Market Entry Guide China.
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.
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)||
|Joint Venture (JV)||
|Wholly foreign-owned enterprise (WFOE)||
Source: Kaizen Corporate Services Limited
2.1 Representative Office
2.1.1 Legal Registration Process
The establishment of an RO involves the following three steps:
220.127.116.11 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
|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.
18.104.22.168 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.
22.214.171.124 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.
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.
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.
2.3.1 Legal Registration Process
The establishment of a JV in China involves the following steps:
126.96.36.199 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.
188.8.131.52 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:
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
184.108.40.206 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.
220.127.116.11 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.
18.104.22.168 Step 5: Post-establishment Registration
The procedures required after registration are similar to those required for establishing an RO.
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.
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.
22.214.171.124 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.
126.96.36.199 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.
188.8.131.52 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.
184.108.40.206 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.
220.127.116.11 Step 5: Post-establishment Registration
The procedures to be followed after registration are similar to those discussed for establishing an RO.
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.
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.
2.5.1 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.
18.104.22.168 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.
22.214.171.124 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
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.
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.
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
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.
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.
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
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
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.
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.
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.
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.
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.
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.
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|
Source: Ministry of Construction HR
Note: The payment base should be the average monthly salary of the employee for the previous year.
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
|Fu Jian Province
Futian FTZ (Shenzhen)
Shatoujiao FTZ (Shenzhen)
Yangtiangang FTZ (Shenzhen)
Tianjin Port FTZ
Source: The China Business Review
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|
|29||HSBC, Citibank, Standard Chartered, The Bank of East Asia, ABN AMRO|
Source: China Banking Regulatory Commission
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:
Official approval documents
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.
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.
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.
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|
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
|LEADING HEADHUNTING AGENCIES||WEBSITES|
|Beijing Haozhu Consultant Co. Ltd.||www.topjobway.com|
|Spencer Stuart Consultants||www.spencerstuart.com|
|Heidrick & Struggles International||www.heidrick.com.cn|
|Reach Human Resource Co. Ltd.||www.reachtalents.com|
Source: Top.weamax.com and China HRD.net
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.
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)|
|Private Practice/ Firm||23,550.8|
|Government- State & Local||15,606.7|
|School / School District||16,166.6|
|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|
Source : Payscale, 2009
Table 13: Median Salary by City in China in 2009
|CITY||MEDIAN SALARY (IN EUR)|
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
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
126.96.36.199 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.
188.8.131.52 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.
184.108.40.206 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).
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.
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.
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.
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
|Ambassador Mr. Carlo Krieger
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
|Consul General Mr. Pierre Ferring
Tel: +86 (21) 63390400
Fax: +86 (21) 63390433
|Luxembourg - China Chamber of Commerce||ArcelorMittal China
Fortune Plaza, Tower A, Room 3801
Dongsanhuan Zhonglu 7
Rm. 4020 Xinhe Dasha, Sanyuanli No.14
Tel: + 86 (0)10 64650320
Fax: +86 (0)10 64652080
|Belgian-Chinese Economical and Commercial Board||BCECC
40, Rue de Washington
|Tel: +32 2 345 25 54
Fax: +32 2 649 04 39
|Embassy of the People’s Republic of China||2 rue van der Meulen,
|Tel: +352 43 69 91-1
Fax: +352 42 24 23
|The Central People’s Government of China||Not Applicable|
|Ministry of Finance||No. 3, Nansan Xiang, Sanlihe
Tel: +86 (10) 68551114
|Ministry of Foreign Affairs||No. 2, Chaoyangmen Nandajie
|Tel: +86 (10) 65961114||www.fmprc.gov.cn/eng/
|The People’s Bank of China||No.32 Chengfang street
Xi Cheng district
Beijing, China, 100800
Tel: +86 (10) 66194114
|Ministry of Commerce||No.2 Dong Chang’an Avenue
|National Audit office||No.1, Beiluyuan, Zhanlan Road
|State Administration for Industry and Commerce||8 Sanlihe Donglu
Tel: +86 (10) 68010463 / 68013447
|National Council for Social Security Funds||Mailbox No.2, South Tower, Fortune
Time, Building 11Fenghuiyuan
Tel: +86 (10) 58362358
|State Administration of Taxation||No. 5, Yangfangdian West Rd.
Tel: +86 (10) 63417114
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.
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
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