Market Entry Guide China.

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1. Introduction
2. Modes of Setting up a Business in China
   1. Representative Office
   2. Branch Office
   3. Joint Ventures
   4. Wholly Foreign-owned Enterprise
   5. Franchise
   6. Launching Trade Business in China from Hong Kong
   7. Average Time (in days) Required for Setting up a Business
3. Procedures for Immigration
   1. Visa Requirements
   2. Procedures for Work Permits
   3. Average Rent for Office Space in Main Cities
   4. Average Living Costs for Expatriates
4. Social Security System in China
   1. Social Security
5. Free Trade Zones in China
6. Opening a Bank Account in China
   1. Overview of Retail Banking
   2. Procedures for FIEs
   3. Procedures for Foreigners
7. Recruitment of Local Staff
   1. Major Recruitment Agencies and Websites
   2. Brief Overview of Labour Laws
   3. Average Salary Range
8. Taxation
   1. Tax Rates
   2. Tax Incentives
   3. Double Tax Treaty
   4. Repatriation of Profits
9. Appendix
   Appendix I: Useful Links and Addresses
10. Disclaimer

1 Introduction

The Chinese economy is undoubtedly a key player in the global economy. In 2008, real GDP growth reached 9 percent¹. China’s top 10 trading countries are the US, Japan, Hong Kong, South Korea, Taiwan region, Germany, Singapore, Malaysia, Russia and Australia. China’s trade with these ten economies together accounted for 57%² of China’s total external trade in 2008. The Chinese economy registered a total external trade amount of EUR 1812 billion³, ranking third among global economies. The major drivers of the Chinese economy are fixed asset investment, sale of consumer goods and the output from foreign-invested companies.

In December 2001, China joined the World Trade Organisation (WTO), following negotiations that lasted over a decade. China had agreed to fundamentally change the framework of its economy in order to become a WTO member. These changes included lifting various restrictions on foreign direct investment (FDI), lowering and removing tariff and non-tariff barriers and improving the transparency of the legal structure for investments and businesses. China’s entry into the WTO ushered in a new wave of FDI. The country agreed to open several sectors including telecommunications, insurance, banking, trade, distribution and logistics. In spite of complicated procedures for foreign investments in the country and additional restrictions during actual implementation, the opening up of these sectors represents a major step forward in the overall opportunities for foreign investors.

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The key national regulations for implementing China’s foreign investment are Regulations for Guiding the Direction of Foreign Investment (Guiding Regulations). The Guiding Regulations classify all foreign investment projects into four categories: encouraged projects, permitted projects, restricted projects and prohibited projects. This classification determines the feasibility and establishment method of the project. The key difference between encouraged and permitted projects is that the former can benefit from increased tax advantages and preferential policies. Restricted projects must be examined and approved by the relevant authorities. It is possible for restricted projects, such as those exporting 70 percent of their output, to be approved but most documents must be submitted to higher authorities.

Guiding regulations are provided in two catalogues, The Catalogue for Guiding Foreign Investment in Industries (Foreign Investment Catalogue) and the Catalogue of Priority Industries for Foreign Investment in Central and Western Regions (Central and Western Regions Catalogue). The Foreign Investment Catalogue lists the industries that are encouraged, permitted, restricted and prohibited. The Central and Western Regions Catalogue lists the industries that are greatly encouraged for foreign investments in the central and western regions of China.

Rapid long-term economic growth, a fast expanding share of the global trade and record-breaking FDI inflows justify China’s position as the new business destination for the rest of the world. Establishing a business or investment in China is an attractive prospect; however, this also requires a planned entry and exit strategy, comprehensive understanding and sound professional advice.

The following report aims to discuss the most important issues pertaining to the administrative, legal and financial aspects of setting up businesses and hiring personnel, as well as the living conditions in China.

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2 Modes of Setting up a Business in China

This section elaborates on the common investment vehicles available to foreign investors, the procedures to be followed in order to establish them and related regulations for each investment mode.

Table 1 lists the most common modes of setting up businesses by foreign investors and the legal particularities involved in the process.

Table 1: Different Modes of Setting up Business in china

MODES OF SETING UP A BUSINESS PARTICULARITIES	PARTICULARITIES
Representative Office (RO)	Usually regarded as the first step towards entering the market Low costs Easy to establish
Branch Office	Not recommended as a new investment vehicle due to the lack of legal implementation rules
Joint Venture (JV)	Most common vehicle used by foreign investors when cooperating with a local partner Offers several advantages
Wholly foreign-owned enterprise (WFOE)	Currently, the most preferred option as an increasing number of sectors are being opened to WFOE Lower financial requirements
Franchise	Prerequisites of the franchisor specified in the new regulations

Source: Kaizen Corporate Services Limited

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2.1 Representative Office

2.1.1 Legal Registration Process

The establishment of an RO involves the following three steps:

2.1.1.1 Step 1: Examination and Approval

An RO needs to be approved by relevant authorities under the Chinese laws. Applicants should apply for approval from different departments depending on their main business. If the RO wants to engage in other businesses as well, it needs to seek approval from relevant authorities. It is important to carefully prepare documents according to requirements as Chinese regulatory bodies work on an ‘approval system’ instead of a ‘register system’. It is possible for an application to be rejected by government authorities without them providing any reason. Table 2 lists the major industries and the authorities they need to seek approval from.

Table 2: Major Industries and Their Approval Authorities

INDUSTRY	APPROVAL AUTHORITY
Finance and Insurance	People’s Bank of China
Marine Transport, Marine Forwarding Agent	Ministry of Communications
Post and Telecommunications	Ministry of Information Industry
Travel and Tourism	National Tourism Administration
Advertising	State Administration for Industry and Commerce

Source: Kaizen Corporate Services Limited

The required documents should include the following⁴:

• Application letter for the establishment of an RO (original) – The form should include a brief on the parent company, the name of the parent company, the purpose of setting up an RO, its business scope, the name of the chief representative, and the duration and address of the RO.
• Application form for the establishment of the RO – A standard format is provided by approval authorities, requesting basic information on the RO and the parent company.
• Application form for RO personnel – It is a standard form containing basic information on the RO staff.
• Reference letter from banks in the country where the parent company is registered – The letter should include the normal deposit and ascertain the credit worthiness of the foreign company.
• Copies of passports, passport size photographs and resumes of the chief representative and other representatives have to be submitted.
• Appointment letter of the chief representative – The letter should state the name of the person to be appointed and must be signed by the chairperson, general manager or an authorised employee in the parent company.
• Office location – A lease agreement or other relevant documents that specify the location of the office have to be submitted.
• A copy of the legal business certificate and the original credit certificates of the parent company are required.
• The approval authorities are required to make the decision within 30 working days.

