Establishing business

Forms for business establishment in China

The main categories of business for foreign investors (including Hong Kong investors) in the Mainland include the following:

Representative office (RO)

RO can engage in non-profit generating activities that are related to the business of its foreign parent enterprise and business-related liaison activities. ROs cannot operate business directly and they do not have legal person status.

To set up a RO in Beijing, application could be made to the relevant administrative authorities. A Business Registration Certificate and a Representative Certificate will be issued after the application has been made. The RO should then proceed with registration procedure.

Individual sole proprietorship

One of the preferential treatments under the Closer Economic Partnership Arrangement (CEPA) states that Hong Kong permanent residents with Chinese nationality may, in line with relevant laws, regulations or administrative rules of the Mainland, establish sole proprietorship in any provinces, municipalities, or autonomous regions in the Mainland without being subject to foreign investment approval process. There is no limit on the number of employees, or the size of its business space. The permissible business scope of sole proprietorship of Hong Kong residents covers retail, restaurants, computer services, advertising, clinic, economic, trade and management consulting services, etc.

For more information, please refer to the website of the Beijing Administration for Industry and Commerce (BAIC) (Chinese Version Only): http://www.baic.gov.cn/

Foreign invested enterprises (FIE)

There are mainly four types of foreign invested enterprises in mainland:

Pre-approval for setting up foreign-invested companies

Foreign investment projects are subject to pre-approval requirements in the Mainland. To streamline the pre-approval process, the Ministry of Commerce (MOC) delegates most approval authority of foreign investments to the commerce departments of local governments. According to the Notice of MOC Delegating Approval Authority over Foreign Investment to Local Counterparts (Shangzifa [2010] No. 209), the delegation of the approval authority on foreign investment is set out below:

Conditions for delegating approving authority Approval authority

1. Foreign investment in Encouraged Industries with total investment below USD 300 million

Commerce department of local governments

2. Foreign investment in Restricted Industries with total investment below USD 50 million

3. Foreign investment companies with registered capital below USD 300 million

4. Establishment and alteration of foreign investment enterprise in service sector
(excluding those that require approval from MOC as stipulated by relevant laws and regulations).

5. Other foreign investments that do not belong to the above categories.

MOC

The Foreign Investment Industrial Guidance Catalogue (hereinafter referred to as "Catalogue") issued by the National Development and Reform Commission (NDRC) and MOC is an important document that classified of foreign investment projects into three categories: encouraged industries; restricted industries and prohibited industries. Foreign investment industries that are not listed in the above three categories may be treated as permitted industries. For certain industries, the Catalogue also imposes specific conditions on foreign investments. For more information about the Catalogue, please refer to the website of the Mainland governments: http://english.gov.cn/

Things to note when signing contracts with mainland investment partners

When entering into joint venture contracts with Mainland investment partners, investors should pay due attention to whether the mainland partner is a legal entity; whether it has valid business registration its financial strength and capability to perform the contractual duties, etc.

In addition, in line with Law of Sino-Foreign Equity Joint Ventures and Law of Sino-Foreign Cooperative Joint Ventures, investors should also take not of issues such as the rights and obligations of each investing parties, the organization structure of the joint venture, business scope, period of operation, appointment of company management, profit distribution, distribution of assets after termination and liquidation of the joint venture, etc.

BAIC provides samples of joint venture contracts and Articles of Association for reference by foreign investors. For more information, please visit BAIC's website (Chinese Version Only): http://www.baic.gov.cn/

Setting up FIE: general approval process

Generally, after obtaining pre-approvals from the relevant commerce departments, FIEs could then apply for business registration with local administrative authority for industry and commerces. Subsequently, FIEs could arrange for injection of registered capital, the engraving of company seals with public security bureaus, the opening of bank account and perform relevant registrations with relevant government authorities, including tax bureau, foreign exchange administration authority, bureau of quality and technical supervision, customs, statistical bureau, finance bureau and other related government authorities.From 1 October 2015, newly established enterprises are no longer required to perform tax registration or obtain tax registration certificates after obtaining business licenses with unified social credit code issued by administrative authorities for industry and commerce.

For certain industries, foreign investors should apply for required certificates/licenses from relevant authorities before applying for foreign investment approval with the commerce department.

Please note that the above general introduction of FIE set-up procedure is for reference only, and should not substitute legal or professional advice. For more detailed information and advice on local practice, investors could visit the website of the Beijing Investment Promotion Bureau: http://www.investbeijing.gov.cn/english/index.do, or seek advice from qualified law firms or other professional consulting agencies. Normally, professional consulting agencies could provide services on FIE set-up, which may cover the drafting of Articles of Association, submission of application documents for FIE establishment, negotiation with local government authorities, etc.

