Business Operations in the People's Republic of China provides companies and individuals considering or engaged in business operations in China with a general description of the relevant Chinese laws and regulations, particularly the country's tax laws, that affect such operations. Written by Owen D. Nee, Jr., Esq. of Jones Day, this Portfolio begins with an overview of the regulations and processes governing business operations in China.  It looks at  the regulation of foreign investment and trade and commerce and discusses Chinese currency controls and intellectual property and licensing.

Business Operations in the People's Republic of China also discusses the state of the Chinese legal system following its market-oriented reforms, which were caused by the country's entry into the World Trade Organization. Attention is paid to the taxation of newer forms of investment, such as mergers and acquisitions and portfolio investment, and revised business models, such as foreign invested commercial enterprises.

The Portfolio analyzes in detail the various taxes, including the enterprise income tax, the agricultural tax, the stamp duty, the consumption tax, the individual income tax, the business tax, the value-added tax, and other turnover taxes.

The Worksheets in this Portfolio contain English translations of the principal Chinese tax laws and regulations as well as the People’s Republic of China-United States tax treaty.

Business Operations in the People's Republic of China allows you to benefit from:

• A perspective that addresses the concerns of foreign investors/enterprises and their advisors looking to invest/do business or already invested/doing business in the country
• Identification of those features of the country’s system that are likely to prove most problematic to outside investors
• Emphasis on those aspects of the tax system that impact transactions and structures with a cross-border dimension
• Information and insight to enable users to anticipate the pitfalls and opportunities likely to arise in making an initial investment, carrying on operations and devising potential exit strategies
• Invaluable practice documents including tables, charts and lists
• Time-saving citations to relevant sections of tax laws, regulations, court cases, and more

This Portfolio is part of the Foreign Income Portfolios Library, a comprehensive series containing more than 100 Portfolios, which covers critical transactions and issues in international taxation. This highly-regarded resource library offers commentary on a wide range of foreign income topics including: Foreign Tax Credit, Business Operations in Italy, Business Operations in Puerto Rico, Branch ProfitsTax, Source of Income Rules, Subpart F (Controlled Foreign Corporations), Foreign Partnerships and Partners, Transfer Pricing, and more.

 

Detailed Analysis

I. The People's Republic of China

Introductory Material

A. The Country

B. The Government and the Party

C. The Legal System and the Judiciary

1. The Judicial System

2. Arbitration and Enforcement of Arbitration Awards

D. The Economy

1. Economic Structure

2. Economic Plans and Development

3. Economic Reforms

4. Foreign Trade

5. Foreign Investment

6. Financial System

II. Doing Business in the People's Republic of China

A. General Background

1. Initiating Business Contacts

2. Agreements between the United States and China and Multilateral Agreements Affecting Business Operations

B. Trade and Commerce Regulation

1. Imports and Exports

a. Licenses and Quotas - Chinese Controls

b. United States Controls

2. Commodity Inspection, Customs and Tariffs

a. Commodity Inspection

b. Customs Administration

c. Tariffs

C. Regulation of Foreign Investment

1. Ministry of Commerce (MOFCOM or MOC)

2. State Administration of Industry and Commerce (SAIC)

3. State Administration of Foreign Exchange (SAFE)

4. Special Economic Zones

5. Open Cities and Development Zones

D. Currency Controls

1. General Background

2. Currency Controls

3. Currency Controls on Foreign Investment Enterprises

4. Recent Developments in Currency Controls

5. Payment for Services

E. Intellectual Property and Licensing

1. Trademarks

a. Service Marks, Well-known Marks, and Geographical Indications

b. Scope of Protection

c. Criminal Enforcement

2. Patents

3. Unfair Competition Law

4. Copyrights

5. Customs Recordals

6. National Technology Transfer Rules

III. Forms of Doing Business in the People's Republic of China

A. Foreign Investment Enterprises

1. Equity Joint Ventures

2. Cooperative Joint Ventures

3. Wholly Foreign-owned Enterprises

4. Partnership Enterprises

5. Form of Contribution

B. Formation of an Equity Joint Venture

1. Documentation

a. Project Proposal

b. Feasibility Study

c. Joint Venture Contract

d. Articles of Association

2. Other Documentation

a. Land Use Contract

b. Technology Transfer Agreement

c. Labor Contract

d. Trademark License Contract(s)

