Foreign Direct Investment, Equity Joint Ventures, Cooperative Joint Ventures, Wholly Foreign Owned Enterprises
Q1. What
preferential taxation policies foreign-funded enterprise enjoy in
China?
(1) Income Tax
Income tax rate: The current rate of income tax imposed upon
foreign investment enterprises is 33%, though it is set at the lower
rate of 15% in special economic zones, national hi-tech industrial
zones and national grade economic and technical development zones.
In coastal regions and provincial capitals the rate is 24%.
Tax-reducing policy: Foreign investment enterprises may enjoy
the benefit of business income tax not being collected during the
first two years after the beneficial year; a half income tax may
then be imposed for the succeeding 3 years.
Foreign investment enterprises in the central and western regions
are also encouraged by the State via 5 years' of tax reductions,
with the possibility of a further 3 years' half income tax thereafter.
In the case of advanced technology enterprises, they are exempted
from income tax for two years and are then subject to a half income
tax for the following six. Export enterprises enjoy the benefits
of two years' exemption and three years at half rate.
(2) Turnover Tax (Valued Added Tax, Business Tax)
From 1 January 1994, China started to implement unified Value
Added Tax, Consumption Tax and Business Tax in foreign invested
enterprises whilst simultaneously abolishing industrial and commercial
consolidated tax. Foreign enterprises and foreign invested enterprises
are exempted from business tax in technological transfer. If the
foreign invested enterprise purchases equipment made domestically
within the volume of total investment, there is a benefit of a refund
of value added tax on domestically-made equipment.
(3) Import Tax
Tariff Rate: The Chinese government has lowered import tariff
rates several times; the current rate is 12% and China's WTO concession
will render the tariff to lower further according to the agreed
time line.
Tariff Exemption Policy for Equipment Import The importation
of equipment for foreign or domestic-invested projects which are
both encouraged and supported by the State shall be granted tariff
and import- stage value-added tariff exemption. Provided that the
foreign-invested product is subject to the Category of Encouragement,
all equipment imported for its use within the aggregated investment
shall be exempted from tariff and import-stage value-added tax (unless
the project comes under the heading of those not entitled to Tariff
Exemption). The aims of this policy are to expand the use of foreign
investment and to encourage the influx of foreign technology whilst
maintaining a healthy and developing domestic economy.
Q2. What are the projects
foreign investors are prohibited to invest in China?
In accordance with the "Provisions
on Guiding Foreign Investment Direction", any of the following
projects is prohibited to be invested in:
(1) those that harm the national security and social public interests;
(2) those that cause environmental pollution, or do great damage
to natural resources and wealth or people's health;
(3) those that occupy a great deal of farm land, do not do favor
to the protection and development of land resources;
(4) those that harm the security of military infrastructures and
its efficiency of application;
(5) those that make use of the unique technique or technology that
the P. R. China possesses in purpose of production of products;
(6) The other cases stated in the laws and relevant administrative
regulations.
Q3. What are the projects
foreign investors restricted to invest in the P.R. China?
In accordance with the "Provisions
on Guiding Foreign Investment Direction", any of the following
projects is restricted:
(1) those that lag behind in technology;
(2) those that does not do favor to the frugality of power and improvement
of ecological environment;
(3) those that are concerned with special exploration and mining
protected by the state and in accordance with the state provision;
(4) those industries that are opened by the state gradually;
(5) other cases stated in the laws and relevant administrative regulations
Q4. What are the projects
China encourages foreign investors to invest in?
In accordance with the provision
of the "Guiding Directions for Foreign Investor to Invest",
the projects China encourages foreign investors to invest in are
listed as follows principally:
1. those that are categorized as advanced new technology for agriculture,
agriculture integrated development, power, traffic transportation,
and important raw materials;
2. those that are categorized as advanced new technology and appropriate
technology which could improve performance of products and enterprise's
economic and technological performance, or produce new equipment
and new materials that domestic production capacity can not meet;
3. those that can improve and update the product's quality level
and explore new market, or enhance the competence of the product
in the international market, pursuant to the requirement of marketing;
4. those that are categorized as advanced new technology and new
equipment which can save power and raw material, make comprehensive
use of resource and renewable resource, prevent from and bring environmental
pollution under control;
5. those that can give full play to the advantages of human resources
and natural resources of the China western region, and accord with
the state's industrial policies;
6. those that are prescribed by other laws, administrative regulations,
and measures.
