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  • General Background Information on China

    1. Geography and climate

    China has a total area of 9,596,960 sq km and its resources consist of coal, iron ore, petroleum, natural gas, mercury, tin, tungsten, antimony, manganese, molybdenum, vanadium, magnetite, aluminum, lead, zinc, uranium, hydropower potential (world's largest). The estimated population in July 2001 was 1,273,111,290.

    Great differences in climate are found from region to region owing to China's extensive territory and complex topography. The northern part of Heilongjiang Province in northeast China has no summer, Hainan Island has a long summer but no winter; the Huaihe River valley features four distinct seasons; the western part of the Qinghai-Tibet Plateau is covered by snow all year round; the southern part of the Yunan-Guizhou Plateau is spring-like all the year; and the northwestern inland region sees a great drop of temperature in the day. Annual precipitation also varies greatly from region to region; it is as high as 1,500 millimeters along the southeastern coast. Decreasing landward, it is less than 50 millimeters in northwest China.

    2. Government

    For centuries China stood as a leading civilization, outpacing the rest of the world in the arts and sciences. But in the first half of the 20th century, China was beset by major famines, civil unrest, military defeats, and foreign occupation. After World War II, the Communists under Mao Zedong established a dictatorship that, while ensuring China's sovereignty, imposed strict controls over everyday life and cost the lives of tens of millions of people. After 1978, his successor Deng Xiaoping gradually introduced market-oriented reforms and decentralized economic decision making. Output quadrupled in the next 20 years and China now has the world's second largest GDP. Political controls remain tight even while economic controls continue to weaken.

    China's administrative divisions are organised into 23 provinces, 5 autonomous regions and 4 municipalities. China considers Taiwan its 23rd province.

    The chief of state is President JIANG Zemin (since 27 March 1993) and Vice President HU Jintao (since 16 March 1998).

    The Head of Government is Premier ZHU Rongji (since 18 March 1998); Vice Premiers QIAN Qichen (since 29 March 1993), LI Lanqing (29 March 1993), WU Bangguo (since 17 March 1995), and WEN Jiabao (since 18 March 1998)

    The Cabinet is the State Council which is appointed by the National People's Congress (NPC)

    The President and Vice President are elected by the National People's Congress for five-year terms; elections were last held 16-18 March 1998 (next to be held NA March 2003) and the Premier is nominated by the president and confirmed by the National People's Congress

    In late 1978 the Chinese leadership began to move the economy from a sluggish Soviet-style centrally planned economy to a more market-oriented system. Whereas the system operates within a political framework of strict Communist control, the economic influence of non-state managers and enterprises has been steadily increasing. The authorities have increased the authority of local officials and plant managers in industry, permitted a wide variety of small-scale enterprise in services and light manufacturing, and opened the economy to increased foreign trade and investment. The result has been a quadrupling of GDP since 1978. In 2000, with its 1.26 billion people but a GDP of just $3,600 per capita, China stood as the second largest economy in the world after the US (measured on a purchasing power parity basis). Agricultural output doubled in the 1980s, and industry also posted major gains, especially in coastal areas near Hong Kong and opposite Taiwan, where foreign investment helped spur output of both domestic and export goods. The government has struggled to (a) collect revenues due from provinces, businesses, and individuals; (b) reduce corruption and other economic crimes; and (c) keep afloat the large state-owned enterprises many of which had been shielded from competition by subsides and had been losing the ability to pay full wages and pensions. From 80 to 120 million surplus rural workers are adrift between the villages and the cities, many subsisting through part-time low-paying jobs. Popular resistance, changes in central policy, and loss of authority by rural cadres have weakened China's population control program, which is essential to maintaining growth in living standards. Another long-term threat to continued rapid economic growth is the deterioration in the environment, notably air pollution, soil erosion, and the steady fall of the water table especially in the north. China continues to lose arable land because of erosion and economic development.

