The main categories of business for foreign investors (including Hong Kong investors) in the Mainland include the following:
RO can engage in non-profit generating activities that are related to the business of its foreign parent enterprise and business-related liaison activities. ROs cannot operate business directly and they do not have legal person status.
To set up a RO in Mainland, application could be made to the relevant administrative authorities. A Business Registration Certificate and a Representative Certificate will be issued after the application was approved by the Administrative department for Industry and Commerce. The RO should then proceed with registration procedure at relevant government departments.
One of the preferential treatments under the Closer Economic Partnership Arrangement (CEPA) states that Hong Kong permanent residents with Chinese nationality can, in line with relevant laws, regulations or administrative rules of the Mainland, establish sole proprietorship in any provinces, municipalities, or autonomous regions in the Mainland without being subject to foreign investment approval process. There is no limit on the number of employees, or the size of its business space. The permissible business scope of sole proprietorship of Hong Kong residents covers retail, restaurants, computer services, advertising, clinic, economic, trade and management consulting services, etc.
For more information, please refer to the relevant government websites
There are mainly four types of foreign invested enterprises in mainland:
The Foreign Investment Law of the People's Republic of China (hereinafter referred to as the “Foreign Investment Law”) was adopted at the Second Session of the Thirteen National People’s Congress on March 15, 2019. The Foreign Investment Law will be effective on January 1, 2020, and at the same time the Law of the People's Republic of China on Chinese-foreign Equity Joint Ventures, the Law of the People's Republic of China on Foreign-Invested Enterprises, and the Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures will be abolished. The foreign-funded enterprises founded in accordance with the Law of the People's Republic of China on Chinese-foreign Equity Joint Ventures, the Law of the People's Republic of China on Foreign-Invested Enterprises, and the Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures may maintain their organizational structure for five years after the implementation of the Foreign Investment Law. The specific implementing measures shall be prescribed by the State Council.
In October 2016, the Ministry of Commerce issued the Interim Measures for Record-filing Administration of the Incorporation and Change of Foreign-invested Enterprises, where the review and approval of the incorporation and alteration of foreign-invested enterprises to which the national regulation on special management measures for admission does not apply (negative list) was changed to record-filing administration, and the negative list based management system was gradually introduced.
The Special Management Measures for Foreign Investment Admission (Negative List) (hereinafter referred to as the “Negative List of Foreign Investment Admission”) lists the special management measures for foreign investment admission such as equity requirements and requirements for executives. Foreign investors shall not invest in the area where foreign investment is prohibited in the Negative List of Foreign Investment Admission. Foreign investors may invest with admission in the non-prohibited area in the Negative List of Foreign Investment Admission. Foreign-invested partnership enterprises shall not be established in the area with equity requirements. Foreign investment may enjoy the same national treatment as that for domestic investment in accordance with the same principles outside the area on the Negative List of Foreign Investment Admission.
On June 30, 2019, the National Development and Reform Commission and the Ministry of Commerce of the People's Republic of China issued the Special Administrative Measures (Negative List) for Foreign Investment Access (2019 Version), the Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (2019 Version) and the Catalog of Industries with Encouragement for Foreign Investments (2019 Version), which came into force on July 30, 2019. The Special Administrative Measures (Negative List) for Foreign Investment Access (2018 Version), the Special Administrative Measures (Negative List) for Foreign Investment Access in Pilot Free Trade Zones (2018 Version), the encouragement category of the Guidance Catalog of Industries for Foreign Investments (Revised in 2017) (of which the Negative List for Foreign Investment Access has been abolished on July 28, 2018) and the Catalog of Competitive Industries for Foreign Investments in Central and Western China (Revised in 2017) have been simultaneously abolished. The former encouragement category of the Guidance Catalog of Industries for Foreign Investments, and encouraging policies supporting the Catalog of Competitive Industries for Foreign Investments in Central and Western China will still be appropriate for the Catalog of Industries with Encouragement for Foreign Investments (2019 Version)
Investors in the area excluded in the negative list should submit the information about the incorporation of the foreign-invested enterprise online for record-filing when registering with the market supervision and management administration (formerly the industrial and commercial administration). After the record-filing, the foreign-invested enterprise or its investors may, with the business license (copy) of the foreign-invested enterprise, obtain the Receipt of Record on Establishment of Foreign-invested Enterprises or the Receipt of Record on Change of Foreign-invested Enterprises from the record-filing department. Then investors may have the official seal produced at the relevant public security bureau, open a bank account at a relevant bank, and handle the procedures at the relevant tax, foreign exchange, customs, and social security authorities and other government department according to the needs and regulations. For specific procedures for registration and establishment of foreign-invested enterprises, please refer to the websites of government departments such as the department (bureau) of commerce, the investment promotion bureau or the market supervision administration (formerly the industrial and commercial administration) at the provincial or municipal level.