Requirements on registered capital of FIEs

Pursuant to the Decision of the Standing Committee of the National People's Congress on Amending Seven Laws Including the Law of the People's Republic of China on the Protection of the Marine Environment announced on December 28, 2013, certain provisions / clauses of the prevailing Company Law have been amended. These amendments include the removal of the minimum threshold with respect to registered capital (except for those specified in other laws, administrative regulations and decisions of the State Council), cancellation of timeframe with respect to capital injections, and allowing shareholders to autonomously decide the amount, method and timeframe of capital contribution. The amended Company Law has come into effect on March 1, 2014.

Total investment of a FIE refers to the total amount of funds needed to run the company, i.e. the total amount of capital for infrastructure construction and working capital that is commensurate with the FIE's production scale. Registered capital of a FIE refers to the total amount of capital registered with the business registration authority for the purpose of establishing the FIE, i.e. the total amount of capital subscribed by foreign investors. Investors are liable for FIE's debts by their capital contribution. To determine the amount of total investment/registered capital of an FIE, the following debt-equity requirement must be followed according to Gongshangqizi [1987] No. 38 issued by State Administration for Industry and Commerce in February 1987:

Total Investment (USD) Minimum Registered Capital(USD)

Less than 3 million (inclusive)

70% of total investment.

Between 3 and 10 million (inclusive)

50% of total investment, or not lower than 2.1 million if the total investment is below 4.2 million

Between 10 and 30 million (inclusive)

40% of total investment, or not lower than 5 million if the total investment is below 12 million

More than 30 million

1/3 of total investment, or not lower than 12 million if the total investment is below 36 million

Despite the above requirements, the commerce authority has the discretion to determine whether or not to approve the establishment of a FIE having regard to the registered capital of the FIE and its operation scale. For specific requirements of debt-equity ratios in Foreign-invested EJV and CJV, investors can seek advice from qualified law firms or professional consulting agencies or communicate with the local in-charge commerce authority.Besides, the amended Company Law would also lead to changes in current business registration procedures and workflow with the relevant authorities. Hong Kong investors who intend to set up business in Beijing should pay close attention to the detailed implementation of the amended Company Law.

The Standing Committee of the State Council held a meeting on October 25, 2013 and decided that requirements with respect to the registration of registered capital should be relaxed. However, detailed measures and regulations in this regard have yet to be announced.

Requirements on leasing operating premises

In leasing operating premises, investors should pay attention to the following issues:

  1. Lease contract should be signed by the legal representative of the investor or the authorized person of the investor.
  2. It should be stated in the lease that the leased premises will be used for the proposed FIE and the FIE would become the lessee after its establishment.
  3. The landlord should provide a valid Property Certificate for the premises being leased. If the FIE operates on premises without a relevant Property Certificate, investors should provide other documents as permitted required by the relevant business registration authority.
  4. The scope of use stated in the Property Certificate should generally be "for commercial purpose / usage". If investors lease residential property and use it as operating premises, the change of use should be in line with relevant provisions in law or other related regulation. Residential buildings or the lowest floor of residential building with permitted scope of use for commercial purposes should nonetheless not be used for food and beverage services, entertainment services, internet services, manufacturing of dangerous chemicals and other prohibited operations.

For more detailed information, please refer to the website of the BAIC (Chinese Version Only): http://www.baic.gov.cn/

Hiring employees in Beijing

Labor laws and regulations in China

The PRC Employment Contract Law came into effect on January 1, 2008, and regulates all employment relationships including establishment, execution, revision, dissolution or termination of labor contracts within the Mainland. In 2012, the Standing Committee of the National People's Congress passed revision of the original Labor Contract Law. The revision came into effect on July 1, 2013.

The Labor Contract Law requires employers to enter into written labor contracts with employees when establishing an employment relationship. In case the employer fails to enter into a written labor contract with the employee within one year after commencement of the employment, an employment contract with indefinite terms would be deemed to have been established with the employee. In such case, the employer should pay the employee double salary on a monthly basis for the one year period since the first month of the employment.

Things to note when hiring Chinese employees

Salary and welfare

Working hours and Salary

The employers could determine its remuneration package for their employees. However, salary and wages paid to employees shall not be lower than the minimum wages set by local and provincial government. The employers could establish employee incentive plans, such as performance bonus and stock options, to attract capable employees. Salary and wages shall be paid on a monthly basis in local currency. Detailed payment date should be agreed upon and documented in the employment contract.

