Doing Business in China

February 2006

This memorandum contains a brief summary of the law and general

requirements in connection with the establishment and maintenance of a business
entity in the People's Republic of China ("China"), which we hope will provide our
clients with an overview of the issues involved. While every effort has been made to
ensure that the information contained herein is accurate, it is not necessarily complete
or exhaustive.
____________________________________

This memorandum is for informational purposes only and is not intended as legal advice. For more
information on the matters discussed in this memorandum, please contact us.

Mark Rodrieg Agatha Blanck

331 5548 0188

info@rodrieg.com

TABLE OF CONTENTS

I. Setting Up Business (Types of Business Entities) .

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- Representative Offices
- Equity Joint Ventures
- Cooperative Joint Ventures
- Wholly Foreign-Owned Enterprises

II. Tax Laws ………….……………..

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- Corporate and Personal Income Taxes
- Indirect Taxes

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III. Tax Concessions …………………………………………………………………………...….
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I. Setting up Business in China

The most common types of business entities in China are:

• Representative Offices
• Equity Joint Ventures
• Cooperative Joint Ventures
• Wholly Foreign-Owned Enterprises

A. Representative Offices

Setting up a representative office is a relatively cost effective way of entering the

market in China. It provides an opportunity to understand the market better. Through
conducting various marketing research, representative offices can get hold of useful
information such as consumer patterns and behavior, market demand, market practices,
local laws and regulations, local costs, etc.

Representative offices can also oversee other joint ventures and operations, and
establish contacts with business partners and customers, which are very important for
doing business in China.

Important Note: Representative offices are restricted from receiving fees,

providing services or signing contracts which directly generate income.

Procedures for setting up a representative office:

Step 1: Appoint a mainland agent.

Step 2: Submit all the required documents by the agent to the provincial Foreign
Trade and Economic Cooperation Department.

Step 3: Register at the provincial or municipal Administration for Industry and

Commerce upon approval from the Foreign Trade and Economic Cooperation
Department.

Step 4: Handle other related applications and registrations such as residence

application and tax payment registration, by the mainland agent.

B. Joint Ventures

Establishing a joint venture is a popular way of direct investment in China. Apart

from conducting market research and establishing contacts with business partners, a
joint venture can also conduct sales and production activities.

There are generally two types of joint venture in China: the equity joint venture
and the cooperative joint venture.

1. Equity Joint Ventures

The profit and risk sharing of equity joint ventures is proportionate to the equity
of each partner. The success of a joint venture relies very much on the local and

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foreign partners complementing one another. It is also important to select a good
Chinese partner who shares the same strategies for development.

Equity joint ventures are usually structured as a limited liability company with the
foreign partner contributing a minimum of 25% of the registered capital.

Equity joint ventures require the approval of the Ministry of Commerce or its local
counterparts and are governed by the Sino-Foreign Equity Joint Venture Law and
related regulations.

Procedures for setting up an equity joint venture:

Step 1: Submit a project proposal prepared and presented by the Chinese

partner.

Step 2: Submit a feasibility study report to the Development Planning

Commission or Economic and Trade Commission of appropriate level for
approval. The feasibility study report generally covers the project details
including the financing plan, the organization structure, the market study,
and potential economic benefits for itself and the local community.

Step 3: Arrange for the signing of a joint venture contract upon the
approval of the feasibility study report. Then, forward the articles of
association and other legal documents to the Foreign Investment
Administration authority of appropriate level.

Step 4: Apply for an approval certificate by the Chinese partner from the
Foreign Investment Administration authority of appropriate level.

Step 5: Apply business license, official seal and enterprise code, etc.

2. Cooperative Joint Ventures

Unlike equity joint ventures, the profit and risk sharing of cooperative joint
ventures are divided according to the contract terms, rather than the investment
shares.

Hence, cooperative joint ventures allow more flexible organization structure,

management and asset allocations. This form of cooperative joint venture is
widely implemented in land and hotel development in order to mitigate costs
involved with land transfer.

Investors may contribute cooperative conditions to cooperative joint ventures in a

form which is more flexible than that of equity joint ventures. In addition, there is
no minimum foreign contribution required.

The cooperative joint venture may be established as a non-legal person entity and
there is no need to establish a new corporation in China.

The procedures for setting up a cooperative joint venture are similar to those for
setting up an equity joint venture.

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 C. Wholly Foreign-Owned Enterprises

Wholly foreign-owned enterprises are foreign companies fully invested by foreign

investor(s). They can enjoy full independence in business operations subject to
government regulations and policies and have become increasingly popular.

Procedures for setting up a wholly foreign-owned enterprise:

Step 1: Submit a feasibility study report to the Foreign Investment Administration

authority of appropriate level. The report must include: the objective and scope of
the business, the scale of operations, the products, the technology and equipment
employed, land use requirements, public facilities and utilities requirements
(water, electricity and gas).

