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Major Issues in Doing Business in China


Please note that the rules, regulations and practice in China are constantly changing, and also vary from city to city and province to province. Whilst best efforts have been made to ensure that the information contained herein is accurate at the time of writing, and guidelines on China, including these, may be out of date before they have been printed, and therefore should not be taken as representing the latest position. Primasia Corporate Services Limited and its China associates and partners will be pleased to advise on specific aspects of doing business in China.



Foreign companies should consider the following factors when determining their method and place of incorporation:

  • Their business needs, whether for trading, manufacturing, export or plain networking, It may not be necessary to establish a legal presence in China, with all that entails;
  • The regional differences in incorporation requirements and tax systems;
  • Incentives from local governments;
  • Supply chains for specific industries in different regions.
  • Following a decision on the approach and location of set-up, foreign companies should apply due diligence and prepare for:

  • Adapting the procedures and requirements for company in corporation and licenceapplications applicable to their own business type and selected regions;
  • Complying with foreign currency controls on fund transfers in and out of China;
  • Meeting the requirements of various layers of tax systems and types;
  • Coping with cultural differences at the country and district levels in terms of commercial concepts as well as employer-employee and social relationships.

    1.Foreign Investment Guidance

    This is a PRC government publication which covers eligible and forbidden business natures and industries, as well as the respective capital and incorporation requirements for eligible business. It is subject to review from time to time. The current version covers four categories, namely the “encouraged”, “permitted”, “restricted” and “prohibited” categories. Industries relating to environment, recycling energy efficiency, venture capital and IP are among the “encouraged” industries. Anything not “encouraged”, “restricted” or “prohibited” is “permitted”.


    2.Four main Types of Foreign Investment Set-up

    Before deciding how to establish a business in China, foreign investors must be aware of and define their long-term and medium-term objectives. There are various corporate set-up options available, such as equity joint ventures, cooperative joint ventures, wholly foreign-owned enterprises and representative offices. Each form has its own legal requirements, benefits and advantages. Below is a brief description of each one:

    ●Equity joint venture(EJV) enterprises
    These are enterprises established in China as a result of joint investment with foreign individuals, firms and/or Chinese economic organizations, based on the principle of equality and mutual benefit, and subject to approval by the Chinese government. An EJV takes the form of a limited liability company with the status of a Chinese legal entity. In requires joint contributions of both parties in investment, operations, share of profits, risk and losses, in strict proportion to the amount of investment contributed by the respective parties. In general, the level of investment offered by the foreign investor should be at least 25 percent. Investment can be in the form of cash, real estate, industrial property, equipment and technology, but these types of investment need to count as different shares in the investment.

    ●Contractual joint venture enterprises (CJV-also known as cooperative joint ventures)
    As for the EJV, CJVs are established in China as a result of joint investment or cooperation with foreign individuals, firms and/or Chinese economic organizations, based on the principle of equity and mutual benefit, and subject to approval by the Chinese government.
    However, a CJV has more flexibility in terms of contractual freedom and structure; that is, profits and losses are distributed between the Chinese party and the foreign investor in accordance with specific contractual provisions, as opposed to their respective equity interests in the CJV.
    Capital contributions to both EJV and CJV can be in cash or in kind, such as buildings, machinery, materials, and know-how. For a CJV, the parties can decide how the value of their contributions should be determined, whereas for an EJV, this evaluation process normally needs an independent third party to assess the “market price” of the contributions.
    A CJV project usually involves the foreign partner providing most or all of the funds and technology as well as key machinery, whilst the Chinese partner contributes land, facilities, natural resources and perhaps a limited amount of funding. However, China’s economic environment has changed. Land has become a rare resource and Chinese companies are not short of money; therefore nowadays forming a CJV has become far less popular.

    ●Wholly owned foreign enterprises
    Wholly owned foreign enterprises (WOFEs) are those set up in China by foreign individuals or firms where the investment is 100 percent provided and operated exclusively by foreign investors (without any Chinese partners). According to Chinese law, if several foreign partners jointly invest in a company, it will also be regarded as a WOFE.
    A WOFE is a legal entity and is a limited liability company. The liability of the shareholders is limited to the assets they brought to the business. Setting up a WOFE requires currency input or equipment contribution, and the registered capital must correspond to the enterprise’s business scale.
    In recent years, the Chinese government has steadily increased the scope of businesses allowed to WOFE, such as consulting, management services and trading. However, although WOFEs can engage in an increasing range of sectors, some restrictions still exist on specific industries (see the section above on the Foreign Investment Guide).
    WOFES offer an advantage in that foreign investors have complete control over major decisions, products, and costs. They also allow strategic alignment with the parent company and greater control over (hence protection of) intellectual property.
    The following is a summary of the characteristics of WOFEs:
    100 percent foreign ownership
    100 percent management control
    Limited liability: An investor’s liability is limited to its share of the WOFE’s registered capital (equity).
    Manufacturing JVs and WOFEs are subject to a Chinese value-added tax (VAT) of 13-17 percent and a corporate income tax of 25 percent (since the 2008 reforms). Business service JVs and WFOEs are subject to Chinese business tax (normally 5 percent, except for some businesses such as bars, karaoke, etc.). Business tax is, however, planned to be eliminated as part of the VAT tax reform.