FIEs should follow requirements about the standard working hour prescribed by labor laws in the Mainland. Standard working hours is 8 hours a day and no more than 40 hours a week on average.

The employers should deduct the Individual Income Tax (IIT) before making salary payments to employees, and for filing tax with relevant tax authorities in the following month after salary payment.

Social securities

The PRC Social Security Law which took effect in July 2011 has established a basic social security system, including basic pension, basic medical insurance, work-related injury insurance, unemployment insurance, and maternity insurance, etc. For any expatriate employees being employed in the Mainland, employers should be responsible for contributing to social security on their behalf. The employers' social security contribution, together with the employees' personal contribution, makes up the employees' social security benefits. For Hong Kong residents, employers should, in theory, make contribution to the social security scheme for them. However, since there is no implementation detail with regard to social security payment for Hong Kong residents at the moment, employers could exercise their discretion on whether to enroll their Hong Kong employees in the social security scheme. According to Administrative Regulations on the Housing Provident Fund promulgated by the State Council, employers and employees are required to contribute to employees' personal Housing Fund account. For more information, please visit the official website of the Beijing Municipal Human Resources and Social Security Bureau (Chinese Version Only): http://www.bjrbj.gov.cn/

Maternity benefit for female employees

The Special Provisions on Labor Protection for Female Employees was published by the State Council and took effect from April 2012. It stipulated that female employees are entitled to maternity leave of no less than 98 days, including 15 days before the delivery. Maternity expenses incurred during maternity leave and medical expenses for delivery or miscarriage for female employees who have enrolled in maternity insurance shall be covered by the insurance whereas for those without maternity insurance, the employer would then be responsible for such payments / reimbursements.

Taxation

Foreign investors (including Hong Kong investors) who have set up FIEs or ROs would generally be subject to the following types of China tax: Corporate Income Tax, Withholding Tax, Value Added Tax, Business Tax, Consumption Tax and local surcharges, Stamp Duty, Urban Land Use Tax, Property Tax, Deed Tax, Land Appreciation Tax, Customs Duties, and etc. For enquiry on detailed taxation information, please call the hotline of Beijing State Taxation Bureau and Beijing Local Taxation Bureau: (8610) 12366.

Corporate Income Tax (CIT)

Overview

Enterprises incorporated in the Mainland (such as FIEs) or foreign enterprises incorporated according to the laws of other jurisdiction but have effective management located in the Mainland should pay CIT in the Mainland on their world-wide income. The applicable CIT rate is 25%. With respect to foreign enterprises that have no permanent establishment or fixed place of business in China; or have permanent establishment or fixed place of business in the Mainland but the income derived from the Mainland is not effectively connected with the permanent establishment or fixed place of business, they would be subject to a Withholding Tax (WHT) on their China-sourced income. The statutory WHT rate is 10%, which could be reduced by applicable tax treaties between the Chinese government and other national governments.

CIT Taxable income is assessed based on an enterprise's accounting profit, but not necessarily equal to its accounting profit. It is the net amount of the annual gross income less non-taxable income and tax-exempt income, and after deducting applicable costs and expenses and offsetting the net operating loss carried over from previous years.

CIT is calculated on an annual basis and within each tax year, taxpayers should perform provisional CIT filings on a monthly or quarterly basis. The tax year of CIT taxpayers is the calendar year (January 1 to December 31). The provisional CIT filing should be performed within 15 days after the end of each month/quarter. Taxpayers should perform annual CIT filings and settle the CIT due/refund within 5 months from the end of each calendar year. For more information on the calculation of gross income, deductions, loss recovery and transfer pricing rules, please refer to the BJO booklet: Practical Guide for Hong Kong People Living in the Mainland (Beijing).

Value-added Tax (VAT), Consumption Tax (CT) and local surcharges

VAT

Entities and individuals shall pay VAT under the regulations if they are engaged in sales of goods, provision of processing, repairs or replacement services, import of goods, sales of services, intangible assets or real estate property in the Mainland. For more information about tax rate, tax period, tax payable etc, please refer to the BJO booklet: Practical Guide for Hong Kong People Living in the Mainland (Beijing).

Pilot VAT reform covers all industries

As part of the reform under the Mainland’s 12th Five Year Plan, a pilot VAT reform (“Pilot VAT Reform”) was announced in the executive meeting of the State Council in October 2011. From January 2012 onwards, Pilot VAT Reform was introduced in selected locations to expand the scope of VAT to cover industries that were previously subject to BT. Shanghai is the first location selected with pilot sectors covering the transportation sector and 6 sub-sectors under the modern services sector (collectively called “the Pilot industries”, including research & development and technical services, IT services, cultural and creative services, logistics auxiliary services, tangible movable property finance leasing and certification & consultation services).