Step 2: Submit a formal application with the articles of association of the

proposed wholly foreign-owned enterprise to the Foreign Investment
Administration authority of appropriate level.

Step 3: Apply for an approval certificate at the Foreign Investment Administration

authority of appropriate level.

Step 4: Apply for a business license with the provincial or municipal

administration for industry and commerce within 30 days.

II. Tax Laws

To do business in China, it is essential to get familiar with the different tax

categories. Foreign invested enterprises and foreign nationals are subject to taxes
distinguished from that applicable to local entities and individuals.

A. Corporate and Personal Income Tax

1. Corporate Tax

Foreign investment enterprises including equity joint ventures, cooperative joint

ventures, and wholly foreign-owned enterprises, have to pay a 33% (30% state
tax plus 3% local tax) corporate tax on their profits derived from operations in
China.

2. Personal Income Tax

Individuals who have resided in China for less than one year are required to pay
personal income tax on income derived from China. Individuals, who have
resided in China for one year or more, are taxed on income from all sources.

Income is taxed progressively from 5% to 45%. There are nine tax brackets
starting from the income range of RMB0-500 to the maximum of over
RMB100,000.

B. Indirect Taxes

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 Other than income tax, all enterprises are also liable for turnover taxes, which are
addressed below.

1. Value-Added Tax

Value-added tax (“VAT”) on goods is charged at different stages of production.

VAT is applicable to all enterprises engaged in the sales of goods, importation of
goods, provision of processing and repairs and replacement services within China.
The standard VAT rate is 17%.

2. Business Tax

Business tax is a turnover tax charged on the revenue generated from the
provision of taxable services. It is applicable to enterprises engaged in the
provision of taxable services, the transfer of intangible assets, or the sale of real
estate within China. As indicated in the table below, there are nine applicable
rates ranging from 3% to 20%.

Business Type Tax Rate (%)

Communications and transportation 3
Construction 3
Finance 5
Post and telecommunications 3
Culture and sports 3
Entertainment, dance halls 5-20
Service agencies, hotels and restaurants 5
Transfer of intangible assets 5
Sales of real estate 5

3. Consumption Tax

Consumption tax is applicable to enterprises engaged in production,

subcontracting for processing or purchasing taxable consumer goods within
China. Tax rates range from 3% to 45%.

III. Tax Concessions

The Chinese government has introduced a range of preferential tax incentives to

foreign invested enterprises and foreign enterprises, which include concessions on
corporate income tax, business tax, value-added tax, customs duty and tax rebates on
re-investments.

A. Major Concession Items on Corporate Income Tax

Foreign invested enterprises located in Special Economic Zones are subject to a

reduced tax rate of 15%, whereas those located in open coastal cities and old urban

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districts of Special Economic Zones and Economic and Technological Development
Zones are subject to a corporate tax rate of 24%.

The corporate tax rate is 15% for foreign invested enterprises engaged in certain
designated business approved by the State Council. Losses can be carried forward for
five years to offset taxable income.

B. Major Concessions on Business Tax, Value-Added Tax and Customs Duty

Foreign invested enterprises in certain sectors enjoy exemption from business

taxes. For example, income derived from technology development and related
consultancy and technical services are exempted.

Raw materials, parts or components, and packaging materials imported by foreign

invested enterprises for outward processing are exempt from value-added tax and
customs duty.

Imports of certain selected equipment and supporting technologies for a business

entity’s own use are exempt from value-added tax and customs duty.

C. Tax Rebate on Re-Investment by Foreign Invested Enterprises

Foreign invested enterprises are eligible to a 40% refund of the corporate income
tax on the re-invested amount.

If the re-invested foreign invested enterprises are establishing or expanding an

export-oriented or high-tech business, there is a 100% refund on the corporate income
tax paid.

D. Individual Income Tax Concession for Foreigners

Items that are eligible for individual income tax concession include housing, food
or travel allowance, dividends and bonuses received from foreign invested enterprises.

Foreign individuals who reside in China consecutively or accumulatively for not

more than 90 days in a tax year are exempt from personal income tax if their wage or
salary is not paid or borne by their employer in China. This tax concession does not
apply to the senior managers of foreign invested enterprises.

E. Avoidance of Double Taxation Between Hong Kong and China

Foreign invested enterprises are required to pay corporate income tax on income
from all sources according to China's tax law. To avoid double taxation, China's tax law
allows foreign invested enterprises to deduct the portion of income tax paid outside
China from their total income tax payable. However, the deductible amount may not
exceed a limit calculated in accordance with the tax law.

____________________________________

This memorandum is for informational purposes only and is not intended as legal advice. For more
information on the matters discussed in this memorandum, please contact us.
6

Copyright © 2006 by RODRIEG & ALLIANCE

Mark Rodrieg Agatha Blanck

331 5548 0188 info@rodrieg.com

Copyright © 2006 by RODRIEG & ALLIANCE