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2.1.1.2 Step 2: Registration

Upon the receipt of the approval certificate, applicants must get themselves registered with the Administration of Industry and Commerce (AIC) within 30 days.

Documents required for this purpose⁵:

A certificate issued by the approval authority

A copy of the documents that were submitted to the approval authority

A copy of the rent agreement for the office site

Photographs of the chief representative

It has to be noted that AICs in different regions may require different documents for registration. Therefore, it is recommended to consult local sponsors or agents regarding the specific local requirements. After the registration is approved, the relevant authorities will issue a registration certificate for the RO. ROs must obtain Representative Cards from relevant approval authorities to recruit employees⁶.

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2.1.1.3 Step 3: Post-establishment Registration

After a successful registration process, the following procedures should be undertaken:

Make the official seal

Apply for opening a bank account

Apply for a Corporation Registration Code Certificate

Ensure tax registration

Take labour permit

Take residence permit

Observe customs formalities for the import of office equipment

Employ local employees

Obtain health certificate

All these procedures also apply while establishing other business modes.

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2.1.2 Regulations

Detailed rules of the Ministry of Foreign Trade and Economic Cooperation (MoFTEC) on the approval and control of foreign enterprises’ ROs came into force on 17 March 1995⁷.

The following points list the activities and the legal responsibilities of ROs and their parent companies in China:
| An RO is only permitted to engage in indirect business activities, such as business liaison, product introduction, market studies and technical exchanges. Any other activity including issuing bills or invoices to customers, collecting money from customers, and warehousing and managing inventory in China for trading purposes is prohibited.
| Foreign companies are subject to the jurisdiction of the Chinese law in case of disputes arising from contracts or other property rights.
| A parent company bears all the legal responsibilities for business activities of its resident RO in the People’s Republic of China.

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2.2 Branch Office

In China, only a few business sectors such as banks and insurance companies are permitted to set up branches. Although the Company Law generally authorises the establishment of Branch Offices by foreign companies, the necessary implementation rules are yet to be issued. Meanwhile, a Branch Office in China is not recognised as an independent legal entity; it can only carry out liaison and coordination work. As a result of these restrictions and the lack of legal standing, a Branch Office is not recommended as a vehicle for foreign investment.

2.3 Joint Ventures

The most common form of JVs is the equity joint venture (EJV) and the cooperative joint venture (CJV). The corporate form of EJVs is a limited liability company with its own registered capital and an independent legal identity. A CJV is a Chinese-foreign contractual enterprise that has joint investments of both parties or conditions.

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2.3.1 Legal Registration Process

The establishment of a JV in China involves the following steps:

2.3.1.1 Step 1: Approval of Project Application Reports

After the partners reach an agreement, the Chinese side is required to submit a project proposal to the relevant approval authorities. The proposal should include basic information on the project, the technology involved, the energy and other resources required, an environmental impact assessment, a list of equipment to be imported and their value, and ways of capital contribution.

2.3.1.2 Step 2: Approval of Contract and Articles of Association

Both parties should work in collaboration on a feasibility study report. Following this, the Chinese party should submit all documents to the local foreign trade and economic cooperation department for approval.

Documents required for this purpose include⁸:

Application form

Feasibility study report

Approval document for the project

Application form for the registration of the name of the JV approved by the provincial or municipal administration for industry and commerce

Written comments on the project by different government departments

Contract and Articles of Association signed by the legal representatives of both JV parties

List of names on the board of directors

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2.3.1.3 Step 3: Application for an Approval Certificate

After receiving the approval of the contract and the Articles of Association, the Chinese party should apply for an approval certificate from the provincial or municipal foreign trade and economic cooperation department.

Documents required for this purpose include:

Project application form

Feasibility study report

Contract and Articles of Association

List of names of directors approved by the respective approval authorities

The approval authorities are required to make their decision within 3 months for EJVs and 3 months for contractual JVs.

2.3.1.4 Step 4: Registration

Within one month of the receipt of the approval certificate, the applicant for the business licence should register with the administrative department for industry and commerce of the relevant province or autonomous region. The date of issuance of the business licence will be the date of the formal establishment of the JV.

2.3.1.5 Step 5: Post-establishment Registration

The procedures required after registration are similar to those required for establishing an RO.

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2.3.2 Regulations

The regulations for the implementation of the Law of the People’s Republic of China on Chinese-foreign equity JVs were promulgated by the State Council on 20 September 1983.

The industries that are permitted to establish JVs include the following:

• Energy development, building material, chemical and metallurgical industries
• Machine manufacturing, instrument and meter industries, and offshore oil exploitation equipment manufacturing
• Electronics and computer industries, and communication equipment manufacturing
• Light industry, textile, foodstuff, medicine, medical apparatus and packaging
• Agriculture, animal husbandry and aquaculture
• Tourism and service trade

In general, the foreign company’s investment should not be less than 25 percent of the total investment. If the capital contribution by foreign parties is less than 25 percent in EJVs, preferential policies will not be applicable to the JV.

Detailed rules for the implementation of the Law of the People’s Republic of China on Sino-foreign contractual JVs were promulgated by the Ministry of Foreign Trade and Economic Cooperation on 4 September 1995⁹.

Contractual JVs shall independently carry out business activities and management under the scope specified in the contractual JV agreement and Articles of Association, and are not subject to interference from any organisation or individual.

Contractual JVs may or may not have Chinese legal status.

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2.3.3 Others

The following problems are likely to be encountered while setting up a JV:

Difficulty in obtaining data about the commercial situation of private Chinese companies

The need to retain comprehensive control

2.4 Wholly Foreign-owned Enterprise

2.4.1 Legal Registration Process

The procedures for establishing a WFOE are very similar to that of a JV. One major difference is that in a WFOE, a foreign company does not need to find or negotiate with Chinese parties. Therefore, a WFOE is easier to establish and exit from than a JV.