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Q5. What types of foreign
investment are allowed in China?
Branch Offices
A branch office in China is one that is used for business purposes
for which the main company office holds responsibility. It is not
a legal entity and it can only carries out liaison and coordination
work. Such a situation would involve the existence of an offshore
"parent", the People's Republic of China would be denied
control of the entity - a situation which it seeks to avoid. In
this way, China does not officially recognise branch offices, nor
does it officially allow them to operate. Therefore, the difficulties
posed by such restrictions and lack of legal standing mean that
the branch office cannot be recommended as a vehicle for investment.
Sino- Foreign Equity Joint Ventures
These are enterprises established in China with joint investment
from foreign companies, enterprises or other economic bodies and
Chinese economic bodies. As the name suggests, such enterprises
involve joint investment, operation and share of risk in proportion
to the amount of investment inputted by the respective parties.
Each party is accordingly jointly responsible for the profits and
losses of the enterprise. Investment can come in the form of (amongst
other things) currency, buildings, industrial property or equipment.
In general, the level of investment offered by the foreign company
should not be less than 25%.
The corporate form of such joint ventures is the limited liability
company, with a Board of Directors as its supreme body of power.
Some joint ventures in China have now adopted this corporate form.
Sino-Foreign Co-operative Joint Ventures
Sino-foreign co-operative joint ventures also refer to Chinese-
foreign contractual joint ventures. They are enterprises established
in China with investment or conditions for co- operation jointly
offered by foreign companies, enterprises or other economic bodies
as well as by Chinese economic bodies.
The main difference from the equity joint venture we have just discussed
is that the investment of the parties involved will not necessarily
be converted into ratios of investment.
The rights and obligations of the parties involved with regards
to such issues as distribution, investment, operation and sharing
of risks and profits is determined by the contracts signed by the
parties from the outset of the venture. These ventures tend to involve
the foreign partner providing most or all of the funds whilst the
Chinese partner contribute land, facilities and a perhaps a limited
amount of funding. The usual approach is to stipulate in the contract
that the Chinese party will own all the assets of the venture once
the date of expiry of the venture is reached, with the foreign party
recouping its investment within the duration of the venture.
Such forms of co-operative joint venture are universally attractive,
for they allow the Chinese partner to have a source of investment
whilst permitting the foreign company to recoup its investment.
Wholly Owned Foreign Enterprises
These also refer to wholly foreign owned enterprises. They are enterprises
set up in China by foreign companies or economic bodies in accordance
with Chinese law with the investment entirely provided by foreign
investors.
Such enterprises must be conducive to the development of China's
national economy; they must also meet one of the following requirements:
1. The application of internationally advanced technology
2. The orientation of most of the products for export
The corporate form of foreign enterprises in China is generally
the limited liability company. Although China has been late on the
scene in terms of providing a system of establishment for foreign
enterprises, they have grown in number rapidly over the past few
years.
Chinese Holding Companies
Approval has recently been given to multinational corporations by
China's Ministry of Foreign Trade and Economic Cooperation (MOFTEC)
to establish foreign-invested holding companies. Though mostly analogous
to Western Holding Companies, there are a couple of differences.
Multinational companies may wish to set up holding companies in
order to increase investment or reinvestment in China, as well as
to coordinate investment companies already established in China.
A Holding Company in China may invest in such fields as industry,
agriculture, infrastructure and energy, provided that the State
encourages foreign investment in these sectors.
Typical work undertaken by a Holding Company might include action
as a purchasing agent, distribution or the provision of after sales
service, amongst other things. Provisional Regulations dictate that
a Chinese Holding Company may enjoy the preferential treatment of
a foreign- invested enterprise, and as such is awarded both a foreign-
invested enterprise certificate and licence.
B Shares
Chinese government allows foreign investment to acquire shares of
special category, B shares, of approved list companies in the Stock
Exchange. However, ownership and management are separated. Chinese
government is considering allowing foreign invested entity in China
to be listed in the Stock Exchange, but it takes time for the government
to come at this decision.
