NOTE FROM THE CHAIRMAN · Companies under investigation have had little guidance regarding...

Dear Esteemed Clients, Associates & Friends,

Happy year of the Goat! Those of us in China and other Asian countries have just returned to work after ushering in this New Year with family and friends. We bring renewed perspectives and fresh energy to the challenges and opportunities ahead of us.

As you will read in the following pages, various Chinese government agencies have closed out the Year of the Horse with a gallop. Not only has the State Administration of Taxation released the final version of its upgraded tax General Anti-Avoidance Regulations, but the agency has also revisited and clarified related enterprise income tax provisions regarding the indirect disposal of Chinese entities by offshore companies. Coupled with these upgrades, the Administration has also clarified and improved the reporting and individual income tax declaration requirements for individual shareholders that perform equity transfers of Chinese entities.

Meanwhile, the Ministry of Commerce has been busy rewriting the primary laws that govern foreign investment in China, and several other ministries have expanded the visa regulations that apply to foreigners who enter the country for short-term work assignments. Foreign e-commerce companies will be pleased to learn that the Shanghai FTZ will soon have regulations in place that allow foreign investors to hold 100% of the equity in for-profit e-commerce companies registered there. And as predicted when the first FTZ opened in Shanghai, FTZs are now scheduled to open in Tianjin, Guangdong Province and Fujian Province.

All of these upgrades and reforms have been taking place against a backdrop of continued general poor economic performance around the world, and China has not been immune. While no major economic crisis has erupted here, GDP growth continues to fall short of expectations, and other indicators substantiate that the economy is moving slower than it has in decades. In spite of that, both incoming and outgoing FDI continue to increase, and opportunities abound for foreign investment.

While the goat is revered for its gentleness, we indeed hope that the coming year will bring happiness, health and blessings, as well as a good portion of the opportunities, to all of our colleagues and clients. Happy New Year to all!

Henry TanChairman

Your Personal AdvisersListening, Thinking, Growing, Asia.

Nexia China

In This Issue

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NOTE FROM THE CHAIRMAN

CHINA TAX UPDATES

February 1, 2015 Implementation of New GAAR Measures

Controversial SAT Circular 698 Replaced: New Rules for Indirect Transfers by Offshore Parties

New Rules for Collection of Individual Income Tax on Equity Transfer Income

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FOREIGN INVESTMENT

UPDATES

Foreign Investment Law Redrafted

New Regulation for Foreigners Entering China for Short Term Work

Other Foreign Investment Updates of Interest

2014 Foreign Direct Investment (FDI) Statistics Wrap Up

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February 1, 2015 Implementation of New GAAR Measures

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CHINA TAX UPDATES

Since the latest Enterprise Income Tax (“EIT”) law took effect in January 2008, China’s State Administration of Taxation (“SAT”) has been steadily working to create General Anti-tax-Avoidance Rules (“GAAR”), as well as to develop both definitions and procedures with which to handle tax-avoidance investigations and tax adjustments. Yet as recognized by the SAT in recent history, the country’s GAAR regulations have lacked clarity. Companies under investigation have had little guidance regarding procedures, and thus have been unable to present effective arguments in defense of their business and tax practices. It was therefore welcome news in December 2014, when the SAT released Circular [2014] #32, the Administrative Measures for the General Anti-tax Avoidance Rules: Trial Implementation (“Circular 32”). With these new measures taking effect on February 1, 2015, considerable clarity has been brought to the definitions and procedures by which China’s tax authorities will be handling potential tax-avoidance cases.

