Ways to invest in China *People´s Republic of China (“PRC” or “China”, excluding the territories of Hong Kong, Taiwan and Macau.
A) Company with separate legal personality
The most common foreign invested enterprises (FIE) with separate legal personality are wholly foreign-owned enterprises (WFOE) and equity joint ventures (EJV), among other corporate forms.
- No minimum registered capital: Capital depends on the business scope and local practice.
- Cash and capital contributions. License or IP contributions are generally not accepted from foreign investors.
- Limited liability: Shareholders’ liability is limited to their respective capital contributions:
- EJVs are always limited liability companies.
- In most cases, WFOEs are limited liability companies.
WFOE: WFOEs are the most common form of foreign investment in China. WFOEs are enterprises that are wholly owned by one or more foreign investors.
The managing body of a WFOE is the general shareholders’ meeting.
The main advantages of a WFOE include the control of management and assets and confidentiality in the use of technology and other intellectual property.
EJV: EJVs are limited liability companies jointly incorporated by one or more foreign enterprises and one or more Chinese companies. Profits are allocated in accordance to capital contributions.
The managing body of an EJV is the board of directors.
B) Entities without separate legal personality
Foreign invested enterprises without separate legal personality include representative offices (RO) and branches.
- Limitations on business scope and activities.
- Head office is ultimately responsible for liabilities and obligations arising from activities in China.
RO: ROs have neither registered capital nor a board of directors and they hire employees through an authorized labor agency. The activities of an RO in China are limited to intermediation, market surveys and marketing information.
Branches: Branches are only available in a small number of industries and activities, primarily banking and insurance.
Procedural formalities for incorporating a company
Procedural formalities for incorporating a company vary signifcantly depending on the type of company and other essential matters.
- Prior approval of the corporate name by the State Administration for Industry and Commerce (SAIC).
- Record-fling/approval of foreign investment by the Ministry of Commerce (MOFCOM) to obtain the record-fling receipts or certificate of approval.
- Commercial registration with the SAIC to obtain a business license.
- Registration with other relevant governmental authorities to obtain the necessary certifications for day-to-day operations.
- Other post-incorporation approvals and licenses.
General matters regarding investment
A) Foreign investment controls: There are special administrative rules for foreign investments (the so-called “negative list”), specifying the industries in which foreign investment is encouraged, restricted or prohibited. In addition, China issues the “Catalogue for the Guidance of Foreign Investment Industries,” establishing the special administrative measures for foreign investment in the pilot free trade zones. There are a total of 11 pilot free trade zones: Shanghai, Tianjin, Fujian, Guangdong, Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan and Shanxi.
B) Foreign exchange controls: The Chinese government imposes controls on capital inflows and outflows. FIEs must apply for a foreign exchange registration certificate, which is reviewed and handled by banks. The State Administration of Foreign Exchange indirectly regulates such registration via the banks. Recent changes in capital controls include restrictions on the repatriation of profits and on outbound investments.
A) Direct taxation
Enterprise income tax (EIT)
Nature: Direct tax levied on the worldwide income of Chinese-resident enterprises from production and business operations and from other Chinese and foreign sources.
Tax residence: A company is deemed to be resident in China when it is incorporated in China or when its place of effective management is in the country.
Tax base: Total income less non-taxable income, exempt income, allowable deductions and prior years’ losses that have not been offset in the preceding five years.
Taxable income is calculated on an accrual basis.
Tax rate: Standard rate of 25% on worldwide taxable income. Preferential EIT rates of 15% and 20% are applied for high-new technology enterprises (HNTEs) and qualified small enterprises with low profits, respectively.
Dividends and capital gains: Dividends paid from a resident enterprise to another resident enterprise are EIT exempt.
Dividends paid overseas are subject to EIT withholding of 10%, unless otherwise established in China’s tax treaties. Dividends paid overseas may be exempt in the case of reinvestment in certain projects in China.
Capital gains are taxed at the standard EIT rate of 25% for resident companies and at 10% for nonresident enterprises.
Special regime: In general, tax consolidation is not allowed in China. Companies must file separate tax returns, except for headquarters and their local branches.
Formal obligations: Quarterly EIT returns based on accounting records must fled within 15 days of each quarterly close.
Annual EIT returns must be filed by May 31 of the following year, adjusting the annual accounting profits in accordance with the Chinese EIT law.
Individual income tax (IIT)
Nature: Tax levied on the worldwide income of Chinese nationals and residents, as well as on the Chinese-source income of nonresidents.
