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Accounting Practice and Regulations
  • 1.Does China follow international accounting practice?

    China does not follow international accounting policies and guidelines, although it has been moving in this direction for a while and with its accession to the World Trade Organisation will be fully compliant within a few years. Many of the accounting regulations are the same or similar to international practice, however it is important for organisations in China to understand the differences.


    Tax deductibility for instance is different and a lack of understanding of this could lead to significant tax charges on such items as intercompany transactions. China treats transfer pricing with high importance and as with many other countries it wants its fair share of the international tax pie. Meanwhile proper planning and compliance can reduce an organisation’s tax burden.


    Another area where differences lie is in depreciation of capitalised assets. China specifies that companies must use the straight-line method unless they obtain approval from the Ministry of Finance for use of an accelerated method. The period over which a company may depreciate its assets also can vary to that of the holding companies own country’s accounting practice. The depreciation rates per China’s income tax law are:


    1. For houses and buildings: 20 years;
    2. For airplanes, trains, shipping vessels, machinery, mechanical apparatus, and other production equipment: 10 years;
    3. For fixtures, tools and furnishings related to production and business operations: 5 years;
    4. For transport other than airplanes, train, ships: 4 years;
    5. For electronic equipment; 3 years.


    Companies therefore on the one hand need to comply with their HQ’s requirements, being usually their countries GAAP, whilst on the other hand maintain compliance with China’s rules and regulations. LehmanBrown provides assistance in setting up accounting procedures and systems to bridge this.

  • 2.Can a foreign holding company charge the China subsidiary for services rendered and what supporting documentation is required by the Chinese authorities?

    China allows reasonable administrative expenses paid by a foreign enterprise in connection with its subsidiary in China to be charged to its subsidiary. Agreement is required by the local tax authorities after an examination and verification of supporting documents as proof. The head office is required to provide details of the basis and methods of allocation together with an accompanying verification report from a certified public accountant.

  • 3.What are the regulations governing accountants in China?

    The Accounting profession in China is governed by the Law of the People’ s Republic of China on Certified Public Accountants (October 31, 1993). This Law was revised subsequently in August 30, 2014.

  • 4.What is the background of China’s accounting and auditing systems?

    With the founding of PRC in 1949 all resources of production in the country came under state ownership and basically the only form of economic entity was the state-owned enterprise. The accounting rules and regulations, known as fund accounting, and characterised by their rigidity and uniformity, were used on the one hand primarily for establishing an information and reporting system for the implementation of state economic policies and on the other hand for the maintenance of administrative control over assets of the State. To a great extent accounting rules also served as a tool to strengthen the financial discipline of an enterprise and to safeguard state property.


    Since the promulgation of the Joint Venture Law in 1979 a separate set of accounting rules were formulated to govern the preparation of financial statements by enterprises. This was undoubtedly the first step away from the fund accounting concept, which applies to state-owned enterprises and is used mainly for the purpose of resource allocation in a planned economy.


    Alongside economic reform and the open-door policy adopted at the beginning of the 1980s, foreign investors were allowed to set up enterprises and conduct business in China. A separate set of accounting regulations that is applicable to only foreign investment enterprises was developed and implemented. Although these regulations or principles are now much in line with the International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS), the requirements are subservient more to the purpose of ascertaining the amount of tax an enterprise should pay rather than to the purpose of ascertaining the ‘truthfulness and fairness’ of the financial statements.


    Concurrently China has undertaken a program to restructure the form and structure of state-owned enterprises by transforming them into enterprises which issue shares and have limited liability – joint stock limited companies. Most of these enterprises will eventually go public. A new set of accounting regulations, intended specifically for joint stock limited companies, was formulated in the early 2006s and subsequently revised firstly in 2010, and most recently in 2014.

  • 5.What developments have there been in China in recent years?

    The rapid growth of the economy, the demand for foreign investment, the gradual maturity of China’s securities market and the accession into the WTO have highlighted the need for a sound, reliable and transparent accounting system acceptable to foreign investors. The accounting regulations and systems designed to cater for tax regulations and state ownership under the communist system can no longer meet modern business management and funding requirements. To meet the demands of foreign investors and an increasing number of individual and institutional investors in the securities market, a series of regulations were issued. These include the Accounting Law which was issued in 1999, the Regulations on Financial Reporting of Enterprises issued in 2000 and finally the Accounting Systems for Business Enterprises (ASBE) issued in early 2001. The ASBE sets out the fundamental accounting framework and is more in line with IAS.


    In 2001 joint stock limited companies offering shares to the public were the first obliged to adopt the ASBE. The Accounting Regulations for Selected Joint Stock Limited Companies were then abolished.


    In 2002 foreign investment enterprises were the second to adopt the ASBE. The Accounting Regulations for Foreign Investment Enterprises of the PRC were replaced. Although not yet mandatory, State-owned enterprises and other domestic enterprises are encouraged to adopt these new rules. In essence the ASBE will become the primary set of basic accounting regulations applicable to different types of enterprises.


    Throughout 2006, new “Accounting Standards for Business Enterprises” have been published and 38 specific accounting standards were issued. Up to the end of October, 2014, three more specific accounting standards were been issued and five existing accounting standards have been revised, although not all of them are mandatory to foreign investment enterprises. Nevertheless the focus is clearly to steer the current systems and standards towards IAS/IFRS.

  • 6.How are accounting standards set in China?

    Unlike Western practice, setting authoritative accounting standards is not the responsibility of the Accounting Society of China (ASC) or the Chinese Institute of Certified Public Accountants (CICPA). Instead the Ministry of Finance (MOF) is responsible for formulating, promulgating and administering accounting regulations. ASC and CICPA are responsible for regulating, governing and monitoring the reform and development of the accounting profession in China. The CICPA also assumes administrative authority, delegated by MOF, to serve as a bridge between the government and practicing accountants.


    In China the government issues accounting regulations. They are rules and must be strictly adhered to. With the introduction of the ASBE, individual companies are allowed to exercise judgment in formulating their own accounting policies which will suit specific circumstances.

  • 7.What is the difference between Western and China’s accounting standards?

    In Western countries, although amendments and revisions to accounting practices or standards do not have legal binding power, they are formulated according to an existing national legal framework which is provided in most cases by Companies Ordinance or Acts. Companies Ordinance or Acts together with other regulations applicable to individual industries, such as the Banking Ordinance for financial institutions and Listing Rules or Securities Acts for listed or public companies, provide a framework upon which accounting professional bodies formulate accounting and auditing standards. These standards form the basis for establishing accounting principles, and perhaps conventions, that allow enterprises flexibility in formulating their own accounting policies best suited to their individual circumstances. The ultimate objective, in a nutshell, is to produce a set of financial statements that are ‘true and fair’.


    Until 1994, China lacked a regulatory framework on which accounting and auditing standards could be set since the country’s first national Companies Laws were not effective until 1 July 1994. The lack of such a framework also rendered the formulation of other regulations, such as the national Securities Laws and Listing Regulations, more difficult and time consuming.


    Nevertheless, having realised the need for establishing acceptable accounting principles to enable PRC enterprises to attract foreign investment or have their stocks listed on overseas markets, the MOF promulgated a separate set of accounting regulations for selected joint stock companies in January 1992.


    In addition, MOF was made effective on July 1, 1993, and were the first set of accounting standards – Accounting Standards for Enterprises – applicable to all PRC enterprises. Although it might be confusing at times which accounting regulations or standards should be applied, together with the then Accounting Regulations for Foreign Investment Enterprises of the PRC, they have provided relatively uniform accounting practices for enterprises to follow in preparing their financial statements. More importantly because of the lack of a complete regulatory and conceptual framework, these accounting rules or regulations are so comprehensive that they encompass accounting concepts, disclosure requirements, accounting entries, control procedures, record keeping and some aspects of auditing requirements and liquidation.


    With the introduction of the Accounting Law in 1999, the Regulations on Financial Reporting of Enterprises in 2000 and the Accounting Systems for Business Enterprises in early 2001, which harmonises the different accounting standards and regulations applicable to different enterprises, the framework of modern Chinese accounting has finally become clear. With the implementation of the Accounting Systems for Business Enterprises in 2006, accounting standards in China have become more convergent with IAS and IFRS.

  • 8.What are the forms and content financial statements in China?

    Under the Accounting Laws, the Regulations on Financial Reporting of Enterprises and the ASBE, financial statements or reports should comprise a balance sheet, income statement, statement of changes in equity, cash flow statements and notes to the financial statements. The regulations also cover classification of assets and liabilities in the balance sheet.

  • 9.What are the accounting concepts and bases employed in China’s accounting regulations?

    The general accounting principles or concepts employed in China’s accounting regulations include accuracy, completeness, consistency, comparability, timeliness, materiality, accrual basis, matching, prudence, substance over form and going concern. By and large, the principles mirror those of IAS and IFRS . Other major features of these regulations are as follows:


    • The historical cost convention is prescribed. Assets are required to be recorded at purchase cost (less any necessary impairment provision) and revaluations are strictly prohibited except when allowed by other State provisions.


    • The concept of fair market value is not commonly used due to the limited existence of open markets.


    • These regulations also require companies to use the calendar year, which is January 1 to December 31, as their financial year.


    • The double-entry bookkeeping method should be adopted. Records in accounts and books have to be made in Renminbi (Yuan) (the lawful currency of the PRC). Transactions and balances denominated in foreign currencies have to be converted into Renminbi at the official rate, which may differ from the current market rate. All records and balances of transactions made in foreign currencies and the exchange rate used must be maintained for reference.


    • A clause in these regulations specifically requires the appropriation of a collective Welfare Fund and a Statutory Reserve Fund from profit after tax.


    • Due to the infancy of the new systems, certain footnote disclosures may not be as comprehensive as those acceptable elsewhere in the world. Yet, in certain areas, the Chinese standards are extremely stringent. This includes disclosing the corporate identity of related parties and commenting on the fairness of transactions conducted between related parties, and preparing the cash flow statements using both the direct and indirect methods.


    The old standards are neither broad nor flexible enough to allow discussion or maneuverability on particular subjects. For the first time, ASBE gives management the authority to exercise professional experience and judgment. While the setting of the ASBE has in theory narrowed the gap between accounting issues in China and those of the Western world, the rigour of applying the ASBE may vary from province to province and from company to company.

  • 10.What are the auditing requirements in China?

    In Western countries limited liability companies are generally subject to an annual audit carried out by independent external auditors whose role is to express an objective opinion on the truthfulness and fairness of the financial statements.


    In China, auditing is not a legal requirement but is required under the regulations. Prior to the introduction of the ASBE, the primary objective of auditing in China was to carry out inspection on the financial records of a business to ascertain their accuracy and legality (i.e. whether the transactions conducted complied with relevant state laws and regulations). Auditors in China are concerned with protecting the legal interests of the company as well as the interests of the state. Only with the implementation of the ASBE were the concepts of true and fair presentation introduced.


    Prior to 2000 financial statements of state-owned enterprises were not required to be audited annually by independent auditors, but periodical or social audits conducted for the purpose of ascertaining the enterprise’s tax liabilities or other purposes might be conducted by the State Audit Bureau or Tax Bureau. Since 2002, except for a few types of specialised industries that have been explicitly exempted, all other state-owned enterprises must be audited at least annually. In addition, the regulations governing the accounting of joint stock companies and foreign investment enterprises require these companies to be subject to annual audit carried out by a registered Chinese certified public accounting firms. When reporting on whether the financial statements of foreign investment enterprises are prepared in accordance with the relevant laws and regulations, auditors may make reference to the following main laws and regulations:


    • The PRC Sino-foreign Equity Joint Venture Law (EJV Law) promulgated by the National People Congress (NPC), effective July 8, 1979 and revised March 15, 2001;
    • Implementing Regulations of the EJV Law promulgated by the State Council (SC), effective September 20, 1983 and revised July 22, 2001;
    • The PRC Sino-foreign Cooperative Joint Venture Law (CJV Law) promulgated by the NPC, effective April 13, 1988 and revised October 31, 2000;
    • The PRC Wholly Foreign-Owned Enterprise Law (WFOE Law) promulgated by NPC, effective April 12, 1986 and revised October 31, 2000;
    • Implementing Rules of the WFOE Law promulgated by SC, effective December 12, 1990 and revised April 12, 2001;
    • The PRC Small and Medium Enterprises Law (SME Law) promulgated by NPC and effective June 29, 2002 and revised October 18, 2011;
    • Regulation on the implementation of Enterprise Income Tax Law of the PRC promulgated by NPC and effective January 1, 2008.

  • 11.What role does the professional auditor play in national economic activities?

    Only very recently has the impact of accountants or auditors on national economic activities become more apparent. By virtue of the PRC Accounting Law promulgated in January 1985, the function of certified public accountants in carrying out audits was established. This law has now been superseded by the PRC Registered Accountant Law which became effective January 1, 1994. Following the setting up of the Chinese Institute of Certified Public Accountants in 1988, the status of certified public accountants and professional accounting firms in society received a major boost. In China some accounting firms are direct functional units of certain government bureaus. Although other professional accounting firms are not direct functional units of any government departments, many of them are still financially dependent units and require approval from the State to conduct their business as certified public accountants. In 1998 the State Council set forth regulations that require certified public accountants to be independent from any government bureaus. Many professional accounting firms have transformed (or are in the process of transforming) in order to operate the form of sole proprietorship or partnership with unlimited liabilities.


    In December 1988 the Ministry of Finance promulgated the Auditing and Certification Regulations (Provisional) which sets out the roles of certified public accountants, audit scope and procedures and the requirements for maintaining audit working papers. From 1995 to 1996 four General Independent Auditing Standards – Basic Standards, Quality Control, Continuing Education and Ethics were issued. New specific auditing standards applicable in March, 2006 were also promulgated, which complete and clarify the provisional regulations and general standards. In 2010, in order to move forward to be more convergence with International standards on auditing, a revised thirty-eight specific auditing standards had been promulgated. So far, forty-eight specific auditing standards have been issued.

  • 12.What is the format and content of an audit report?

    The audit report normally contains an introductory paragraph, a management’s responsibility paragraph, an auditor’s responsibility paragraph and an opinion paragraph. The introductory paragraph sets out the areas covered for auditing; the management’s responsibility paragraph sets out the preparation and fair presentation of financial statements; the auditor’s responsibility paragraph sets out the principal audit work and procedures carried out and the results. The opinion paragraph sets out whether the accounts have been prepared in accordance with the relevant laws and regulations. Any reservations in the opinion need to be elaborated on.
    In some instances different government bureaus may stipulate their own requirements as to what certified public accountants should give their opinion on. Sometimes these additional requirements have not been agreed by the Ministry of Finance or the CICPA and fall beyond the expertise of what is normally expected of a certified public accountant. In some circumstances these requirements issued by other government bureaus have been retracted.