    ●Representative offices
    The representative office (RO) is an office set up in China by a foreign investor (including foreign companies and economic organizations). Compared to other foreign entities in China (JVs and WFOEs), applying for an RO business licence is quite simple and easy, except in some special industries such as banking, insurance, security and investment. Most RO applications do not need any Central government approval and are directly submitted to the local Administration of Industry and Commerce.
    Please note that the Chinese government is now discouraging ROs in favour of WOFEs.
    However, an RO is not a legal entity. An RO (like its Hong Kong namesake) can only carry out liaison and coordination work, market research and promotion for its parent company.      An RO is not allowed to conduct other business activities such as signing contracts in its own name and invoicing, to name a few.
    An RO is subject to business tax, normally approximately 10 percent to 12 percent of its total expenses (i.e. deemed profit), including office rental, staff salary, travelling and other expenses.
    The following is a summary of the characteristics of an RO:
    Not a legal entity
    Conducts research and promotion
    No invoicing


    3. Major Tax Categories for Foreign Investment Enterprises and Foreigners

    Since China adopted a reform and opening-up policy in the late 1970s, foreign investment has played an increasingly important role in the country’s economic growth. Hundreds of thousands of foreign investment enterprises and foreigners in China in accordance with regulations set by the National People’s Congress, its Standing Committee and the State Council of China.
    Chinese tax authorities have been paying more attention to international tax collection and administration. The division of taxation and tax policymaking powers between levels of authorities is still largely determined by the Central government, rather than through legislation. Under the existing taxation regime in China, there are mainly three taxation collection systems, namely state tax bureaus at various levels, local tax bureaus at various levels and Customs.
    Generally, state tax bureaus have the power to levy certain taxes (e.g. enterprise income tax and value –added tax), while taxes imposed by local authorities include the individual income tax, business tax and stamp tax. The following content briefly summarises the major tax categories for foreign investment enterprises and foreigners. For more information, please refer to “Tax System of the People’s Republic of China State Administration of Taxation” at http://english.tax861.gov.cn/zgszky/zgszky.htm.

    Value-added tax

    Value-added tax (VAT) is payable by enterprises and individuals who are sell merchandise, who import goods or who supply services, such as processing, repair and replacement. Unlike in Western countries, VAT is not imposed on all services in China.

    Consumption tax

    Consumption tax is levied on production, processing or importation of certain specific consumable goods in China.

    Customs duty

    Customs duty is levied by the customs authority on imported and exported goods in order to raise state revenue and to protect domestic industries.

    Business tax

    In China, business tax is a kind of turnover tax imposed instead of VAT on businesses other than those related to manufacturing. These businesses include most services such as communications, transportation, finance, entertainment, as well as the transfer of intangibles and immovable property.

    Enterprise income tax

    In general, foreign companies are taxed on their China-source income whether they have any permanent establishment in China or not.


    Taxable China-source income

    Taxable foreign-source income

    Resident enterprises *

    Non-resident enterprises, * *if income is effectively connected with their China establishment

    Non-resident enterprises, if they do not have any China establishment, or if income is not effectively connected with their China establishment


    Note: *Resident enterprises: incorporated or effectively managed in China
    * *Non-resident enterprises: incorporated and effectively managed outside China

    Individual income tax

    Individuals who have resided in China for less than one year should pay individual income tax on their incomes derived from sources within the country. Those who have resided in China for one year or more should pay individual income tax on their income derived from sources both inside and outside China.

    Land appreciation tax

    Urban real estate tax

    A tax of 1.2 percent is imposed on foreign investment enterprises and foreign national owners of real estate, or at the rate of 12 percent of rental income.

    Stamp duty

    Stamp duty is payable on instruments created in the process of economic activity, on the documents written.

    Vehicle and vessel tax

    Those who own or operate vehicles and vessels should pay a vehicle and vessel tax in China; otherwise, the user should pay the tax on behalf of the owner or the operator of a vehicle.
    Foreign investors tend to assume that the tax laws in China are fairly straightforward, that as long as they provide proper documentation they can deal with such laws themselves without expert advice. Nevertheless, there are various complex rules covering numerous aspects of the business activities of foreign investment enterprises in China, particularly when preferential policies are provided to foreign investment enterprises. Both investors and companies need to find practical ways to keep updated with the latest information on regulations and laws. In a nutshell, it is suggested not to disregard or delay seeking professional advice on Chinese tax laws; otherwise, foreign investors may face serious may face serous penalties or losses due to under payment.