e. Management Services Contract

f. Assets Purchase Agreement

g. Other Agreements

h. Other Filings

3. Government Involvement in the Process

a. Catalogue Guiding Foreign Investment

b. Prior to Formal Submission for Approval

c. Feasibility Study and Project

d. MOFCOM and Provincial Approval Authorities

e. Administration of Industry and Commerce

C. Cooperative Joint Ventures

D. Wholly Foreign-owned Enterprises

E. Other Approaches: Petroleum Investment

F. Compensation Trade and Processing

G. Other Foreign Investment Enterprises

1. Representative Offices

2. Bonded Zone Companies

3. Export Processing Zone Companies

4. Bonded Logistics Center Companies

5. Offshore Structures for Internet Startups

6. Holding Companies

7. Trading and Distribution Companies

8. Publicly Listed Companies

H. Service Sector Reforms

1. Banking

2. Securities

3. Insurance

IV. Chinese Taxation

A. Tax Legislation, Policy and Administration

1. Legislation

2. Tax Policy

3. Tax Administration

a. Registration

b. Accounting Systems

c. Tax Collection

d. Transfer Pricing

e. Enforcement Powers

f. Statute of Limitations

g. Tax Investigations

h. Tax Penalties

4. Certain Designated Targets for Tax Investigation

a. Foreign Investment Enterprises

b. Tax Payment Guarantees

c. Wealthy Individuals

B. Tax Revenues from Various Taxes

C. Revenue Sharing Between Central and Local Governments

D. Sources of Information

E. Principal Taxes of Interest to Foreigners

F. Miscellaneous Taxes

1. Stamp Duty

a. Foreign Investment Enterprises

b. Construction Contracts

c. Stock Exchange Transactions

d. Books of Account

e. Enterprise Transformation

2. Real Property Taxation

3. Vehicle and Vessel License Tax

4. Agricultural Taxes

5. Deed Tax

6. Natural Resources Tax

7. Land Appreciation Tax

8. Vehicle Purchase Tax

9. Consumption Tax

V. Enterprise Income Taxation

Introductory Material

A. Domestic Enterprise Income Tax Regulations

B. Domestic Enterprise Settlement Procedures

VI. [Reserved]

VII. Unified Enterprise Income Tax Law

A. General Structure

B. Resident and Nonresident Enterprises

1. Representative Offices

2. Regional Headquarters

3. Business Agents

C. Source of Income Rules

D. Income and Tax Rate

1. Net Income Tax Rates

2. Low Profit Enterprises

3. High/New Tech Enterprises

E. Taxable Income

1. Operating Income

2. Liquidation Income

3. Taxable Income of Nonresident Enterprises

4. Sale and Leaseback

5. Pre-sale Income

F. Gross Income

G. Exempt Income

H. Deductions

1. Wages and Salaries

2. Staff Welfare Expenditures, Union Fees, and Education

3. Interest Deductions

4. Exchange Losses

5. Entertainment and Advertising

6. Rental Deductions

7. Management Fees; Internal Interest, Rent and Royalties

8. Charitable Donations

9. Other Deductions

I. Non-deductible Expenditures

J. Tax Treatment of Assets

1. Depreciation of Fixed Assets

2. Forests and Livestock

3. Non-depreciable Assets

4. Reorganization

K. Intangible Assets

L. Inventory

M. Foreign Losses and Tax Credits

N. Tax Calculation and Tax Incentives

1. Lower Rates

a. Small Profit Enterprises

b. High Tech Enterprises

2. Tax-free Income

3. Preferred Sectors

Content

a. Software and Integrated Circuits

b. Securities Investment Funds

4. Encouraged Activities

a. High Tech Activities

b. Key Public Infrastructure Projects

c. Environmental Protection Projects

d. Technology Transfers

5. Reduction in Withholding Tax

6. State Advocated Programs

a. Research and Development Activity

b. Hiring of the Handicapped

c. Pioneering Enterprises

d. Comprehensive Use of Resources and Environmental Protection, Conservation and Safety Equipment

