Q. What are the basic laws and regulations encouraging overseas investors to invest in China?
A:In order to create a congenial investment environment and to encourage overseas firms to invest in China, China has gradually set up a relatively complete legal system. In 1979 the National People's Congress issued The Law of the People's Republic of China on ChineseForeign Equity Joint Ventures. In the following 20-odd years, the Chinese government has promulgated and issued a series of laws and statutes concerning the establishment, operation, termination and liquidation of foreign-invested enterprises. The main laws and regulations include the three basic lawsThe Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures, The Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures, and The Law of the People's Republic of China on Wholly Foreign-Owned Enterprises; detailed rules for the implementation of the three basic laws; The Company Law of the People's Republic of China; The Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises; Interim Provisions for Guiding Foreign Investment; Industrial Catalogue for Foreign Investment; Interim Provisions Concerning the Investment within China of Foreign-invested Enterprises, Provisions Regarding the Merger and Separation of Foreign-invested Enterprises, and Liquidation Measures for Enterprises with Foreign Investment. These provide legal bases from which to guarantee the independent operation rights of foreign-funded enterprises and to protect the legitimate rights and interest of both domestic and overseas investors.
Currently, the Chinese government is reexamining its existing laws and statutes in accordance with the framework of the WTO. It has abolished certain obsolete laws and regulations, and will gradually revise the laws and regulations that are incompatible with the rules of the WTO. For instance, in 2000 China revised The Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures and The Law of the People's Republic of China on Wholly Foreign-Owned Enterprises, and discarded certain restrictions regarding the balance of foreign exchange account and localization of supplies. In 2001 The Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures was also revised.
Q. What are the formalities for overseas investment to establish enterprises in China? What departments are involved?
A:In accordance with the existing laws of China, the establishment of enterprises with foreign investment is subject to project-by-project examination, approval and registration by the government. In general, the following steps should be followed for the establishment of Chinese-foreign equity joint ventures and Chinese-foreign contractual joint ventures:
(1). Submit the project proposal to the relevant department (planning department or technological renovation administration) and get approval before investors can proceed with various jobs centered round the feasibility study of the project.
(2). Submit the feasibility study report to the planning department or technological renovation administration and get approval before investors can sign legal documents, such as the contract and articles of corporation of the enterprise.
(3). Submit the contract and articles of corporation of the enterprise to the examination and ratification department, who shall issue the Approval Certificate for Enterprises with Foreign Investment after approval by the Ministry of Foreign Trade and Economic Cooperation.
(4). With the Approval Certificate issued by the examination and ratification authorities, the investors can go through registration procedures with the administration of industry and commerce.
The procedures for the establishment of enterprises with foreign investment are quite simple. After the initial project application is approved in writing by the examination and ratification authorities, the investors may submit a formal application, with articles of corporation and other required documents. On receipt of the Approval Certificate, they can proceed with the registration formalities by presenting the Approval Certificate.
In accordance with China's existing laws, the state adopts a classification administrative system for foreign investment. The provinces, municipalities, autonomous regions and cities listed as independent units in state plans have the authority to examine and approve investment of less than US $30 million in areas encouraged and permitted by the state. When an investment exceeds this amount, the project application and feasibility study report shall be examined and approved by the State Development Planning Commission or the State Economic and Trade Commission, while the contract and articles of corporation shall be examined and approved by the Ministry of Foreign Trade and Economic Cooperation.
Many provinces, autonomous regions and municipalities directly under the central government have established foreign investment service centers, which offer foreign investors with a one-stop service, ranging from legal consultation to procurement of project approval. With the improvement of China's social services system, intermediary service agents, including consultation companies, lawyers, and accountants, are all expected to provide investors with efficient and qualified services.
Q. What are the preferential policies offered to enterprises with foreign investment?
A:The Chinese government levies low tax on enterprises with foreign investment, and preferential tax policies are offered to the sectors and regions where investment is encouraged by the state.