On August 1, 2012, Pilot VAT Reform was rolled out to eight other cities/provinces, including Beijing. From August 1, 2013, the Pilot VAT Reform was implemented nationwide and its scope has been expanded to cover the radio, film and TV industry. Effective from January 1, 2014, the Pilot VAT Reform was further expanded to cover railway transportation and postal services. From June 1, 2014, the Pilot VAT Reform has been expanded to include telecommunications industry.

From 1 May 2016, the VAT reform for all industries has been launched. Scope of the VAT pilot reform has been expanded to the construction industry, real estate industry, finance industry and life-style service industry. This last phase of the VAT pilot reform is an important new chapter of Chinese VAT history and the existing Business Tax (BT) will be phased out.

In the pilot area, the taxpayer engaged in the business of the Pilot industries shall be subject to VAT instead of BT. New VAT rates of 6% and 11% were introduced for some of the Pilot Industries. Regarding calculations of VAT, prevailing VAT policies continue to adopt different methodologies for general VAT payer and small-scale VAT payer. Detailed information on Pilot VAT Reform is listed as follows:

VAT
General Taxpayer

VAT Payable
= Output VAT - Input VAT
Tangible property leasing services 17%
Transportation services, postal services, basic telecommunication services, construction services, immovable property leasing services, sales of immovable property, transfer of land use right 11%
Value-added telecommunication services, financial services, modern services other than tangible property leasing services, life-style services, sales of intangible assets 6%
VATable supplies regulated by the Ministry of Finance and the State Administration of Taxation 0%

Small-scale Taxpayer

VAT Payable =
Sales income * VAT rate
All VATable supplies 3% or 5%(for real estate development companies selling self-developed real estates)

Consumption Tax (CT)

CT is imposed on top of VAT/BT for the sale of 14 specific kinds of consumer products. According to PRC Tentative Regulations on Consumption Tax(amended in 2008 and came into force since January 1st 2009), the 14 kinds of product subject to CT include: cigarettes, wine and alcohol, cosmetics, gasoline, luxury cars, golf balls and equipment, yachts, luxury watches and etc. CT payable is calculated on the basis of sales amount and/or the sales volume/quantity depending on the product item concerned. From 1 December  2014, CT is no longer imposed on small-displacement motorcycles with a cylinder capacity of less than 250ml (exclusive), automobile tires, leaded gasoline for cars and alcohol.

Starting from 1 February 2015, battery and coatings shall be subject to CT in order to promote energy conservation and environmental protection. CT of 4% will be levied on the sale price (before VAT) at the point of production, processing and import of battery and coatings.

From 10 May 2015, the ad valorem rate for wholesale of cigarette is increased from 5% to 11% plus unit rate of RMB 0.005 per cigarette.

Local surcharges

City Construction Tax (CCT), Education Surcharge (ES) and Local Education Surcharge (LES) are calculated based on the actual payment of VAT and CT (hereinafter referred to as “the Two Taxes"), which are filed and paid together. The calculation is based on the actual payment of the Two Taxes multiplied by the tax rates respectively.

There are three levels of CCT rates of Beijing (7%, 5% or 1%) depending on the regions of the taxpayer. ES rate is 3% and LES rate is 2%.

Tax Policies for Cross-border E-commerce Retail Imports and Exports

To build a fair market for competition and to promote healthy development of cross-border e-commerce retail imports, the imported commodities from cross-border e-commerce retail (Business to Customer, i.e., B2C) shall be subject to Customs Duty (CD), import-level VAT and Consumption Tax (CT). The taxpayers shall be the individuals purchasing the imported B2C commodities. The dutiable values of imported commodities shall be their actual transaction prices including the retail prices of the goods and accompanying freight and insurance expenses. E-commerce enterprises, enterprises engaging in e-commerce trading platform or logistics enterprises may act as the withholding agents.

Applicable tax treatments

Amount of the B2C import transaction (threshold: RMB2,000 per transaction and RMB 20,000 per year individually) Applicable tax treatments

Not exceeding the threshold

CD rate is 0% on a provisional basis.
Import-level VAT and CT shall be imposed with a 30% reduction on a provisional basis, i.e., import-level VAT and CT exemption will no longer be available.

Exceeding the threshold (including single inseparable commodity with a dutiable value exceeding RMB 2,000)

Taxes shall be imposed in full amount according to the general trade mode.