In addition, for Hong Kong service providers that only invest in the areas of trade in services accessible to Hong Kong in the Mainland and Hong Kong Closer Economic Partnership Arrangement, the record-filing for the incorporation and change of their enterprises shall be handled in accordance with the Management Measures for the Record-filing of Investment in the Mainland by Hong Kong and Macao Service Providers (Trial).
For details, please refer to:
No. 6 Decision of the Ministry of Commerce on revising the Interim Measures for Record-filing Administration of the Incorporation and Change of Foreign-invested Enterprises in 2018
Website of the Integrated Management Information System for Foreign Investment under the Ministry of Commerce:http://wzzxbs.mofcom.gov.cn/
The Special Management Measures for Foreign Investment Admission (Negative List) (2019 Edition)
The Special Management Measures for Foreign Investment Admission in Pilot Free Trade Zone (Negative List) (2019 Edition)
The Foreign Investment Industrial Guidance Catalogue (Revised in 2019)
The Management Measures for the Record-filing of Investment in the Mainland by Hong Kong and Macao Service Providers (Trial)
Relevant data about the Mainland and Hong Kong Closer Economic Partnership Arrangement
The above information about the procedures for the incorporation of a foreign-invested enterprise is a general outline for reference only rather than any legal or professional advice. For specific issues and practical operations, please refer to the websites of relevant government departments or consult with a qualified Chinese law firm or consulting agency. General consulting agencies provide such services for investors as handling procedures for the incorporation of the foreign-invested enterprise, by helping it draft the articles of association, the application for incorporation and other documents, fill out the relevant forms for incorporation, and negotiate and communicate with relevant government departments.
When entering into joint venture contracts with Mainland investment partners, investors should pay due attention to whether the mainland partner has valid legal entity; whether it has valid business registration and has carried out annual inspection; assess the partner's registered capital and financial strength, etc.
In addition, in line with Law of Sino-Foreign Equity Joint Ventures and Law of Sino-Foreign Cooperative Joint Ventures, investors should also pay more attention to issues such as the rights and obligations of each investing parties, the organization structure of the joint venture, business scope, period of operation, appointment of company management, profit distribution, distribution of assets after termination and liquidation of the joint venture, etc.
The PRC Employment Contract Law came into effect on January 1, 2008, and regulates all employment relationships including establishment, execution, revision, dissolution or termination of labor contracts within the Mainland. In 2012, the Standing Committee of the National People's Congress passed revision of the original Labor Contract Law. The revision came into effect on July 1, 2013.
The Labor Contract Law requires employers to enter into written labor contracts with employees when establishing an employment relationship. In case the employer fails to enter into a written labor contract with the employee within one year after commencement of the employment, an employment contract with indefinite terms would be deemed to have been established with the employee. In such case, the employer should pay the employee double salary on a monthly basis for the one year period since the first month of the employment.