2.4.1.1 Step 1: Reservation of the WFOE Company Name

The first step is to reserve a name for the WFOE with the local Administrative Bureau for Industry and Commerce. The applicant needs to submit a proposed name along with two alternative names.

2.4.1.2 Step 2: Approval of the Project Proposal

Before the final examination and approval of the WFOE, the applicant is required to submit a project proposal to the local approval authorities. The proposal will normally include information on the purpose of the WFOE, the scope and scale of the business, financial evaluations, technologies and equipment involved, land use requirements, personnel required, wages, etc.

2.4.1.3 Step 3: Application for the Approval Certificate

After the proposal is approved by authorities, the applicant can apply for the approval certificate.

Documents required for this purpose¹⁰:

A standard application form for the establishment of WFOE

A feasibility study report

Articles of Association for the proposed WFOE

A list of chairpersons, Board of directors and appointment letters

The incorporation document of the WFOE investor

A credit certificate of WFOE investors, issued within 3 months

The approval certificate from SAIC

It must be noted that different cities may require different documents for approval. The approval authorities are required to make a decision within 3 months; however, many local approval authorities are able to grant approval within 5–15 working days.

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2.4.1.4 Step 4: Registration

Within 30 days of receiving the approval certificate, the applicant should register with the local SAIC for a business licence. Documents similar to those required for receiving an approval certificate have to be submitted to the approval authorities. SAIC is required to issue the business licence within 30 days; however, many local authorities are able to issue the licence within 5–10 working days.

2.4.1.5 Step 5: Post-establishment Registration

The procedures to be followed after registration are similar to those discussed for establishing an RO.

2.4.2 Regulations¹¹

The law of the People’s Republic of China on wholly foreign-owned enterprises was amended on 31 October 2000¹², while the Company Law of the People’s Republic of China was revised in 2005.

WFOEs can only engage in business activities that are declared in the Articles of Association. If the company wants to explore new areas, further application and approval are required. Generally approved scopes of business are investment consulting, international economic consulting, trade information consulting, marketing and promotion consulting, corporate management consulting, technology consulting and manufacturing.

A minimum of one shareholder’s detailed information is required to be submitted to the local SAIC. However, this shareholder cannot be a Chinese national or reside in China.

The minimum amount of registered capital is CNY 30,000 (around EUR 3,233). According to Company Law, the registered capital is equal to the paid-up capital, which has to be deposited in the bank account to pay for the subscribed shares.

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2.4.3 Others

A strong relationship between local authorities and suppliers is a key factor for the success of business ventures in China. The main disadvantage for an inexperienced investor is insufficient knowledge of the Chinese market in terms of administrative processes and cultural customs; often, misunderstandings occur due to communication gap.

2.5 Franchise

2.5.1 Legal Registration Process¹³

A franchisor in China should have a mature business model and the capacity to provide a franchisee with operational guidance, technical support and training services. The franchisor should have at least two directly operated units that have been operating for more than one year.

2.5.1.1 Step 1: Preparation of the Franchise Contract

To apply for a franchising operation in China, the franchisor and franchisee should prepare a franchise contract. The contract should include the basic information on both parties, content and the term limit, amount and method of payment of franchise fees, and details of the business operation.

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2.5.1.2 Step 2: Registration

Within 15 days of its first franchise contract, the franchisor should register the operation with the commerce regulatory authorities. If the location of the business operation is in the provinces, the franchisor should register with local commerce regulatory authorities. If the business operates across provinces, the franchisor should register with the Ministry of Commerce.

Documents required for this purpose:

A copy of the business licence or certificate of business registration

A copy of the franchise contract

Franchise operation manual

Marketing plan

Written affidavit

Other files and documents mandated by the Ministry of Commerce

Additional files and documents may have to be produced before the regulatory authorities within seven days. Commercial regulatory authorities will register a franchise operation within 10 days upon the receipt of the relevant documents.

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2.5.2 Regulations

Regulations for the Administration of Commercial Franchising (came into effect on 1 May 2007) – The key issue is that the regulation specifies the prerequisites of the franchisors, namely that they should have at least two directly operated units under operation for more than one year.

Commercial Franchise Registration Management Measures and Commercial Franchise Information Disclosure Management Measures (came into effect on 1 May 2007) – These regulations impose mandatory registration and disclosure duties on franchisors.

2.6 Launching Trade Business in China from Hong Kong

Many foreign and Chinese domestic companies choose to register their companies in Hong Kong while conducting their trade business in Mainland China, as opposed to registering in China directly. The major benefits with this kind of structure are listed below¹⁴.

Companies incorporated in Hong Kong can legally reduce their tax exposure for all trade businesses that are conducted on the mainland.

Companies can avoid foreign exchange restrictions on the mainland by the State Administration of Foreign Exchange, so they are able to trade in a more flexible situation.

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2.6.1 Conditions for Hong Kong Company Registration¹⁵

The following are some basic conditions for Hong Kong company registration:

At least one shareholder and all shareholders must be over 18 years old

All shareholders must present their identity cards or passports

Legal persons must submit copies of their identity card and business licence

The lowest amount of registered capital is HKD 10,000. (EUR 946.3)

2.7 Average Time (in days) Required for Setting up a Business

In order to start a business, the legal and bureaucratic hurdles that companies/entrepreneurs must overcome need to be identified. Registration to access a range of market infrastructure, including finance, physical infrastructure (electricity, water) and contract enforcement is typically critical. The greater the number of procedures, the wider is the scope for enforcing them in uneven ways.

According to a World Bank report, the average time taken to start a business in China is high in comparison to that in countries such as OECD, Mexico and Russia. Figure 1 illustrates the obstacles inherent in starting business ventures in various countries.

Figure 1: Obstacles in Starting Businesses in Various Countries (2009)

Source: The World Bank Group - Document: Doing Business 2009
Note: OECD = Organization for Economic Cooperation and Development
Numbers represented for OECD based on the average calculated for the 27 countries in this category

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3 Procedures for Immigration¹⁶

Foreigners must obtain the permission of relevant authorities of the Chinese government for entry, transition, work or residence in China. For entry into the country, foreigners must hold visas that should be applied for through Chinese diplomatic missions, consular offices or other resident agencies authorised by the Ministry of Foreign Affairs. Under certain circumstances, foreigners may, in compliance with the provisions of the State Council, apply for visas at ports designated by the relevant authorities of the Chinese government.