(1). Income Tax
a. Rate of income tax: The income tax on enterprises with foreign investment is levied at the rate of 33 percent. The income tax on enterprises with foreign investment located in special economic zones, state new- and hi-tech industrial zones, or economic and technological development zones is levied at the rate of 15 percent. The income tax on production enterprises with foreign investment located in coastal economic open zones, special economic zones, or in the old urban district of cities where economic and technological development zones are located is levied at the rate of 24 percent. And the income tax on enterprises with foreign investment that are engaged in projects such as energy, communications, port and dock is levied at the reduced rate of 15 percent.
b. Tax reduction and exemption: The production enterprises with foreign investment that have an operation period exceeding 10 years shall, from the year they begin to make profit, be exempt from income tax for the first two years and allowed a 50 percent reduction for the following three years. Enterprises with foreign investment engaged in agriculture, forestry and animal husbandry, and enterprises with foreign investment established in remote and underdeveloped areas may, upon approval by the State Bureau of Taxation, be allowed a 15 to 30 percent reduction on the income tax for a period of another 10 years following the expiration of the period of tax exemption and reduction as provided for above. The income tax on enterprises with foreign investment located in mid-west China that are engaged in projects encouraged by the government shall be levied at a reduced rate of 15 percent for a period of another three years following the expiration of the Five-Year period of tax exemption and reduction. The enterprises with foreign investment that adopt advanced technology shall be exempt from income tax for the first two years and allowed a 50 percent reduction for the following six years. In addition to the two-year tax exemption and three-year tax reduction treatment, foreign-invested enterprises producing for export shall be allowed a reduced income tax rate of 50 percent as long as their annual export accounts for 70 percent or more of their sales volume. The foreign investor of an enterprise with foreign investment which reinvests its share of profit obtained from the enterprise in a project with an operation period of no less than 5 years shall, upon approval by the State Bureau of Taxation of an application filed by the investor, be refunded 40 percent of the income tax already paid on the reinvested amount.
(2). Circulation-stage Tax
Since January 1st, 1994, the Chinese government has levied unified value-added tax, consumption tax and business tax on enterprises with foreign investment and domestic enterprises. Technology transfer and technological development by foreign enterprises and enterprises with foreign investment are exempted from value-added tax, as a measure to expand domestic demand and to encourage technological renovation in foreign-invested enterprises. For foreign-invested enterprises engaged in projects in the encouraged or restricted-B categories, the value-added tax on China-made equipment purchased by the enterprises within their total amount of investment shall be fully refunded if the equipment is listed under the catalogue offered with income tariff exemption.
(3). Import-stage Value-added Tax
a. Tariff rate: Since 1992 the Chinese government has reduced nine times the tariff rate for imported commodities. The present average tariff rate is 12 percent.
b. Tax exemption for imported equipment: Equipment imported for foreign-invested or domestic-invested projects that are encouraged and supported by the state shall enjoy tariff and import-stage value-added tax exemption.
Q. What impact may China's accession to the WTO have on foreign investment in China?
A:After joining the WTO, China will adapt its laws and regulations to conform to the WTO's fundamental rules, improve and develop China's socialist market economy, and create suitable conditions for fair competition between domestic and foreign enterprises. The Chinese government has committed itself to continuing opening its commodities market to the outside world, while simultaneously pushing forward the opening of its service industries. Technological innovation and the Western Development strategy provide a solid foundation for further improvement of foreign-invested industries and regional industrial structures. The policy series issued by the state government in 1999 to encourage foreign investment and increase export will also bring obvious results in foreign capital utilization. China's WTO access will provide more market opportunities and greater stability for foreign investment in China and a larger scope of economic and trade cooperation, as well as exerting a positive influence on future exploration and absorption of foreign capital.
Q.What are the favorable policies for foreign investors to central and western China?
A:In order to coordinate economic development in different areas, the Chinese government is encouraging foreign investment in central and western China. Key measures being taken are as follows.
(1). The state has approved and issued the Catalogue of Advantageous Sectors for Foreign investment in Central and Western Regions. Projects included in this catalogue enjoy the same policy as offered to projects of encouraged category in the Industrial Catalogue for Foreign Investment, and favorable tax policy applies to the import of necessary equipment, parts, spares and technology used in such projects.
(2). There will be fewer restrictions in investment fields, and on the conditions for establishment of foreign-invested enterprises in central and western China, as well as on the proportion of shares owned by the foreign contingent of the foreign-invested enterprises in these areas.
(3). Encouraged Projects in central and western China shall pay income tax at the reduced rate of 15 percent for three years on expiry of the current favorable tax period.
(4). If foreign-invested enterprises reinvest in central and western China with foreign capital accounting for 25 percent or more of the project, the new project will enjoy policies offered to enterprises with foreign investment.
(5). Trial projects approved by the central government should, in principle, be carried out simultaneously in eastern, central and western China. On approval from the state government, provincial and autonomous regional capitals and municipalities may open the fields of commerce, foreign trade and banking to foreign investment on a trial basis. Foreign-funded banks in western China may embark on RMB business gradually. Foreign investors may invest in telecommunications and tourism insurance in accordance with relevant regulations, and set up Sino-foreign joint venture accounting firms, engineering design companies, railway and highway freight transport and public utility companies, and other fields open to foreign investment.