Recruitment methods differ between FIEs and ROs. According to the PRC Labor Law which took effect in 1995, FIEs can hire staff from the local workforce based on their operating needs, as well as determine their own organization structures and human resources. Recruiting can be carried out through different channels, such as engaging authorized professional agencies, posting advertisements, etc.
ROs are required to employ staff through authorized labor agencies. A RO must sign a service contact with a labor agency and the labor agency would establish employment relationship with the employees.
On July 28, 2018, the State Council issued the Decision on Cancellation of Certain Regulations on Administrative Licensing(GF  No. 28), where the requirement for the employment permit for people from Taiwan, Hong Kong and Macao in mainland China was cancelled. On August 23, the Ministry of Human Resources and Social Security promulgated the Decision on Abolishing the ‘Regulations on Employment of Taiwan, Hong Kong and Macao Residents in the Mainland’ (Order No. 37 by the Ministry of Human Resources and Social Security), where the Regulations on Employment of Taiwan, Hong Kong and Macao Residents in the Mainland (Order No. 26 by the Ministry of Labor and Social Security) is abolished. (http://www.gov.cn/xinwen/2018-08/30/content_5317710.htm
The employers could determine its remuneration package for their employees. However, salary and wages paid to employees shall not be lower than the minimum wages set by local and provincial government. The employers could establish employee incentive plans, such as performance bonus and stock options, to attract capable employees. Salary and wages shall be paid on a monthly basis in local currency. Detailed payment date should be agreed upon and documented in the employment contract.
FIEs should follow requirements about the standard working hour prescribed by labor laws in the Mainland. Standard working hours is 8 hours a day and no more than 40 hours a week on average.
The employers should deduct the Individual Income Tax (IIT) before making salary payments to employees, and for filing tax with relevant tax authorities in the following month after salary payment.
The PRC Social Security Law which took effect in July 2011 has established a basic social security system, including basic pension, basic medical insurance, work-related injury insurance, unemployment insurance, and maternity insurance, etc. For any expatriate employees being employed in the Mainland, employers should be responsible for contributing to social security on their behalf. The employers' social security contribution, together with the employees' personal contribution, makes up the employees' social security benefits.
According to Interim Measures on the Participation in Social Insurance by Hong Kong, Macao and Taiwan Residents in the Mainland(http://www.mohrss.gov.cn/gkml/zcfg/bmgz/201911/t20191130_344467.html ) which takes effect on 1 January 2020, Hong Kong, Macao and Taiwan residentswho are legally employed or recruited by employing units such as enterprises, institutions, social organizations, individual economic organizations with employees registered in the Mainland shall take part in employee basic pension insurance, employee basic medical insurance, work injury insurance, unemployment insurance and childbirth insurance. The employing unit and the employee should make contribution payments for social insurance in accordance with regulations.
According to Administrative Regulations on the Housing Provident Fund promulgated by the State Council, employers and employees are required to contribute to employees' personal Housing Fund account.
The Special Provisions on Labor Protection for Female Employees was published by the State Council and took effect from April 2012. It stipulated that female employees are entitled to maternity leave of no less than 98 days, including 15 days before the delivery. Maternity expenses incurred during maternity leave and medical expenses for delivery or miscarriage for female employees who have enrolled in maternity insurance shall be covered by the insurance whereas for those without maternity insurance, the employer would then be responsible for such payments / reimbursements.
Foreign investors (including Hong Kong investors) who have set up FIEs or ROs would generally be subject to the following types of China tax: Corporate Income Tax, Withholding Tax, Value Added Tax, Business Tax, Consumption Tax and local surcharges, Stamp Duty, Urban Land Use Tax, Property Tax, Deed Tax, Land Appreciation Tax, Customs Duties, and etc. For enquiry on detailed taxation information, please call the hotline of the Taxation Bureau:12366.