The entry of nationals from countries with visa agreements with the Chinese government will be managed in accordance with the agreed terms by both parties. In cases where another country has special provisions for Chinese citizens entering and transiting that country, the relevant authorities of the Chinese government may adopt reciprocal measures contingent to the circumstances.

For the convenience of foreigners who plan to stay in China for more than one year, the Ministry of Public Security announced the formal implementation of The Supervisory Laws Governing the Examination and Approval of Foreigners being granted the Right to Permanent Residence in the People’s Republic of China (also known as Supervisory Laws) in 2004. Without a Chinese green card, foreigners must renew their resident permit once a year. There is a restriction placed on the duration and location of their visit in China. The Chinese green card is valid for 5 years if foreigners are below 18 years of age, while it is valid for 10 years for those above this age. Besides, foreigners with green cards are able to enjoy almost the same rights as nationals in matters regarding entry and exit, employment, children’s education, residence, investment, etc.

However, for many, the Chinese green card requirements are not easily satisfied. Except for the spouses of Chinese citizens, their children and elderly family members, there is a rather high threshold for investors, highly skilled individuals and other individuals who have made significant contributions towards the development of the country.

Individuals who manage to procure the green card should not stay in China for less than three months in a year or less than a year in five years. Special causes will need approval from citylevel public security bureaus. Moreover, foreigners with Chinese green cards will still need to observe rules concerning travelling, temporary residence in other cities and visiting areas that are generally closed to the public.

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3.1 Visa Requirements

Table 3 lists the different types of visas issued by the Chinese Government.

Table 3: Visas Issued by the Chinese Government

TYPE OF VISA	PURPOSES OF ENTRY
Tourist/Family Visa L-Visa)	Travelling, visiting families or personal affairs in China
Visit Visa (F-Visa)	Being invited for diplomatic visits, investigations, business visits and exchange programmes and study, in China for no more than 6 months
Study Visa (X-Visa)	Studying in China for more than 6 months
Work Visa (Z-Visa)	Work, employees’ families and commercial exhibitions in China
Transit Visa (G- Visa)	Travelling to a third country via China
Boarding Visa (C-Visa)	International airlines and transportation staff across countries in China
Journalist Visa (J-Visa)	For journalists working in China
Resident Visa (D-Visa)	For residence in China

Source: Law Lib.com

For all kinds of visa applications, foreigners must present a valid passport and, if necessary, provide pertinent documents.

For the visa applications of foreigners who have been invited or hired to work in China, the evidence of invitation or employment should be submitted.

Foreigners planning to reside permanently in China shall, when applying for visas, present status-of-residence identification forms. Applicants may obtain such forms from public security organs at the place they intend to reside.

To reside in China, foreigners must possess identification papers or residence certificates issued by the relevant authorities of the Chinese government. The terms of validity of identification papers or residence certificates will be restricted by the purpose of entry. Certificates to the local public security organs for examination within the prescribed period of time should be submitted by foreigners who have resided in China.

Visa applications for entry, transit, work or residence should be submitted to China’s diplomatic missions, consular offices and other resident agencies abroad that are authorised by the Ministry of Foreign Affairs.

The Ministry of Public Security, its authorised local public security organs, the Ministry of Foreign Affairs and its authorised local foreign affairs departments are the government agencies in China handling foreigners’ applications for entry, transit, residence and travel.

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3.1.1 Documents Required for Visa Applications¹⁷

Passport valid for more than 6 months and with enough blank space for visas

Completed visa application form of PRC

One recent passport-size photograph

Other application documents according to different purposes for entry into China

Other application documents that are required by the visa officer

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3.2 Procedures for Work Permits¹⁸

3.2.1 Requirements for Eligible Applicants

Over 18 years of age and in good health

Technical qualifications or relevant work experience

No criminal record

Employed by an organisation

A valid passport holder or international travelling document holder

3.2.2 Procedures¹⁹

The employer that intends to employ a foreigner should complete the Application Form for the Employment of Foreigners and submit it to the relevant authorities at the same level as the labour administrative authorities, along with the following documents:

• The curriculum vitae of the employee
• The letter of intention for employment
• The report of reasons for employment
• The credentials of the employed foreigner
• The health certificate of the foreigner to be employed
• Other documents required in accordance to Chinese rules and regulations
• After seeking approval from the relevant trade authorities, the employer should take the application form for examination and clearance to the labour administrative authorities of the province, the autonomous region or municipality directly under the central government or the labour administrative authorities at the prefecture and city level where the employer is located. These labour administration authorities will designate a special body (hereafter referred to as the Certificate Office) to take over the responsibility for issuing the Employment Licence. The Certificate Office will take into consideration the opinions of the concerned trade authorities and the demand and supply of the labour market, and will issue the Employment Licence to the employer after examination and clearance.
• Employers with permission to employ foreigners should not send the Employment Licence or the letter of visa notification directly to their employees; it must be sent by the authorised unit. Foreigners with permission to work in China should apply for Employment Visas at Chinese embassies, consulates and visa offices, carrying with them the Employment Licence issued by the Ministry of Labour, the letter or telex of visa notification sent by the authorised unit and the valid passport or travel documents.
• The employer should, within 15 days of the entry of the employed foreigner, take the original Certificate Office the Employment Licence, the labour contract with the foreigner and his/her passport or travel documents to receive the Employment Permit; a Foreigner Employment Registration Form also needs to be submitted. The Employment Permit will be effective only within the area specified by the Certificate Office.
• Foreigners who have gained the Employment Permit should, within 30 days after entry, apply for a residence certificate with the public security organisations, carrying with them their Employment Permit. The term of validity of the residence certificate may vary according
  to the term of validity of the Employment Permit.

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3.3 Average Rent for Office Space in Main Cities

The average office rental expenses in Shanghai, Beijing and Shenzhen are much higher than those in other Chinese cities.