The new measures of Circular 32 are the result of feedback on an earlier draft of the measures, which was not implemented, but was sent out for public comment in July of 2014 (see our November 2014 newsletter). Following release of Circular 32, the SAT also published a questions and answers commentary (“Q&A”) about the new measures on its website. According to the SAT, a most crucial point to recognise is that these new measures have been developed to compliment the existing regulations in the EIT laws, as well as the 2009 Measures for Special Tax Adjustments; the controversial Circular 698 regarding indirect equity transfers of Chinese entities by offshore parties (see the update in the next article); and the 2009 Circular 601 (criteria used for recognition of the Beneficial Owner in cross border transactions). These new measures are also consistent with China’s ongoing input into the OECD’s Base Erosion and Profit Shifting (“BEPS”) initiative. Throughout all of

the regulations, the over-riding principle in the examination of any cross border arrangement is the necessity to utilise a “substance over form” analysis approach.

GAAR Application Under Circular 32

Circular 32 states that GAAR measures shall not apply to corporate arrangements that lack cross border transactions or payments. This is in keeping with the government’s current focus on elimination of cross border tax avoidance by global companies. GAAR will also not apply to cases of illegal corporate practices, such as falsifying invoices, nonpayment of taxes or tax fraud. In these cases, the related governing laws will dictate procedures. The circular also discusses the precedence of other regulations over GAAR. For example, if a given corporate arrangement falls under other existing regulations governing transfer pricing, cost sharing, controlled foreign companies, thin capitalization, or other special tax adjustments, those regulations shall take precedence over GAAR. Likewise, applicable tax treaty beneficial ownership rules and/or limitations on benefits shall take precedence. While these precedence conditions imply that tax authorities will not arbitrarily revert to GAAR when examination of a corporate arrangement appears to be warranted, it should be noted that most Chinese regulations and tax treaties are dotted with “…other cases as determined by tax authorities…” clauses that potentially allow for ignoring the precedence rules offered in these current measures.

The 2008 EIT law and its implementation rules provide for a tax-based test for whether or not GAAR should be applied in a given case, stating that any transaction or arrangement which decreases the taxable income of a company while also lacking any reasonable commercial purpose is a potential candidate for tax adjustment under GAAR. That is, given that the “primary purpose of an arrangement is to reduce, avoid or defer taxation,” GAAR should apply.

These new measures of Circular 32 generally uphold these ideas, but further clarify that a tax avoidance arrangement

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is one in which the “sole or primary purpose” of the arrangement is to obtain a “tax benefit” (defined as tax elimination, reduction or deferral), and that in pursuing a tax benefit, the arrangement “takes a form that complies with tax rules but is not consistent with the [purported] economic substance” of the arrangement. While this new definition does nothing to really alter the previous tax-avoidance test criteria, it does continue to highlight that the economic substance of an arrangement is a major consideration.

Reclassification of Arrangements

Tax authorities are instructed to utilise a variety of data sources in order to discover potential anti-tax avoidance cases, including enterprise income tax returns and supporting documentation, outbound payment documentation, equity transfer documentation, tax assessments and so on. Authorities shall then apply this “substance over form approach” in a given case by first referring to a similar transaction or arrangement that is judged to have reasonable economic substance. The arrangement under investigation may then be adjusted by:

Procedures

Beyond defining how and when GAAR should be used for investigations and tax adjustment, the measures of Circular 32 delineate the logistical procedures for handling cases. For instance, after SAT approves an investigation and tax authorities issue a “Notice of Tax Inspection” to a company, the company has 60 days in which to submit documentation related to the arrangement under question, including background documents, statements of business purpose, board resolutions and similar decision-making documentation, communications between the parties, contracts, agreements, documentation regarding payments, and other documents as needed by the company or requested by the tax authority. The tax officials then have nine months from the date that SAT approves the investigation to complete their examination of the documents and submit a plan back to SAT. Based on the SAT’s decision, notice shall be sent to the investigated company. If the company objects to the decision, they have seven days to raise the objection and/or request

In part or in entirety reclassifying the nature of the arrangement;

Denying the existence of a transaction party or treating all transaction parties as being the same entity;

Redistributing among the parties or reclassifying the income, deductions, tax incentives and discounts or exemptions of overseas taxes; and

Other reasonable means of adjustment.