    4. Employment

  • Paid Annual Leave
  • Years served in the company

    Days of annual leave

    I full year, less than 10 years

    5 days

    10 full years, less than 20 years

    10 days

    >20 years

    15 days

    Statutory national holidays and rest days are not included in annual leave.

  • Rest Days
  • The employer must ensure that its workers have at least one day off a week with a maximum of 44 working hours per week.

  • Sickness Allowance
  • Sick leave is required to be paid for all employees. Sick leave is paid at 60-100%daily wages, depending on the seniority of the employee.

  • Severance Payment
  • An employee shall be given compensation based on the number of years he has worked for the employer and at the rate of one month’s wage for each full year he worked and for no more than 12 years of his work.

  • Termination
  • An employee may dissolve the labour contract if he notifies the employer in writing 20 days in advance. During the probation period, an employee may dissolve the labour contract if he notifies the employer 3 days in advance.

  • Minimum Wage
  • Regulations on the Minimum Required Wage are set by each provincial government. Foreign employers are expected to pay much more than the minimum, roughly double the minimum or more.

  • Social Security Insurance
  • Each agency must provide the five benefits legally required, at the rates set by the local or provincial government. All foreign employees who work in China for longer than six months must be included in the social security system as well.
    The legally required benefits are 1) retirement pension, 2) medical fund, 3) unemployment insurance, 4) disability insurance, 5) maternity fund.

  • Salaries Tax
  • Local employees are taxed on the basis of the balance of their monthly income after deducting their social benefits contribution, a standard deduction of RMB 3,500, and then applying the progressive tax rate.
    Foreign Employees:

    1. foreigners that have lived in China for less than 90 days(183 days for citizens of countries that have signed a treaty on the avoidance of double taxation with China)will have to pay Individual Income Tax..
    2. foreigners that lived in China for more than 90 days (183 days) but less than a year: income for work in China from all sources is taxable. However, for senior executives, they are liable for their full income derived from Chinese sources from the first day in the country.
  • Visas
  • There are two categories of visas that foreigners can apply for, F visa and Z visa.
    F visa- visitor visa (under 6 months)
    To obtain one, a foreigner needs an invitation from a company that is established in China. Your Chinese partners, your Chinese companies, or some agents can issue the invitation letter.
    Z visa- working visa (also allows family members to stay)
    For foreign employees who are expected to be working in China, a Z visa, often referred to as a working visa, is required. A foreigner who possessed a Z visa can apply for a residence permit, which allows the foreigner to travel in and out of the country without limitation during the term of visa.
    L visa – travel visa (less than a month)
    Another option for foreigners who travel to China for a short period of time(less than one month) is to apply for an L visa (tourist visa), which does not require invitation and can be approved at a short notice, but where extensions can be problematic.


    5. Possible Obstacles for Foreign Companies Running Businesses in China

  • Government authorities involved with the set-up and running of foreign businesses in China work very differently from those in other countries.
  • There is no single step of company incorporation and business license application. In general, it takes two to four months to obtain all the approvals/ certificates/ licences on one application.
  • There are complex taxation systems at state and local levels.
  • There are differences in the working styles of Chinese government authorities and foreign companies.
  • There are different perspectives on environmental, cultural and ethical issues, among others.
  • Conclusion
    It is important to define the short-term and objectives and find the operations that best meet your requirements. Before starting any business, it is highly recommended that you discuss your plan through with an appropriately experienced advisor.

  • Foreign Investment Guidance (2012 version)—Chinese government’s encouragement of foreign venture benefiting economics, the environment and the long-term development of China. Preferred industries are environmental and high-tech. as well as VC and IP
  • Four main types of foreign investment set-up in China:
  • Equity joint venture enterprises
  • Contractual joint venture enterprises/cooperative joint ventures
  • Wholly foreign-owned enterprises
  • Representative offices
  • Major tax categories for foreign investment enterprises and foreigners:
  • Value-added tax 
    Consumption tax
    Customs duty
    Business tax
    Enterprise income tax   
    individual income tax
    Land appreciation tax   
    Urban real estate tax
    Stamp duty      
    Vehicle and vessel tax    



    NOTICE: The material contained herein is in the nature of general comment and information ONLY and neither purports, nor is intended, to be advising on any particular matter. Readers should not act or rely upon any matter or information contained in or implied by the publication without taking appropriate professional advice.



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