Shanghai

Reports by Jones Lang LaSalle in Q1 2007 indicated that the average rental expense of A-level office buildings increased to EUR 0.83 per square metre per day. In the core business area of Puxi, the figure reached EUR 0.93 per square metre per day, while in the Pudong New Area, the figure was EUR 0.85 per square metre per day. The average office rental prices are expected to continue to grow in Shanghai till 2010²⁰.

Beijing

The average rental expense for office space in Beijing has slightly increased due to the effect of foreign exchange. In Q1 2007, Colliers International showed an increase of 2 percent in the average rental expenses for office space as compared to the previous quarter, which was EUR 0.6221 per square metre per day (including property management fees). The average rent expenses of A-level office buildings are EUR 0.79 per square metre per day (including property management fees) and the average rent expenses of B-level office buildings are EUR 0.52 per square metre per day (including property management fees). The global real estate advisor, DTZ, has anticipated that the average price of office rents will continue to grow in Beijing²².

Shenzhen

In the Q1 2007 report of DTZ Shenzhen, the average selling price of office buildings had increased by 20 percent to EUR 1,390 per square metre, with the average rental expense for office space increasing to EUR 0.35 per square metre per day. This represents a 6 percent increase as compared to the previous quarter²³. The average rental expense of A-level office buildings has increased to EUR 0.42 per square metre per day²⁴.

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3.4 Average Living Costs for Expatriates

The cost of living in most Chinese cities is much lower than that of the cities of developed countries. Food, public transport, clothing, etc., are much cheaper—for example, a can of Coca Cola costs approximately EUR 0.22, a burger is approximately EUR 1.22 at KFC, and metro fares range from EUR 0.32 to EUR 0.64²⁵. However, housing is considerably expensive when the local income level is taken into account. For instance, in 2004, the renting expense (in Beijing) for foreigners ranged from EUR 813 to EUR 4,065 per month; this rate has been growing over the years²⁶.

Maintaining the quality of life in China on a par with those in other western countries can be quite expensive. According to the Annual List of Most Expensive Cities for Expatriate Employees by Mercer Human Resource Consulting, Shanghai and Beijing ranked 26th and 20th, respectively, while Luxembourg ranked 43rd in March 2007²⁷.

According to Mercer’s Worldwide Cost of Living Survey 2008, three Chinese cities (Hong Kong (6), Beijing (20) and Shanghai (24)) were ranked among top 50 costliest cities across the globe. Two other cities Shenzhen (61) and Guanggzhou (70) appeared in the next 50²⁸.

The main Chinese cities are reported to have high house rentals and international education fees, making it costly for expatriates. However, many of them dwell on free/subsidized housing, free healthcare, low cost of food, cheap domestic help and cheap local products as included in their employment contracts. Cost of living in eastern cities such as Beijing, Shanghai, Qingdao and Guanghou are high compared to western China²⁹.

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4 Social Security System in China

The Labour Law of China states that employers and employees must join the social security system. Employers should design employee welfare plans to include basic social security and extra commercial insurance plans according to their own operations and profitability. However, a basic social security plan is compulsory for all employers and employees.

4.1 Social Security

China’s social security system includes social insurance, social welfare, special care and placement system, social relief and housing services. The main focus areas of China’s social security system include old age, unemployment, medical, work-related injury and maternity insurance. Basic social security (usually called Sijin) covers old age insurance, unemployment insurance, medical insurance, and housing funds.

The basic social security system involves regular payments by both employers and employees. Part of the sum payment has to be deposited in the employees’ personal account, while the remaining is deposited in the national social security fund, which is administrated by the Chinese government for increment and future payout. The Chinese government sets the lowest base payment percentages for employers and employees, respectively, while payment percentages are slightly above the base payment percentages and vary from one city to another.

Tables 4 and 5 list the basic components of the social security systems in Shanghai and Beijing, respectively, with the required contributions of employees and employers.

Table 4: Basic Social Security System in Shanghai

SOCIAL INSURANCE	EMPLOYEE’S PAYMENT (PERCENT)	EMPLOYER’S PAYMENT (PERCENT)	AMOUNT TO BE DEPOSITED IN PERSONAL ACCOUNT
Old-age Insurance	8	22	11 % = 8 % (employee) + 3 % (employer)
Medical Insurance	2	12	Age: below 35 years - 0.5% Age: below 35-44 years - 1% Age: older than 45 years - 1.5%
Unemployment Insurance	1	2	Not Applicable
Housing Funds	7	7	14 %

Source: Shanghai University of Finance & Economics
Note: The payment base should be the average monthly salary of the employee for the previous year.

Table 5: Basic Social Security System in Beijing

SOCIAL INSURANCE	EMPLOYEE’S PAYMENT (PERCENT)	EMPLOYER’S PAYMENT (PERCENT)	AMOUNT TO BE DEPOSITED IN PERSONAL ACCOUNT
Old-age Insurance	8	20	8 % = 5 % (employee) + 3 % (employer)
Medical Insurance	2 percent + CNY 3	10	Age: below 35 years - 2.8 % Age: below 35-44 years - 3 % Age: older than 45 years - 4 %
Unemployment Insurance	0.2	1	Not Applicable
Funds30	12	12	24 %

Source: Ministry of Construction HR
Note: The payment base should be the average monthly salary of the employee for the previous year.

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5 Free Trade Zones in China

In order to attract FDI and increase exports, China has established various types of special zones throughout the country. Free Trade Zones (FTZs) are a typical example—a wide range of business activities are permitted in FTZs, such as warehousing, foreign exchange transactions, marketing, trading and export processing. FIEs located in these zones can take advantage of a host of preferential policies, such as the absence of bond requirements for imports within the zone and liberal foreign exchange rules. Tax incentives are the main advantage including exemptions from customs duty and VAT. In addition, the government offers a package of tax incentive for FTZs:

During the first two years of operation, FIEs do not have to pay corporate income tax.

For the next three years, FIEs only need to pay corporate income tax at the rate of 15 percent.

After the fifth year, FIEs have to pay the full tax rate.

Different zones often offer their own preferential policies or incentives apart from those offered by the central government. Local governments may provide land-use or utility incentives, and may also decide to exempt in-zone enterprises from local income tax.