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modification of the plan.

The measures conclude with brief articles regarding dispute settlement. Details are not offered, but an investigated company may apply to the courts for legal remedies. Also, if the resulting adjustment plan results in international double taxation and/or is not compliant with a relevant tax treaty provision, the SAT will coordinate and resolve the problems, negotiating with the tax authorities of the other country as needed.

Conclusion

The release and implementation of Circular 32 provides further evidence of China’s commitment to collect its fair share of taxes from companies that do business here, and especially to collect its fair share of taxes from those looking to avoid taxation internationally. The measures also bring clarity to the GAAR system and how it shall be used, which should be very helpful for global companies that have legitimate business substance in their financial arrangements related to China-based entities. Such companies should now have an understanding, not only of how China authorities will view transactions, but also of what types of documentation companies should have in place from the start to the finish of a given transaction or arrangement. Every global company that has financial arrangements with China-based entities should thus review their current and ongoing documentation so as to ensure that the business substance of those arrangements is self-evident.

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Controversial SAT Circular 698 Replaced: New Rules for Indirect Transfers by Offshore PartiesDuring the more than five years since SAT released its controversial Circular 698, the announcement on Strengthening the Administration of Corporate Income Tax on Gains Derived by Non-resident Enterprises from Equity Transfers, we have received more questions on this topic than perhaps any other tax-related changes that have occurred since the 2008 Enterprise Income Tax (EIT) Law took effect. Due to lack of clarity in Circular 698, answering those questions has often been difficult.

As of the February 3, 2015 SAT release of Announcement 7 concerning Corporate Income Tax on Indirect Transfer of Properties by Non-tax Resident Enterprises, key articles of Circular 698 have been replaced. Now, while a few aspects of indirect transfers remain uncertain, considerable clarity has been brought to the overall regulatory environment on this issue. It should be noted that the GAAR principles outlined in the previous article certainly carry over into this new set of regulations. “Substance over form” remains as the primary guiding principle to be used in determining how and when the regulations apply to a given case.

On a very positive note, the rules of Announcement 7 bring to light considerable detail as to how a lack of business substance shall be determined for indirect transfer transactions. The Announcement also clearly delineates what types of transactions that are automatically exempted from its rules, as well as offering a slightly more flexible reporting requirement system for transaction parties to follow. Less positive is the fact that the list of affected types of Chinese properties involved in offshore indirect transfers includes more than the equity that was targeted in Circular 698. Announcement 7 also adds a new withholding tax system that potentially increases buyer vulnerability to non-compliance.

Affected Transactions in Announcement 7

It is noteworthy that the regulations of the 2009 Circular 698 applied to “income derived by non-resident enterprises from the transfer of equity in Chinese resident enterprises, excluding shares of Chinese resident enterprises purchased and sold on the open securities market.” Circular 698 also stated that “where an overseas investor indirectly transfers equity of a Chinese resident enterprise in a transaction without substantial business purpose and aims to circumvent obligations for payment of enterprise income tax,” the transaction should be reclassified as a direct equity transfer, with the gains taxed accordingly.

In Article 1 of Announcement 7, SAT has modified the application of the reclassification rules such that equity of a Chinese resident enterprise now means “the properties of

an establishment or place in China, immovable properties in China, equity investments in a Chinese tax-resident enterprise, etc.” Taken as a whole, this definition is referred to in the rules as “Taxable Properties in China,” which we shall refer to as “TPC.” Thus the taxation rules of this announcement now apply to transactions “without reasonable commercial purpose that result in avoidance of enterprise income tax liability,” in which a non-resident enterprise (hereinafter “NRC” - not liable for EIT in China) transfers its equity or similar interests in an overseas enterprise that directly or indirectly owns TPC, thus generating an outcome substantively similar to that of a direct transfer of the TPC. This includes changes in the shareholders of the transferred overseas enterprise (hereinafter “TOE”). The resulting taxable gains in China are essentially proportional to the value of the TOE’s TPC.