  • 13.What is the Accounting Law in China?

    First promulgated in 1985, the Accounting Law was revised in December 1993 and then in 1999. From July 1, 2000, the new accounting law was adopted. It represents the highest level of legal norms governing accounting and forms the basis for the formulation of administrative rules and regulations in regard to accounting, as well as providing the highest guiding principles on accounting work. In tandem with this piece of specialised legislation, a number of corresponding laws were passed in the 1990s, including the Certified Public Accountant Law, Budget Law and Audit Law followed by related legislation such as Company Law, Law on Negotiable Instruments, Enterprise Bankruptcy Law, Economic Contract Law, and various tax laws. Together they constitute a legal framework of related economic legislation, forming the cornerstone of a legal system governing accounting work.

  • 14.What are the Accounting Standards in China?

    The Accounting Standards for Business Enterprises promulgated by the Ministry of Finance (MOF) on 30 November 1992 went into effect on 1 July 1993. The introduction of the Accounting Standards represents a milestone in the reform of China’s accounting system, whereby classification according to ownership, industry and government department is replaced by practices in line with international accounting norms, such as debit-credit bookkeeping, categorisation of accounting elements, accounting equation and financial statements. Internationally accepted accounting principles are also adopted, including the principles of prudence, manufacturing cost accounting and capital maintenance. In addition to these basic standards, China promulgated its first set of specific accounting standard in 1997 and MOF has issued 13 more specific accounting standards. In 2006, China continued to promulgate the specific accounting standard and MOF has issued total 38 specific accounting standards. Moreover, up to the end of October, 2014, three more specific accounting standards were been issued and five existing accounting standards have been revised

  • 15.What is the significance of the Accounting System in China?

    On the basis of the accounting standards, the MOF issued a series of industry-specific accounting systems in 1992 covering industry, commodity distribution, construction, real estate, finance and insurance, transport and communications, foreign economic cooperation, tourism and catering, and agriculture, as well as a separate system for foreign-invested enterprises (FIEs). These unified systems form and integral part of China’s legal system governing accounting.


    To cope with enterprise reform and comply with WTO requirements, China made a major revamp to its enterprise accounting system in 2000. The MOF promulgated the Accounting System for Business Enterprises to be applied to joint stock limited companies starting 1 January 2001 on a temporary basis, while other types of enterprises were also encouraged to follow the new system. Under the Accounting System, a unified system of accounting is established for all types of industry, ownership structure, organisation and operation mode and is applicable to large and medium enterprises except those engaged in finance and insurance. On the basis of the Accounting System, industry-specific accounting measures will be formulated for different industries and enterprises according to their characteristics while a specially designed accounting system will be developed for small enterprises. In addition, financial and insurance enterprises will be subject to a special accounting system for financial and insurance enterprises to accommodate their unique requirements.


    The Accounting System for Business Enterprises currently in force is formulated on the basis of the Accounting System for Joint stock Limited Companies and its supplemental provisions and specific accounting standards. It consists of general provisions, account titles and financial statements, as well as examples of key accounting events and selections of major accounting rules. The general provisions list the broad principles for the recognition, measurement and reporting of accounting elements and key business activities. In the sections on account titles and financial statements, the types of account titles to be adopted for business activities and instructions for use are specified, while samples of financial statements and instructions on their compilation are given. In the appendix, examples of how major accounting events are handled are given.

  • 16.What is the relationship between the Accounting Standards and the Accounting System?

    Both the Accounting system and Accounting standards constitute an integral part of China’s unified accounting system. As administrative documents, they set out the rules for accounting such as the recognition, measurement, disclosure and reporting of accounting elements. While both are formulated and promulgated by the MOF, certain differences exist between the two.


    Firstly, in terms of the scope of application, specific accounting standards are mostly applicable to joint stock limited companies although some of them also apply to other enterprises. As for the Accounting System, apart from joint stock limited companies, other qualified enterprises may also adopt the system but prior approval is required for state-owned enterprises wishing to implement the system.


    Secondly, the Accounting System covers all aspects of an enterprise’s transactions and events. In other words, if an enterprise falls within the scope of the Accounting System, the accounting treatment of all its transactions and events must be handled according to the stipulations of the system. As for specific accounting standards, they only govern certain transactions and events or certain accounting aspects of an enterprise. For instance, all the 13 specific accounting standards issued to date merely deal with specific transactions and events of an enterprise.


    Thirdly, stipulations concerning the recognition, measurement, disclosure and reporting of accounting elements contained in the specific accounting standards are more general, with no stipulations on how accounting records should be made. By comparison, stipulations in the Accounting System are more specific, giving detailed rules on the account titles and instructions for use.

  • 17.What are the basic assumptions of accounting in China?

    (a) Accounting Entity


    An accounting entity can be an enterprise, and enterprise group or the accounting department of an enterprise.


    (b) Continuity Postulate


    The Accounting System stipulates that the accounting treatment to be adopted by enterprises under normal circumstances should be based on the continuity postulate. For instance, the historical costing method is used for the assets and liabilities of an enterprise, and the depreciations method on the basis of historical costing is used for fixed assets.


    (c) Accounting Period and Accounting Year


    According to the Accounting System, an enterprise should account for its transactions or events and prepare financial statements in distinct accounting periods. Accounting periods may be a year, half year, a quarter or a month, commencing on the first day thereof according to the calendar year.


    (d) Measurement Currency and Reporting Currency


    Renminbi is the reporting currency of enterprises. While a certain foreign currency may be used as the reporting currency for enterprises heavily engaged in foreign currency transactions, all foreign currency transactions should be converted into renminbi when financial statements are prepared and submitted.


    Accounting records and financial reports should be compiled in Chinese. FIEs, foreign enterprises and other foreign organisations in China may use one foreign language concurrently with the Chinese language.

  • 18.What are the basic principles of accounting in China?

    The general principles guiding and evaluating accounting work can be looked at as 3 sets of principles: general principles for evaluating the quality of accounting information; general principles for recognising and measuring accounting elements; and general principles for revising the above two sets of principles.

  • 19.What are the regulations regarding the establishment of a Financial Accounting Department in China?

    FIEs should establish a financial accounting department in the place where it is located, to be manned by qualified financial and accounting personnel responsible for handling financial and accounting matters in accordance with the law. (MOF has strict management guidelines regarding the qualifications of financial and accounting personnel.)

  • 20.What are the issues involved in the implementation of a new accounting system?

    Since 1 January 2002, FIEs have implemented the Accounting System for Business Enterprises promulgated by the MOF on 29 December 2000, while the Accounting System for Foreign-invested Enterprises issued by the MOF on 24 June 1992 and its related regulations on account titles and financial statements were nullified. Below are certain issues concerning the implementation of the new accounting system.


    (a) If an FIE has to change its accounting estimate as a result of implementing the accounting system, all changes should be made using the prospective application. If an FIE has to change its accounting policies, the following circumstances where it is stipulated that the retrospective adjustment method is to be used:


    Provision for short-term investment write-down and provision for impairment of long-term investment, fixed assets, intangible assets, construction in progress and designated loans.


    The difference between provision for bad debts on receivables and provision for inventory write-down under the new accounting system and those under the old system.


    The changes in depreciation life and residual value for the first time, should be treated as change in accounting policy in the current year and adopt retrospective adjustment method. After that, if FIE adjust on depreciation life and residual value again, it should adopt prospective method.


    Investments made before the accounting system was implemented and which continue after the implementation date should be treated according to the stipulations of the Accounting System as from the date of implementation. In other words, investments and investment income confirmed under the old system prior to the implementation of the new accounting system may not be adjusted retrospectively. Any subsequent confirmation of investment income and adjustment of the book value of investments should be treated according to the stipulations of the Accounting System.

    In implementing the accounting system, under the new accounting standards that promulgate in 2006, the set-up cost cannot be amortised anymore. Instead, the set-up costs should be entered directly under G&A expenses during the set-up period.


    (b) FIEs should abide by the following stipulations in implementing the accounting system:


    The balance of “marketable securities” should be entered under “short-term investment”.


    The balance of “advance payment for goods” and the balance of “advance receipt of payment for goods” should be entered under “prepayment” and “receipt in advance” respectively.


    The balance of “provision for loss in inventory realisation” should be entered under “provision for inventory write-down”.


    The creditor’s balance of “exchange loss during set-up period” should be entered into the profit and loss account of the current period.


    The balance of other deferred expenses should be treated according to different circumstances: it should be entered under “long-term prepaid expenses” if it can generate benefits in subsequent accounting periods; it should be entered under the profit and loss account of the current period if it cannot generate benefits in subsequent accounting periods.


    The balance of “deferred investment loss” should be treated according to different circumstances: it should be entered under “long-term prepaid expenses” if it is a debitor’s balance; it should be entered under “deferred income” if it is a creditor’s balance.


    The balance of bonds payable and the premium or discount on bonds payable should be entered under “bonds payable”.


    The balance of “wages payable” (or “wages and welfare expenses payable”) should be entered under “payroll payable to the employees (including wages, bonuses and allowances, employee incentive and welfare funds drawn from the enterprise’s after-tax profits); the welfare expenses comes under pension funds, insurance, welfare funds and different kinds of subsidies payable to mainland workers should be entered under profit and loss account of the corresponding period when it actually occurred.


    The balance of “reserve fund”, “enterprise development fund” and “profit capitalised on return for investment” should be entered under “surplus reserve”.


    A new item, “deferred income”, should be created under “estimated liabilities” on the balance sheet.


    A new item, “of which: investment of Chinese party (balance of non-renminbi capital at end of period)” and investment of foreign party (amount of non-renminbi capital at end of period)”, should be created under “paid-in capital” on the balance sheet.


    Foreign-invested tourism enterprises, in implementing the Accounting System, should for the time being follow the regulations in the Account Titles and Financial Statements for Foreign-invested Tourism Enterprises in compiling their income statements and supporting reports.


    When compiling comparative financial statements using the retrospective adjustment method, if changes in accounting policies occur during the periods covered, adjustments should be made to the net profits and losses and other related items in the periods concerned accordingly. For entries in comparative financial statements subject to cumulative effect due to policy change prior to the periods covered, adjustments should be made to the initial retained income as well as other related items.

  • 21.What is the definition of an invoice?

    An invoice is the proof of payment in a transaction involving the sale of goods, provision of labour service, or other business activities. It is also a document supporting the fact that a payment and receipt has taken place, an official document for financial management and accounting, and an important tool in auditing for taxation purpose.


    Invoices are generally in triplicate copies, namely the stub, invoice copy and accounts copy. Value-added tax (VAT) invoices have one more copy, which is the deduction copy.

  • 22.What is the procedure for the purchase and collection of an invoice?

    (a) Purchase and collection procedure


    An individual or enterprise that has completed tax registration as required by law will be issued a tax registration certificate, after which she or he can apply to the tax office for the purchase of invoice collection book by submitting the following: identification document of the applicant, tax registration certificate or other proofs, official seal or special seal for invoices. Upon examination and approval by the tax office, an invoice collection book specifying the type and quantity of invoices to be purchased as well as the method of purchase will be issued. The applicant can then purchase the invoices from the tax office.


    (b) Temporary purchase of invoice in other localities


    An individual or enterprise in need of invoices on a temporary basis can apply directly to the local tax office. When an individual or enterprise conducts business activities in places other than the place of the tax office where they set up initially and needs invoices, an application can be made to the local tax office by submitting proofs from the tax office where they first set up. A guarantor is required in this case or a deposit of no more than Rmb10,000 is payable depending on the face value and quantity of invoices specified in the invoice collection book. When this kind of invoices are issued, where the business activities taking place require they have to be used and cancelled within a specified period, by the tax office.

  • 23.What are the stages in the issuance of an invoice?

    (a) An individual or enterprise that receives payment for the sale of goods, provision of service or other business activities should issue invoices to the payer. Under special circumstances, the payer will issue invoices to the payee.


    (b) When enterprises and individuals engage in production or other business operations purchase a good, receive a service or conduct a business activity, they should ask the payee for an invoice and must not change the description or amount shown on the invoice.


    (c) Invoices should be issued in serial order within a specified period of time. Invoices in multiple copies should be issued at one time to accurately record the details of a transaction and stamped with the issuer’s official seal or special invoice seal.


    (d) No individual or enterprise should borrow, transfer or issue invoices on others’ behalf. Unless approval is granted by the tax authority, the invoice books should not be detached for use. The scope of use for special invoices should not be extended randomly.


    (e) Invoices which fail to meet the relevant requirements cannot be used as financial proof. Enterprises and individuals may refuse to accept such invoices.

  • 24.What is the procedure concerning the storage of invoices?

    (a) An enterprise or individual that issues invoices should set up an invoice register recording the usage of invoices and report to the tax office on such usage on a regular basis.


    (b) When an enterprise or individual applies for changes or cancellation of tax registration, the invoices and invoice books should also be changed or cancelled at the same time.


    (c) An enterprise or individual should take good care of the invoices and keep them in good condition pursuant to the rules of the tax office.


    Invoice stubs and invoice registers should be retained for five years after which time they should be destroyed upon checking by the tax office.

  • 25.Are invoices subject to inspection by the tax authorities?

    Enterprises and individuals involved in printing and using invoices are subject to inspection by the tax authorities. They must fully cooperate with inspectors from the tax departments by providing true and accurate information.

  • 1.Is Foreign Direct Investment (FDI) on the increase in China?

    FDI rose from 2009 to 2013 except for in the year 2012. The data is as below:

    Unit: Billion USD

    Year: 2014, 2013, 2012, 2011, 2010, 2009

    Amount 117,59 111.72 116.01 105,74 90.03


    Regarding 2014, figures show that from January to September this year total FDI stood at 87.36 billion USD, this compares to an equivalent figure of 88.60 for 2013.


    The data above is sourced from http://www.mofcom.gov.cn/article/tongjiziliao/v/?3

  • 2.Aren’t FDIs fraught with onerous legal requirements?

    Much less so in recent years. China launched a series of reforms that made the framework for foreign investment more flexible and much clearer.

  • 3.What part does M&A play in modern China?