Table 6 provides the names and official websites of all FTZs in China at the end of 2008

Table 6: FTZs in China

ZONE	OFFICIAL WEBSITES
Fu Jian Province Fuzhou FTZ Xiangyu FTZ	www.fzftz.gov.cn Not Available
Guangdong Province Futian FTZ (Shenzhen) Guangzhou FTZ Shantou FTZ Shatoujiao FTZ (Shenzhen) Yangtiangang FTZ (Shenzhen) Zhuhai FTZ	www.szftz.gov.cn www.getdd.com www.stftz.gov.cn www.stftz.gov.cn www.stftz.gov.cn www.zhfreetradezone.org
Hainan Province Haikou FTZ	www.hkftz.gov.cn
Jiangsu Province Zhangjiagang FTZ	www.zjgftz.gov.cn
Liaoning Province Dalian FTZ	www.dlftz.gov.cn
Shandong Province Qingdao FTZ	www.gdftz.com
Shanghai Waigaoqiao FTZ Zhangjiang FTZ	www.china-ftz.com www.zjgftz.gov.cn
Tianjin Province Tianjin Port FTZ	www.tjftz.gov.cn
Zhejiang Province Ningbo FTZ	www.nftz.gov.cn

Source: The China Business Review

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6 Opening a Bank Account in China

6.1 Overview of Retail Banking

The capital market in China is relatively underdeveloped compared to that of the developed countries. Bank deposits represent the major financial stock and bank loans are the primary source of corporate financing. There are three types of retail banks in China, namely state-owned banks, joint-stock banks and citylevel banks. The major regulators in the banking sector are the China Banking Regulatory Commission and the People’s Bank of China. This sector faces several problems that include nonperforming loans, the lack of transparency and corporate governance. Despite these challenges, the growth of foreign banks in the Chinese market has continued to accelerate. By the end of 2007, 193 foreign banks from 47 countries and regions had established 242 branches and 117 sub-branches in China³¹.

Table 7 lists the major banks in China and their total number in terms of category.

Table 7: Major Commercial Banks in China

CATEGORY	NUMBERS OF BANKS	nAME oF mAJOR bANKS
State-owned banks	5	Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Agricultural Bank of China
Joint-Stock banks	12	Bank of Communications, China Minsheng Bank, China Merchants Bank, Guangdong Development Bank
City-level banks	124	Bank of Shanghai, Bank of Beijing, Bank of Ningbo
Foreign banks (locally incorporated)	29	HSBC, Citibank, Standard Chartered, The Bank of East Asia, ABN AMRO

Source: China Banking Regulatory Commission

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6.2 Procedures for FIEs

FIEs in China are requested to open two types of bank accounts: RMB accounts and foreign exchange account. Foreign currency is not allowed to freely circulate within China. A FIE must apply for registration of foreign exchange with local SAFE within 30 days after receiving business licence.

The documents to be submitted to SAFE are³²:

Registration form

Official approval documents

Approval certificates

Business licence (copy)

Approved valid contracts (copies)

Articles of association (copies)

6.2.1 Foreign Exchange Account

After receiving the foreign exchange registration certificate, the FIE shall open a foreign exchange bank account. The major types of foreign exchange accounts are capital account and current account.

Capital account

This account is for the purpose of capital items such as direct investment and securities investment. It is available for current expenditure and capital expenditure.

Current account

This account is for the purpose of revenue and expenditure in current foreign exchange. It could be available to capital account expenditure if the State Foreign Exchange Regulatory Bureau gives permission. The documents required by banks may vary, but usually include the foreign exchange certificate, business licence, Organization Code Certificate and the application form.

6.2.2 RMB Accounts

There are several types of RMB accounts available for FIEs. The basic one is called a basic deposit account. This account is for the purposes of cash revenue and expenditures, as well as for settlement and transfers between accounts. An entity is only allowed to have one basic account in China.

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6.3 Procedures for Foreigners

Foreigners with valid passports can open a bank account in any branch of the retail banks in China. The only procedure required is to complete a standard application form. However, it is advised to have the name of the applicant translated into Chinese before opening an account, as it can simplify official processes. Foreigners can open an account in EUR, USD or CNY. Some banks require a minimum balance of EUR 243–406.

7 Recruitment of Local Staff

There are various recruitment channels available in China. These include campus recruitment, headhunting agencies, media advertisements (newspapers, magazines, TV and broadcasting), Internet recruiting, on-site recruiting, internal references and ‘walk in’. Different approaches are needed for various recruiting requirements. Table 8 provides the major recruiting approaches in China and their target groups.

Table 8: Recruiting Approaches and Target Groups

RECRUITING APPROACH	TARGET GROUP
Campus recruitment	Entry-level staff
Headhunting agencies	Middle, high-level staff
Media advertisements	Middle and technical staff
Internet recruiting	All groups, especially for the IT industry
On-site recruiting	Entry and middle level
Internal reference	Not applicable
‘Walk in’	Not applicable

Source: MainOne.com

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7.1 Major Recruitment Agencies and Websites

Table 9 lists the major recruitment agencies in China and their websites.

Table 9: Major Recruitment Agencies and Websites

TOP THREE INTERNET RECRUITMENT AGENCIES	WEBSITES
51 JOB	www.51job.com
ZHAO PIN	www.zhaopin.com
CHINA HR	www.chinahr.com
LEADING HEADHUNTING AGENCIES	WEBSITES
Beijing Haozhu Consultant Co. Ltd.	www.topjobway.com
Spencer Stuart Consultants	www.spencerstuart.com
Korn/Ferry International	www.KornFerry.com
Heidrick & Struggles International	www.heidrick.com.cn
Reach Human Resource Co. Ltd.	www.reachtalents.com

Source: Top.weamax.com and China HRD.net

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7.2 Brief Overview of Labour Laws

The Labour Law of the People’s Republic of China33 came into effect on 1 January 1995. It sets the basic standards for labour-related matters in China. Labour contracts comprise a major part of this law including probationary periods, terms of contract, labour protection, emuneration, termination and its consequences, leave, and social insurance. In the 12 years since the introduction of the labour law, China has witnessed significant reforms. The Chinese economy has changed from a planned economy into a market economy. As a result of the reformed economic system, the current labour law fails to meet the requirements of the existing labour relationships.