Special approved foreign Joint Venture
Foreign nationals are generally not allowed to hold equity of private
companies in China unless with special consent from the government.
A merger and acquisition exercise involving foreign fund will convert
a private company into a foreign JV.
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Q6. How to establish a foreign-
funded enterprise in China?
It is naturally most important that foreign investors understand
the procedures which need to be followed in order to establish foreign-
funded enterprises in China. The regular steps which must be taken
in this regard shall now be examined.
(1) Choice of Projects, Co- operation of Partners and Relevant Office
Approval
The logical first step for foreign investors to take is to decide
upon a project to undertake. Foreign investors have two options
to choose from in this respect; they may chose a project proposed
by enterprises or institutions across China or they may propose
investment projects by themselves.
If the first option is taken, it should be noted that institutions
and enterprises across China have proposed numerous projects, some
of which have government approval and some that do not. It is therefore
best to select those projects which have been officially approved
in order to secure the approval of the relevant authorities.
The second option requires awareness as to whether the chosen project
conforms to China's industrial policies, and whether the project
belongs to a field which they are officially allowed to invest in.
In addition to this, attention should be paid to attaining reliable
Chinese partners for investment. When applying for joint ventures
or co-operative ventures, it is the responsibility of the Chinese
partner to submit the application for the establishment of investment
projects to the competent authorities for approval.
For wholly-owned foreign ventures, investors should seek assistance
from the consultants who shall assist in the establishment of the
presence in China.
(2) Submission of Feasibility Study Reports and Relevant Official
Approval
Investors in a joint venture or a co- operative joint venture can
only mount a feasibility study on a project once the application
for establishment has been approved. A feasibility study report
usually needs to contain the following 10 items:
a Outline of implementation
b Background and history of the project
c Marketing and production capacity
d Materials and inputs
e Site location
f Design of Project
g Organisational costs
h Construction arrangements
i Financial and economic assessments
j Foreign exchange equalisation and assessment of risks
Once again, in equity and co-operative joint ventures it is the
Chinese partner to submit the feasibility report. However, the foreign
party should maintain an effective channel of consultancy to screen
through the papers and process. For investors in a wholly foreign-
owned venture, the report should be submitted along with the application
for establishment by consultants to the relevant local government
authority.
(3) The Signing of Contracts and Charters of Association in addition
to Relevant Official Approval
Once the feasibility study is approved, the respective partners
in equity or co-operative joint ventures can get down to the matter
of addressing contracts, charters of association and other legal
documents. Competent government authorities require these charters,
contracts and documents to conform to the following principles:
a. The content must be complete, with specific terms and precise
language used. The responsibilities of all parties must have been
clearly defined
b. The rights and obligations of all the parties concerned with
the contracts must have been provided on an equal footing
c. The content of the contracts and charters of association must
conform to the relevant provisions of Chinese law and Regulations
d. Liabilities to third party should be limited to the amount of
registered capital
It is possible to refer to standardised contracts and charters of
association which have been prepared by the Chinese government for
reference during the negotiation and drafting of contracts.
In the case of equity and co-operative joint ventures, it is the
responsibility of the Chinese partner to submit the contracts and
charters of association for approval by the competent authorities.
When the charters are approved, the authorities will issue a certificate
of approval for the foreign- funded enterprise.
In the case of wholly-owned foreign enterprises, a formal submission
of the charters and other documents may be made after the initial
application has been approved. Once again, certificates will be
issued if this formal application is successful.
The Chinese government has recently moved to simplify matters for
small ventures of all the varieties mentioned, allowing all the
applications, feasibility reports and legal document to be submitted
in unison.
(4) Registration
Two steps should be followed by foreign investors and their Chinese
partners during the application stage:
a. The name of the foreign- funded enterprise must be registered
after the establishment application is fully approved
b. The establishment of the foreign- funded enterprise must be registered
after the contract and charter of association are fully approved.
The registration of the name of the venture serves to protect the
use of the name. No party concerned with the project is allowed
to use the name registered to conduct business before the registration
of the venture itself is completed.
