How to do business in China

Can a local company be 100% held by foreign resident shareholders?

In most cases, a local Chinese company can be held by a foreign resident shareholder. However, foreign investment into a local Chinese company is subject to the Negative List for Foreign Investments promulgated by the Ministry of Commerce and can be revised from time to time, under which certain industries are either prohibited or restricted from foreign investment: 

• if the investment project falls into prohibited industry, foreign investment is not permitted 
• if the investment project falls into restricted industry, it is possible that a joint venture must be established, and foreign investment may also be subject to a shareholding limit.

What are the main legal forms of companies in your country?

Limited liability company and company limited by shares. 

Must the managing director of the company be a resident and/or a national of your country?

No. A resident of foreign nationality or Chinese nationality can act as the managing director of the company.  

Are there any foreign exchange rules applicable to foreign investment in your country? If yes, please explain briefly?

PRC implements foreign exchange control regulations and divides mainly foreign exchange control into capital items and current items. Capital item transactions (e.g. equity investment and debt investment, as well as the disposal/payback of the investment) must be subject to registration at the State Administration of Foreign Exchange (“SAFE”). Use of funds formed from capital item investments must also be subject to foreign exchange scrutiny at the banks. 

Are there any Central Bank rules applicable to foreign investment in your country?

The foreign investment rules are mainly stipulated by the Ministry of Commerce, although other ministries may also have related regulations regarding their own industries which involve foreign investment. Minimum registered capital requirements are set for special industries or functions such as financial institutions and foreign-invested holding companies. Foreign loans are subject to upper limits depending on the scale of the registered capital of the foreign-invested company. 

The People’s Bank of China is in charge of all related currency matters regarding offshore RMB into China, RMB cash pooling etc, whereas all foreign currency control matters are governed by the SAFE under the People’s Bank of China.   

How long does it take to incorporate a company?

It will usually take 1-2 months for the establishment of an ordinary foreign-invested company without special pre-registration approvals, such as consulting companies, trading companies, etc. Manufacturing companies may take longer, perhaps 3-4 months, because of the time required to deal with the lease or investment agreement with the local government. In case of companies subject to special pre-registration approvals from the relevant authorities (e.g. financial institutions, agricultural operation companies), or in case of companies subject to restricted control for foreign investment falling to the scope of the Negative List for Foreign Investment, the time will be even longer, depending on scrutiny from the approval authorities.  

What are the main taxes applicable to all businesses in your country?

• Indirect taxes such as VAT (whose standard rate ranges from 6%-13%) and the associated surcharge taxes at around 10% of the VAT payable. Qualified small-scale VAT payers can be subject to a levy rate as low as 3%, but cannot enjoy the input VAT credit system 
• Corporate Income Tax (“CIT”) at a standard rate of 25%, which can be reduced to 15% if the company qualifies as a High New Technology Enterprise. The effective CIT rate can be reduced to 5% if the company qualifies as a Small Low Profit Enterprise 
• Consumption Tax may be applicable for certain products  
• Individual Income Tax may be applicable for income received by individuals doing business or receiving remunerations in China.  

What is considered a permanent establishment in your internal law? Is it different from the classical OECD definition of article 5?

There is no definition of “permanent establishment” (“PE”) under PRC domestic law, but the term of “establishment or place of business” (“EPB”) is introduced by CIT Law. The definition of EPB is similar to the definition of PE under typical bilateral double taxation treaties, but there is no minimum timing threshold for a foreign enterprise to constitute an EPB in China. However, the PE assessment overrides the EPB assessment under PRC domestic law, in case an applicable bilateral double taxation treaty between China and the relevant foreign jurisdiction applies.  

Are there any thin capitalisation rules?

The interest expenses derived from related party loans exceeding the shareholders’ equity of the company twice (for non-financial enterprises) or five times (for financial enterprises) cannot be deducted from the taxable income for CIT purposes, unless sufficient evidence can be provided to prove that the loan arrangements are in line with the arm’s length principle. 

Are there any stamp/registration duties payable upon injection of equity? Same question on intra-group loans.

The invested company needs to pay 0.025% stamp duty for any incremental paid-in capital contributed by the shareholder(s). Direct intra-group loans are not subject to stamp duty, but if the loans are granted through a Chinese financial institution in the form of entrusted loans, 0.005% stamp duty on the loan amount will be levied on both the financial institution and the borrower. 

Is there a withholding tax on dividends?

10% Withholding Tax (“WHT”), which may be reduced by the applicable double taxation treaty between China and the relevant jurisdiction.  