The Labour Contract Law was enacted on 29 June 2007, and will take effect on 1 January 2008. From the perspective of employees, the implementation of the law will provide more protection. However, employers are likely to face higher labour costs and less flexibility. A summary of the law is as follows:

• A written labour contract should be formed upon the establishment of the employment relationship.
• In order to protect the rights and interests of the employee, the law stipulates maintaining a long-term labour relationship between an employer and an employee.
• The provision on the probation period is stricter. For example, the probation period must be no longer than six months, and the salary during this period must not be lower than 80 percent of the normal salary level.
• Non-compete obligations are confined by the relevant personnel from companies, but the employer and employee may agree to the scope and terms of the obligation in a labour contract.
• The law provides more freedom for employees while resigning from or changing jobs.
• The law provides more protection for employees in case of termination and dissolution.
• The application of severance pay is wider.
• Collective bargaining contracts are specified under several categories.
• Part-time employment is more flexible. The average working hours of a worker must not exceed four hours per day. The remuneration is paid on an hourly basis.
• The formulation of internal employment rules by employers is quite rigid due to more participants from trade unions or a large number of employee representatives.

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7.3 Average Salary Range

The median salary ranges by job, employer type, industry, city and degree in China in 2007, as per Payscale, are presented in the tables 10 to 14 below:

Table 10: Median Salary by Job in China in 2009

JOB	mEDIAN sALARY (IN EUR)
General / Operations Manager	52,771.1
Country Manager / General Operations	84,368.9

Source : Payscale, 2009

 

Table 11: Median Salary by Employer Type in China in 2007

EMPLOYER TYPE	MEDIAN SALARY (IN EUR)
Company	21,924.1
Private Practice/ Firm	23,550.8
Non-Profit Organization	44,440.1
Government- State & Local	15,606.7
School / School District	16,166.6
Other Organization	18,532.3
Self-Employed	23,276.2
Foundation / Trust	18,319.2

Source : Payscale, 2009

 

Table 12: Median Salary by Industry in China in 2009

INDUSTRY	MEDIAN SALARY (IN EUR)
Information Technology Services	19,551.3
Manufacturing and Distribution	31,668.3
Software Development	16,343.1
Financial Services	23,670.2
Telecommunications	24,440.0
Consultancy	27,127.9
Electronics Manufacturing	25,267.5

Source : Payscale, 2009

 

Table 13: Median Salary by City in China in 2009

CITY	MEDIAN SALARY (IN EUR)
Shanghai	25,236.4
Beijing	21,840.2
Shenzhen	16,495.1
Guangzhou	15,689.1
Hangzhou	16,958.3
Suzhou	31,766.7
Dongguan	14,952.2

Source : Payscale, 2009

 

Table 14: Median Salary by Degree in China in 2009

DEGREE / MAJOR SUBJECT	MEDIAN SALARY (IN EUR)
Master of Business Administration (MBA)	51,369.2
Master of Science (MS/MSc)	27,179.3

Source : Payscale, 2009

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8 Taxation

8.1 Tax Rates³⁴

The main tax law for foreign investors is the Foreign Income Tax Law of the People’s Republic of China for enterprises with foreign investment and foreign enterprises, adopted at the fourth session of the National People’s Congress and promulgated by Order No. 45 of the President of PRC on 9 April 1991³⁵. The major taxes that affect foreign businesses are the enterprise income tax and turnover tax; the latter includes value-added tax (VAT), consumption tax and business tax.

8.1.1 Enterprise Income Tax³⁶

All foreign companies that start business operations in China must pay the corporate income tax at the rate of 30 percent and a 3 percent local income tax. Foreign enterprises that are not formally established but have gained profits, interest, rent or other kinds of income from the Chinese territory must pay income tax of 20 percent.

8.1.2 Turnover Tax

8.1.2.1 Value-added Tax

All companies and individuals should pay VAT if they are involved in the sale of goods, provision of processing repairs and replacement service, and the import of goods within the Chinese territory. The basic VAT rate is 17 percent. The tax rate is 13 percent if taxpayers engage in selling or importing food grains, edible vegetable oils, tap water, books, newspaper, magazines, feeds, chemical fertilisers, agricultural chemicals, agricultural machinery, etc.

8.1.2.2 Consumption Tax

The taxpayers of consumption tax comprise all units and individuals engaged in the production or import of taxable consumer goods within China. Taxable consumer goods are tobacco, alcoholic drinks and alcohol, cosmetics, skin care and hair care products, precious jewellery, precious jade and stones, firecrackers and fireworks, gasoline, diesel oil, motor vehicle tyres, motorcycles and motor cars. Taxpayers who export taxable consumer goods are exempted from consumption tax, unless the taxable consumer goods are restricted by the state from exports. There are 11 different tax rates for consumption tax, ranging from the lowest 3 percent to the highest 50 percent.

8.1.2.3 Business Tax

Taxpayers of business tax consist of all units and individuals engaged in the provision of taxable services including transportation and communications, posts and telecommunications, finance and insurance, construction, culture and sports, entertainment and servicing. Any transfer of intangible assets or the sale of immovable properties within the territory of China will require the payment of business tax. There are three business tax rates, ranging from the lowest 3 percent (e.g. transportation and communications fee) to the highest 20 percent (e.g. entertainment).

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8.2 Tax Incentives

The Chinese government offers preferential tax policies to foreign companies that have investments in certain industries and/or regions.

The 15 percent preferential tax rate applies to companies with foreign investment that are

• Located in special economic zones (SEZ)
• Located in the Shanghai Pudong New District (for production enterprises)
• Located in the state economic and technological development areas (for production enterprises)
• Located in hi-tech industrial zones
• Involved in projects related to energy, communication, ports and docks

The 24 percent preferential tax rate applies to production companies with foreign investments that are

• Located in open cities beside the sea and open coastal economic zones
• Located in SEZs that are located in old city districts or state economic and technological development areas

The reduction of corporate income tax can apply in certain circumstances. For example, profits of foreign investments from wholly foreign-owned enterprises will be exempted from income tax. The government has cited eight different conditions for the exemption of corporate income tax.

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8.3 Double Tax Treaty³⁷

The main tax law regarding double taxation is specified in the Agreement between the People’s Republic of China and the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income and capital, applicable since 1 January 1996.

From the following sources, income derived by a resident or an enterprise of a Contracting State located in the other Contracting State may be taxed in that other Contracting State.