After the contract and charter of association have gained approval,
foreign investors and their co- operation partners should proceed
to apply for registration to the administrative authorities for
industry and commerce within 30 days. A business licence will be
issued to all parties when the registration is made and checked.
Once all this has been done, the procedure for the establishment
of a foreign- funded enterprise in China is completed.
Time Limit for Operation and Enterprise Termination
The time limit for foreign investment enterprises is usually 20
years at the longest, and may be stipulated by investors through
negotiation. Where a time limit is appointed, termination of the
enterprise comes with the expiration of the time period.
Prolongation may be sought at least 180 days before the expiration
date from the relevant approving authorities.
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Q7. How to establish a wholly
foreign owned enterprise in China?
Wholly foreign owned enterprises are permitted to register in cases where at least half of their
annual output is exported or if the nature of their operations relies
heavily on advanced technology and the application of this high
technology is beneficial to China. Approval to establish a wholly
foreign owned enterprise is granted much more sparingly when compared
to joint ventures.
Like joint ventures, wholly foreign owned enterprises are in most
cases required to balance their foreign exchange and are allowed
to occupy facilities other than those managed by the Foreign Management
Bureau. As a Chinese legal entity they may sign separate contracts
with the appropriate government authorities or Chinese business
entities to acquire land use rights, rent buildings, and receive
utility services.
Wholly foreign owned enterprises enjoy exclusive management control
of their business activities and have autonomy in their operation
and management with less interference from the Chinese government.
Because there is no Chinese partner to guide the project through
the approval process and through the other regulatory issues associated
with construction and operation of the enterprise, the logistics
of establishing a wholly foreign owned enterprise can be difficult
and costly.
A wholly foreign owned enterprise is considered a Chinese legal
entity and must abide by all Chinese laws. They must employ Chinese
labor in accordance with local and central government labor laws
and are encouraged to establish trade unions (but not required to
do so.
Traditionally the wholly foreign owned enterprise has rarely been
the chosen method for investment in China. The independence offered
to the foreign investor is often outweighed by the lack of direct
links to the domestic economy. Most international corporations choose
to establish joint ventures for the relationships and connections
provided by the Chinese partners.
Recently some major international players in China's telecommunications
industry including AT&T and Ericsson have set up wholly owned
enterprises to handle much of the domestic management originally
handled by their representative office. They have done so only after
years of business experience in China and despite their registration
as a wholly foreign owned enterprise, maintain the registration
of their representative office.
Q8. How to set up a resident
representative office in Beijing, P.R. China?
Foreign traders, manufacturers,
shipping agents, economic organizations and other groups shall report,
according to their nature of the business, to the Ministry of Commerce
(Mofcom) or other relevant ministries, committees or bureaus which
are authorized for the examination and approval of the setup of
resident offices. Proxy authorized by Mofcom will go through the
examination and approval procedures for the above-mentioned companies.
The business activities of the established institutions can only
be in the range of business connection, products introduction, marketing,
technology exchange and consulting service and etc. Direct business
activities are prohibited.
Documents Required and Necessary Procedures
(1) Application for setting up the office: The application
shall include background of the enterprise, business conditions,
purpose of the office to be established, name of the office, person
in charge, scope of business, location and operational term. Application
shall be signed by the chairman or president of the enterprise together
with the enterprise's seal. (original)
(2) A certificate of authorization to the representative accredited
to the office issued by the chairman or president of the enterprise.
(original)
(3) Copy of certificate of legal operation or copy of certificate
of registration provided by the proper authorities of the country
or region where the enterprise comes.
(4) Bank reference provided by the bank of the country or region
where the enterprise comes: The bank reference, to be signed
by the person in charge or business manager of the bank, shall state
clearly the enterprise's registered capital and present amount of
deposit, as well as the reputation of its flexing capitals after
the opening of the account. (original)
(5) Resume of representative accredited to the office. The resume,
including both educational and working background, should be detailed,
specific and true. Disconnection is not allowed. Two photographs
of each representative are required.
(6) Identification paper of the representatives. For representatives
of foreign nationality, copy of passport of the country he holds
should be submitted. For compatriots from Hong Kong and Macao, copy
of certification for his returning to his hometown and permanent
resident identification should be submitted. If a domestic personnel
is to take the post of representative or chief representative, approval
and identification from Beijing Foreign Enterprise Service Corporation
(FESCO) are needed.