    3. Establishing an office in China

    Direct foreign investment in China can be done by way of three vehicles, Equity Joint Venture, Co-operative Joint Venture or wholly foreign-owned enterprise ("WFOE") (collectively called "FIE" for foreign investment enterprises). Foreign enterprises can also set up an office in China by way of a representative office.

    Equity Joint Venture
    In an Equity Joint Venture the foreign party must hold an equity interest greater than 25% of the registered capital of the Joint Venture. The advantage of forming an Equity Joint Venture under the Equity Joint Venture Law is that, compared with other laws regulating foreign business entities in China, this law is more comprehensive, and, therefore, offers more certainty to the foreign investor. An Equity Joint Venture is formed as a limited liability company with the partners sharing their profits and losses in proportion to the partners' respective capital contributions. The capital contribution can be cash, buildings, land use rights, equipment, industrial property, and/or intellectual property. However, there are certain limitations imposed upon the foreign partner as to what kind of equipment, industrial property, or know-how can be contributed.

    A Board of Directors is necessary and is comprised of both Chinese and foreign members. The Chairperson is chosen by the Board of Directors and can be either a Chinese director or a foreign director. However, regardless of share distribution, certain decisions must be made unanimously. Therefore, even if the Chinese partner contributes only one percent of capital, he or she may still exert important influence.

    Co-operative Joint Venture
    A Co-operative Joint Venture is organised either as a Chinese enterprise with limited liability or a business organisation with a joint management committee but with no separate legal entity. The parties should consider setting up a Co-operative Joint Venture when the foreign partner desires to form a Chinese joint venture with limited liability under Chinese law and still be characterized as a partnership for tax purposes in its own country. Co-operative Joint Venture also provides more flexibility in terms of profit and loss sharing.

    The Co-operative Joint Venture Law allows the joint venture partners of a Co-operative Joint Venture to share their profits and losses based on the parties' contractual terms, not necessarily on their respective capital contribution. Further, the Co-operative Joint Venture may adopt a "Joint Management Committee", or similar form of decision-making body, instead of a "Board of Directors", so as to accommodate any unique needs of the foreign partner. Although the law does not require the joint venture to be formed as a limited liability company, the joint ventures formed under this law have generally taken that form voluntarily.

    Wholly Foreign-Owned Enterprise
    A WFOE is organised as a Chinese legal person with limited liability. Certain industries must be organised as a joint venture and cannot be set up by way of a Wholly Foreign-Owned Enterprise, examples are service companies, travel agencies and transportation services.

    Representative Office
    A representative office is not a separate legal entity. It serves as a liaison office of the parent foreign enterprise. Its main functions are to research the local market, liaise with local contacts and make the necessary arrangements for the staff of its parent company. It is not permitted to engage in any business for profit, sign contracts or issue invoices.

    4. Setting Up of an FIE in China

    The foreign investor must submit a report to the foreign trade and economic cooperation department at county level or above in the area where the proposed foreign investor enterprise is located. The report should include the objectives, the business, scale of operation, products to be produced, technology and equipment to be used, the area of land to be used and the amount of utilities the business will use. Once the foreign investors receives confirmation in writing from the local authority, a formal application should be filed with the foreign trade and economic department. The following documents should be included:-

    1. An application letter to establish the foreign invested enterprise.
    2. A feasibility study report.
    3. The articles of association.
    4. List of legal representatives, or the board of directors.
    5. The foreign investor's legal papers and credit report.
    6. List of materials to be imported
    7. Written replies from the local approval authorities.
    8. application for registration of the name of the enterprise approved by the provincial or municipal administration for industry and commerce.
    9. Comments on the proposed project by various government departments such as the environmental protection, fire services, health etc.

    After the formal application is approved, the foreign investor shall apply tot he foreign trade and economic cooperation department at county, municipal or provincial level for an approval certificate by presenting all the necessary documents which are:-
    1. Ratification documents.
    2. The application letter for establishing the foreign-invested enterprise.
    3. The feasibility study report.
    4. Articles of association.
    5. A list of the approved board of directors.