e. Autonomous Region Preference

7. Transitional Arrangements

O. Withholding Tax

P. Transfer Pricing and Anti-avoidance

1. Transfer Pricing

a. Cost Sharing Agreements

b. Advance Pricing Arrangements

c. Annual Report on Related Party Transactions

d. Parent Services

2. Anti-Avoidance

a. Controlled Foreign Corporation

b. Thin Capitalization

Q. Tax Collection Management

VIII. Individual Income Tax

A. History and Unification

B. Liability to IITL

1. Domicile and Residency in China

2. Residency in China Less than One Year

a. Source of Wages

b. Not More than 90 Days (183 Days)

c. More than 90 Days (183 Days) but Less Than One Year

3. Residency in China at Least One Year but Less Than Five Years

4. Residence in China More Than Five Years

5. Self-assessment Filing

6. Directors and Senior Managers

7. Calculation of Tax for Periods of Less than One Month

8. Tax Treaties

C. Source Rules

1. Place of Payment

2. Compensation for Personal Services

3. Rents and Royalties

4. Property Transfers

5. Interest, Dividends and Bonuses

6. Overseas Income of Domiciled Persons

D. Types of Income Subject to IIT

1. Employment Income and Exemptions

a. Exempt Income

b. Expatriate Benefits

c. Tax Indemnity

d. Bonuses

e. Foreign Tax Credit

f. Supplemental Pensions and Guarantees

g. Stock Options

h. Insurance and Social Benefits

2. Production and Business Income

3. Contract and Leasing Operations

4. Personal Services

5. Author's Remuneration

6. Royalty Income

7. Interest, Dividends and Bonuses

8. Property Leasing

9. Transfer of Property

10. Contingent Income

11. Other Taxable Income

E. Tax Rates

1. Wages and Salaries

2. Taxation of Production and Business Operations

3. Author's Remuneration

4. Personal Services

5. Royalties, Interest, Dividends and Bonuses, Lease of Property, Transfer of Property, and Contingent Income

6. Interest, Dividends and Extra Dividends, and Other Kinds of Income

F. Exempt Income

1. Awards for Scientific, Technological or Cultural Achievements

2. Interest on Treasury Bonds and Other Financial Obligations Issued by the State

3. Subsidies and Allowances

4. Welfare Benefits and Relief Payments

5. Insurance Indemnities

6. Military Severance Pay and Demobilization Pay for Members of the Armed Forces

7. Severance Pay and Retirement Pay for Public Servants, Staff Members, and Workers

8. Salaries of Diplomatic Officials in Foreign Embassies and Consulates in People's Republic of China

9. Tax-free Income as Stipulated in International Conventions to Which Chinese Government Is a Party or as Stipulated in Agreements that People's Republic of China Has Entered Into