Enterprises incorporated in the Mainland (such as FIEs) or foreign enterprises incorporated according to the laws of other jurisdiction but have effective management located in the Mainland should pay CIT in the Mainland on their world-wide income. The applicable CIT rate is 25%. With respect to foreign enterprises that have no permanent establishment or fixed place of business in China; or have permanent establishment or fixed place of business in the Mainland but the income derived from the Mainland is not effectively connected with the permanent establishment or fixed place of business, they would be subject to a Withholding Tax (WHT) on their China-sourced income. The statutory WHT rate is 10%, which could be reduced by applicable tax treaties between the Chinese government and other national governments.
CIT Taxable income is assessed based on an enterprise's accounting profit, but not necessarily equal to its accounting profit. It is the net amount of the annual gross income less non-taxable income and tax-exempt income, and after deducting applicable costs and expenses and offsetting the net operating loss carried over from previous years.
CIT is calculated on an annual basis and within each tax year, taxpayers should perform provisional CIT filings on a monthly or quarterly basis. The tax year of CIT taxpayers is the calendar year (January 1 to December 31). The provisional CIT filing should be performed within 15 days after the end of each month/quarter. Taxpayers should perform annual CIT filings and settle the CIT due/refund within 5 months from the end of each calendar year.
All units and individuals shall have an obligation to pay value-added tax (VAT) for the incomes from the sales of goods or services, from the provision of processing, repairs and replacement service, from the importation of goods, or from the transfer of intangible assets or real property within the territory of the People’s Republic of China.
As part of the reform under the Mainland's 12th Five Year Plan, a pilot VAT reform ("Pilot VAT Reform") was announced in the executive meeting of the State Council in October 2011. From January 2012 onwards, Pilot VAT Reform was introduced in selected locations to expand the scope of VAT to cover industries that were previously subject to Business Tax.
From May 1, 2016 on, the reform has been launched to change business tax to added-value tax. In December 2017, the State Council promulgated the Decision of the State Council on Abolishing the ‘Interim Regulations of the People's Republic of China on Business Tax’ and Amending the ‘Interim Regulations of the People's Republic of China on Value-Added Tax’, where the Interim Regulations of the People's Republic of China on Business Tax was abolished, and the units and individuals that sell services, intangible assets, and real estate are defined as added-value tax payers.
CT is imposed on top of VAT/BT for the sale of 14 specific kinds of consumer products. According to PRC Tentative Regulations on Consumption Tax (amended in 2008 and came into force since January 1st 2009), the 14 kinds of product subject to CT include: cigarettes, wine and alcohol, cosmetics, gasoline, luxury cars, golf balls and equipment, yachts, luxury watches and etc. CT payable is calculated on the basis of sales amount and/or the sales volume/quantity depending on the product item concerned. From 1 December 2014, CT is no longer imposed on small-displacement motorcycles with a cylinder capacity of less than 250ml (exclusive), automobile tires, leaded gasoline for cars and alcohol.
Starting from 1 February 2015, battery and coatings shall be subject to CT in order to promote energy conservation and environmental protection. CT of 4% will be levied on the sale price (before VAT) at the point of production, processing and import of battery and coatings.
From 10 May 2015, the ad valorem rate for wholesale of cigarette is increased from 5% to 11% plus unit rate of RMB 0.005 per cigarette.
City Construction Tax (CCT), Education Surcharge (ES) and Local Education Surcharge (LES) are calculated based on the actual payment of VAT, BT and CT (hereinafter referred to as "the Three Taxes"), which are filed and paid together. The calculation is based on the actual payment of the Three Taxes multiplied by the tax rates respectively.
To build a fair market for competition and to promote healthy development of cross-border e-commerce retail imports, the imported commodities from cross-border e-commerce retail (Business to Customer, i.e., B2C) shall be subject to Customs Duty (CD), import-level VAT and Consumption Tax (CT). The taxpayers shall be the individuals purchasing the imported B2C commodities. The dutiable values of imported commodities shall be their actual transaction prices including the retail prices of the goods and accompanying freight and insurance expenses. E-commerce enterprises, enterprises engaging in e-commerce trading platform or logistics enterprises may act as the withholding agents.
|Amount of the B2C import transaction (threshold: RMB5,000 per transaction and RMB 26,000 per year individually)||Applicable tax treatments|
|Not exceeding the threshold||CD rate is 0% on a provisional basis.