    5. Setting Up of an office for a Foreign Enterprise in China

    Registration Procedures
    The procedures required for the establishment of an representative office of a foreign enterprise are twofold:-
    1. The obtaining of formal approval for the establishment of the representative office of a foreign enterprise from the appropriate Chinese approval authorities; and
    2. The completion of registration formalities with the State Administration for Industry and Commerce ("SAIC") in order to obtain a Registration Certificate for the representative office.

    The foreign enterprise must submit, to the appropriate approval authorities in China, an application in order to obtain approval for the establishment of its representative office in China.

    Applications of foreign enterprises wishing to establish a representative offices in China are required to be approved by the Ministry of Foreign Trade and Economic Co-operation of China ("MOFTEC").

    The foreign enterprise , when applying for approval to establish a representative office in China, must provide the Sponsor with the following documents for submission to the Approval Authorities:-

    1. Original Letter of Authorisation from the foreign enterprise permitting the Sponsor to carry out the application procedures for the establishment of a representative office in China for and on behalf of the foreign enterprise.
    2. Original Application for Establishment of Representative Offices of Foreign Enterprises (Form) (to be completed in triplicate and in both English and Chinese).
    3. Original Application of Personnel of the Representative Offices of Foreign in English and Chinese.
    4. Original Application Letter setting out a brief introduction of the foreign enterprise, the name of its representative office proposed to be established in China, the purpose of setting up the representative office, the chief representative or representative, business scope, duration and address of the representative office, etc, with a Chinese translation.
    5. Copy legal document(s) issued by the authorities in company's country of origin approving the operation of the foreign enterprise.
    6. Original Capital Credit-worthiness Certificate/Letter issued by the banking institution which has business relations with the foreign enterprise.
    7. Letter(s) of Appointment of the chief representative and/or representative of the representative office proposed to be established in China.

    6. Registration of the FIE or the Representative Office

    The FIE or Representative Office is required to complete registration formalities with SAIC within 30 days from the date of Approval Certificate, failing which the Approval Certificate will be rendered void and must be returned to the Approval Authorities.

    Other Registration Formalities
    Each representative assigned by the FIE or Representative Office to represent its representative in China together with each of his family members (if any) must:-

    1. Register with the Public Security Bureau and obtain foreigner's residence certificate(s);
    2. Register with the Household Registration Section of the Public Security Bureau in order to obtain a Household Registration booklet which booklet must at all times be kept at the place of residence of the representative in question; an
    3. Apply, upon completion of the abovementioned registration formalities, to the Visa Section of the Public Security Bureau for the issuance of Chinese Multiple Entry Visa. This will usually remain valid for 6 months.

    After the completion of all the above registration procedures, the representatives in question have to submit copies of the original Approval Certificate, resident representative identity card(s) and the SAIC Registration Certificate to the Approval Authorities.

    7. Bank of China

    The FIE or Representative Office is, after obtaining the Registration Certificate, required to open foreign exchange account(s) in the name of the representative office (and where applicable, the representatives of the representative office are permitted to open foreign exchange account(s) in their own names for their personal purposes) with the Bank of China in accordance with the relevant Chinese laws, rules and regulations on foreign exchange control.

    8. Customs

    The FIE or the Representative Office is required to register with the Chinese Customs authorities after completion of its registration formalities with SAIC.

    According to the registration procedures of the Customs in China, the FIE or the Representative Office has to register with the local Customs authorities by filing a Customs Registration Form and submitting copies of the specimen signatures and chops of the representatives and the representative office for record purposes.

    9. Tax Registration

    Tax registration formalities must be completed within 30 days from the date of commencement of operations of the FIE or Representative Office, failing which may lead to imposition by the relevant tax authorities of a fine of up to RMB¥5,000.00.

    10. Employment Matters

    Local Personnel
    All local staff required by representative offices of foreign enterprises in China, including but not limited to secretaries, drivers, other office personnel and domestic helpers serving the individual representative(s), must be hired only through the Chinese organisations authorised or designated by the State to be a foreign employment service compnay ("FESCO"). FIEs may however determine their own terms, conditions and methods of recruitment.