Customs Duties

Consignee of imported goods, consignor of export goods, owner of entry articles are taxpayers of Custom Duties. All goods permitted to be imported into or exported out of and all articles allowed to enter into the Mainland shall be subject to payment of Customs Duties unless otherwise specified by the State Council. The tariff items, tariff heading numbers and tariff rates as proscribed in the Customs Import and Export Tariffs of China and the Import Tariff Rates of the PRC for Entry Articles are formulated by the State Council.

Customs Offices are responsible for the collection of Customs Duties of goods imported into the Mainland and other import taxes (including import VAT and consumption tax). To comply with relevant World Trade Organization (WTO) requirements, tariff rates of imported goods have gradually been reduced since 2002. Customs Duties are computed based on customs value assessed by the Customs Offices or quantity, and are collected by the Customs Offices.

With State Council’s approval, the import tariff for daily consumables, such as skin care products, suits, short boots and diapers, will be lowered through provisional tariff starting from 1 June 2015. Please refer to “Notice from the Customs Tariff Committee of the State Council in regard to adjusting the import tariff for certain daily consumables” issued on 21 May 2015 by State Council for details.

Stamp Duty (SD)

According to the PRC SD Provisional Regulations (“SD Regulations”, effective in October 1988), entities or individuals which conclude or receive the dutiable documents prescribed in the SD Regulations in the PRC are subject to SD. In order to support small-scaled and micro-scaled business enterprises, during the period between 1 November 2014 and 31 December 2017, loan contracts entered into between such enterprises and financial institutions are temporarily exempt from SD.

Application for tax treaty relief under the PRC-Hong Kong Tax Arrangement

Since December 2006, The Arrangement between the Government of the People’s Republic of China and Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as "PRC-Hong Kong Tax Arrangement) and its first Protocol came into effect. Subsequently, the two parties agreed and signed the second, third and fourth protocol of the PRC-Hong Kong Tax Arrangement in June 2008, May 2010 and April 2015. According to PRC - Hong Kong Tax Arrangement, to enjoy preferential tax treatment of the arrangement, qualified Hong Kong tax residents, who obtained dividends, interest, royalties and/or capital gains from transfer of property from the mainland China, should apply for pre-approval with relevant mainland tax authorities for eligibility of preferential tax arrangements. For the PRC-sourced dividend, interest, royalties and capital gains derived by Hong Kong people but are not eligible for preferential treatment under PRC-Hong Kong Tax Arrangement, it would be subject to WHT at the standard rate of 10%.

Dividends Interests Royalties Capitals gains

Applicable WHT rates under PRC-Hong Kong Tax Arrangement(Note 1)

5% 7%

7%

(Royalties derived from aircraft and ship leasing businesses shall be subject to the preferential rate at 5%)

0%

Note 1: the lower rates would be applicable if the recipient of relevant passive income qualifies necessary requirements, and it entitled to the preferential tax treatments under the PRC-Hong Kong Tax Arrangement

To simplify the implementation of PRC-Hong Kong Tax Arrangement, the competent tax authorities of the Mainland and Hong Kong have negotiated and reached an agreement. The Certificate of Hong Kong Tax Resident Status issued by the Hong Kong competent authority to a Hong Kong tax resident for a particular calendar year may serve as proof of its Hong Kong tax residency for that calendar year and the two succeeding calendar years for claiming the benefits under the Mainland-Hong Kong DTA. If there have been any changes resulting in failure to meet any condition of the residency status, the resident would no longer be entitled to the benefits under the Mainland-Hong Kong DTA since the date of the change.

Intellectual property (IP) protection

Types of intellectual property in the Mainland include trademark, patent, copyright, and business secrets. There are relevant laws and regulations for the protection of IP rights, sanction of IP rights infringement and settlement of IP rights dispute.

Remedies on IR right infringement

When infringement on IP rights occurs, the patent rights' holder or other affected parties may request an administrative remedy from relevant administrative authorities or file lawsuit with a people's court. The main administrative punishments on IP right infringement include: Ordering the assailant to stop IP infringement activity and to compensate the IP right holder for any losses incurred and cash fines; In case of severe IP rights violation, the assailant might be subject to criminal punishment.

For more information about applying for a patent, trademark and copyright in the Mainland, please seek professional advice or visit the official websites of relevant government authorities listed below:

  1. State Intellectual Property Office of the People's Republic of China: http://english.sipo.gov.cn/
  2. National Copyright Administration of the People's Republic of China (Chinese Version Only): http://www.ncac.gov.cn/
  3. Trademark Office of The State Administration For Industry & Commerce of the People's Republic of China: http://www.saic.gov.cn/sbjEnglish/
  4. Intellectual Property Protection in China: http://www.chinaipr.gov.cn