Article 5, however, states that the rules of this announcement do not apply if the NRC obtains income by transfer of TOE shares on a securities exchange, or if the NRC directly holds and transfers the TPC and a tax treaty exempts the transaction from EIT. Certain conditions on the holding percentage and China-sourced income percentage apply for treaty relief case.

Reasonable Commercial Purpose

Announcement 7 goes far beyond the language of both Circular 698 and the recent GAAR Circular 32 (which is discussed in the previous article) in defining, or at least describing the presence or lack of presence of “reasonable economic purpose.” Of key interest, Article 3 describes the factors that tax authorities must consider in order to determine when an indirect transfer transaction may lack “reasonable commercial purpose.” These factors include:

Whether the TOE’s primary value is directly or indirectly sourced from TPC;

Whether the TOE’s assets are directly or indirectly comprised of TPC, or whether the TOE’s income is primarily directly or indirectly China-sourced;

Whether the TOE’s functions and risks (and/or those of its subsidiaries that may hold TPC) prove the economic substance of the corporate structure;

How long the TOE’s organisational structure has been established, including its shareholders and business model, etc.;

To what extent the transaction is subject to taxation overseas;

Whether or not a direct transfer of the TPC may have accomplished the same or similar results;

To what extent, if any, that tax treaties or other tax arrangements apply to the transaction; and

Other related factors as determined by tax authorities.

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Article 4 provides further guidance, stating that if all the following criteria are met, a given transaction is automatically considered to lack reasonable commercial purpose, and no further consideration of the factors listed above would be necessary:

Conversely, Article 6 of this announcement states that an indirect transfer of TPC shall be deemed as having reasonable commercial purpose if ALL of the following conditions are present in the transaction.

The shareholding relationship between the transaction parties satisfies any of the following conditions:

a) The NRC transferor directly or indirectly owns 80% or more of the equity interests in the party receiving the equity interests (“the buyer”);

b) The buyer directly or indirectly owns 80% or more of the equity interests in the NRC transferor; or

c) 80% or more of the equity interests in the NRC transferor and the buyer are, directly or indirectly held by the same third party; or

d) If 50% or more of the TOE’s value is directly or indirectly derived from immovable properties situated in China, the shareholding relationship referred to in 1a, 1b, and 1c above shall be 100%.

The current indirect transfer would not result in a reduction of enterprise income tax applicable to the income arising from a subsequent potential indirect transfer of the TPC; and

The consideration paid by the buyer is 100% in the form of equity (not including the equity in a listed company) in the buyer or another enterprise with a shareholding relationship.

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Withholding Tax and Reporting Requirements

Announcement 7 has completely overhauled the requirements that govern when and how indirect transfer transactions shall be reported. On one side, the reporting requirements are tightly coupled to the relevant EIT or withholding tax obligations. On the other side, there is somewhat increased flexibility as to which party handles the initial reporting. The Circular 698 regulation that reporting is only required if the TOE is located within a jurisdiction that does not charge corporate income tax on income derived outside its jurisdiction, or if the tax burden within the jurisdiction is less than 12.5%, is completely eliminated. All transactions to which Announcement 7 applies are subject to the reporting requirements.

The first point to note is that in cases where the indirect transfer involves TPC that is an establishment or place subject to Chinese EIT, the establishment or place must include the income from the transfer in its EIT filing for the year in which the transfer takes place. This requirement of course forces further reporting, especially if parties to the transaction wish to argue that the transaction should be exempt from taxation.