    Applications for the required personnel must therefore be submitted directly by the representative office to the foreign enterprises service corporation ("Service Corporation").

    Employment contracts must be entered into by and between the representative office and the Service Corporation. Such employment contracts are required to be certified by SAIC. The Chinese employee who is engaged by the representative office is also required to register at the Foreign Affairs Section of the Public Security Bureau.

    Representative offices which violate the relevant Chinese regulations and policies on employment of local staff will be penalised by the Public Security Bureau, SAIC and/or the relevant government agencies at their discretion depending upon the seriousness of the cases. The penalties include loss of representative office status, revocation of the Registration Certificate, rejection for application of any renewal of permit(s) and/or fines up to RMB¥10,000.00.

    Expatriate Personnel
    Wherever possible foreign businesses should employ staff from the PRC wherever possible. If there is a requirement to hire expatriates, approval of the labour authority is required. Upon approval. The authority will grant the expatriate a foreigner's employment certificate who can then obtain an employment visa for entering and working in China.

    11. Taxation Matters

    Taxable Income
    Representative Offices are taxed at the rate of 20% on income derived from production,, business operations and other sources within the territory of China.

    FIEs, as Chinese residents, are taxed at the rate of 33%, 30% corporate income tax and 3% local income tax, on income earned both inside and outside China. In the case of FIEs set up in special economic zones or economic or technical development zones, the tax rate may be reduced to 24%, or in certain cases, even 15%.

    Individual Income Tax
    The representatives and other personnel employed by the representative office of a foreign enterprise in China are subject to individual income tax on their wages or salaries in connection with their employment in China.

    According to the relevant tax laws, rules and regulations, representatives of foreign enterprises stationed in China on a permanent basis are deemed to be employees of a Chinese entity. Thus, all income derived from services they have performed in China is taxable, regardless of the number of days they spent in China during the relevant period.

    A resident representative who spends only part of his time in China may, subject to restrictions set out below, be able to reduce his Chinese individual income tax liability by excluding the income he earns during the time when he is outside China.

    A representative of the representative office in China who is not domiciled in China but resides inside China consecutively or accumulatively for not more than 90 days in any one tax year is exempt from individual income tax in China provided that his income derived from sources in China is paid by an employer outside China; and

    A tax year means the period commencing from the 1st January and ending on 31st December of the Gregorian calendar.

    The representative is subject to Chinese income tax if he is consecutively or accumulatively present in China more than 90 days in a tax year.

    The representative will be subject to individual income tax in China regardless of the number of days he spent in a calendar year in China if he is paid by or his remuneration is ultimately borne by the representative office of the foreign enterprise in China.

    The representative, who is not domiciled in China and has resided in China for less than 1 year, will be subject to tax on his China sourced income only.

    1. If the resident is not domiciled in China, but has resided in China for more than 1 year and less than 5 years, he will be subject to tax on his Chinese income and, subject to the approval of the tax authorities-in-charge, his income from sources outside China will only be subject to tax if it is paid by enterprises or individuals in China.
    2. f the representative is not domiciled in China but has been resident in China for more than 5 years, he will, commencing from the sixth year, be subject to individual income tax on the whole amount of his worldwide income.
    3. In cases referred to in paragraph numbered 4.2.11 above, credits will be available for tax paid overseas on outside China income calculated on a country basis. Excess credit can be carried forward for a maximum period of 5 years.
    4. The categories of income subject to individual income tax are:-
    (a) income from wages and salaries;
    (b) income derived by individual industrialists and merchants from production and business;
    (c) income from contracting for or leasing of the operation of enterprises or institutions;
    (d) income from remuneration for personal services;
    (e) income from office's remuneration;
    (f) income from royalties;
    (g) income from interest, dividends and extra dividends;
    (h) income from the lease of property;
    (i) income from the assignment of property;
    (j) casual income; and
    (k) other income determined taxable by the Finance Department of the State Council.