    With the continuous development of economic globalisation and increasingly severe market competition, more and more companies are looking at M&A as a vehicle to adjust their economic strategic structure, increase their cash flow, expand their production scale, improve their economic efficiency and promote their cultural integration and their management ideals.

  • 4.Is a foreign invested enterprise (FIE) treated any differently than a domestic company?

    Yes. FIEs are controlled through the Catalogue for the Guidance of Foreign Investment Industries revised in 2011, which classifies various industries into: (1) the encouraged, (2) the permitted, (3) the restricted and (4) the prohibited.

  • 5.What is the main difference between a WFOE and a CJV?

    A CJV is a more flexible corporate form, in which risks and profits can be allocated by agreement. Since 1995, FICLS has been an alternative for foreign investors.

  • 6.What is a FICLS?

    A Foreign Invested Company Limited by Shares is one of four possible forms that a foreign investor may opt for as a corporate structure. A FIE may be converted into a FICLS.

  • 7.Is it possible to invest in China outside of these corporate structures?

    No. It is a legal requirement that all investments are made through one of the four corporate structures, and approved by the Ministry of Commerce (MOFCOM).

  • 8.Would a merger or an acquisition (M&A) with an existing FIE avoid MOFCOM scrutiny?

    No. Any change to a FIE must obtain MOFCOM approval in advance. Thus, any M&A involving foreign investment falls squarely under control of MOFCOM.


    In recent years, the rules on M&A concerning FIEs have been revamped and provided a much clearer picture for M&A transactions. According to Article 31 in Anti-monopoly Law, which has  been in effect since January 1st, 2008, if a foreign investor participates in the concentration of undertakings by merging and acquiring a domestic enterprise or by any other means, which involves national security, the matter shall be subject to a review on national security as is required by the relevant state regulations, in addition to the review on the concentration of undertakings in accordance with the provisions of this law.

  • 9.What are the merger and acquisition options for a foreign company hoping to enter the Chinese market?

    M&A is a major component of the new wave of foreign investments recently flowing into China. There are two essential choices for foreign companies interested in investing in M&A with domestic companies: direct and indirect M&A.


    The indirect method is self-explanatory, and occurs when a foreign investor invests in another company outside of China, using that company to own parts of a Chinese firm. Most deals are done in an indirect M&A method; however, this method has many disadvantages. While indirect investment may be suitable for foreign companies who have already had a considerable presence in the Chinese market, it may be inapplicable for companies who have not entered the market yet, and want to maintain a market share for only a short period of time.


    A foreign company owned by foreign investors could purchase the equity of shareholders of non-foreign investment enterprises in China or subscribe to additional capital of domestic companies to convert such domestic companies into foreign investment enterprises. This process is called equity acquisition. Another method is that a foreign company could purchase the assets of domestic companies by foreign investors through an agreement and invest such assets to provide foreign enterprises for operation of such assets, which is defined as assets acquisition. These two methods are direct M&A, which are able to enter the market in a short period of time. Currently, there are extremely strict laws and rules for its permit in China.

  • 10.What are the legal documents that support M&A through Foreign Invested Enterprises (FIEs)?

    There are eight major supporting legal documents for M&A through FIEs:


    1. Provisions on Merger and Acquisition of Domestic Enterprises by Foreign Investors (2009)


    2. Anti-monopoly Law (2008)


    3. Measures for Strategic Investment by Foreign Investors upon Listed Companies (2005)


    4. Using Foreign Investment to Reorganise State-owned Enterprises Tentative Provisions (2003)


    5. Issues Relevant to the Transfer of State-owned Shares and Legal Person Shares in Listed Companies to Foreign Investors Circular (2002)


    6. Interim Rules on the Domestic Investment by FIEs (2000)


    7. Rules on Merger and Division of FIEs (1999)


    8. Regulations on Changing Investor’s Shares Right in the FIEs (1997)

  • 11.Who can apply for FIEs under these regulations?

    EJVs, CJVs, WFOEs in the form of a limited liability company and foreign invested companies limited by shares can all apply under the regulations. The investments which the above mentioned companies can apply for, can include establishing new companies or acquisition of other companies.

  • 12.When can a FIE begin to invest onshore and what limits these investments?

    Now there are no specific regulations for this.

  • 13.What are some of the problems involved with M&A with State Owned Enterprises (SOEs)?

    First of all, M&A with SOEs require approval from many government agencies such as the State Authority of Property Management. Secondly, the procedure is not very transparent. There will be uncertainty when approaching this method because there are unclear approval procedures. The approval authorities employ a significant amount of discretion regarding this matter.

  • 14.What are the chances of M&A with listed companies on the China stock market?

    M&A with listed companies on the China stock market are legally allowed. However, there are still many specific restrictions.

  • 15.What are the several ways in which mergers & acquisitions in the Chinese Market can take place?

    Mergers & acquisitions deals may take the form of either;


    (i) The purchase of equity or assets of an existing company.


    (ii) Share swaps


    (iii) A merger of two or more business entities by way of cash or shares, or


    (iv) A combination of (i), (ii) and (iii).

  • 16.Given that mergers and acquisitions in China can take several forms, how should one structure one’s business in the Chinese market?

    This would depend on many factors. For example, if a foreign investor already has a reliable business associate in China, the foreign investor may wish to consider entering into a merger with the existing entity. The advantages of a merger with a local counterpart are, among others, ready local knowledge and channels to penetrate the local market and the comfort of having one less competitor in the market while the existing business continues.

    In some instances, the foreign investor may worry about the hidden liabilities in the target company. Under these circumstances, the foreign investor may be reluctant to enter into a merger with the target company but wish to purchase only the assets of the target company. Therefore, the foreign investor may form a separate entity and thereafter acquire the assets of the local company through the newly formed entity. An asset deal enables the foreign investor to acquire only the viable assets without having to take over the accumulated debts and liabilities of the local entity.

  • 17.Does China have an anti-trust law which a foreign investor has to consider when entering into a merger and acquisition deal?

    China issued an Anti-monopoly Law which took effect from January 1, 2008. According to Anti-monopoly Law, Article 31, if a foreign investor participates in the concentration of undertakings by merging and acquiring a domestic enterprise or by any other means, which involves national security, the matter shall be subject to a review on national security as is required by the relevant state regulations, in addition to the review on the concentration of undertakings in accordance with the provisions of this law.

  • 18.Is it necessary to conduct a legal due-diligence exercise in a merger and acquisition transaction in China?

    Certainly. Some Chinese companies may have certain irregularities somewhere in the course of their business. For example, the director of a company may deliberately fail to file for registration of title to a property in order to save costs. It is imperative that a foreign investor resolves any irregularities there may be before entering into the merger and acquisition transaction. Therefore, conducting a legal due diligence exercise is often just as important as conducting a financial due diligence to determine the viability of the target company in a merger and acquisition deal.

  • 19.What is the general tax consequence of a merger in China?

    According to the Notice of the Ministry of Finance and the State Administration of Taxation on Enterprise Income Tax Treatment of Enterprise Reorganisation Caishui [2009] No.59, as a general proposition, the relevant tax treatments of merger are as follows:


    1) The merging enterprise shall determine the tax basis of assets and liabilities received from the merged enterprise(s) in accordance with the fair market value.


    2) The merged enterprise and its shareholders shall follow the enterprise income tax treatment of liquidation.


    3) The tax losses of the merged enterprise shall not be carried over to or be utilised by the merging enterprise.

  • 20.What are the tax benefits of a merger?

    If a merger meets some special conditions, the recognition of gain or loss could be deferred. Compared with an asset acquisition, a merger will not trigger any VAT or business tax issues.

  • 21.Are there any special requirements on the tax accounting of the post merger company?

    Under current rules, the assets, liabilities and shareholders’ equity should be recorded at fair market value. The depreciation or amortisation value should also be calculated based on the fair market value of the corresponding assets.

  • 22.How about the tax holidays of the pre-merger company?

    According to the Notice of Ministry of Finance and the State Administration of Taxation on Enterprise Income Tax Treatment of Enterprise Reorganisation Caishui [2009] No.59, in the case of a merger by absorption, where the eligibility and conditions of tax incentive entitlement of the surviving corporation have not changed; such an entity’s pre-merger unused tax incentive may be carried over after the merger is completed. The amount of the tax incentive is determined based on the taxable income (zero if taxable loss) of the surviving entity in the year preceding the merger.

  • 23.What is the tax effect of the losses of any pre-merger company?

    According to the Notice of the Ministry of Finance and the State Administration of Taxation on Enterprise Income Tax Treatment of Enterprise Reorganisation Caishui [2009] No.59, the tax losses of the merged enterprise do not need to be carried over to or be utilised by the merging enterprise. However, if some special conditions are satisfied, the net operating losses of the merged enterprise, which may be utilised by the merging enterprise, equals the fair market value of the net assets of the merged enterprise times the bond yield of the government bond with the longest maturity term as at the year end to which the merger occurred.

  • 24.If a foreign investment enterprise (FIE) has several branches in different localities, how would they pay tax?

    Generally, income tax should be consolidated and paid by the company’s HQ. As for VAT and business taxes, the branches should pay those taxes in their own localities. However, with the approval of the competent tax authorities, HQ may consolidate VAT for all branches in China.

  • 1.What are the options for foreign enterprises to establish a permanent presence in China?

    There are three main forms business establishments can take for foreign companies operating in China:


    1) Representative Offices

    2) Joint Ventures and

    3) Wholly Foreign Owned Enterprises.


    The form chosen by a foreign investor is dependent on many factors:


    1. How active one wants to be in China
    2. The industry one is investing in
    3. Whether or not a Chinese partner is necessary, either because it is required by law or to benefit from the partner’s experience within and access to the Chinese market.


    One of the popular forms of foreign company establishment is a Representative Office. The downside to this establishment type is that Representative Offices are very limited in the activities they can carry out. They can not carry out direct business activities and are limited to activities such as market research and liaison. In practice, some Representative Offices exceed their business scope and thus leave themselves open to negative legal ramifications.


    If a foreign company wants to legitimately carry out profit making business activities in China then they must set up a Joint Venture with a Chinese partner or a Wholly Foreign Owned Enterprise (WFOE). Many investors prefer Wholly Foreign Owned Enterprises to Joint Ventures as it gives them full control over their business. However, there are certain industries in which a Wholly Foreign Owned Enterprise cannot be established, although this list is getting progressively shorter. Some investors do still choose to cooperate with a Chinese partner and form a Joint Venture for strategic reasons. In general, though, WFOEs are gaining popularity, mainly because they are easier to establish now than in the past.

  • 2.Representative offices may not carry out direct business activities. What does this mean and are representative offices subject to taxation?

    Representative offices may promote but must not sell. That is, under Chinese law, Representative Offices may not engage in direct business activities and therefore should not directly generate profits. Permitted activities include establishing and arranging contacts, rendering advice, preparation of market studies, and general collection of information and liaising with authorities and business partners. Representative Offices may not bill clients or sign contracts.


    It should be noted, however, that it is advisable to seek professional advice before opening a representative office in order to ensure that its activities fall within the permitted scope and that all tax benefits are applied.

  • 3.I set up a representative office for my international company in China, but things have not worked out. How do I go about closing the office down and discontinuing my business?

    Closing down a representative office in China can be a lengthy process if it is not handled in the correct way, particularly if the office was not originally established entirely in accordance with the law, but rather through “back-door” connections. China’s legal system is becoming more and more transparent and administrative bodies are increasingly enforcing the law, so it pays to do things the right way. Simply walking out of the country is not the way to go!


    There are several steps required to close down an office.


    Firstly, tax payment certificates and receipts from the national and local tax bureaus must be given to the authority responsible for closing the office, along with a brief statement about the settlement of debts and credits. The Tax Bureau will require the closure audit report to be approved by a Certified Public Accounting firm.


    Secondly, various documents need to be prepared and given to the relevant authorities. Cancellation forms need to be submitted to the Industrial and Commercial Bureau, along with a detailed explanation as to why the office is closing. Both Chief Representative and the authorised person of the parent company must sign the forms. A separate application also needs to be made by the holding company’s letterhead, and must be stamped with the holding company’s seal. There must also be a board resolution that agrees to the closure of the office or a statement expressing the company’s wish to close the office, signed by the chairman of the parent company. The Certificate of Incorporation must be returned to the Industrial and Commercial Bureau.


    Furthermore, the bank must provide a notice that confirms the cancellation of the office’s bank account. The official seal and financial seal should be returned to Public Security Bureau. If all the necessary documents are provided and taxes have been paid, the closure procedure should take roughly 9 to 18 months.

  • 4.What is an Equity Joint Venture?

    An Equity Joint Venture is the older and less flexible type of JV. Equity Joint Ventures must operate in the form of a Limited Liability Company, which means that the personal wealth and property of the actual individuals who are responsible for the company are shielded from corporate loss.


    The most significant difference between Equity Joint Ventures and Cooperative Joint Ventures is the allocation of profits. In Equity Joint Ventures, profits must be allocated according to the ratio of the capital contributions made by the partners. In other words, if one party puts in 40% of the capital investment, they will reap 40% of the total profits.


    Equity Joint Ventures are the preferred investment vehicle for most manufacturing Joint Ventures. However, potential investors must be clear about their purpose before deciding which form of Joint Venture they will use.

  • 5.What is a Cooperative Joint Venture?

    Cooperative joint ventures allow for more flexible agreements between the joint venture parties. In cooperative joint ventures companies have the choice to organise themselves as a limited liability company or as a non-legal person in which the partners are subject to unlimited liability. This means that the partners are entirely liable for losses the joint venture may incur. In practice, the majority of cooperative joint ventures are set up as limited liability companies.


    The other major difference between a cooperative joint venture and an equity joint venture is that, in a cooperative joint venture, profits can be allocated according to the partners’ discretion and do not have to be proportional to the investments made by the partners. The parties may also agree that one party recovers its investment through an accelerated repayment structure, whereas the other party will become the owner of the joint venture’s assets after termination of the joint venture.

  • 6.Some foreign companies invest in China using an offshore company. What are the advantages of structuring an investment in this way?

    There are various reasons why foreign investors use offshore companies to structure their investment in China. Offshore companies add an additional layer of limited liability, removing risk from its valuable parent company. The corporate law of offshore jurisdictions is often very flexible. The sale of the investment in China can be made by transferring the offshore entity, rather than the stake in the Chinese entity. This saves bureaucratic hassles in China.