Under the circumstances in which the transfer involves TPC that is an immovable property or equity interest that is subject to EIT under the definitions in Article 1 of this Announcement 7, the buyer (or party that is obligated to pay the NRC transferor) must act as withholding agent, immediately withhold the funds and pay the relevant taxes in China. If the buyer fails to withhold the tax from its payment to the NRC transferor, the NRC transferor must within 7 days report the transaction and pay the tax. However, if within 30 days of concluding the transfer agreement the buyer submits certain documentation to the China tax authorities, liabilities for penalties or interest on unpaid taxes may be reduced or waived. The required documents include: a copy of the equity transfer contract (in Chinese and English); charts showing the before and after shareholding structure; two years of financial statements for the TOE and its subsidiaries directly or indirectly holding the relevant TPC; and a statement as to why Announcement 7 does not apply to the transaction.

In all cases, the Chinese tax authorities may request additional documentation from the NRC transferor, the buyer, a planning firm (if used), and/or the Chinese TPC that is being indirectly transferred. Such documentation may include:

Documents evidencing the decision-making process for the transfer;

Documents evidencing the business operations, personnel, finances and properties of the TOE;

The assets valuation reports and other supporting information used for pricing the transaction;

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The TOE derives 75% or more of its value through direct or indirect ownership of TPC;

If at any time within one year prior to the indirect transfer 90% or more of the TOE’s assets (not including cash) consisted of investments in China, or if 90% or more of the TOE’s income was directly or indirectly derived from China;

The TOE (and/or its subsidiaries) is incorporated in a region to meet the required organisational form, but performs limited functions and undertakes limited risks insufficient to substantiate economic substance; and

The effective applicable overseas income tax is less than the Chinese income tax would be for a direct transfer of the same TPC.

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It should be noted that Article 12 states concisely that in-charge tax authorities shall follow all relevant GAAR regulations (see previous article) when investigating an indirect transfer of TPC.

Other Issues

Subsequent articles in Announcement 7 deal with enforcement issues. For example, it is stated that the “in-charge” tax authorities are the officials in the tax office that would handle the EIT issues if the transaction were carried out as a direct transfer of the TPC. The date that EIT or withholding tax liability arises is the date that the indirect transfer agreement takes effect and the relevant formalities are completed.

Interestingly, it is repeated that if there is any discrepancy between the rules of this announcement and the provisions of a tax treaty, the tax treaty provisions shall prevail.

Announcement 7 took immediate effect on the day it was released, February 3, 2015. At the same time, the relevant articles of the 2009 Circular 698 and its sister 2011 Circular 24 are repealed.

Conclusion

Indeed the more comprehensive regulations outlined in Announcement 7 provide significantly more clarity as to how Chinese tax authorities are to examine NRC indirect transfers of TPC, which in turn should assist all parties involved in indirect transfer agreements to prepare documentation to support any tax reduction or elimination position.

Based on the new withholding tax and/or enterprise income tax regulations in this announcement, it would appear that regardless of how the transaction parties may view their transaction, taxes will more often than not be paid immediately, leaving the parties to argue their case for a later date. Especially in cases where withholding tax must be withheld by the buyer and subsequently remitted to the in-charge tax authorities, questions will no doubt arise. For example, what if the buyer and/or other transaction parties believe that the transaction has reasonable commercial purpose? Should they first withhold and pay the tax as prescribed, and then present their case later? Or should they (or the seller) take the chance of just submitting the documentation for presenting their case? If they do the latter, and the transaction is found to lack

reasonable commercial purpose, not only will they pay the taxes, but they will also pay penalties and interest.

Every NRC planning to indirectly dispose of TPC (as defined in this announcement), as well as buyers planning to receive the TPC, should seek the planning assistance of experienced consultants in China. The entire organisational structure of the indirect transfer must be carefully examined against these current regulations in order to assess risk to the seller and buyer. Certainly, as more cases involving these new rules come to light over the coming months, risk assessments should become clearer, just as happened after the initial release of the controversial Circular 698 that started China, and now other countries as well, down this very specific pathway toward shutting off one potential method of tax avoidance.

