Business Operations in the People's Republic of China (Portfolio 7070)

Tax Management Portfolio, Business Operations in the People's Republic of China, No. 7070-1st, provides companies and individuals considering or engaged in business operations in China with a general description of the relevant Chinese laws and regulations, concentrating on the country's tax laws that affect such operations. The enterprise income tax, the individual income tax, the business tax, the value-added tax, and other turnover taxes are analyzed in detail. To view this Portfolio, visit Bloomberg Tax for a free trial.

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Description

Tax Management Portfolio, Business Operations in the People's Republic of China, No. 7070-1st, provides companies and individuals considering or engaged in business operations in China with a general description of the relevant Chinese laws and regulations, concentrating on the country's tax laws that affect such operations. The enterprise income tax, the individual income tax, the business tax, the value-added tax, and other turnover taxes are analyzed in detail.

The Portfolio discusses in detail the Chinese legal system after China's market-oriented reforms 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 Worksheets contain English translations of the principal Chinese tax laws and regulations, and the China-United States Income Tax Agreement.

This Portfolio may be cited as Nee, 7070-1st T.M., Business Operations in the People's Republic of China.

Authors

Owen D. Nee, Jr., Esq.

Owen D. Nee, Jr., AB., Princeton University (1965), J.D., Columbia University (1973).