10. Other Income Approved as Tax-exempt by the Ministry of Finance

11. Education-related Items

12. Income Not Listed as Taxable

G. Withholding

H. Returns

1. Monthly Returns

2. Annual Returns

3. Administrative Measures

I. Penalties and Investigations

J. Disputes

K. Creditability of Individual Income Tax for United States Foreign Tax Credit Purposes

1. 1984 People's Republic of China-United States Income Tax Agreement

2. Special Treaty Source Rule

3. Application to United States Citizens that Are Not United States Residents

IX. Turnover Taxes

Introductory Material

A. Prior Tax System

B. Value-Added Tax

1. VAT Tax Rates

2. Calculation and Payment of Value-Added Tax

3. Mixed Sales Activities

4. Disallowed Input VAT

a. In General

b. Fixed Assets

5. Types of VAT Taxpayers

a. In General

b. Commercial Enterprises

6. Items Exempt from Value-Added Tax

a. VAT on Integrated Circuits and Software

b. VAT on Foreign Aid Projects

7. VAT on Imports

a. Import Exemptions

b. Imports of Capital Equipment

c. VAT on Audio Visual Products

8. VAT on Exports

a. VAT Export Refund Rates

b. Calculation of VAT Refunds

c. Deemed Exports

d. Management of Tax Refunds and Sanctions

e. FIEs and Export VAT

9. VAT Administration Issues

10. VAT Invoices

C. Business Tax

1. Tax Rates and Scope of Application

2. Service and Other Income Exempt from Business Tax

3. Income to Which Business Tax Is Applied

4. Place and Timing of Business Tax Payments

5. Tax Payor

6. Commercial Retailers

7. Tax Treatment of Contractors

8. Tax Treatment of Dividends Distributed in Kind

9. Tax Treatment of Cross-border Transfers of Intangible Property

10. Tax Treatment of Cargo Transportation Service Providers

11. Foreign Exchange and Securities Trading; Vouchers for Netting

D. Consumption Tax

1. Taxable Items and Tax Rates

2. Calculation of Tax

3. Tax Payment

4. Processed Oil Revision

X. Income Tax Agreements

A. Double Taxation Agreements

B. 1984 People's Republic of China-United States Income Tax Agreement

1. In General

2. Business Profits

3. Capital Gains

4. Employees and Independent Contractors

5. Dividends, Interest and Royalties

6. Treaty Shopping

7. Tax Sparing

8. Effective Date

9. Application for Treaty Protection

C. 1982 People's Republic of China-United States Shipping and Air Transport Tax Agreement

D. Hong Kong Tax Arrangement

1. Effective Dates

2. Scope of the Arrangement

3. Resident of One Side

4. Permanent Establishment

5. Agents and Subsidiaries

6. Associated Enterprises

7. Dividends

8. Interest

9. Royalties

10. Capital Gains

Working Papers

Table of Worksheets

Content

Worksheet 1 Law of the People's Republic of China on Enterprise Income Tax

Worksheet 2 Implementation Rules of Enterprise Income Tax Law of the People's Republic of China [Unofficial Translation Prepared by Deloitte Touche Tohmatsu CPA Ltd.]

Worksheet 3 [Reserved]

Worksheet 4 [Reserved]

Worksheet 5 Individual Income Tax Law of the People's Republic of China

Worksheet 6 Implementing Regulations for the PRC Individual Income Tax Law (Amended)

Worksheet 7 Provisional Value-Added Tax Regulations of the People's Republic of China

Worksheet 8 Detailed Rules for the Implementation of the Tentative Regulations on Value-Added Tax of the People's Republic of China

Worksheet 9 Provisional Regulations of the People's Republic of China on Business Tax

Worksheet 10 Detailed Rules for the Implementation of the Provisional Regulations of the People's Republic of China on Business Tax

Worksheet 11 Provisional Regulations of the People's Republic of China on Consumption Tax

Worksheet 12 Detailed Rules for Implementing the Interim Regulations of the People's Republic of China on Consumption Tax

Worksheet 13 [Reserved]

Worksheet 14 [Reserved]

Worksheet 15 Disclosure of Related Party Transactions/Transfer Pricing

Worksheet 16 2006 Mainland China - Hong Kong (Special Administrative Region) Income Tax Arrangement (COURTESY TRANSLATION)

Worksheet 17 List of Comprehensive Double Taxation Agreements and Related Protocols Signed by China (PRC) as of February 1, 2008

Worksheet 18 1984 People's Republic of China-United States Income Tax Agreement

Worksheet 19 1986 Protocol to 1984 People's Republic of China-United States Income Tax Agreement

Worksheet 20 Application for Tax Treaty Protection

Worksheet 21 Administrative Law of The People's Republic of China on The Levying and Collection of Taxes (as amended)

Worksheet 22 Forms for Application and Review of Hi-Tech Status

Bibliography

OFFICIAL

Statutes

Announcements, Decisions, Notices, Regulations, Rules, etc.

Treaties, Agreements and Letters of Understanding

Web Sites