Import-level VAT and CT shall be imposed with a 30% reduction on a provisional basis, i.e., import-level VAT and CT exemption will no longer be available.
|Exceeding the threshold (including single inseparable commodity with a dutiable value exceeding RMB 5,000)||Taxes shall be imposed in full amount according to the general trade mode.|
Consignee of imported goods, consignor of export goods, owner of entry articles are taxpayers of Custom Duties. All goods permitted to be imported into or exported out of and all articles allowed to enter into the Mainland shall be subject to payment of Customs Duties unless otherwise specified by the State Council. The tariff items, tariff heading numbers and tariff rates as proscribed in the Customs Import and Export Tariffs of China and the Import Tariff Rates of the PRC for Entry Articles are formulated by the State Council.
Customs Offices are responsible for the collection of Customs Duties of goods imported into the Mainland and other import taxes (including import VAT and consumption tax). To comply with relevant World Trade Organization (WTO) requirements, tariff rates of imported goods have gradually been reduced since 2002. Customs Duties are computed based on customs value assessed by the Customs Offices or quantity, and are collected by the Customs Offices.
According to the PRC SD Provisional Regulations ("SD Regulations", effective in October 1988), entities or individuals which conclude or receive the dutiable documents prescribed in the SD Regulations in the PRC are subject to SD. In order to support small-scaled and micro-scaled business enterprises, during 1 January 2018 and 31 December 2020, loan contracts entered into between such enterprises and financial institutions are temporarily exempt from SD.
Since December 2006, The Arrangement between the Government of the People's Republic of China and Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as "the Arrangement") and its first Protocol came into effect. Subsequently, the two parties then signed the Second Protocol, Third Protocol, Fourth Protocol and the Fifth Protocolto the Arrangement in 2008, 2010, 2015 and 2019, respectively. The Arrangement brings a greater degree of certainty on taxation liabilities for those who engage in cross-boundary business activities in the Mainland and Hong Kong, and helps promote bilateral trade and investment.To enjoy preferential tax treatment of the arrangement, qualified Hong Kong tax residents, who obtained dividends, interest, royalties and/or capital gains from transfer of property from the mainland China, should apply for pre-approval with relevant mainland tax authorities for eligibility of preferential tax arrangements. For the PRC-sourced dividend, interest, royalties and capital gains derived by Hong Kong residents but are not eligible for preferential treatment under PRC-Hong Kong Tax Arrangement, it would be subject to WHT at the standard rate of 10%.
Applicable WHT rates under PRC-Hong Kong Tax Arrangement(Note 1)
|5%||7%||7%(Royalties derived from aircraft and ship leasing businesses shall be subject to the preferential rate at 5%)||0%|
Note 1: the lower rates would be applicable if the recipient of relevant passive income qualifies necessary requirements, and it entitled to the preferential tax treatments under the PRC-Hong Kong Tax Arrangement
Types of intellectual property in the Mainland include trademark, patent, copyright, and business secrets. There are relevant laws and regulations for the protection of IP rights, sanction of IP rights infringement and settlement of IP rights dispute.
When infringement on IP rights occurs, the patent rights' holder or other affected parties may request an administrative remedy from relevant administrative authorities or file lawsuit with a people's court. The main administrative punishments on IP right infringement include: Ordering the assailant to stop IP infringement activity and to compensate the IP right holder for any losses incurred and cash fines; In case of severe IP rights violation, the assailant might be subject to criminal punishment.
For more information about applying for a patent, trademark and copyright in the Mainland, please seek professional advice or visit the official websites of relevant government authorities listed below: