes, such as infrastructure foreign exchange used by the and Commerce. Payment reporting) and the registered capital. outbound remittance construction, reconstruction, enterprise for regular day-to- 3. Certificate of Legal Personal If there is any excess, the agency business, credit cards, day operating items. After Code and Organisation issued Beside the required total investment amount Repatriation of cash is strictly etc. Cannot settle sales income the separation of the capital by the State Bureau of Quality documents, most banks should be re-approved by controlled. The only way a or withdraw cash. account and the current and Technical Supervision. require authorised signatories the original approval authority. company can transfer profits • Temporary account: for account, RMB transactions 4. Valid foreign-invested to be present when opening out of the country is to pay an temporary need such as under the current account are Enterprise Foreign Currency an account. Some banks, Besides, the gap between annual dividend. Supporting establishment of temporary freely convertible (subject to Account Opening Approval however, have alternative rules total investment and documents must be submitted institutions, temporary business certain procedural controls) Documents (if applicable) and dealing with the absence of the registered capital will be to banks for cross-border profits activities in different places or as long as the transactions Foreign Exchange authorised signatories. the allowable borrowing transfers. Meanwhile, for verification of injected RMB are considered commercially Registration IC Card issued by limit for foreign debt even payment amounts exceeding capital. It can be used to make legitimate. However, in the the State Administration for When opening different offices if the FIE also borrows certain US$30,000 or equivalent, account transfers or to withdraw case of capital accounts, the Foreign Exchange. in different cities, each office domestic debts denominated tax clearance certificates cash in accordance with relevant convertibility of the currency 5. Identification documents needs to open accounts within either in renminbi or in should also be presented for regulations. Generally, this kind is still subject to the of the legal representative, the registered city according to foreign currency within China. remittance purpose. 42 1. As at May 2012. 2. Figures represent ownership of Hang Seng Bank in Hong Kong, which is 62.14% owned by Hongkong and Shanghai Banking Corporation Limited.

HSBC in China

As one of the first foreign banks Largest foreign bank investor in mainland China HSBC milestones in Dec 2007 locally incorporated in China, mainland China Hubei Suizhou Cengdu HSBC HSBC Bank (China) Company HSBC’s investments Rural Bank Company Limited Limited started operations on % Ownership Outlets 1865 (HSBC Rural Bank), a wholly- in China 2 April 2007. Local incorporation Founded in Hong Kong owned subsidiary of The marks an historic milestone and Shanghai. Hongkong and Shanghai HSBC Operated Business for HSBC in China, enabling Banking Corporation Limited, the bank to further expand its HSBC Bank (China) 100.0% 120 Since 1865 opened for business, marking network and service range, Company Limited Has had a continuous presence the first entry by an international in particular its RMB financing in mainland China. bank into China’s rural market. ability for the benefit of HSBC Jintrust Fund 49.0% 1 its customers. Management Company 1980 Nov 2008 Limited The first foreign bank to open a HSBC China launched debit Network representative office in Beijing cards in 17 mainland Chinese HSBC Life Insurance 50.0% 2 customer service centres, following the Open Door policy. cities on 17 November. The As of June 2012, HSBC China Company Limited 230 sales agents and cards can link with RMB and has 120 outlets (26 branches, 94 Dec 2001 foreign-currency accounts, a bancassurance products sub-branches) in 33 cities across The first foreign commercial feature unparalleled among the 19 provinces/municipalities, the offered via partners* bank to acquire an 8% stake debit cards offered by foreign largest network among foreign in a Mainland bank – Bank of banks in mainland China. HSBC Rural Banks 100.0% 12 banks in China. There are over Shanghai. 5,000 staff members of which Hang Seng Bank 100.0% (via 43 Jun 2010 98% are local hire. Feb 2004 HSBC launched its China new (China) Limited Hang Seng Bank) The first foreign bank to head office building, HSBC HSBC also serves its customers Strategic Investment in China conduct RMB business to local Building, in Shanghai Pudong’s through a huge ATM network in companies in mainland China. Lujiazui financial district and all cities where HSBC China has Bank of 19.0% 2,600+ opened the 100th HSBC-branded a presence. Communications Dec 2006 service outlet in Shanghai. The first foreign bank to offer Overview Ping An Insurance 15.57% 486,900+ sales time deposit service to local Jul 2011 agents and 62,000+ citizens for amounts no less The first foreign bank to be • City of incorporation: Shanghai bancassurance outlets than RMB1 million in nine cities granted access to China’s gold of Beijing, Dalian, Guangzhou, futures market. • Relationship with parent: Bank of Shanghai 8.0% 230+ Qingdao, Shanghai, Shenzhen, 100% subsidiary of the Hong Industrial Bank 12.8% (via Hang 640+ Tianjin, Wuhan and Xiamen. Nov 2011 Kong and Shanghai Banking The Hongkong and Shanghai Seng Bank)w Corporation Limited. Apr 2007 Banking Corporation Limited HSBC Bank (China) Company paid in RMB2.8 billion to boost Yantai Bank 20.0% (via Hang 70+ • Registered Capital: Limited started operations on HSBC China’s registered capital Seng Bank) RMB10.8 billion 2 April 2007 as a wholly-foreign- to RMB10.8 billion, which owned bank solely owned by enables HSBC China to hold the * HSBC Life Insurance Company’s partners are HSBC Bank (China), Hang Seng Bank (China) • Moody’s Rating: A1 and Bank of Communications The Hongkong and Shanghai largest capital base among all (Outlook is stable) Banking Corporation Limited. foreign banks in the mainland. HSBC is among the first batch of foreign banks to locally incorporate in mainland China. 44 Corporate Sustainability Our education programmes Awards for Excellence in China help to lift people out of For HSBC, Corporate poverty, build financial Sustainability is about bringing literacy and promote social and environmental environmental awareness. Best Foreign issues together with financial Commercial Bank Best Foreign performance to maintain and Our environmental programme in China Retail Bank in China grow a successful business for focuses on the HSBC Climate FinanceAsia 2009-2012 the benefit of our stakeholders. Partnership – a five-year 2001-06, 2008-11 environmental programme – We apply clear policies and to reduce the impact of climate processes to manage potential change on people, forests, social and environmental risk in freshwater and cities. our lending and other financial activities in sensitive sectors. HSBC’s programme partners – We help our clients to seize are carrying out original Best Trade the opportunities presented scientific research, developing Best Domestic Finance Provider by the shift to a low-carbon demonstration projects, Cash Management in China economy. creating working models, Bank in China Euromoney – We try to reduce our own and proving clear solutions Euromoney 2 011 environmental footprint so that governments can 2 011 and share good practice enact legislation for the on this with our clients adoption of low-carbon policies. and other stakeholders. – We focus our community In China, cooperation with investment (philanthropic Tongji University has included activities) on education and the Tongji-HSBC Leadership Best Risk the environment. programme: Environment Best International for Sustainable Development Management Bank Trade Bank in China and a three-year research in China Treasury Management Trade Finance project on carbon dioxide International 2008-09 emission reduction in the 2010-11 Yangtze river delta region & 2011 HSBC China was first locally incorporated bank to publish its CSR report and launch the Consumer Education programme to provide consumers with commercial- Rated China’s Best Foreign No.1 Leading Clients free financial knowledge. Private Bank Top-rated in China Agent Bank Private Banker Global Custodian 2 011 2009-2 011

46 Country overview

Capital city Beijing

Area and population Area of 9,600,000 sq km and population size of 1,371 million as of 2011

Language Putonghua (or Mandarin), based on the Beijing dialect

Currency RMB

International dialling code +86

National Holidays Scheduled Public Holidays for 2013

New Year’s Day 1 January Chinese New Year (3 days) 9-11 February* Qing Ming (Tomb Sweeping) Festival 4 April* Labour Day 1 May Dragon Boat Festival 12 June* Mid-Autumn Festival 19 September* National Day 1-3 October

*Depending on the lunar calendar. Note that in addition to the holidays listed above, individual provinces may observe provincial holidays.

Business and banking hours In most cities in China, businesses and government offices are usually open Monday through Friday from 8:00am to noon and from about 1:00pm to 5:00pm, although this can vary depending on the organisation. China has a five-day working week consisting of 40 hours. Banks are generally open Monday through Friday from 9:00am to 5:00pm. Shops are generally open every day. Most of China’s business world slows down considerably during the spring festival in late January and early February. Business visitors would be wise to avoid this two to three week holiday period.

Stock exchanges /

Political structure The National People’s Congress System

Source – Office of National Statistics www.ons.co.uk

48 Contacts

Kenny Lam, Partner China Tax & Business Advisory Services

Tel: +86 21 2323 2595

Email: [email protected]

Address: 10/F Shui On Plaza, 333 Huai Hai Zhong Road, Shanghai 200021, PRC

Website: www.hsbc.com.cn

Phone: +86 400 882 6688

Head Office: 37/f., HSBC Building, Shanghai ifc, 8 Century Avenue, Pudong, Shanghai, China 200120

3rd Edition: August 2012

Copyright

Copyright 2012. All rights reserved.

‘PwC’ and ‘PricewaterhouseCoopers’ refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way. 50 141TP_China_221012_3 141TP_China_221012_3