Table of Contents

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. Lawsuits Involving Foreign Interests, Arbitration and Enforcement of Arbitration Awards
D. The Economy
1. Economic Structure
2. Economic Plans and Development
3. Economic Reforms
4. Membership in the World Trade Organization
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. U.S. Controls
2. Commodity Inspection, Customs and Tariffs
a. Commodity Inspection
b. Customs Administration
c. Tariffs
C. Regulation of Foreign Investment
1. Ministry of Commerce
2. State Administration of Industry and Commerce
3. State Administration of Foreign Exchange
4. Special Economic Zones
5. Regulators for Specific Industries
D. Currency Controls
1. General Background
2. Currency Controls
3. Currency Controls on Foreign Investment Enterprises
4. Recent Developments in Currency Controls
5. Payments 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. Approval Level
c. Negative List System
d. Annual Reporting
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
9. Equity Contributions
10. Negative List Experimentation
11. Proposed Foreign Investment Law
H. Service Sector Reforms
1. Banking
2. Securities
3. Insurance
IV. 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. Overseas Investment Reporting
g. Statute of Limitations
h. Tax Investigations
i. Tax Penalties
j. Administrative Reconsideration
k. Complaints Procedure
l. Deepening Reform
m. Nationwide Processing
4. Certain Designated Targets for Tax Investigation
a. Foreign Investment Enterprises
b. Tax Payment Guarantees
c. Wealthy Individuals
d. Standardizing Taxation and Other Preferential Policies
B. Tax Revenues from Various Taxes
C. Revenue Sharing Between Central and Local Governments
1. Sharing Based on Type of Tax
2. Sharing Based on Multiple Branches of One Enterprise
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. Aircraft Leasing
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. Enterprise Income Tax Law: General Structure
B. Resident and Nonresident Enterprises
1. Resident Enterprises
2. Nonresident Enterprises
3. Representative Offices
4. Regional Headquarters
5. Business Agents
6. Seconded Workers
7. Cultural Enterprises
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. Gross Income
a. Interest Income
b. Rental Income
c. Transfers of Property
2. Operating Income
3. Liquidation Income
4. Taxable Income of Nonresident Enterprises
a. In General
b. Finance Lease and Real Estate Lease
5. Sale and Leaseback
6. Pre-sale Income
7. Capital Gains on Foreign Share Sales of Chinese Companies
F. Gross Income
G. Exempt Income
1. In General
2. Special Purpose Financial Funds
3. State Asset Investment
4. Non-profit Organizations
H. Deductions
1. Wages and Salaries
2. Staff Welfare Expenditure, Union Fees and Education Costs
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. Discarded Offshore Oil and Gas Production Facilities
10. Environmental Liability
11. Other Deductions
I. Nondeductible Expenditure
J. Tax Treatment of Assets
1. Depreciation of Fixed Assets
2. Forests and Livestock
3. Nondepreciable Assets
4. Reorganizations
5. Asset Write-offs
6. Relocation of Facilities
K. Intangible Assets
L. Inventory
M. Foreign Losses and Tax Credits
N. Tax Calculation and Tax Incentives
1. Reduced Rates
a. Low-profit Enterprises
b. Hi-tech Enterprises
2. Tax-free Income
3. Preferred Sectors
a. Software and Integrated Circuits
b. Securities Investment Funds
4. Encouraged Activities
a. High-Tech Service Activities
b. Key Public Infrastructure Projects
c. Environmental Protection Projects
d. Technology Transfers
5. Venture Capital Limited Partnerships
6. Reduction in Withholding Tax
7. 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
8. Record Filing
O. Withholding Tax and Tax Assessments on Nonresidents
1. Withholding Agents for Passive Income
2. Miscellaneous Income Subject to Withholding
3. Foreign Contractors and Service Providers
4. Permanent Establishment Taxpayers
5. Qualified Foreign Institutional Investors
6. Listed Share Dividends
P. Transfer Pricing and Anti-avoidance
1. Definitions and Documentary Reports
2. Transfer Pricing
3. Advance Pricing Arrangements
4. Cost Sharing Agreements
5. Controlled Foreign Corporations
6. Thin Capitalization
7. General Anti-avoidance Approach
8. Parent Company Services and Royalties
Q. Tax Collection Management
1. Foreign Enterprises
2. State-owned Enterprises
3. Tax Payment Periods
4. Classification of Taxpayers and Publication
R. Reorganizations
1. Ordinary Reorganizations
a. Change in the Legal Form of an Enterprise
b. Enterprise Debt Restructuring
c. Acquisitions of Stock or Assets
d. Mergers
e. Demergers
2. Special Reorganizations
a. Enterprise Debt Restructuring
b. Stock for Stock
c. Assets
d. Mergers
e. Demergers
f. Boot
g. Cross-border Transactions
h. Treatment of Existing Tax Incentives
i. Transfer of Equity or Assets of Resident Enterprises
3. Administrative Measures
4. Optimizing Mergers and Reorganizations
VI. Individual Income Tax
A. History and Unification
B. Liability to Individual Income Tax
1. Domicile and Residence in China
2. Residence in China for Less than One Year
a. Source of Wages
b. Residence in China for Not More than 90 Days (183 Days)
c. Residence in China for More than 90 Days (183 Days) but Less than One Year
3. Residence in China for at Least One Year but Less than Five Years
4. Residence in China for 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 Chinese-domiciled Persons
D. Types of Income Subject to Individual Income Tax
1. Employment Income and Exemptions
a. Exempt Income