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Q9. How to establish an equity
joint venture in China?
Equity joint ventures are the second
most common manner in which foreign companies enter the China market
and the preferred manner for cooperation where the Chinese government
and Chinese businesses are concerned. Joint ventures are usually
established to exploit the market knowledge, preferential market
treatment, and manufacturing capability of the Chinese side along
with the technology, manufacturing know-how, and marketing experience
of the foreign partner.
Normally operation of a joint venture is limited to a fixed period
of time from thirty to fifty years. In some cases an unlimited period
of operation can be approved, especially when the transfer of advanced
technology is involved. Profit and risk sharing in a joint venture
are proportionate to the equity of each partner in the joint venture,
except in cases of a breach of the joint venture contract.
Share holdings in a joint venture are usually non-negotiable and
cannot be transferred without approval from the Chinese government.
Investors are restricted from withdrawing registered capital during
the live of the joint venture contract. Regulations surrounding
the transfer of shares with only the approval of the board of directors
and without approval from government authorities will probably evolve
over time as the size and number of international joint ventures
grow.
There are specific requirements for the management structure of
a joint venture but either party can hold the position as chairman
of the board of directors. A minimum of 25% of the capital must
be contributed by the foreign partner(s). There is no minimum investment
for the Chinese partner(s).
It is preferable that foreign exchange accounts are balanced in
order to remit profits abroad so that the repatriated foreign exchange
is offset by exports from the joint venture. With the elimination
of foreign exchange certificates and the further opening of the
China market, this requirement is becoming more and more relaxed.
The permissible debt to equity ratio of a joint venture is regulated
depending on the size of the joint venture. In situations where
the sum of debt and equity is less than US$ 3 million, equity must
constitute 70% of the total investment. In joint ventures where
the sum of the debt and equity is more than US$ 3 million but less
than US$ 10 million, equity must constitute at least half of the
total investment. In cases where the sum of the debt and equity
is more than US$ 10 million but less than US$ 30 million, 40% of
the total investment must be in the form of equity. When the total
investment exceeds US$ 30 million, at least a third of the sum of
the debt and equity must be equity.
Equity can include cash, buildings, equipment, materials, intellectual
property rights, and land-use rights but cannot include labor. The
value of any equipment, materials, intellectual property rights,
or land-use rights must be approved by government authorities before
the joint venture can be approved.
After a joint venture is registered, the entity is considered a
Chinese legal entity and must abide by all Chinese laws. As a Chinese
legal entity, a joint venture is free to hire Chinese nationals
without the interference from government employment industries as
long as they abide by Chinese labor law. Joint ventures are also
able to purchase land and build their own buildings, privileges
prevented to representative offices.
Q10. How to set up a cooperative
joint venture in China?
In a cooperative venture,
the parties involved may operate as separate legal entities and
bear liabilities independently rather than as a single entity. A
cooperative venture may also be registered as a limited liability
entity resembling an equity joint venture in operation, structure,
and status as a Chinese legal entity.
There is no minimum foreign contribution required to initiate a
cooperative venture, allowing a foreign company to take part in
an enterprise where they preferred to remain a minor shareholder.
The contributions made by the investors are not required to be expressed
in a monetary value and can include excluded in the equity joint
venture process can be contributed such as labor, resources, and
services. Profits in a cooperative venture are divided according
to the terms of the cooperative venture contract rather than by
investment share, allowing a more flexible schedule for return on
investment in cases where one investor provides cash while the other
party's investment is primarily in kind.
Greater flexibility in the structuring of a cooperative venture
is also permissible including the structure of the organization,
management, and assets. There is no term for unlimited terms in
cooperative ventures, but also no provisions for the term of the
duration. The term of the cooperative venture contract may be renewed
subject to the consent of the parties involved and approval from
the examination and approval authorities. The foreign investor is
permitted to withdraw their registered capital or a portion thereof
from the cooperative venture during the duration of the cooperative
venture contract.
Because of the unique privileges and added features offered to the
foreign party in a cooperative venture, trade unions must be allowed
to represent the employees in employment matters to protect the
interests of the employees.
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