(6). Provinces, municipalities and autonomous regions in central and western China may select a built-up development area in the provincial or regional capital and apply for the status of a national economic and technological development zone.
(7). Enterprises with foreign investment engaged in energy and transportation infrastructure will pay income tax at the reduced rate of 15 percent with approval from the State Bureau of Taxation.
(8). In the interests of protecting the ecological environment, income from special products reverting cultivated land to forestry and grassland is exempt from special agricultural product tax for a period of ten years.
(9). There are also preferential policies for land use and mineral resource exploration, promoting forest farming and grass planting on barren mountain slopes and fields, and the reverting of cultivated land to forest and grassland. Those who revert cultivated land to forest and grassland enjoy land use rights, as well as rights of ownership of forest or grassland. Economic entities and individuals may apply to utilize barren mountain slopes and fields according to legal procedures, plant trees and grass, and practice ecological environmental protection. Alternatively, they can be granted the land use rights directly from the state, in which case the land utilization fee will be either exempted or reduced. Land use rights will remain unchanged for a period of 50 years. On expiration of this period, application may be made for renewal of these rights. The granted rights of land use may be inherited, or transferred on payment of a transfer fee. The government supports activities involving mineral resource exploration, evaluation, rational utilization and protection.
(10). Foreign investment is encouraged in agriculture, water conservancy, transportation, energy, ecological and environmental protection, tourism, mining, municipal engineering and other infrastructure projects in western China. The establishment of foreign-invested research and development centers are also encouraged, and will be given support in terms of funding for accessory projects and pertinent policies.
(11). Trials in western China to utilize foreign capital through BOT and TOT methods are encouraged. The state supports enterprises in the encouraged and permitted categories in the west to attract foreign investment through assignment of operation right, offering equity interests and enterprise merger and reorganization.
Q. What are the specific policies that encourage the development of software and integrated circuit industries?
A:In order to promote the development of China's software and the integrated circuit (IC) industries and increase the creativeness and international competitiveness of the Chinese information industry, in June 2000 the Chinese government issued Policies on Encouraging the Development of Software Industry and Integrated Circuit industry. The document provides policy support to the software industry in the aspects of investment, financing, taxation, industrial technology, export, accreditation of software enterprises, and protection of intellectual property rights. For investments of certain scales into IC businesses, the policies offer preferential terms in taxation and other related aspects. The details are as follows.
The Software Industry
(1). Investment and Financing Policies
a. Risk investment mechanism in software industry shall be established to encourage risk investment into software industry. Risk investment companies will be supported and set up by the state, and risk investment fund will be established.
b. In the Tenth Five-Year Plan (2001-2005), an appropriate part of the capital construction fund in the budget will be allocated for the infrastructure construction and industrialization projects of software industry. Software parks will be established under the auspices of the state in areas where there is concentration of scientific research forces, such as institutes of higher learning and scientific research institutions.
c. Efforts will be made to establish as soon as possible the pioneering board on the stock market. As long as they meet the requirement of listing on the pioneering board of the stock market, software enterprises shall be given preferential consideration, irrespective of the nature of their ownership.
d. In the evaluation of assets of software enterprises that have good market prospects and human resource advantages, the proportion of invisible assets to the net assets can be negotiated by investing parties.
e. Software enterprises are encouraged to go public and find financing on overseas markets. After verification, software enterprises qualified for being listed on overseas stock markets shall be allowed for getting listed overseas.
(2). Taxation Policies
a. The state encourages the development and production of software products within the territory of the People's Republic of China. For general taxpayers selling software products developed and manufactured by themselves, the added-value tax will be collected, before 2010, in line with the tax rate of 17 percent set by law. Practically, except for the part of 3 percent, other part of the tax will be reimbursed after collection, for the enterprises to use on the research and development of software products and expansion of reproduction.
b. Software enterprises established within the territory of the People's Republic of China can enjoy, after verification, an income tax exemption for the first two years, beginning from the year of bringing in profits, and a 50-percent tax reduction for the following three years.
c. For key software enterprises within the framework of the state planning, their income taxes will be collected at the rate of 10 percent if they do not enjoy income tax exemptions that year.
d. Equipment imported by software enterprises for self use and supporting technology (including software), parts and spares imported with the equipment in accordance with the contract shall be exempted from tariffs and import-stage value-added tax.
e. The actual amount of salaries and training expenses for employees of software companies can be entered as cost.
(3). Technology Policies for the Industry
a. The development of general software of importance and basic software is supported. The state technology fund shall mainly support the research and development of basic, strategic, forward-looking and substantial key software technology of generality, mainly including operational systems, large-scale database management systems, network platforms, development platforms, information security and embedded systems, large-scale applicable software systems and other basic and general software. The above-mentioned software research and development projects supported by the state should mainly rely on enterprises, and the project undertakers shall be selected through open bid.
b. Domestic enterprises, scientific research institutions and institutes of higher education are supported to cooperate with foreign enterprises in jointly establishing research and development centers.
(4). Export Policies
a. Software export shall be integrated into the business scope of the Import and Export Bank of China and enjoy credit support with preferential interest. Moreover, the state export credit insurance institutions shall provide export credit insurance.
b. The Customs shall provide convenient services for the production and development of software. When research and development centers are established within the software parks supported by the state in order to design software for overseas customers, equipment to create the environment of virtual users shall be bonded.
c. The examination and approval formalities for the entry and departure of senior and middle-level managerial personnel and technicians of software enterprises shall be simplified, and the valid period can be extended.
d. Foreign exchange control measures in conformity with characteristics of software trade shall be adopted.
e. Software export enterprises are encouraged to pass the certification of GB/T19000-ISO9000 quality guarantee system and CMM (Capability Maturity Model). The certification expenses will be subsidized through the Central Foreign Trade Development Fund.
(5). Accreditation System for Software Enterprises
a. Accreditation standards for software enterprises shall be formulated by the Ministry of Information Industry, the Ministry of Education, the Ministry of Science and Technology, the State Bureau of Taxation and other related departments.
b. Annual assessment system shall be carried out among software enterprises. Enterprises that fail to pass annual assessment will be deprived of their identities as software enterprises and can no longer enjoy related preferential policies.
c. The Ministry of Information Industry and the State Bureau of Quality and Technical Supervision shall be responsible for the formulation of national standards of software products.
(6). Protection of Intellectual Property Rights
a. The registration of software copyrights is encouraged and key protection is given to registered software in accordance with the state laws.
b. No unit is allowed to use unauthorized software products in its computer system.
c. Crackdown on software smuggling and pirating shall be strengthened, and making, production and selling of pirated software shall be punished severely.
Integrated Circuits (IC) Industry
(1). Foreign and domestic enterprises are encouraged to establish jointly invested or wholly foreign-invested IC production enterprises. For average tax payers selling IC products (including monocrystalline silicon chips) made by themselves, before 2010 value-added tax will be collected in line with the tax rate of 17 percent, as set by law. Practically, except for the part of 6 percent, other part of the tax will be reimbursed immediately after collection for the enterprises to use in research and development of new integrated circuits and reproduction expansion.
(2). Preferential tax policies that encourage foreign investment in energy and communications industries will be adopted for IC manufacturers whose amount of investment exceeds 8 billion Yuan or whose IC wire width is less than 0.25 μ m.
(3). Self-use raw material and consumption goods for production imported by manufacturers whose amount of investment exceeds 8 billion Yuan or whose IC wire width is less than 0.25 μ m shall be exempted from tariffs and import-stage value-added tax. The Customs shall provide clearance convenience for such enterprises.
(4). Enterprises whose amount of investment exceeds 8 billion Yuan or whose IC wire width is less than 0.25 μ m are permitted to deposit their after-tax profit intended for reinvestment within the territory of the People's Republic of China in a special account in the form of foreign currencies. These deposits are subject to the supervision of the foreign exchange administration department.
(5). The minimum depreciation period for production equipment of IC manufacturers is three years.
(6). IC technology and complete sets of production equipment imported by IC manufacturers and special IC equipment and apparatus imported as separate items shall be exempted, in accordance with relevant regulations, from import tariffs and import-stage value-added tax.
(7). Chips of integrated circuits designed by domestic IC designing enterprises can be manufactured abroad if they cannot be manufactured domestically. After the processing contract (including specifications and amounts) is approved by the department in charge, tariffs shall be levied according to the interim preferential tax rate for their import.
(8). The examination and ratification department in charge of IC projects is responsible for recognizing IC enterprises after soliciting opinions from the taxation department at the same level.
(9). IC designs are regarded as software products and enjoy the protection of laws concerning intellectual property rights. The state encourages the evaluation and registration of IC designs.
(10). IC designing is regarded as software industry and enjoys policies concerning software industry.
Tannet——Global Corporate Solution Provider,Value Investment & Strategic Development
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