b. Expatriate Benefits
c. Tax Indemnity
d. Bonuses
e. Foreign Tax Credit
f. Pensions
g. Stock Options, Stock Appreciation Rights, and Restricted Stock
(1) Stock Options
(2) Stock Appreciation Rights
(3) Restricted Stock
(4) Stock Options in Unlisted Companies and Share Purchase with Technology
(5) Converted Surplus to Capital After an Acquisition
(6) Equity Rewards and Share Capital Increases
h. Nontradable Shares of Listed Companies
i. Early Retirement Income
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
a. Transfer of Shares
b. Transfer of Real Property
(1) Sale of a House
(2) Gratuitous Transfer
c. Transfer of Non-monetary Assets
10. Incidental Income
11. Gifts
12. Other Taxable Income
E. Tax Rates
1. Wages and Salaries
2. Income from Production and Business Operations
3. Author's Remuneration
4. Compensation for Personal Services
5. Royalties, Interest, Dividends and Bonuses, Income from the Leasing of Property, Income from the Transfer of Property, and Incidental Income
6. Interest, Dividends and Bonuses, and Other Kinds of Income Defined
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 of Foreign Embassies and Consulates in the People's Republic of China
9. Tax-free Income as Stipulated in International Conventions to Which the Chinese Government Is a Party or Agreements that the 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. Commercial Health Insurance
13. Income Not Listed as Taxable
G. Withholding
H. Returns
1. Monthly Returns
2. Annual Returns
3. Administrative Measures
4. Reply Documents
I. Penalties and Investigations
J. Disputes
K. Creditability of Individual Income Tax for United States Foreign Tax Credit Purposes
1. People's Republic of China-United States Tax Agreement
2. Special Agreement Source Rule
3. Application to United States Citizens Who Are Not United States Residents
VII. Turnover Taxes
Introductory Material
A. Prior Tax System
B. Value Added Tax
1. Value Added Tax Rates
a. Simplified Method of Payment
b. Other Value Added Tax Rates for Certain Goods and Services
2. Calculation and Payment of Value Added Tax
3. VAT and Other Turnover Taxes
4. Disallowed Input Value Added Tax
a. In General
b. Fixed Assets
c. Special Equipment
5. Types of Value Added Taxpayers
a. In General
b. Commercial Enterprises
c. Oil and Gas Field Enterprises
6. Items Exempt from Value Added Tax or Qualifying for Reduced Value Added Tax
a. Value Added Tax on Integrated Circuits and Software
b. Value Added Tax on Foreign Aid Projects
c. Value Added Tax on Renewable Resources
d. Value Added Tax and the Energy Saving Industry
e. Value Added Tax on Wind Power
f. Value Added Tax on Larger Passenger Aircraft and New Feeder Aircraft
7. Value Added Tax on Imports
a. Import Exemptions
b. Imports of Capital Equipment
c. Value Added Tax on Audio Visual Products
d. Value Added Tax on Equipment for Research and Development Facilities
e. Value Added Tax on Cross-border Services
8. Value Added Tax on Exports
a. Value Added Tax Export Refund Rates
b. Calculation of Value Added Tax Refunds
c. Deemed Exports
d. Management of Tax Refunds and Sanctions
e. Foreign Invested Enterprises and Export Value Added Tax
9. Value Added Tax Administration Issues
10. Value Added Tax Invoices
11. Reorganization
C. Value Added Tax on Services, Intangible Assets, and Property
1. Modern Service Industries
2. Telecommunications Service Industry
3. Real Estate Developers
4. Taxpayers and Withholding Agents
5. Scope of Taxation
6. Tax Rates for VAT Service Tax
7. Place and Time of Payment
8. Administration of Tax Collection
9. Transitional Policies
D. Consumption Tax
1. Taxable Items and Tax Rates
2. Calculation of Tax
3. Tax Payment
4. Processed Oil Revision
VIII. Tax Treaties
A. Double Taxation Agreements
1. Claiming Tax Treaty Benefits
2. Definition of Beneficial Owner
3. Convention on Mutual Assistance
4. Common Reporting Standard
B. China (PRC)-United States 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 Tax Treaty Protection
C. China (PRC)-United States Shipping and Air Transport Tax Agreement
D. China (PRC)-Hong Kong Tax Arrangement
1. Effective Dates
2. Scope of the China (PRC)-Hong Kong Tax 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
Note
Worksheet 1 Law of the People's Republic of China on the Administration of Tax Collection
Worksheet 2 Law of the People's Republic of China on Enterprise Income Tax
Worksheet 3 Implementation Rules of Enterprise Income Tax Law of the People's Republic of China
Worksheet 4 Forms for Application and Review of Hi-Tech Status
Worksheet 5 Individual Income Tax Law of the People's Republic of China
Worksheet 6 Implementing Regulations for the Individual Income Tax Law of the People's Republic of China (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 Notice of the Ministry of Finance and the State Administration of Taxation on Implementing the Pilot Program of Replacing Business Tax with Value-Added Tax in an All-Around Manner
Worksheet 10 [Reserved.]
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 Disclosure of Related Party Transactions/Transfer Pricing
Worksheet 14 2006 Mainland China — Hong Kong (Special Administrative Region) Income Tax Arrangement
Worksheet 15 List of Countries with Which China (PRC) Has In Force Income Tax Treaties and Other Tax-Related Agreements as of March 30, 2018
Worksheet 16 [Reserved.]
Worksheet 17 1984 People's Republic of China-United States Income Tax Agreement
Worksheet 18 1986 Protocol to 1984 People's Republic of China-United States Income Tax Agreement
Worksheet 19 Application for Tax Treaty Protection