    Most importantly, offshore corporations can be used for tax planning purposes. By correctly arranging financial affairs, significant tax savings can be achieved. However, it should be noted that some schemes may constitute illegal tax evasion, rather than legal tax planning, so great care should be taken before setting up in one of these jurisdictions. Offshore jurisdictions are typically small islands in exotic locations. Examples are the Cayman Islands, British Virgin Islands, Samoa and Mauritius. Hong Kong is also a popular jurisdiction, due to its special status and proximity to the mainland.


    It should be noted, that placing the administration side of a company far from China causes practical difficulties, for instance when opening a bank account or when verifying documents.


    All in all, offshore companies offer many advantages to investors, but there are many traps one could fall into. Therefore, sound legal advice should be sought before setting up an offshore company as an investment vehicle for China.

  • 7.When forming a joint venture in China, what are some of the IP issues that I should be concerned about?

    Intellectual Property is becoming more and more important in today’s information-based economy. This means that one must protect oneself when entering into new business relationships. The following are some areas that deserve extra attention when setting up a JV:


    Improved and New Intellectual Property


    In the growth and development of a Joint Venture, new IPRs will come about, and these will be regarded as belonging to the Joint Venture. Therefore, it is also up to the Joint Venture to assign it or to apply for protection. If the foreign investor only holds a minority stake in the Joint Venture, then she/he may find themselves in a weak position regarding control over new IPRs. It is recommended that you deal with these matters in the joint venture agreement before they become problems.


    Investment Capital Contribution


    The transfer of technology or the IPRs of a foreign investor into a joint venture can serve as a contribution of capital. Depending on the investment sector of the Joint Venture, the transfer can make up a certain percentage of the Joint Venture.


    License/Royalty Fees


    Licensing or Royalty fees from the transfer of IPRs in a joint venture deserves close attention.




    Probably the most important question to take into account is control of the IPRs after being transferred or licensed to a joint venture. If the IPR holder is a minority shareholder, it is even more of a concern.


    Although IPRs can be controlled through a detailed joint venture agreement, control also depends on the investment sector, the type of IPR and the size of the investment among other things. However, in China, it is very important to select a partner that you can trust to not misuse or misappropriate your IPRs.

  • 8.When obtaining a company through mergers and acquisitions, what sort of IPR-related issues should I think about?

    As the investment market in China is becoming more and more deregulated, the practice of acquiring a company is becoming popular. One of the most important things to determine in an acquisition is the structure of the transaction. This may be dictated by investment regulations. However, whether an asset or share purchase transaction structure is used will greatly affect how the IPR involved will be affected.


    It is very important to carry out a due diligence check before following through on a merger or acquisition. The majority of enterprises have some form of IPRs and how integral those IPRs are to the business under acquisition is very important to know. An IPR-specific due diligence can be very useful.


    Registered IPRs, such as trademarks and patents, can be simply checked with the relevant office. Not yet registered IPRs can prove difficult. In some cases they may mean that an in depth investigation of the business history, including employment contracts, confidentiality agreements and other documents that can determine the security of an IPR must be conducted. When acquiring a company that has licensed its IPRs from another company, it cannot be stressed enough that one must first review these license agreements to guarantee that the licensing contracts are in fact transferable.

  • 9.What is the structure of the Chinese Investment Fund Market?

    An investment fund serves as an institutional investor, which collects funds by issuing securities, and primarily invests in the securities market.


    At this time foreign investment firms are not allowed to participate in the investment fund market other than through giving advice to fund management companies in China. However, after the WTO accession, fund management companies will be allowed up to 33% foreign ownership in a joint venture. By now, the foreign equity interest has been increased to 49%. Needless to say there is great potential in the China Investment Fund market. The investment funds in China are categorised under so-called close-ended and open-ended funds, where all existing funds today are close-ended. Close-ended funds have a pre-determined total issuing amount and a fixed total number of fund units. These funds are listed and can only be transacted through stock exchanges.

  • 10.What are the different types of FIE acquisition?

    Many investors choose acquisition before establishing an enterprise since it means that the investor can take over an already established and ongoing business operation with all relevant licenses and permits.


    An acquisition can be made directly or indirectly. In a direct acquisition the investor becomes a direct party to the FIE. If the acquisition is indirect the investor acquires shares in the foreign party to the FIE and holds an interest in the company in that way. For a direct acquisition, normally there must be a unanimous board resolution, waivers of preemptive rights, consent of the parties, and an approval of the original approval authority.


    Instead of acquiring an interest in an FIE, an alternative is to acquire the assets of the company. Such a purchase does not have an effect on the existence of the parties to the transfer. Also, in asset purchasing it is important that legal due diligence is performed, especially concerning the good title of the assets.

  • 11.Which issues should be considered when effecting an equity acquisition in an FIE?

    In order to gain approval for the acquisition, important issues to bear in mind are:


    1. If it is an acquisition that is in the shape of a Joint Venture, the foreign ownership must be at least 25%.


    2. Debt/equity ratios should be complied.


    3. If the acquisition creates a WFOE, the business scope may not be in an area prohibited to foreign undertakings.


    4. If PRC law demands that a majority stake is reserved for the Chinese party, a foreign party cannot not gain control.


    5. The MOFTEC Foreign Investment Guidelines must be complied with, as well as the Several Provisions on Changes in Equity Interests of Investors in Foreign Invested Enterprises.


    Furthermore, legal due diligence is highly advisable. Firstly, the investigation should include the background and history of the project and a preliminary project approval. Secondly, the joint venture contract and/or articles of association are important documents to consider since they contain regulations concerning the rights of the parties as well as rules concerning mutual rights and obligations of the parties to the FIE. The investor should also ensure that the FIE has been duly approved. Other important points to consider are:


    a) The formulation of the business license,


    b) The need for any special permits or licenses,


    c) The capital verification report and investment certificates in order to see the amounts of capital injection of the parties,


    d) If any conditions are imposed on the parties equity interests,


    e) Land use documentation,


    f) Construction permits,


    g) Technology and intellectual property rights,


    h) Environmental requirements and assessments.

  • 1.What system does China have regarding foreign exchange (FOREX) control?

    China’s current FOREX control system was first introduced in 1996. According to this system, all FOREX transactions are classified into two categories: capital account items and current account items.


    Capital account items are capital inflow or outflow transactions which serve either to increase or decrease a company’s debt or equity, including foreign direct investment, all types of loans, loan-related security transactions and securities investments. All capital account transactions are subject to approval by the State Administration for Foreign Exchange (SAFE).


    Current account items are transactions of an ordinary recurrent nature, including payments for foreign trades and services and interest payments for FOREX debts.

  • 2.What does the abbreviation SAFE stand for?

    SAFE is the State Administration for Foreign Exchange. SAFE creates balance sheets for international payments, recommends exchange rate policies and recommends policies for balancing international payments. SAFE also regulates foreign exchange and standardises the FOREX (Foreign Exchange) market. It regulates remittances, forecasts supply and demand and oversees FOREX reserves.

  • 3.How is China reforming its foreign exchange control regulations?

    Following the relaxation of foreign exchange restrictions in the last decade, the State Administration of Foreign Exchange (SAFE) issued the Administrative Regulations of the People’s Republic of China on Foreign Exchange in 2008. In recent years, SAFE has further liberalised foreign exchange control and also simplified the related procedures to improve efficiency.

  • 4.How SAFE controls foreign exchange on Current Accounts?

    Current account foreign exchange income may, in accordance with relevant provisions of the state, be retained or sold to any financial institution engaged in foreign exchange settlement and sales business.


    Foreign exchange payments from current accounts, shall be in accordance with the State Council Foreign Exchange Administrative Department’s provisions relating to foreign exchange payments and purchases, be made out of one’s own foreign exchange funds on the strength of valid documents or be made with foreign exchange purchased from any financial institution engaged in foreign exchange settlement and sales business.

  • 5.How SAFE controls foreign exchange on Capital Accounts?

    Any foreign organisation or individual that seeks to make a direct investment in China, must first obtain approval from the relevant competent department prior to making the appropriate registrations with the relevant foreign exchange administrative authority.


    Any foreign organisation or individual that seeks to engage in the issuance or trading of negotiable securities or derivatives shall comply with state provisions relating to market access and shall make the appropriate registrations in accordance with the State Council foreign exchange administrative department provisions.


    The state exercises scale management on the administration of foreign debts. Foreign currency borrowings shall be handled in accordance with relevant provisions of the state and registered as foreign debts with the relevant foreign exchange administrative authority.


    The State Council foreign exchange administrative department shall be responsible for the compilation of China’s foreign debt statistics and shall periodically publish foreign debt information.

  • 6.What is the requirement for SAFE registration to open a Capital Account?

    After being issued a Corporate Legal Person Business Licence, a foreign-invested enterprise (FIE) must apply for registration of foreign exchange with SAFE at the place of its business registration. They must present their FIE Background Information Registration Form, official approval documents and a Certificate of Establishment of the FIE, a Corporate Legal Person Business Licence issued by the State Administration for Industry and Commerce, approved valid articles of association and other documents as required by SAFE.

  • 7.What were the rules on the registration of FOREX debts?

    The latest regulation of FOREX debts and Administrative Measures for Registration of Foreign Debts, was issued by National SAFE and came into effect on May 13, 2013.

  • 8.What rules have been issued regarding foreign debts registration?

    Foreign debt registration states that the debtor shall register or report the information on the signing of contracts, withdrawal, repayment, settlement and sale of foreign exchange for foreign debts with and to the local Foreign Exchange Bureau pursuant to the required method.


    In case of any change to the foreign debt loan contract, the debtor shall go through the formalities for registration of any change in foreign debt contract with the Foreign Exchange Bureau as required.


    Where the outstanding foreign debts balance is zero and the debtor has no more withdrawal, the debtor shall go through the formalities for foreign debt cancellation with the Foreign Debt Bureau as required.

  • 9.What rules have been issued regarding administration of the accounts, utilisation of funds and settlement and sale of foreign exchange of foreign debts?

    According to the application by Non-bank Debtor, banks may directly open and close foreign debts accounts and go through formalities for withdrawal, settlement and sale of foreign exchange and repayment of foreign debts after performing necessary examination procedures.


    The funds of foreign debts borrowed by foreign-invested enterprises may be used for settlement of foreign exchange. Unless otherwise provided, the funds of foreign debts borrowed by domestic financial institutions and Chinese-funded enterprises may not be used for settlement of foreign exchange.


    When dealing with the settlement of foreign exchange for funds of foreign debts, the debtor shall follow the principle of actual needs and directly go through the formalities with the banks upon the strength of the required certification documents.


    Banks shall go through the formalities for settlement of foreign exchange for the debtor after examining the certification documents in accordance with relevant regulations.

  • 10.What is the registration process for Foreign Debts?

    The registration process for Foreign Debts is as follows:


    1) SAFE Registration for a Foreign Debts Certificate, Foreign Debts Statement and Bank Opening Approval


    2) Foreign Debt Account opening in bank.


    3) Fund injection into China.

  • 11.How can FIEs use the capital in cash?

    The Types of Capital Conversion are as follows:


    a) Reserve Settlement (equivalent to USD 50,000 or less)


    b) Large Settlement


    For Capital Settlement, the enterprise needs to provide the necessary documents to the bank. Such as the SAFE IC card, a letter of payment order for the RMB funds derived from its capital settlement, certificates demonstrating the purposes for which RMB funds derived from the capital settlement are to be used and the most recent capital verification report, etc.


    Where the settlement is to be made for the reserve funds of a foreign-invested enterprise equivalent to USD 50,000 or less, the enterprise may directly go through the settlement procedure with respect to the accrued interests to its capital account using the relevant interest bill issued by any of the banks.


    The Large Settlement should be transferred to the payee’s bank account directly after submitting the application documents. However, the Reserve Settlement with the amount of USD 50,000 or less is allowed to be transferred and kept in a basic RMB bank account.

  • 1.What type of treasury management business operations need the approval of the People’s Bank of China?

    Generally, any Chinese entities, including foreign invested enterprises (“FIEs”) or establishments of foreign enterprises, specially engaged in the business of Loaning and Financing should obtain approval from the People’s Bank of China. The People’s Bank of China is the central bank of China. Foreign companies or FIEs, require additional approval by the Ministry of Foreign Trade and Economic Cooperation (“MOFTEC”) and State Administration of Foreign Exchange (“SAFE”).

  • 2.How much is the tax rate on financial products in China?

    The withholding tax rate is 10 % for all interest, rentals, royalties and other income of foreign enterprises. Interest income received by FIEs in China is subject to the applicable business tax rate of 5 %.

  • 3.There are different cases in which deductions can be made on interest payment. What happens with interest paid during the establishment of foreign enterprise period?

    During the start-up period, interest on borrowing for establishment or construction should be treated as capital expenses. It can be included in the original price of relevant assets, which may be depreciated or amortised in future years. The interest paid annually, after the commencement of business operations, will be deducted as current expenses in the relevant taxable years.


    During the production or business operation period, interest on loans to purchase equipment and expand operations should be treated as capital expenses if the borrowings are invested before actual use by taxpayers. Should there be any interest accrued after the actual use of the relevant assets or properties, the amount paid may be deducted from the taxable income of taxpayers. Any interest on borrowings for working capital is deductible as other expenses.

  • 4.In the jurisdiction of China, there exists different tax exemptions for doing business in China. What are they?

    The most important  tax exemptions are interest on government bonds. The interest received from government bonds by foreign enterprises or FIEs are exempt from income tax. However, any gains from the transfer of such bonds will be consolidated with the taxpayers other income to determine their tax liabilities.


    Capital gains come from the sale of certain public company shares.. Any capital gains from the sale of B shares or overseas stocks issued by Chinese companies are exempt from income tax if the relevant shares are not held by establishments or legal entities of foreign enterprises in China. The dividends received by foreign enterprises from overseas stocks of Chinese companies are also exempt from income tax in China. Business tax on certain inter-bank loans of local currency Renminbi (“RMB”) loans between foreign banks or foreign invested banks approved to conduct business in China may also be exempt from business tax.

  • 1.What are the consequences for late payment of income tax?

    Under the Law of the PRC for the Administration of tax levying (amended in June 2013) and the Measures for the Administration of Tax Registration (effective from February 2004), the taxpayer should register with the local tax authorities within 30 days of receiving its business license.


    The payment of enterprise income tax on a monthly or quarterly basis should be determined by the taxation authority in accordance with actual situation and have the actual income tax amount settled within five months of the tax year ending. A late payment fine of 0.05% of the outstanding amount per day may be added to the taxpayer’s balance in addition to the back taxes owed. The clock will start ticking for the fine from the day the taxes were due.

  • 2.How would the PRC tax authorities secure the payment of income tax?

    If a taxpayer fails to pay its tax on time, they should be given a deadline for squaring it up with the tax authorities. As an enterprise engaged in production, if the taxpayer fails to make the payment by the specified deadline, the tax authority may (subject to the approval by the head of a tax bureau at county level or above):


    • Order the taxpayer’s bank to withhold from the taxpayer’s accounts the amount due plus any surcharge for overdue payment;




    • Seize and sell other assets belonging to the taxpayer equivalent to the value of the amount due plus any surcharge for overdue payment.


    In addition, under Article 63 of the Tax Collection Law, the tax authorities can possibly impose a fine of up to five times the unpaid or underpaid amount.

  • 3.Who is responsible for the penalty an expatriate employee incurs for late payment of income tax?

    Normally, the FIE would be the withholding agent of the expatriate employee’s tax. This means it has the obligation to withhold and pay the income tax directly from the expatriate employee’s salary within the first fifteen days of each month. As the withholding agent, the FIE is liable if the tax has not been withheld or collected and would thus be lumbered with the late payment fine or other fines imposed. On the other hand, if the expatriate employee’s salary was paid by the parent company in Hong Kong, the expatriate employee would himself by responsible for the payment of tax on his salary. Either way, PRC tax authorities will go for the easy target when chasing the expatriate employee’s tax payment, which normally is the FIE, as they have a fixed presence and assets in China.


    How the FIE is going to retrieve the tax payments from the expatriate employee is of no concern to the Chinese tax authorities!

  • 4.Is it possible to obtain an extension for payment of income tax?

    The expatriate employee is under an obligation to file a tax return and submit relevant tax information with the tax authorities. Alternatively, the FIE, as the withholding agent, is obliged to submit a report and pay the withheld taxes within the specified period. The tax authority may grant an extension to a taxpayer or withholding agent who is unable to file a tax return or report on time. An extension of tax payment may also be offered to a taxpayer with “special difficulty” in paying taxes. The extension can only last as long as three months.

  • 1.Who is responsible for the taxation liability of an expatriate employee working in China?

    Under Chinese law, an employer-paid bill is treated as a taxable benefit. A foreign establishment in China is the withholding agent of its employees’ tax, and is obliged to report to the Chinese authorities that it is bearing an employee’s tax liability.

  • 2.How serious are the Chinese tax authorities in cracking down on tax evasion by expatriate employees?

    Chinese tax authorities’ are mounting a campaign against tax evasion. This means it is more likely that expatriate employees in China will be faced with an unpaid tax bill as well as an additional late payment fine of 0.05 percent per day of the overdue amount.


    If the tax authority finds out about the late payment, it will provide a time limit to the individual or FIE on the individual’s behalf, to declare his / her tax situation and settle the outstanding tax. If they miss the deadline, a fine in the region of RMB 2,000 to RMB 10,000 may also be imposed.


    If the expatriate employee approaches the tax authorities first before they find out about his problem, they may be able to avoid, or at least minimise, the fine as China’s officials have a tradition of extending leniency to individuals who admit their wrongdoings and turn themselves in. It is important that an expatriate employee avoids giving the impression that he or she is engaged in a conscious effort to evade paying taxes under the Supplementary Individual Income Tax Rules of the Standing Committee of the National People’s Congress on Punishment for Tax Evasion and Refusal to Pay Tax. Tax evasion is punishable by prison sentences of up to seven years and fines of up to five times the amount of tax evaded.

  • 3.Is it likely that an expatriate employee could get detained in China for outstanding tax payments?

    Under the Law of the People’s Republic of China on the Administration of Tax Levying (Article 44), a taxpayer must settle outstanding tax payments or provide a guarantee for the outstanding payment to the tax authority before leaving China. If the taxpayer fails to do so, the tax authority may inform the border control authorities and stop the taxpayer from leaving. It is not known whether the Customs authorities have already used this method against managers or other personnel of foreign-invested enterprises, but there have been reports of foreign artists who had performed in China being held up at the border until they settled their tax bills.

  • 4.How is the taxation liability for an expatriate employee calculated?

    Depending on whether the foreign establishment is bearing all or only a part of the expatriate employee’s personal tax bill, different calculation formulae apply. Notices 89 and 199 issued by the State Administration of Taxation in 1994 and 1996 respectively set out the various formulae for “gross up” income and calculating the extra amount of tax due.


    The basic formula provided in Notice 89 applies to individual income tax which is fully borne by an employer. It takes into account the monthly income; the allowable monthly deduction (which under current rules usually amounts to RMB 4,800 for foreign employees) and a quick calculation deduction which is specified together with the applicable tax rate on a progressive scale in a table attached to Notice 89.

  • 5.Are there variations to the previous Taxation Liability Formula?

    The formula mentioned above can be varied if the expatriate employee is one who benefits from a tax equalisation plan. Under such equalisation plans, the employer bears, on behalf of the employees assigned to work in China, the tax which exceeds that of their original country of residence. The expatriate employee’s wages following deduction of tax from their original country of residence will be the “monthly income” in this case.

  • 6.Is there an alternative to the employer paying tax on the expatriate employee’s grossed up income?

    Yes. This is in the form of a loan bonus. An employer makes a loan to cover the employee’s individual tax bill and this loan is later restructured, waived or paid when the employee has completed his China posting. If the loan is to be repaid after an employee leaves PRC, other tax planning considerations come into play. It is important to consider whether the loan will be taxed in the employee’s home country as well as whether it will be taxed in the PRC where the employee receives the loan.


    In addition, there is a distinction between loans made by foreign-invested companies in China and those made by foreign shareholders outside the PRC. A foreign-invested enterprise should book such a loan as the waiver of such a loan may be considered additional China-sourced income on which the employee is liable for income tax in China.

  • 7.How can an expatriate employee working in China and Hong Kong avoid double taxation?

    Agreement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Incomes (“the Arrangement”) has been effective since April 1,2007 Hong Kong and January 1, 2007 in Mainland China. It is aimed at preventing the imposition of income tax and other similar taxes in both Hong Kong and in the Mainland. Specifically, it covers PRC individual income tax, enterprise income tax, and the parallel Hong Kong taxes: salaries tax, profits tax and tax charged under personal assessment. Thus, the Arrangement could affect the expatriate employee from the start of their employment in the Mainland, and may also have some bearing on the employer.

  • 8.Would an expatriate employee be considered a resident of Hong Kong for taxation purposes under the Arrangement?

    Under Article 4 of the Arrangement, a “resident” of Hong Kong who works in the Mainland will be taxed on their remuneration for Mainland-based work by the PRC tax authorities. The Arrangement is sketchy on the meaning of “resident”. The definition given is “any person who is liable to the taxes of one side by reason of their residence, domicile, place of effective management, location of head office or any other criterion of a similar nature in accordance with the laws of the respective sides”.

  • 9.How many days will the Hong Kong employee have to be in China before they will incur tax liability under the Arrangement?

    The crucial question is: “Will the employee clock up more than 183 days in China during any one calendar year?”


    Before the implementation of the Arrangement, individuals from Hong Kong were limited to a 90-day tax-exemption period in the Mainland. Under the Arrangement, the Hong Kong employee’s tax liability in China will not be triggered until after 183 days within any 12 months. The 183-day exemption applies to those Hong Kong “residents” whose salary is borne by an employer outside China. After 183 days, the Hong Kong employee will be taxed in the Mainland on a “days in, days out” basis.

  • 10.Will the fringe benefits received by an expatriate working in China be taken into account for their PRC individual income tax bill?

    The Individual Income Tax Law of the People’s Republic of China and its accompanying Implementing Regulations (2011 revision), only scrape the surface of the issue of fringe benefits. On the one hand, “subsidies and allowances” related to the tenure of an office or employment that is derived by individuals by virtue of them having secured the tenure of that office of employment” are bundled in with taxable “income from wages and salaries”. On the other hand, certain allowances and subsidies are “exempted from individual income tax by State Council regulations”. These exemptions are outlined in subsequent notices issued by the State Administration of Taxation and the Ministry of Finance.


    The PRC tax authorities allow very few expatriate benefits. The hardship allowance cannot, however, escape the taxman’s clutches as it is deemed to fit the description “related to the tenure of an office or employment”. A job in China today is still considered a “hardship” post. Any salary boost to compensate for such hardship will be caught in the tax net.

  • 11.How would tax be levied on fringe benefits?

    Sometimes, the taxability of a fringe benefit will depend on the way it is structured. For example, if the company is providing the expatriate employee’s housing free of charge for the length of their employment in China, the tax authorities will let this benefit slip through.


    Likewise, if the company paid the actual expenses of the employee’s housing, no tax would be levied. It would be a different story, however, if the expatriate employee was given a fixed housing allowance every month and selected accommodation that cost less than the allowance. The amount of such allowance spent on items other than housing would be taxable. Tax would also be an issue if the company passed the title to the residential premises to the employee after, say 5 years of service in China. In this case, the value of this payment-in-kind would be spread over their monthly salary during the 10 year period and taxed accordingly.


    As long as the expenses are “reasonable”, the expatriate employee can rest easy on holiday and their children can enjoy school without being pressured by an extra tax burden. A 1997 SAT notice specifically referred to a tax exemption on trips to visit relatives. Thus it may be tricky trying to squeeze a beach holiday in Bali past the PRC tax officials.

  • 1.What is transfer pricing?

    Transfer pricing is the pricing of goods, services and intangibles and the making of other payments between companies that are commonly owned or controlled across state and national boundaries.

  • 2.What are the Transfer Pricing rules in China?

    Transfer pricing in China is governed by the Income Tax Law, and The Law Concerning the Administration of Tax Collection.


    Furthermore, the State Administration of Taxation has issued a number of rulings on the issue. The most important one is Guoshuifa [2009] No.2.


    The Chinese government has also adopted international principles. Accordingly, inter-company transactions should be priced according to the “arm’s length principle”. If firms are regarded as associated, which they are if one of the entities are owned or controlled by another entity, then the assets must be priced according to the arm’s length transaction principles.

  • 3.Which methods are used to determine the pricing?

    There are 6 methods that are currently used to determine the pricing. These are:


    1. Comparable Uncontrolled Price Method


    A pricing method adopted by arm’s length parties in conducting same or similar transactions;


    2. Resale Price Method


    A product purchase pricing method that begins with the resale price to arm’s length parties (of a product purchased from an affiliated party), reduced by a gross margin of the same or similar transactions;


    3. Cost-Plus Method


    A pricing method that takes into consideration additional cost, reasonable fees and profits;


    4. Transactional Net Profit Method


    Profits are determined as per the net profit margins of arm’s length parties in conducting same or similar transactions.


    5. Profit Split Method


    The consolidated profits or losses of an enterprise and its affiliated parties are allocated between or among them using a reasonable rate.


    6. Other Methods


    As set out in compliance with the arm’s length principle.

  • 4.What is the current legislation governing business transactions between affiliates?

    Under the Law of the People’s Republic of China on Enterprise Income Tax promulgated in 2007 and Circular of the State Administration of Taxation on Printing and Distributing the Implementing Measures for Special Tax Adjustments (Guo Shui Fa [2009]No. 2, China adopts the internationally recognised “arm’s-length rule” for transfer pricing. Accordingly, a subsidiary in China should be pricing the goods it sells to its parent company at the same fair level as if the parent company was an unrelated party. Similarly, the parent company must charge interest and royalties to its subsidiaries at rates it would offer to non-affiliates.


    The Law of the People’s Republic of China on Enterprise Income Tax and its detailed implementing rules allow China’s tax authorities to make reasonable adjustments to prices and costs if they believe that a foreign enterprise has lightened its tax burden in China by failing to adhere to the arm’s-length rule. If the Chinese subsidiary can only provide its local SAT office with information which shows that it is selling its goods to the parent company at unjustifiably deflated prices, the SAT officials have the right to apply the “comparable uncontrolled” method, “resale price” method, “cost plus” method or any other reasonable method to adjust the prices to an arm’s-length standard for tax purposes. These methods will be familiar to companies whose business straddles two or more jurisdictions. The Chinese tax authorities may also effect appropriate adjustments to abnormally high or low interest rates or to non-existent or negligible royalty payments in affiliate transactions.

  • 5.What are the aspects of the framework for the administration system for the taxation of transfer pricing as stated in the Transfer Pricing Notice?

    The Transfer Pricing Notice lays down the framework for a highly efficient administration system for taxation of transfer pricing. The key elements include competent specialist audit teams to inspect the transfer pricing aspects of foreign enterprises’ transactions and a database for administration of transfer pricing using information gathered from other government authorities such as the respective Administration of Industry and Commerce, PRC customs authorities and banks. In addition, departments dedicated to the tax administration of transfer pricing will be established within tax authorities in areas where Foreign-Invested Enterprises (“FIEs”) are concentrated.

  • 6.What obligations are placed on FIEs by the Transfer Pricing Notice?

    China adopts stringent requirements on filing related party information. Tax payers are required to file annual related party transaction reports as part of their annual CIT filing package before May 31st of each year. In addition, enterprises are required to prepare TP documentation in place for inspection upon request by Chinese tax bureaus. Enterprises meeting certain conditions are exempt from such requirements.

  • 7.Why do foreign enterprises use transfer pricing?

    Foreign enterprises use transfer pricing for the purpose of profitability. Despite tax exemptions and other preferential policies on offer, some foreign businesses adopt low prices but report high prices when importing equipment, pass off inferior goods as quality goods and raise production costs thereby gaining big profits on equipment with unfair equity ratios. As a result, state-owned assets and income tax have been draining away.


    Increasing profits outside China – foreign businesses report high prices and charge high technology transfer fees and royalties for the purpose of transferring profits. In some FIEs that are controlled by foreign parties, the Chinese party follows protocols with the foreign party and relies on the foreign party to make decision on importing technology. The transfer of technology and exclusive rights, such as the transfer of trademarks is entirely controlled by the foreign party. Sometimes the foreign party does not make reasonable valuations and by this means of transfer pricing, it reduces it profits in China and increases its profits outside China.

  • 8.Do companies in China normally have Advanced Pricing Agreements (APA)?

    It depends on the complexity of explaining the manner in which a company does its pricing. If many complex issues are involved, then perhaps a company will need to have an APA in place. It also depends on the respective local tax authorities and their expertise in this area. If the local authorities are not well versed in this area (which undoubtedly is highly specialised), then it is futile investing time and effort to put together an APA.


    * (An APA is an agreement between the tax authorities and the taxpayer, setting out the method of transfer pricing policy for controlled transactions over a fixed period of time.)

  • 9.How long does it take for an APA to be approved in China? What needs to be done?

    At present, an APA between the taxpayer and the tax authority takes nine months to a year for approval in China. A pre-filing meeting with the State Tax Bureau is essential to discuss the following particulars:


    (i) Parties involved;


    (ii) Duration of the agreement;


    (iii) Documents for review by the State Tax Bureau;


    (iv) Any double taxation involved;


    (v) Sufficiency of documentation to make market price comparisons;


    (vi) Principles applicable in determining transfer pricing methods;


    (vii) Compliance requirement of the Tax Bureau.

  • 1.What is the scope of Chinese Value-Added Tax (VAT)?

    Value-Added Tax (VAT) is levied on both domestic and foreign enterprises in China on the transfer of taxable goods and services at each stage of the production process.


    VAT is levied on sales by producers, wholesalers and retailers as well as at the retail level whereby goods and services are sold to the end consumer. Commercial activities known as “mixed sales activities” which involve the sale of goods and certain services may also attract either VAT or business tax liabilities.

  • 2.What is the VAT rate in China?

    The general VAT rate levied on the sale or import of goods and the provision of processing, repair and installation services is 17%. A lower rate of 13% applies to goods such as books, newspapers, magazines, cereals, edible vegetable oils, tap water, heaters, coal products for residential use and other goods as prescribed by the State Council.


    In respect of goods sold by certain small scale taxpayers, a special VAT rate of 3% is applied.


    According to Caishui [2013] No.106 & Caishui [2014] No.43, service industries that were originally subject to Business tax are now subject to VAT instead.


    The applicable Service VAT rates are as follows:


    Intangible Movable Property Leasing Services 17%


    Transportation Services 11%


    Postal Services 11%


    Basic Telecommunications Services 11%


    Value-Added Telecommunications Services 6%


    Research, Development & Technical Services 6%


    Information Technology Services 6%


    Cultural & Creative Services 6%


    Logistics Auxiliary Services 6%


    Certification & Consulting Services 6%


    Broadcasting, Cinematic & Television Services 6%

  • 3.How is VAT Calculated?

    In respect of general taxpayers, VAT is calculated by deducting the amount of VAT paid on goods and services purchased by the taxpayers (“Input VAT”) from the VAT on the sale of goods and services (“Output VAT”). If the total output VAT for the current period is less than the deductible input VAT, the balance may be carried forward and offset in later periods. Output VAT is calculated in RMB and may be collected by the taxpayer from the purchaser.


    For sales value in foreign currency, the taxpayer must use the prevailing foreign exchange rate quoted by the State to convert the sales value into RMB.

  • 4.What Products can enjoy VAT refund when exported?

    Under the Guo Shui Han [1999] No.264, products subject to VAT refund have been expanded, and the VAT refund rate on exports ranges from 5% to 17%.

  • 5.How to apply for the VAT refund?

    Cai Shui [2012] No.39 specifies the measures to apply for the VAT refund for exported goods and services, and the computational formulas to compute and calculate the refund.

  • 6.How to make deductions for Input VAT?

    To deduct Input VAT, the taxpayer must have the requisite withholding certificates, i.e. special VAT invoices obtained from the seller or tax certificates obtained from Customs. The special VAT invoices need to be verified within 180 days after issuance.

  • 7.Is all Input VAT deductible?

    Not all input VAT is deductible.


    Some examples of Input VAT that are deductible are:


    • The amount of Input VAT printed on the VAT invoice acquired from the seller.


    • The amount of Input VAT printed on the paid import VAT receipt acquired form Customs.


    • Input tax on the purchase of agricultural products is calculated by multiplying 13%.


    Some examples of those Input VAT that are not deductible:


    • Non-VATable Goods and services, VAT exempted activities, welfare, and personal consumption.


    • Goods and services with abnormal losses.

  • 8.When returning goods, should I also return the Special VAT Invoice?

    Yes, otherwise VAT refunds will not be available to the taxpayer. Therefore, when a buyer returns goods, the taxpayer must ensure that the special VAT invoice is also returned.

  • 1.What are the investment options open to expatriates in China?

    As an expatriate, you have great scope in your investment decisions. Whilst analysts argue that investments should be judged using pre-tax returns, where expatriates are concerned, there should be extensive research conducted as to whether the investments should be owned and where income and capital gains should be realised. After all, you are the one taking the risk of the investment, so why would you want to give any more to the tax-man than you possibly have to?


    When it comes to your personal financial planning and investment strategies, we would recommend that you first sit down and plan your financial goals, assess your risk adversity, your time horizon and your current financial position. When this has been finalised you are in a much better position to seek professional advice and begin your financial planning.

  • 2.What kind of benefits do non-Chinese residents have access to when residing in China?

    This will depend on what type of visa you are working on, your tax status in China and the length of time you spend in the PRC within a 12 month period. Tax rates in the PRC are, in many cases, lower than other countries. This provides benefits of reducing your tax obligation on income earned from labour, from investments and also possibly on any capital gains that you realise.


    Also, by structuring your employment contract properly, there are many tax deductions made available to expatriates that will assist in reducing your taxable income. These can include housing allowances, education allowances, home leave allowance, and reasonable expenses. Similarly, by structuring year-end bonuses properly, taxation burdens can be reduced.

  • 3.What are the tax implications of having options included as part of your expatriate package in China?

    When assessing the tax obligations of options, the authorities will examine the location of services rendered in earning the options and income generated. There are three main issues to consider:


    1. Location of grant


    2. Location of vesting


    3. Location of exercise


    Whilst stock options granted prior to residing in China and based on services performed outside of China are PRC-tax exempt, if you are a resident of China for less than five years and are granted options during this time, you may certainly need to consult a professional to understand your tax liabilities and your individual situation.

  • 4.What should expatriates do about their banking whilst in China?

    Whatever your financial circumstances, as an expatriate you would be advised to examine the possibility of opening an offshore bank account, in order to take advantage of the tax efficiency and enhanced confidentiality that this provides. No tax is payable on interest arising from money held in an offshore bank account, so even if you are just looking for somewhere to receive funds remitted from home, or have your salary paid into, this has to be a plus.


    In China this is particularly important given the restrictions on taking hard Chinese currency out of the country. The controls are quite strict and troublesome and this can cause issues if you have all your salary and savings accumulating in a bank account within the PRC.


    It is most convenient usually to set up a bank account within China for conducting day-to-day transactions easily and limiting currency exchanges and risks. You can also then set-up an offshore account (which can usually be denominated in many currencies) where you accumulate savings and conduct investment activities. This also provides greatest flexibility when it comes to leaving countries!

  • 5.What is the difference between expatriates and local Chinese for individual income tax purposes?

    There is a classification in Chinese citizens and non-Chinese citizens, both of them are regarded as taxpayers in China and their IIT shall be payable in accordance with the provisions of the IIT law of the PRC.


    Chinese citizens refers to an individual who has a domicile in the territory of China (refers to individuals who by reason of their family registration administration, family or economic interests habitually reside in China), or who has no domicile but has stayed in the territory of China for one year or more shall pay individual income tax in accordance with the provision of this law for their incomes obtained inside and /or outside the territory of mainland China.


    An individual who has no domicile and does not stay in the territory of China or who has no domicile but has stayed in the territory of China for less than one year shall pay individual income tax in accordance with the provisions of this law for their income obtained in the territory of mainland China.


    Non-Chinese Citizens refers to individuals who are neither domiciled nor resident in China, or who are not domiciled and have resided for less than one year in China. They shall pay individual income tax in accordance with this Law on income derived from sources within China. Non-Chinese Citizens assume a limited obligation to pay tax and only income from China will be subject to IIT. With regard to expatriates, “to live in China for one year” requires the expatriate to live in China for 365 days per taxable year.


    If the expatriate temporarily leaves China for no more than 30 days every time or no more than an accumulated total of 90 days for several times, the time will still be regarded as one year.

  • 6.What is the legal statement about tax payment of individuals, who have stayed more than 1 year and less than 5 years (including the 5 year) but have no domicile within China?

    For income derived from sources outside Mainland China by individuals not domiciled in China, but resident for more than one year and less than 5 years, subject to the approval of the responsible taxation authorities, IIT may be paid for only that part which was paid by companies, enterprise or other economic organisations or individuals which are in China.

  • 7.Which opinion exists within the jurisdiction for individuals living in the territory of China longer than 5 years?

    For individuals who have lived within the territory of China for 5 full years, from the sixth year onwards, individuals who have lived within the territory of China for one full year shall declare payment of tax on their incomes gained from inside and outside China every year. For those individuals who have lived in China less than one year, they shall declare payment of tax only on their incomes of that year gained from within the territory of China.
    From the sixth year onward if an individual resides less than 90 days within the territory of China, their tax obligations shall be determined according to the Individual Income Tax Law of China and the 5 year time limit will start recomputing from the year when they have lived within China for one full year again.

  • 8.Which type of income will be subjected to payment of individual income tax (IIT)?

    The taxpayer has to pay attention as there are a lot of types of income:


    • Income from wages and salaries;


    • Income from private industrial and commercial households from their production and business operations;


    • Income from contracting or leasing enterprises and institutions;


    • Income from remuneration for labor service;


    • Income from authors’ remuneration;


    • Income from royalties;


    • Income from interest, stock dividends and bonuses;


    • Income from lease of property;


    • Income from transfer of property;


    • Occasional income; and


    • Other incomes specified as taxable by the department of the State Council for finance.


    Whether the place of payment is inside the China or not, it shall be regarded as income derived from sources inside China if it is;


    • Income from personal services provided inside China because of the tenure of an office, employment, the performance of a contract and etc.


    • Income from the lease of property to a lessee for use inside China.


    • Income from the assignment of property such as buildings, land use rights, etc. inside China or assignment inside China of any other property.


    • Income from the licensing for use inside China of any kind of licensing rights:


    • Income from interests, dividends and extra dividend derived from companies, enterprises and other economic organisations or individuals inside China

  • 9.Regarding the tax liability of directors and senior management personnel of enterprises within the jurisdiction of China. How is it determined and what measures will the tax authorities take if this tax is not paid?

    For individuals who assume posts as directors or senior level managerial personnel of an enterprise within China, director fees or wages and salaries gained by them, which are paid by the enterprise within China, shall be individually taxed on income from the day they assume the post as director or senior level managerial personnel of the enterprise within China, until the day when they terminate the posts mentioned above.


    Whether or not they perform their duties outside China, they shall perform the tax paying obligations on wages and salaries gained by them, which are paid by the enterprise outside China.


    If they fail to do this the tax authorities will reserve the right to check and ratify their income referring to similar entities and positions in local area.

  • 10.What has to happen for IIT to be reduced upon approval?

    There are three situations, whereby IIT can be reduced:


    • Income derived by disabled persons, unsupported aged persons or members of a martyr’s family;


    • The taxpayer suffers major losses caused by disasters;


    • Other cases in which reduction is approved by the finance department of the State Council

  • 1.Do foreign employees have to pay China taxation and on what basis is this calculated when their salaries are paid offshore?

    When a foreign employee is not a China domiciled individual and receives remuneration from a foreign employer whereby the payment is not borne by the company in China, the income tax payable will depend on the length of residence in China in a year as follows (varies by country):


    • Not more than 90/183 days: exempt from paying income tax.


    • More than 90/183 days but less than 5 years: Income tax is payable on China sourced income during the period during the period of residence in China.


    • Over 5 years: Income tax is payable on worldwide income from the 6th year.


    The above is a general rule, though there are in place bilateral tax treaties with some countries, providing an extra source of rules for interpreting the term “residence”.


    When the employee is paid predominantly off-shore, the employee will need to declare the element that is associated with the work conducted in China on behalf of the company’s entity there.

  • 2.Can losses be carried forward in China?

    Chinese regulations allow losses to be carried forward for up to five years. Losses are not however allowed to be carried back.

  • 3.What should a company do if it has not filed its taxes properly, how can this be rectified?

    China is making great strides in reforming its taxation system, improving the collection of tax and ensuring compliance. The taxation authorities tend to look favorably on companies coming forward to resolve their irregularities, with severe consequences if the tax department finds them out first.


    When a company has not filed taxes properly it is advisable to discuss with a taxation agent immediately to first assess the potential liability and the extent of irregularities. Additionally such agents are licensed to discuss and negotiate with the authorities on the company’s behalf.


    LehmanBrown works with a number of experienced agents and can assist in both resolving taxation problems and in ensuring compliance going forward.

  • 4.Which condition is important in order to pay corporate income tax in China?

    Any foreign enterprise with establishment in China that generates income (including production and business operation income and other income) from within China should be subject to corporate income tax in China.

  • 5.Why is the definition of business agent very important for foreign companies?

    Generally, a business agent refers to a company, enterprise or other economic organisation or individual entrusted by a foreign enterprise to act as an agent in any of the following:


    • representing the foreign principal on a regular basis in arranging purchases and signing of purchase contracts on behalf of the principal;

    • entering into agency agreements or contracts with the principal, storing on a regular basis products or commodities owned by the principal, and delivering on behalf of the principal such products or commodities to other parties;

    • being authorised to represent the foreign principal on a regular basis in signing of sales contracts or in accepting purchase orders

  • 6.What is the difference between permanent establishments and non-establishments of a company. How is this characterised and what are the consequences for taxation?

    Usually, permanent establishment includes:


    • place of management;
    • a branch;
    • an office;
    • a factory;
    • a workshop;
    • a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources;
    • a building site, a construction, assembly or installation project, or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than six months;
    • an installation, drilling rig or ship used for the exploration or exploitation of natural resources, but only if so used for a period of more than three months; and
    • the rendering of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where such activities continue (for the same or a connected project) within the country for a period or periods aggregating more than six months within any twelve month period.


    There are also some activities by a foreign enterprise in China will not be considered as constituting permanent establishment, including:


    • the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
    • the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;
    • the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
    • the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;
    • the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activities of a preparatory or auxiliary character;
    • the maintenance of a fixed place of business solely for any combination of the activities above, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

  • 7.What is the usual way the income of a permanent establishment is taxed ?

    Generally, a permanent establishment of a foreign enterprise should be taxed on its income sourced from within China. Theoretically, the foreign sourced income attributable to the permanent establishment of a foreign entity may not be taxed in China.


    The taxable income of a permanent establishment within a tax year should be determined by the total income of the current year with deductions of the relevant costs, expenses and losses. In practice, a deemed profit rate ranges from 15%-50% may apply when the costs and expenses cannot be accurate booked.

  • 8.Which reasonable deductions are applicable in China?

    As a general proposition, reasonable costs and executive and administrative expenses will be allowed as deductions in determining the tax liabilities of a permanent establishment of a foreign enterprise. However, certain payments to related parties or head offices will not be deductible under most of the tax treaties. The non-deductible expenses usually include royalties and interests or payment of the same nature.

  • 9.How much is the tax rate of permanent establishments of foreign enterprises, and if there is a connection to industry, which jurisdiction will exist in this case?

    Permanent establishments of foreign enterprises will be taxed at the rate of 25%.


    In practice, the tax incentives are hard to obtain because these tax benefits need prior approvals from relevant government authorities, including SAT.

  • 10.What should a company do if it has not filed its taxes properly, how can this be rectified?

    China is making great strides in reforming its taxation system, improving the collection of tax and ensuring compliance. The taxation authorities tend to look favorably on companies coming forward to resolve their irregularities, with severe consequences if the tax department finds them out first.


    Where a company has not filed taxes properly it is advisable to discuss with a taxation agent immediately to first assess the potential liability and the extent of irregularities. Additionally such agents are licensed to discuss and negotiate with the authorities on the company’s behalf.


    LehmanBrown works with a number of experienced agents and can assist in resolving any taxation problems and in ensuring compliance going forward.

  • 11.What happens if an FIE fails to submit to the tax authority tax filings with the stipulated time limit?

    The tax authority shall make an assessment on the taxable income of the FIE and decide the amount to collect, according to the Provisional Measures for Assessment and Collection of Enterprise Income Tax (the “Assessment and Collection Measures”).

  • 12.How does the tax authority determine the taxable income?

    Two alternatives are available, one of which is the fixed amount method, whereby the tax authority directly assesses the amount of enterprise income tax that is payable, the other is to assess the taxable income rate, whereby the taxable income rate is calculated in advance.

  • 13.Under what circumstance shall the “assessment and collection” method be taken?

    • When the account books are not kept properly;

    • When the actual expenses and costs cannot be accurately verified although the total income can be verified;

    • Where the total income cannot be accurately verified although the costs and expenses can be verified;

    • Where neither of the total income nor the costs and expenses can be accurately verified plus that the truthful, accurate payment materials cannot be provided;

    • If, when tax payment is due, the taxpayer fails to make its tax filing within the time limit set out in the relevant tax laws and regulations, and still fails to file after being issued with an order by the relevant tax authorities to submit its tax filings within a certain time limit.

  • 14.Should there be any change if the tax payable or taxable income rate has been fixed?

    For the year usually there is no adjustment unless the following situation arises:

    • A major company restructuring occurs;
    • Major changes are made with respect to the scope of production and business or the main business that is carried on; and/or
    • An event of force majeure occurs.

  • 15.What are the consequences if an FIE fails to comply with tax laws noted above?

    The tax payer’s acts in violation of the tax law shall be dealt in accordance with the relevant provisions of the law of The Peoples’ Republic of China on the administration of tax levying and its implementing rules (Decree of the President [2001] No.49) which stipulate there will be fine for it and compulsory execution on the tax.

  • 1.Are there any exceptions to the new rules?

    Under the old rules, the contribution was calculated based on the average monthly salary income of the participating employee from the previous year, therefore the higher the salary the higher the contribution. Since employers must match the contribution by the employee the enterprise must also set aside more money with increases in salaries. Contributions are tax free for individual income tax purposes.

  • 2.My company plans to send some employees to the USA for training. Can I prevent them from switching companies after having received the training?

    Yes, you can prevent them from switching companies after having received the training. Specifically, you may have these trainees sign a training agreement with your company, indicating that the trainees will pay all the costs related to the training if they switch companies within 2 to 3 years after they have completed the training. It would be better to have the training agreement, with all necessary signatures, notarized at a notary public office in China. Training agreements with reasonable terms have been upheld by Chinese courts.

  • 3.How do you best retain a talented workforce?

    There are many ways to retain talent. One way that is now making way also in China is the global stock option plans, which can be tailored to comply with Chinese regulations. Other forms that are used are supplemental benefits such as cafeterias, housing loans etc. Generally speaking however, the best tool is a strong corporate culture with clear succession and development plans for the individuals. Many times companies assume that finding talent is hard in China and therefore expensive, however many times the foreign company already has the necessary talent and it is simply a matter of discovering it. Discovering and developing talent however requires a structured process that strives to leave all employees happy.

  • 4.What are important topics in Human Resources (HR) with regards to China?

    Regarding China or other locations an important issue is getting the right people working on the right thing in the right way. This may be difficult using only the resources available. Many companies are stuck in that situation in China right now due to the global down turn and related downsizing. It is important to realize that in situations like this HR can work to raise efficiency and productivity.

  • 5.Which government body is responsible for the administration of employment law in China?

    The Ministry of Human Resources and Social Security. The ministry is responsible for formulating national human resource and social security policies. The Labour and Social Security Bureau, which sits beneath the ministry, is responsible for administering national and local regulations.

  • 6.What are the principal labour regulations in China?

    The Labour Contract Law of People’s Republic of China, (the Labour Contract Law) effective from January 1, 2008, amended on December 28, 2012) the PRC Labour Law (the Labour Law), effective from 1 January 1995 and amended on August 27, 2009, and the PRC Trade Union Law, promulgated on 3 April 1992 and amended on 17 October 2001 are the principal Chinese labour laws. The laws, which apply to all enterprises and economic organisations, address most employment issues including recruitment, contracts, wages, work conditions, occupational health and safety, and women in the workforce and labour dispute resolution.
    Under the Labour Contract Law, all employers and employees must execute labour contracts that define the parties’ rights and obligations and include the term, nature of the job, place of work, working hours, rest and leave, labour remuneration, social secruity, labour protection, working conditions and protection against occupational hazards, other matters which laws and statutes require to be included in employment contracts. Supplementary laws have also been issued for particular aspects of employment, including:


    • Interim Provisions on Labour Dispatch, adopted in 2014


    • Special Provisions on the Labour Protection of Women Employees, adopted in 2012;


    • The Regulations of the State Council Governing Working Hours for Workers, adopted in 1995;
    Labour practices vary between regions as provincial and local labour departments have fairly wide discretion in handling local labour matters.

  • 7.How can FIEs recruit local and foreign employees?

    FIEs may recruit Chinese employees directly or through local employment service centers. Foreign nationals, however, require approval from the local Human Resources and Social Security Bureau and the employer must demonstrate why local employees cannot fill the position or do not otherwise qualify. Expatriates should meet a range of requirements including academic degree, professional qualification, position and contract term etc.

  • 8.Is there a minimum wage requirement in China?

    The Labour Law provides a minimum wage requirement, which is determined at a provincial level. The Regulations on Minimum Wages (adopted in March 1, 2004) require all provinces, autonomous regions, and directly administered municipalities to set minimum wage standards and report them to the Ministry. Employers that fail to meet these standards may be ordered to compensate employees for the difference, pay other compensation, or both. Employers must also deduct and withhold employee individual income tax, social security and related payments.

  • 9.Are Chinese employees entitled to receive subsidies?

    Employers and employees must participate in the PRC social insurance system for unemployment, old age pensions, medical treatment, work-related injuries and maternity care. In addition to these mandatory subsidies, employers may also introduce incentive schemes such as bonuses or allowances. These incentives can refer to the related preferential terms and standard policies on business income tax and employee’s individual income tax issued by national and local tax offices

  • 10.What are the standard working times in China?

    The standard workweek is eight hours, five days a week.. Enterprises requiring different standards may, with the approval from the local labour administration, adopt flexible work systems.


    Restrictions apply to overtime work. Overtime may not exceed three hours per day and 36 hours per month. This may be longer under special circumstances and subject to agreement with trade unions and employees. Standard overtime wages are:


    • 150% of regular wage for overtime
    • 200% of regular wage for work on rest days
    • 300% of regular wage for work on statutory holidays


    Employees who have worked continuously for one year or more are entitled to paid annual leave. The amount of annual leave varies according to accumulated years of service, normally 5-20 days a year.

  • 11.Are there any employment restrictions that apply to local employees?

    Special laws protect various aspects of female employees such as maternity benefits. Employees between the ages of 16 and 18 are also protected under special occupational health and safety measures, including special procedures for hiring minors. Hiring children less than 16 years of age is strictly prohibited. Employers must also implement occupational health and safety programs in the workplace and conduct regular physical examinations for employees in hazardous environments.

  • 12.How can I terminate the employment of a local employee?

    Employment termination is complicated in the PRC and employers should exercise caution when terminating employees. Employers may dismiss employees without notice and economic compensation only when the employee:


    • is dismissed during the statutory probation period;
    • has seriously violated workplace rules;
    • causes great losses to the employer due to serious dereliction of duty, embezzlement or another criminal offence;
    • has additionally established an employment relationship with another employer which materially affects the completion of his tasks with the first-mentioned employer, or he refuses to rectify the matter after the same is brought to his attention by the employer; or
    • is being investigated for a criminal offence.


    Employers may otherwise dismiss employees by first giving 30 days’ notice or paying an additional month’s salary when the employee:


    • is unable to take up his original or any new work upon returning from non-work-related medical treatment for illness or injury;
    • is unqualified for his job and remains unqualified even after receiving training or an adjustment to another work post; or
    • is unable to agree with the employer, after mutual consultation, to modify his labour contract when the purpose for which he was originally hired was significantly changed or no longer exists.


    Employers may not dismiss employees when they:


    • are engaged in operations exposing them to occupational disease hazards and have not undergone a pre-departure occupational health check-up, or are suspected of having contracted an occupational disease and are being diagnosed or under medical observation;
    • suffer from a work-related sickness or injury that has been medically confirmed as having completely or partially caused the employee to lose the ability to work;
    • suffer from an illness or injury for which medical treatment within a specified period is allowed;
    • are pregnant, on maternity leave or within the specified period for nursing; or
    • Has been working for the employer continuously for not less than 15 years and is less than 5 years away from his legal retirement age;


    The Provisions Concerning Economic Redundancy in Enterprises (effective January 1, 1995) allow employees to be laid-off or dismissed for economic reasons, such as when the employer:


    • faces bankruptcy;
    • undergoes statutory reorganisation under the People’s Court order; or
    • falls into ‘serious operational difficulty’ as defined by the local government.

  • 13.How can my employee terminate his or her employment with my company?

    Employees generally may resign at will, but generally must give at least 30 days’ notice. During his probation period, an employee may terminate his employment contract by giving his employer three days’ prior notice.


    No notice is required if an employee resigns:


    • If an employer uses violence, threats or unlawful restriction of personal freedom to compel a employee to work;

    • If an employee is instructed in violation of rules and regulations or peremptorily ordered by his employer to perform dangerous operations which threaten his personal safety.

  • 14.How are labour disputes generally resolved in China?

    The PRC Labor Dispute, Mediation and Arbitration Law establishes the procedures for handling labour disputes. Under the dispute regulations, parties are encouraged to settle labour disputes by negotiation or mediation. If neither of these works, the parties must resort to compulsory arbitration before they may initiate legal proceedings.

  • 15.What are the requirements for foreign employees working in China?

    Foreign nationals may work in the PRC only after obtaining employment permits, employment certificates and residence certificates.


    Employment permits and employment certificates are exempt where they:


    • are a professional technician or management personnel employed directly by the Chinese government;

    • hold a Foreign Expert Certificate issued by the Foreign Expert Bureau and are employed by state authorities or public institutions;


    Employment permits are exempt where they:


    • have specialised skills working in offshore petroleum operations without the need to go ashore and hold a Work Permit for Foreign Personnel Engaged in Offshore Petroleum Operations in the PRC; or

    • engage in commercial activities with the approval of the Ministry of Culture and hold a permit to conduct temporary commercial activities.

  • 16.What legislation governs the employment of foreign employees in China?

    The Administrative Regulations on the Employment of Foreign Nationals in the PRC (amended in 2011)(the Provisions), promulgated on January 22, 1996, govern the employment of foreign nationals in the PRC (holders of Hong Kong, Taiwan and Macao travel documents are governed by the Administrative Regulations on the Employment of Hong Kong, Taiwan and Macao residents in Mainland China). The provisions require that an employer must prove that a ‘special need’ (defined as where there are requirements for a position for which there is a temporary shortage of suitable local candidates) exists before employing a foreign national.


    Foreigners without residency rights seeking employment in the PRC must:


    • be at least 18 years of age and be in good health;
    • have no criminal record;
    • have a confirmed prospective employer;
    • hold a valid passport or other international travel document in lieu of the passport; and
    • With professional skills and job experience required for the work of intended employment.

  • 17.Do the same employment laws and regulations apply to representative offices in China?

    Registered representative offices are subject to different regulations. All Chinese staff hired by representative offices must be employed from Chinese organisations authorized by the State to provide services to foreign enterprises. Direct private hiring is prohibited.

  • 18.Who is responsible for deciding and adjusting enterprise wage standards?

    Generally enterprises have full autonomy over their own wage system. They may determine their staff’s average wage level and wage increase with reference to the local workers’ average wage levels in the same industry. Competent local departments regularly release information such as wage guidelines and consumer price index for reference by enterprises.

  • 19.What are the components of workers’ wages?

    Workers’ wages generally include pay on time basis, pay on piecework basis, bonus, allowance and subsidy, over-time pay, and other payment for special duties.


    The following must be provided, but not included in workers’ wages:


    • Social insurance and welfare benefits, such as bereavement, poverty relief, and paid by the employer to individual staff;

    • Labour protection-related benefits, such as allowances on work clothes, detoxification agents and refreshing drinks;

    • Other labour remuneration not listed in the total payroll according to relevant regulations.

  • 20.Are there any special requirements when the enterprises pay their workers? If so, what are they?

    Yes, the enterprises shall pay in accordance with the following requirements when they make payments to employees.


    (a) Enterprises must deduct personal income tax and various social insurance fees from their workers’ wages and make payment for them.


    (b) Enterprises may reduce workers’ wages under the following rules and circumstances:


    • Specific stipulations in China’s laws and regulations;
    • Specific stipulations in labour contract signed according to law;
    • Specific stipulations provided in factory rules and disciplines formulated according to law by the enterprise and approved by workers’ congress;
    • Where the total payroll of the enterprise is linked with economic benefit, i.e. wages have to come down in tandem with falling economic benefit (but the wages for regular staff must not be lower than the local minimum wage);


    (c) Enterprises may delay wage payment in the following circumstances:


    • Enterprises cannot pay their workers on time because of force majeure such as natural disasters and wars;
    • Enterprises may temporarily delay paying their workers if they have cash flow problem due to difficulties in production and operation, but consent from the trade union is needed. The maximum grace period is subject to the regulations of the local provincial-level labour administrative department.

  • 21.Are there any minimum wage requirements?

    Minimum wage means the minimum remuneration an enterprise should pay to its workers who perform regular work within the prescribed working time. However, it does not include the following: overtime work payment; allowance for swing shift, night shift or work under special conditions such as high temperature, low temperature, underground, exposure to toxic or hazardous substances, staff insurance and welfare stipulated by the state, as well as non-cash benefit such as meal and housing allowances.


    The wages an enterprise pays to its workers must not be lower than the minimum rates promulgated by the local labour administrative department.

  • 22.How should companies pay overtime to employees?

    Enterprises extending working hours on a normal working day should pay workers for the overtime work, and the rate should not be lower than 150% of the worker’s hourly wage stipulated in the labour contract. Enterprises requiring workers to work on their off days without compensation in terms of time off should pay for the overtime work at a rate not lower than 200% of the worker’s daily or hourly wage. Overtime pay for statutory holidays should not be lower than 300% of the workers’ daily or hourly wage.

  • 23.What is social insurance under Chinese labour law?

    Social insurance is a mandatory, non-profit social security system established by law in China. It is administered by the Human Resources and Social Security departments.


    There are five types of social insurance in China: old age, medical, unemployment, work-related injury and childbearing. Among these, the premiums for old age, medical and unemployment insurance are jointly contributed by the enterprise and the individual, whereas work-related injury and childbearing insurance premiums are the sole responsibility of the enterprise.

  • 24.What are the social insurance responsibilities for enterprises?

    All enterprises must register with the local social insurance institution, participate in social insurance schemes and pay social insurance premiums on a monthly basis. The portion of premium payable by individual workers will be withheld and deducted from their salary and paid to the relevant authorities by the enterprises.


    If any changes in the social insurance registration details occur, due amendment must be made to update the record. In the event an enterprise ceases to be responsible for paying social insurance premiums because it has been dissolved, terminated, merged or gone bankrupt, it should promptly cancel its social insurance registration.

  • 25.What requirements exist for employing staff in a foreign representative office in China?

    In order to employ Chinese nationals in a Foreign Representative Office in China, the employer must obtain a registration certificate. In order to be granted this certificate, a number of formalities must be completed such as opening a bank account for foreign exchange, applying for direct telecommunication lines and securing a multiple entry visa for expatriate managers.


    NB: The minimum ratio of Chinese staff to foreign staff in a RO is 1:1.

  • 26.Will I need to go through the Beijing Foreign Enterprise Services Corporation in order to employ local Chinese staff in my Foreign Representative Office?

    Although a Foreign Representative Office must go through a designated employment agency, you will not necessarily have to go through the Beijing Foreign Enterprise Services Corporation. Employment formalities require that the Representative Office signs a contract with a service agency who will themselves sign a contract with the employee that it recommends.

  • 27.What is considered “unfair dismissal” in China?

    Unfair dismissal occurs when an employer terminates an employee for unfair or illicit reasons. In China it is illegal to dismiss a member of staff due to the following:


    • Pregnancy, nursing, or maternity leave

    • Receiving prescribed treatment for illness or injury

    • Suffering from occupational diseases or work related injuries

    • Claiming violation of rules but with no supporting evidence


    These are all types of “unfair dismissal”. A successful claim by an employee of “unfair dismissal” can result in restitution of damages for losses incurred by the employee.

  • 28.In the case of lawful dismissal, are there any types of compensation afforded to the dismissed employee?

    In the case of voluntary resignation by the employee, no compensation is afforded to the dismissed employee. In all other cases of lawful dismissal, an employee shall be paid severance pay based on the number of years worked with the employer at the rate of one month’s wage for each full year worked. Any period of not less than six months but less than one year shall be counted as one year. The severance pay payable to an employee for any period of less than six months shall be one-half of his monthly wages.


    If the monthly wage of a employee is greater than three times the average monthly wage of employees in the employer’s area as published by the People’s Government at the level of municipality directly under the central government or municipality divided into districts of the area where the employer is located, the rate for the severance pay paid to him shall be three times the average monthly wage of employees and shall be for not more than 12 years of work.

  • 29.Joint venture companies and wholly foreign owned enterprises enjoy independent legal person status. How does this affect the recruitment process?

    The result of this independent legal status is that such companies are afforded complete autonomy with regard to their employment decisions. For example, they may choose whom they employ, and what criteria to apply throughout the recruitment process

  • 30.In composing a contract of employment between employer and employee, what clauses must be included by law?

    In drafting a contract of employment, an employer must ensure that all the rights and obligations of the employer and the employee are clearly stipulated. Clauses that must be included are job description, and the place of work, working hours, rest and leave, labour remuneration, social security, labor protection, working conditions and protection against occupational hazards; and other matters which laws and statutes required to be included in employment contracts.

  • 31.Must the contract of employment be completed in Chinese?

    There are no specific stipulations in Chinese Law regarding the language of the contract, but it is advisable to create a bilingual document – one of the languages being Chinese; particularly as in case that all contracts must be verified by the labour authority that require the contract to be in Chinese.

  • 32.Does there exist a statutory probationary work period required by Chinese Law?

    According to Chinese Law, a probationary period automatically precedes a contract of employment. Nevertheless, this probationary period is not mandatory. If an employment contract has a term of not less than three months but less than one year, the probation period may not exceed one month; if an employment contract has a term of more than one year and less than three years, the probation period may not exceed two months; and if an employment contract has a term of not less than three years or is open-ended, the probation period may not exceed six months.

  • 33.Can I, as an employer, sign a probationary contract of employment with my prospective employees?

    According to Chinese Law, a probationary period automatically precedes a contract of employment, therefore a probationary contract will not be valid, and in the event of a dispute, this type of contract will be treated as a formal contract of employment.

  • 34.How would a claim for “unfair dismissal” proceed in a Chinese court of law?

    Under Chinese Law, any labour dispute, including those of unfair dismissal must initially go to arbitration. An application for arbitration must be filed within one year of the dispute. If either party wants to challenge the arbitral award granted, they must file a lawsuit within 15 days of receipt of the award.

  • 35.Is there any scope for Foreign Human Resource Enterprises in China’s business market?

    Due to its WTO commitments, China has allowed into its market Foreign Human Resource Service Enterprises.

  • 36.What pressures do companies in China often face?

    Externally there are industrial and community-relations issues. This includes stronger labour unions and more litigious employees, who now are less likely to hesitate to protest in cases of down sizing. Since companies are more and more expected to demonstrate social responsibility and corporate citizenship, it is important to implement changes well and promote good communication within the company. A good start is to receive expert labour law input when forming for example the joint venture and other contracts.

  • 37.How does one best improve workforce quality?

    This can be achieved through the elimination of underperforming employees as well as the utilisation of training and evaluation systems. Currently, because of lower hiring rates by multinationals, many highly qualified graduates are available, both Chinese and foreign. The problem with replacing staff with new graduates is the difficulties that are present in identifying new high performers. In this regard it is important to acknowledge that performance throughout a company needs to be tied to the business goals.

  • 38.I would like to hire a foreigner to work in my company. What are the relevant rules and guidelines concerning employment of a foreigner in China?

    Although the prospect of a foreigner working in China and the bureaucracy concerning such an action is formidable, it is possible and common for foreign workers to work legally in China. Firstly, a prospective employee must have no criminal record, be at least 18 years old and in good health, have a valid passport or other travel document, a clearly defined employer and the necessary professional skills required for the applied position. Unless the foreigner is working in an embassy, consulate, with the United Nations or other similar international organisations, in which case these formalities are not necessary, a foreigner will have to go through extensive paperwork and different state levels of bureaucracy.


    The position that the foreigner is applying to fill must be of a special need, one that cannot be satisfied by the domestic labour force. Once a suitable employer is defined, he or she will fill out the Application Form for the Employment of Foreigners, and submit this to the competent trade authorities of the specified region together with the employee’s C.V., a letter of intention of employment, the report of reasons for the employment, the credentials of the prospective employee, a health certificate of the employee and any other relevant documents required by regulations. The trade authorities will then examine the said documents and approve the application.


    Within 15 days after the employee enters China, the employer and the employee should go to the Certificate Office, with the employment license, a labour contract (maximum five years long), and the foreigner’s passport to fill out the Foreigner Employment Registration Form and receive an employment permit. This employment permit authorises the foreigner to work only in the area specified and to apply for a residence permit.


    Once the employee has begun working, every year there is an annual inspection of the employment permit. If the deadline is passed without the proper inspection, the employment permit is immediately revoked. If the foreigner’s residence status is revoked due to violation of Chinese law or if the contract is terminated, the employment permit is also revoked.


    A foreigner employed in China enjoys the same privileges as a China-born employee. This means at least a minimum wage, with working hours, hygienic standards, rest and vacation provisions all in accordance with the state standards. However, the freedom of a Chinese employee allows him or her to look for a job anywhere desirable, whereas a foreign employee must continue working within the specified area with the same employer. Any changes in the foreigner’s working situation may subject the Employment permit to being revoked.


  • 39.Are there any provisions regarding employee transportation to and from work? I know that some employers provide for such benefits, but is this mandatory? Also, if I do provide transportation, am I liable if someone gets injured?

    There are no mandatory requirements for employer-provided transportation. Your company does not need to provide this benefit to its staff.
    However, you might be making an incorrect assumption by thinking that there would be added liability if you provide such transportation. In fact, injuries that occur to employees on their way to/from work are regarded as work-related injuries under China law, irrespective of who provides the transportation. In other words, your company is already liable for these sorts of injuries so long as they occur to/from work. Providing transportation does not change this liability or add to it.


    According to the Work-Related Injuries Regulations, a work-related injury occurs if an employee is injured, handicapped, or killed in a traffic accident, due to a reason that is not attributable or mainly attributable to him, on his way to/from work during such hours that correspond to the business start and end times and by such route that he must reasonably take. Locally, the recently issued Beijing Work-Related Injuries Regulations also provide for the same definitions. The definition is thus fairly narrow. For example, let’s assume that an employee is going home after work and stops at a market on the way to purchase some yuanxiao. After leaving the market, he is hit by a car. Generally this would not satisfy the “such route that he must reasonably take” requirement of the regulation because he did not go directly home after work. Recently there are some extensive discussions by government and the public on whether accidents occurring on employee’s way to and from office should be regarded as work-related injuries. It is expected more specific rules will be launched in near future.

  • 40.Which issues should a foreign investor take into account when entering into labour contracts?

    There are many pitfalls involved in labour contracts. In general, one of the most important issues to take into account is the accuracy of an applicant’s CV. A way to do this is to ensure that the employer retains a right to revoke the labour contract in case the items on an applicant’s CV turn out to be false. Another important issue is to conduct physical examinations of new employees, both to ensure product quality and consumer health. Furthermore, training is vital in order to guarantee the necessary skills of the employees. A way to ensure that the training has been sufficient is for the employer to have a post-training test before the applicant can be formally employed. Finally, a labour contract must be signed, which stipulates the relationship between the employer and employee, either for a fixed or open period.

  • 41.I just set up a WFOE in China. How can I hire Chinese employees? Can I directly enter into labour contract with them or must hire employees via intermediary companies?

    To employ Chinese employees, you can directly sign a contract with them. Since JVs and WFOEs are established under Chinese law and regulations, they are considered as Chinese enterprises. According to Chinese laws and regulations, it is legal for Chinese enterprises to hire Chinese employees by directly entering into contract with them. There are no regulatory requirements in this aspect. However, for the representative offices of foreign enterprises, it is required that they hire employees via qualified intermediary companies such as FESCO and China International Interlectech.

  • 42.When restructuring a company, how do I transfer part of the employees into one of our affiliate companies? Do I need to compensate the employees for terminating them?

    In order to do this, you need to first terminate employment with the employees and then invite them to enter into another labour contract with the affiliate company. If they agree, then you do not need to pay them any compensation. However, you must make sure that the employees can enjoy the same or better benefits after being transferred to another company. If after the transfer, the employee benefits in the new company are actually inferior to those enjoyed in the former company, then they may refuse to enter into a labour contract with the affiliate company. In that case, according to related regulations, you must pay compensation for their unemployment.

  • 43.I terminated an unqualified employee recently. He seemed unsatisfied with the compensation I gave him and threatened to sue. Can you provide me some information as to how to settle labour disputes in China?

    According to Chinese law and regulations, there are four ways to settle the labour disputes: consultation, mediation, arbitration and litigation. Generally speaking, arbitration and litigation are the most helpful ways to settle labour disputes. The parties involved in the dispute can apply to the labour dispute arbitration committee for arbitration within one year from the date the dispute arises. The Labour Dispute Arbitration Committee will arbitrate the case and issue an arbitration award. However, this award is not final. If the relevant parties fail to agree to the arbitration award, they can file a lawsuit on the case to the relevant People’s Court, which will then make a final decision on the case. In China, the two parties involved in the dispute are not allowed to file lawsuits directly to the People’s Court. They must apply for arbitration first. So even though your employee threatened to sue you, he may actually mean that he will apply to the arbitration committee for arbitration of the case.

  • 44.What are the rules concerning housing fund contribution?

    The housing fund contribution scheme deals with the amount that an employer shall contribute to the fund. A circular was published in 2008, which has introduced changes to the scheme. The Beijing Municipal Housing Reform Office and Beijing Finance Bureau issued the circular, which modifies the base for determining the amount an employer can contribute to the fund. In the new circular the housing fund base is revised to three times the average monthly salary of all staff employed within the Beijing municipality area in the previous housing fund calendar year. The stipulated contribution rate is 12 %. The Beijing Local Census Bureau will revise the average monthly salary annually and the housing fund contribution is tax deductible.

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