• Immovable property (including income from agriculture or forestry)
• A permanent establishment situated in a Contracting State through which the enterprise carries on business in the other Contracting State, but only some portion of the profits are attributable to that permanent establishment.
• Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State.
• Interest arising in a Contracting State and paid to a resident of the other Contracting State.
• Royalties arising in a Contracting State and paid to a resident of the other Contracting State.

From the following sources, income derived by a resident or an enterprise of a Contracting State located in the other Contracting State shall be taxed in that other Contracting State.

• The operation of ships or aircraft on international routes.

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8.4 Repatriation of Profits

8.4.1 Before-tax Distribution³⁸

Overseas parent companies are allowed to repatriate before-tax profits by receiving inter-company charges from their foreign-invested enterprises (FIEs). The inter-company charges include royalty fees, loan interests, rentals, overhead charges, management fees, training fees, technical support fees and other service charges. However, overseas parent companies may be subject to income or business tax.

8.4.2 After-tax Distribution³⁹

According to the law in China, after-tax profit should be distributed in the following manner:

Fines such as breach-of-contract late charges, late interest charges and other penalties need to be paid.

FIEs have to compensate for the losses from the previous years.

There is no minimum or maximum limit on the three funds reserve requirements for JVs; however, the amounts allocated to each fund should be specified in the JV’s Articles of Association. WFOES are not required to contribute to the expansion funds, but must pay a minimum 10 percent towards the reserve fund until it reaches 50 percent of the registered capital.

Dividends are distributed according to the proportion of their equity or the terms specified in the relevant contract. There is no withholding tax (WHT) on the dividends distributed to foreign investors.

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9 Appendix

Appendix I: Useful Links and Addresses

TYPE OF ORGANISATION	ADDRESS	CONTACTS	WEBSITE
CHINESE MINISTRIES, AGENCIES aND SERVICES
Embassy of the Grand Duchy of Luxembourg in Beijing	21, Nei Wu Bu Jie 100600Beijing	Ambassador Mr. Carlo Krieger E-mail: pekin.amb@mae.etat.lu Tel: +86 (10) 65 13 59 37 Fax:+86 (10) 65 13 72 68
Consulate General of the Grand Duchy of Luxembourg in Shanghai Board of Economic Development	12, Zhongshan Dong Yi Lu 200002 Shanghai	Consul General Mr. Pierre Ferring E-mail: shanghai.cg@mae.etat.lu Tel: +86 (21) 63390400 Fax: +86 (21) 63390433
Luxembourg - China Chamber of Commerce	ArcelorMittal China Fortune Plaza, Tower A, Room 3801 Dongsanhuan Zhonglu 7 Chaoyang District Beijing, 100020	Beijing Rm. 4020 Xinhe Dasha, Sanyuanli No.14 Shunyuan Street, Chaoyang District Beijing, 100027 Tel: + 86 (0)10 64650320 Fax: +86 (0)10 64652080 E-mail: beijing@bencham.org Shanghai Room 201, Shanghai Tai Pan Business Counter, No. 20 Dong Hu Road, Cross Middle Huai Hai Road, Shanghai 200031, PR. China Tel: +86 21 54038177 ext 118, 117 Fax: +86 21 54038167 E-mail: office-sh@bencham.org	www.bencham.org
Belgian-Chinese Economical and Commercial Board	BCECC 40, Rue de Washington B-1050 Bruxelles	Tel: +32 2 345 25 54 Fax: +32 2 649 04 39 E-mail: info@bcecc.be	www.bcecc.be
Embassy of the People’s Republic of China	2 rue van der Meulen, L-2152 Luxembourg	Tel: +352 43 69 91-1 Fax: +352 42 24 23 E-mail: ambchine@pt.lu
The Central People’s Government of China	Not Applicable
Ministry of Finance	No. 3, Nansan Xiang, Sanlihe Xichen District Beijing 100820	E-mail: webmaster@mof.gov.cn Tel: +86 (10) 68551114	www.mof.gov.cn/english/ english.htm
Ministry of Foreign Affairs	No. 2, Chaoyangmen Nandajie Chaoyang District Beijing, 100701	Tel: +86 (10) 65961114	www.fmprc.gov.cn/eng/ default.htm
The People’s Bank of China	No.32 Chengfang street Xi Cheng district Beijing, China, 100800	E-mail: webbox@pbc.gov.cn Tel: +86 (10) 66194114	www.pbc.gov.cn/english
Ministry of Commerce	No.2 Dong Chang’an Avenue Beijing, 100731		english.mofcom.gov.cn
National Audit office	No.1, Beiluyuan, Zhanlan Road Xicheng District Beijing, 100830	E-mail: cnao@audit.gov.cn	www.cnao.gov.cn/main/ index.htm
State Administration for Industry and Commerce	8 Sanlihe Donglu Xichengqu Beijing, 100820	E-mail: dfa@saic.gov.cn Tel: +86 (10) 68010463 / 68013447	www.saic.gov.cn
National Council for Social Security Funds	Mailbox No.2, South Tower, Fortune Time, Building 11Fenghuiyuan Xicheng District Beijing, 100032	E-mail: webmaster@ssf.gov.cn Tel: +86 (10) 58362358	www.ssf.gov.cn
State Administration of Taxation	No. 5, Yangfangdian West Rd. Haidian District Beijing, 100038	E-mail: webmaster@chinatax.gov.cn Tel: +86 (10) 63417114	www.chinatax.gov.cn

 

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10 Disclaimer

The Government of the Grand Duchy of Luxembourg declines all responsibility regarding the use of information featured in this document. The contents are provided for information purposes only. They contain information which is not necessarily complete, exhaustive, precise or up to date. In the event of discrepancies between the texts of this publication and the original documents, the original documents as officially published shall apply. This publication may refer to external sites over which the Government of the Grand Duchy of Luxembourg has no control and for which it declines all responsibility.

 

June 2009

 

Ministry of the Economy and Foreign Trade
Directorate of Foreign Trade
L-2914 Luxembourg | Grand Duchy of Luxembourg
Tel.: (+352) 247 841 25 | Fax: (+352) 22 34 85
info@luxembourgforbusiness.lu
www.luxembourgforbusiness.lu

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