The main categories of business for foreign investors (including Hong Kong investors) in the Mainland include the following:
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.
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.
There are mainly four types of foreign invested enterprises in mainland:
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  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
5. Other foreign investments that do not belong to the above categories.
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 Central People's Government of the People's Republic of China: http://english.gov.cn/
When entering into joint venture contracts with Mainland investment partners, investors should pay due attention to whether the mainland partner has valid legal entity; whether it has valid business registration and has carried out annual inspection; assess the partner's registered capital and financial strength, 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.
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.
For certain industries, foreign investors should apply for required certificates/licenses from relevant authorities before applying for foreign investment approval with the commerce department.
On 28 December 2013, the Standing Committee of the State Council promulgated amendments to the Company Law of the Mainland. The amendments include removal of the restrictions on minimum registered capital requirement (except otherwise required by laws, administrative regulations and requirements designated by the State Council), removal of the restrictions on the period of capital investment, and allowing enterprise shareholders to decide among themselves the amounts of capital investments, the means of investments, and the period of investments, etc. The amended Company Law has taken effect from 1 March 2014. Moreover, the State Administration for Industry and Commerce promulgated the Administrative Provisions on the Registration of Companies Registered Capital on 20 February 2014 to effect the above-mentioned amendments in the Company Law. The Administrative Provisions on the Registration of Companies Registered Capital has also taken effect from 1 March 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  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.
In leasing operating premises, investors should pay attention to the following issues:
For more detailed information, please refer to the website of the BAIC (Chinese Version Only): http://www.baic.gov.cn/
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.
Recruitment methods differ between FIEs and ROs. According to the PRC Labor Law which took effect in 1995, FIEs can hire staff from the local workforce based on their operating needs, as well as determine their own organization structures and human resources. Recruiting can be carried out through different channels, such as engaging authorized professional agencies, posting advertisements, etc.
ROs are required to employ staff through authorized labor agencies. A RO must sign a service contact with a labor agency and the labor agency would establish employment relationship with the employees.
Taiwan, Hong Kong and Macao residents will need a work permit for working in the Mainland. If a company plans to hire persons or accept assignees from Taiwan, Hong Kong and Macao, it shall apply for the "Taiwan, Hong Kong, and Macao Expatriates Work Permit" (hereinafter referred to as "Work Permit") (hereinafter referred to as Employment Permits) for the individuals. Likewise, people from Taiwan, Hong Kong or Macao, who engage in an individual business in the mainland, shall apply for Employment Permits by themselves.
Hong Kong residents seeking employment in the Mainland should fulfill the following requirements:
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.
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.
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.
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 Taxation Bureau: 12366.
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.
Income from the sales of tangible goods, provision of services, transfer of intangible assets or real property is subject to PRC VAT or BT.
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 R&D 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 Guangdong (including Shenzhen) and Fujian (including Xiamen). From August 1, 2013, the Pilot VAT Reform would also gradually expand its scope nationwide to cover the radio, film and TV industry. Effective from January 1, 2014, the Pilot VAT Reform expands to cover railway transportation and postal services.
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 the following:
VAT General Taxpayer
|VAT Payable =
Output VAT - Input VAT
|Tangible movable property finance leasing||17%|
|Transportation and postal services||11%|
|R & D and technical services, IT services, cultural and creative services, logistics auxiliary services, certification & consultation services, radio, film & TV production, distribution and broadcasting services||6%|
|VAT Payable = Sales income * VAT rate||All taxable services||3%|
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.
City Construction Tax (CCT), Education Surcharge (ES) and Local Education Surcharge (LES) are calculated based on the actual payment of VAT, BT and CT (hereinafter referred to as "the Three Taxes"), which are filed and paid together. The calculation is based on the actual payment of the Three Taxes multiplied by the tax rates respectively.
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.
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.
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 have agreed and signed the second protocol of PRC-Hong Kong Tax Arrangement in June 2008. 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 residents 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%.
Applicable WHT rates under PRC-Hong Kong Tax Arrangement(Note 1)
|5% / 10%||7% / 10%||7% / 10%||0% / 10%|
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
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.
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: