The Foreign Investment Regulation and Tax overview in China
In the past decades there has been a strong commitment by Chinese Authorities on accelerating reforms and opening up process in order to stabilize economic growth, boost investments and stimulate consumption.
One of the afore-mentioned reform processes involves the new Foreign Investment Law (FIL), which officially took effect on 1 January 2020 and replaced previous laws and regulations governing the three traditional types of foreign-invested enterprises (FIEs): Wholly Foreign Owned Enterprise (WFOE), Equity Joint Venture (EJV), Cooperate Joint Venture (CJV).
The new FIL is based on three Pillars, as follow:
1. Promotion of foreign investment
Promotion of foreign investment is highly encouraged by several means. Within the new law, Foreign Invested Enterprises (FIEs) have an equal right to participate in government procurement activities through fair competition as well as have the right to raise funds by means of public offering of securities, e.g. shares and corporate bonds. At the same time, local governments may formulate foreign investment promotion and facilitation policies and measures.
2. Protection of foreign investment
Besides encouraging foreign investments, a lot of efforts have been made to protect those already in place. Government authorities, in general, will not expropriate foreign investments: foreign investors can freely transfer into/outside China their contributions, profits, capital gains, royalties of IP rights, etc. in CNY or foreign currency. The intellectual property rights of foreign investors and FIEs will be protected. The administrative staff shall not use administrative means to force the transfer of technology.
Also, authorities should strictly keep policy commitments lawfully made and perform all contracts lawfully concluded. The government authorities should not change their policy commitments concerning preferential treatment provided to FIEs.
Finally, a complaint system was introduced for FIEs to handle the complaints raised by FIEs and to address problems reported by FIEs.
3. Management of foreign investment
A streamlined procedure for approval of foreign investment and company registration is enforced:
- FIEs falling under the Negative List, Ministry of Commerce (MOFCOM) filing is still required;
- FIEs falling outside the Negative List, MOFCOM filing is no long required.
A new Foreign Investment Reporting System is introduced. Foreign investment information will be collected through State Administration for Market Regulation’s (SAMR) system and shared with Ministry of Commerce. There are 4 types of reporting included:
- initiation reporting in relation to company establishment;
- change reporting;
- de-registration reporting;
National Security System is established. However, detailed practice is expected to be clarified further by government authorities.
Furthermore, also China taxation has been subjected to several reforms during the last decade. Some of these reforms, without limitations, are referred to the Business Tax to VAT Pilot Reform (B2V reform, from 2012 to 2018) and the Individual Income Tax (IIT reform, effective since 1st January 2019). Nowadays major taxes are listed as follow (other miscellaneous taxes or certain trivial surtaxes on the major tax have not been listed):
Income Taxes
- Corporate Income Tax (CIT) – Tax resident: 25% in general, reduced rate (15%/10%) or tax holiday for qualified enterprises under certain incentives
- Withholding Income Tax (WHT) – Non-tax resident: 10% in general, reduced rate as per tax treaty
- Individual Income Tax (IIT): 3% - 45% on a progressive basis
Turnover taxes and customs duty
- Value-added Tax (VAT) : 13% on Sales and imports of general goods; provision of processing, repair and replacement services; and provision of leasing services of tangible and movable assets; 9% on Sales and imports of specified goods; provision of transportation, postal, basic telecom services, construction services and leasing services of immovable property and sales of land use rights or immovable property; 6% on provision of value-added telecom services, financial services, modern services and lifestyle services; and sales of intangible assets other than land use rights.
- Consumption Tax (CT): it applies to 14 categories of consumable goods, including, without limitations, tobacco, alcoholic drinks, cosmetics, jewellery, fireworks, gasoline. The tax is computed based on sales price and/or sales volume.
- Customs Duty (CD): duties are imposed on goods imported into China and are generally assessed on the CIF (cost, insurance and freight) value. The rate of duty depends on the nature and country of origin of the imported goods.
Land/Property related taxes
- Real Estate Tax (RET): A tax imposed on the owners, users or custodians of houses and buildings at the rate at either 1.2% of the original value with certain deduction or 12% of the rental value
- Land Appreciation Tax (LAT): A tax levied on the gains realized from real property transactions at progressive rates ranging from 30% to 60%
- Deed Tax (DT): A tax levied on the transferees or assignees on the purchase, gift or exchange of ownership of land use rights or real properties, with the tax rates generally range from 3% to 5%
- Stamp Duty (SD): A tax levied on enterprises or individuals who execute or receive "specified documentation" in China and the tax rates vary between 0.005% to 0.1%.
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