    5. If the representative is, according to his employment contract, paid fringe benefits by the representative office as part of his salary, then those paid benefits will be subject to tax.

    If however those expenses, for example housing, paid home leave, children's education, medical benefits, reimbursement of business related expenses, are reimbursed to the representative on the actual expenses he incurred, such reimbursements will not be subject to tax.

    Nevertheless, such pecuniary benefits and reimbursements will still be subject to tax if the tax authorities-in-charge deem that they are paid and provided for the purposes of evading individual income tax.

    6. The representative is, whether he is a local Chinese citizen or an expatriate, entitled to the standard monthly allowance of RMB¥800.00 which is deductible from his monthly income from taxation.

    In addition, an expatriate representative is entitled to an additional monthly allowance of RMB¥3,200.00, making a total of deductible monthly allowance of RMB¥4,000.00.

    7. Under the amended individual income tax law which has come into effect since 1st January 1994, tax rates for wages and salaries are progressive from 5% to 45% which tax bands are set forth in the following table:-

    INDIVIDUAL INCOME TAX RATES

    (Applicable to income from wages and salaries)

    Scale Monthly Taxable Income
    Tax Rate (%)
    1 Not exceeding RMB¥500
    5
    2 That part exceeding RMB¥500 but not exceeding RMB¥2,000
    10
    3 That part exceeding RMB¥2,000 but not exceeding RMB¥5,000
    15
    4 That part exceeding RMB¥5,000 but not exceeding RMB¥20,000
    20
    5 That part exceeding RMB¥20,000 but not exceeding RMB¥40,000
    25
    6 That part exceeding RMB¥40,000 but not exceeding RMB¥60,000
    30
    7 That part exceeding RMB¥60,000 but not exceeding RMB¥80,000
    35
    8 That part exceeding RMB¥80,000 but not exceeding RMB¥100,000
    40
    9 That part exceeding RMB¥100,000
    45
    (N.B. for the purposes of the above table, the term "Monthly Taxable Income" means the monthly income less RMB¥800.00 for local citizens or less RMB¥4,000.00 for expatriate representatives, as provided for under the new individual income tax law).

    The due date for payment and filing for tax returns for the current month is the 7th day of the following month. Quarterly or semi-annual filings may be possible but subject to the approval of the relevant tax authorities at and above county level.

    When the expatriate representative is about to leave China, he is required to complete tax payment procedures before he leaves China.

    The representative should file his tax return at the place where he receives the income in China. If the representative in question receives income in more than one place in China, he may choose one of the places at which he will file his tax return.

    The local tax authorities will verify the accuracy of the tax returns filed based on the information provided in the tax returns.

    Evidence of the representative's salary and other remuneration must be provided generally in the form of a letter issued by the representative office of the foreign enterprise detailing the salary and other remuneration the representative receives.

    This documentary requirement is also required upon tax registration and whenever there is a change in the representative's salary or remuneration.

    Reporting Requirements, Supervision & Sanctions

    Annual Reporting

    As from 1988, representative offices in Beijing are required to submit annual business activities reports to SAIC when extending their registration.

    Annual business activities report must contain information in respect of the following:-

    (a) Details of business contracts (N.B. only for the permitted scope of business of a representative office) between the representative office and the relevant Chinese units during the registration year;
    (b) Information as to whether or not contracts have been entered into through liaison activities of the representative office and the amounts of any transactions (if any); and
    (c) details of the personnel of the representative office, for example, details of the representative(s) and personnel already registered with SAIC.
    (d) if the information submitted when applying for extension or amendment of registration is in a foreign language, it must be accompanied by accurate Chinese translation.

    The foregoing is only a general overview of various issues considered to be of possible interest. It is not, and should not be considered as, exhaustive. No person should rely on the contents hereof, nor construe them as legal or other advice without first obtaining advice from a lawyer qualified in China.

    © 2002 Irish Business Forum of Hong Kong Ltd
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