Tax residence: An individual is a tax resident of China if he or she has been in the country for 365 days, without a single period of absence of more than 30 consecutive days or cumulative periods of absence of more than 90 days.
Tax rate: Employment income is subject to a progressive tax rate up to a maximum of 45%.
Other income may be taxed at fat rates, depending on the nature. Investment income (dividends, interest income and capital gains) may be taxed at a flat rate of 20%.
For foreign individuals, some income in kind may be IIT exempt upon fulfillment of certain requirements. This includes housing allowances, relocation costs, minors’ tuition fees and roundtrip fight tickets for home visits.
Formal obligations: Monthly IIT returns must be filed within 15 days of each month end.
Annual IIT turns must be filed by March 31 of the following fiscal year, subject to certain conditions.
B) Indirect tax
Value added tax (VAT)
Nature and tax rates: Indirect tax levied on sales and imports of goods and services, intangible assets or immovable property within Chinese territory. VAT taxpayers are classified as either general VAT payers or small-scale VAT payers, each subject to different tax calculation rules.
Different VAT rates apply based on the nature of the related business activity:
- 17% for sales of goods, processing and repair services and leasing services for moveable and tangible assets.
- 11% for agricultural products, transportation services, postal services, basic telecommunication services, construction services, leasing of real estate, sales of real estate and transfers of land use rights, among others.
- 6% for all other services.
General VAT payers are entitled to deduct input tax on purchases and issue special VAT invoices. Small-scale VAT payers, which are subject to a lower VAT rate of 3%, may not claim input tax credits or issue special VAT invoices.
Formal obligations: Frequency of VAT fling is determined by the relevant tax authorities. Most companies fle VAT returns monthly or quarterly.
Local tax surcharges
Local tax surcharges are levied on VAT and consumption tax payables.
The tax base is the total VAT and consumption tax liability. Tax rates are determined by local authorities.
Tax fling is consistent with the VAT and consumption tax fling dates.
Stamp duty is levied on enterprises and individuals that execute or receive specifc legal documents under Chinese law.
Based on the scope of the legal documents, the stamp duty could be levied as a percentage rate or a fxed amount.
Customs duties on imported goods, exported goods and incoming articles are calculated on the customs value.
Customs duties are paid by the consignees of imported goods, the consignors of exported goods and the owners of incoming articles.
Goods imported are also subject to import VAT and import consumption tax, which are calculated on the customs value plus customs duties.
Other taxes in China include but are not limited to consumption tax, land appreciation tax, deed tax, farmland occupation tax, property tax and land use tax.
Social security contributions
Social security contribution rates and the maximum contribution amount are determined by each provincial government. Consequently, social security contributions may differ from one province to another.
In Beijing and Shanghai, social security contribution rates and the maximum contribution amount are as follows:
- Employee: 10.2%+3 RMB
- Employer: 30.8%-32.5% (depending on the different work-related risk categories)
- Employee: 10.5%
- Employer: 31.2%-32.9% (depending on the different work-related risk categories)
- Beijing: RMB 23,118 in 2017
- Shanghai: RMB 19,512 in 2017
Social security treaties: Exceptions to certain social security contributions may apply to foreign investors and foreign employees from countries that have entered into social security treaties with China
Labor and employment matters
Local employment contract requirements:
An employment contract must be entered into where a labor relationship is to be established.
Types of contracts include:
- Fixed term
- Indefinite term
- Contracted assignment
Salary: Wages may not be lower than the local minimum wage, as determined by the corresponding provincial government. Regional governments are entitled to set their own minimum wages.
In 2017, the minimum wages in the main investment destination cities in China were as follows: RMB 11.49 per hour and RMB 2,000 per month in Beijing and 20 RMB per hour and RMB 2,300 per month in Shanghai.
Working hours: May not exceed an average of eight hours per day and 44 hours per week.
- State holidays: 11 days
- Employees are entitled to 5-15 days of annual paid leave, based on their length of service.
Labor dispute resolution: If a labor dispute arises, the parties may apply for mediation or arbitration or bring legal proceedings before a court. In general, labor arbitration is required before initiating a lawsuit. However, if an employee directly files a lawsuit claiming non-payment of wages citing a pay-slip issued by the employer as evidence, and the claims do not involve any other dispute over the labor relationship, the court will allow the matter to proceed.
Foreign workers: Foreigners working in China are required to obtain a work visa and a work permit.