Documents related to any overseas taxation of the transaction;

Evidence that the Article 5 conditions outlined above exempt the transaction from Chinese taxation under this announcement; or

Evidence that the transaction has reasonable commercial purpose as outlined above.

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New Rules for Collection of Individual Income Tax on Equity Transfer Income Enterprise income tax regulations such as those outlined in the previous article are not the only SAT targets where equity transfers are concerned. SAT recently also released Announcement [2014] #67, the Measures for Administration of Individual Income Tax on Income Derived from Equity Transfer (for Trial Implementation), which took effect on January 1, 2015. These new measures replace those outlined in the 2009 Circular 285 and 2010 Announcement 27, tightening assurance that equity transfers by individuals are reported and that applicable individual income tax is paid. The new measures also clarify criteria or factors used in valuing equity and determining when equity transfer prices may be unreasonably low.

Definitions and Application

For purposes of the Announcement 67 measures, equity is defined as “equity or shares invested by natural-person shareholders into enterprises or organisations established in the territory of China.” Sole proprietorships and partnerships are explicitly excluded. Additionally, throughout the measures, natural-person shareholders are referred to as “individuals,” and the entities in which they have invested are referred to as “invested enterprises.”

The articles of this announcement apply to any transaction in which an individual transfers his/her equity in an invested enterprise to another individual or legal entity under any of the following conditions:

Under any of the conditions listed above, the taxable income derived from an equity transfer is defined as the total consideration (or “equity transfer income”) received by the transferor minus the original value of the equity. The equity transfer income may consist, all or in part, of cash, physical or other assets, securities or other forms of compensation.

Equity is sold;

A company repurchases equity;

Investors in a company sell their shares during an IPO;

Equity is the consideration in making an investment;

Equity is used in lieu of cash to pay off debt;

Equity is transferred due to court or administrative order, or

Equity is transferred under other circumstances as determined by authorities.

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Equity Transfer Income

According to Article 10 of these measures, equity transfer income must be determined using arm ‘s length principles. Following that, in-charge tax authorities have the right to adjust or determine the equity transfer income in cases where it is “obviously low” and cannot be justified; or when no tax declaration has been made; or when the transferor does not provide requested information. As is usual with such provisions, authorities may also make adjustments under “other” circumstances as seen fit.

With regards to determining when equity transfer income may be obviously and unjustifiably low, the new measures provide reasonable clarity. Equity transfer income will be considered as obviously low when ANY of the following conditions are present:

However, in keeping with certain provisions of previous measures, obviously low equity transfer income is considered justifiable under ANY the following situations:

In the cases where tax authorities adjust or determine the equity transfer income, they will generally do so using one of two methods. The first is to evaluate the net value of assets per share, generally requiring an asset valuation. The second method is to evaluate recent similar equity transfers that have taken place in similar industries under similar circumstances or conditions.

The income is lower than the net value of the invested enterprise’s assets, including intellectual property and rights of all kinds;

The income is lower than the individual’s original investment;

The income is lower than that received in other equity transfers of the same invested enterprise;

The income is lower that that received in equity transfers of similar invested enterprises in similar industries; and

Other circumstances as determined by tax authorities.

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Valid documentation indicates that the value of the invested enterprise has been significantly affected by national policies;

The equity is transferred to certain blood relatives or transferred by inheritance;

Transfers take place between employees of the invested enterprise and it is proven that employees cannot transfer shares outside of the company; and

Other circumstances under which the parties to the transfer can provide valid documentation of reasonable cause.

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Determination of Original Equity Value

The original equity value used in determining the taxable income in an equity transfer transaction is essentially derived from the cash or non-monetary consideration, plus the relevant taxes, paid by the individual when originally acquiring the equity in the invested enterprise. In the case where no consideration was paid when the individual acquired the equity, the original value may be determined by the prices paid by previous shareholders. It should be noted that in cases where the transferor cannot produce documented evidence of the original equity value, it shall be determined by the tax authorities.