The withholding tax on dividends can be deferred under special situations for foreign investment if the dividends will be directly reinvested into China. 

CIT on dividends is exempted if the dividends are distributed by one PRC tax-resident company to its shareholder which is also a PRC tax-resident enterprise.  

Is there a withholding tax on interests?

6% VAT plus 10% WHT, which may be reduced or exempted by the applicable double taxation treaty between China and the relevant jurisdiction.   

Is there a withholding tax on services paid to foreign suppliers?

6% VAT regardless of the place of services.  

25% CIT is applied based on a deemed profit rate ranging from 15%-50% depending on the nature of services (resulting in an effective CIT rate ranging from 3.75%-12.5%) if the services have constituted a PE of the foreign supplier in China.  

• CIT is exempted if the services do not constitute a PE of the foreign supplier in China 
• No CIT if the services are provided purely offshore.  

How many tax treaties does your country have to date? Please list the main countries (notably EU) with which your country has a tax treaty in force.

109 valid bilateral double taxation treaties, plus two double taxation arrangements in force, including: 

• (EU) Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia and Spain    
• (non-EU): Belarus, Bosnia & Herzegovina, Iceland, Macedonia, Montenegro, Norway, Russia, Serbia, Sweden, Switzerland, Turkey, Ukraine and the UK. 

What is the applicable rate of VAT/GST?

Standard rates: 

• 13% VAT: sales or import of most goods, processing and repair services and lease of movable properties 
• 9% VAT: transportation services, basic telecommunication services, postal services, construction and installation services, lease of immovable properties, sales of immovable properties and land use rights  
• 6% VAT: all other types of taxable services 
• zero VAT: export of goods (unless exceptionally stipulated for special goods) and certain services/intangible assets which are consumed purely offshore. 

Levy rates (input VAT credit is not available): 

• 5% VAT: sales/lease of immovable properties under certain circumstances 
• 3% VAT: most of the taxable turnover realised by small-scale VAT payers (more preferential VAT treatments may be provided to small-scale VAT payers by provisional VAT regulations).

Under your internal law, is a capital gain realised by a non-resident shareholder taxable in your country? If there is a minimum shareholding, please indicate the rate applicable.

Yes, 10% WHT without minimum shareholding requirements. This WHT may be exempted according to the applicable bilateral double taxation treaties between China and the relevant foreign jurisdictions if certain conditions are met (e.g. most treaties set a minimum shareholding ratio of 25% for taxation in China for a certain period of time – in most cases, 12 consecutive months – and also the test of the value of immovable properties located in China). 

In case of change of control, is there a rule providing for the loss of tax carried forward losses?

Tax loss of the company can be carried forward to the following 5 years for utilisation, regardless whether the company’s shareholder(s) change. If the company is merged into another company, as long as the Special Tax Treatment applies, the valid tax loss can still be carried over to the surviving company for utilisation within an annual limitation.

Are there indirect sale rules incorporated into the tax legislation of your country? Please explain briefly.

If the disposal of an overseas intermediate holding company’s shares results in an indirect transfer of the Chinese company’s shares, the transaction may be subject to capital gain WHT in China if the transaction does not have reasonable commercial purposes.  

“Reasonable commercial purposes” shall be evaluated comprehensively based on various conditions. The key testing points include: 

• whether the value of the overseas company’s shares mainly comes from the investment in China 
• whether the overseas company’s assets are mainly constituted by the investment in China 
• whether the overseas company’s income stems directly or indirectly from China 
• whether the overseas company has taken sufficient functions and risks to justify the business substance 
• the existing time of the indirect holding structure 
• the overseas tax implications of the underlying transaction 
• the substitutability of the indirect share transfer by a presumed direct share transfer 
• application of bilateral double taxation treaties, etc.  

The safe-harbour rule (i.e. waiver of the assessment of “reasonable commercial purposes”, or a direct recognition of having “reasonable commercial purposes”) may apply if certain conditions are met.

Are international reorganisation processes considered a taxable event in your country when, directly or indirectly, the ownership of entities located in your country is modified but remains as part of the Group Company? Are there any exceptions?

For direct share transfers, it depends on whether the transaction qualifies for the Special Tax Treatment as set forth by PRC domestic tax law and subject to the filing formalities to be fulfilled with tax authorities.  

For indirect share transfers, it depends on whether the transaction meets the conditions for enjoying the safe-harbour rule for assessment of “reasonable commercial purposes”.