Reporting and Tax Declaration

Time is of the essence when an equity transfer takes place under these regulations. The buyer (“transferee”) is required to act as the tax withholding agent in the transaction, and as such, must report the transaction to the in-charge tax authorities (those having jurisdiction over the invested enterprise) within five days of signing the equity transfer agreement. Furthermore the invested enterprise must keep records of and report changes in shareholders within five days of the board or shareholder meeting (or other notification) in which the transfer is acknowledged. The invested enterprise must also assist tax officials in the collection of relevant taxes by submitting an individual income tax information form regarding the transaction within 15 days of the end of the month in which the transaction occurs.

In addition to the above reporting requirements, the transferor and transferee must make the actual tax declaration whenever any of the following occurs:

As part of the tax declaration process, the parties must submit a copy of the equity transfer contract or agreement (translated into Chinese as needed), copies of identification for each of the parties, assets appraisal reports, valid documentation to justify a low equity transfer income (if applicable), and any other documents that the tax authorities may require.

The equity transfer income has wholly or in part been paid;

The equity agreement has been signed and entered into force;

Equity has been used to make an investment or pay off a debt;

The transferee has begun to perform duties or enjoy the rights of a shareholder;

A relevant court or administrative judgment requiring the transfer has been announced; or

Other situations determined by tax authorities.

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Any failure to report, declare tax and pay tax within prescribed time limits will incur penalties and interest, and may be punished according to other provision of tax collection laws and implementation rules.

ConclusionGenerally, the previous administrative rules regarding individual income tax on equity transfer income were sufficiently clear that most questionable cases could be quickly resolved. With the release of these new measures under Announcement 67, the primary benefit rests with the tax authorities, directly resulting from improvements in the transaction reporting and tax declaration requirements. Where some individuals may have conducted equity transfers without tax bureau scrutiny in the past, it is likely that the current rules have closed those gaps.

12) Develop the commodities futures market; allow use of derivatives for hedging against risk, introduce futures varieties for bulk resource products, development commodity options, commodity indexes, carbon emission permits and other trading instruments;

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FOREIGN INVESTMENT UPDATES

Foreign Investment Law RedraftedOn 19 January 2015, the Ministry of Commerce promulgated its exposure draft of a new Foreign Investment Law of the People’s Republic of China. Public comments regarding the proposed law were invited up through mid-February. While proposed law is too lengthy to describe in detail here, the document contains eleven chapters to include:

The General provisions describe the purpose and scope of the law, especially with respect to foreign invested entities receiving national treatment equivalent to domestic Chinese entities, the promotion of foreign investment in the country, and overall improvement in openness and transparency in the administration of foreign investments.

A Foreign Investments and Investors chapter offers clear definitions of each, along with descriptions of which provisions of the law apply to different investment types. It is perhaps noteworthy that in addition to other detailed definitions, “de facto control of a domestic enterprise by a foreign investor” is considered a foreign investment subject to these laws, as is a foreign entity having the right to immovable property in China.

The Access Administration sections are mostly dedicated to rules regarding special professional permitting and required procedures for handling foreign investment in businesses that fall within the restricted industries catalogue.

The National Security Review chapter establishes a

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joint review conference system comprised of several governmental ministries and describes the circumstances under which foreign investment requires national security review. Procedures and content used during the review process are also detailed.

The Information Reporting system for foreign investors and investments has been extensively updated. This chapter describes in detail the reporting obligations for both governmental authorities and the foreign investment entities. While much of the information provided by foreign investors or foreign invested entities shall be publicly available, the law stresses that intellectual property shall be protected. In general, the rules highlight that foreign investors are required to submit certain reports when first making an investment, when changes are made to the investment, and on an annual basis. Annual reports are due before April 30 of each year. However, foreign invested entities with more than RMB 10 million in annual revenues or that hold 10 or more subsidiaries must submit financial reports on a quarterly basis.

The next chapter on Investment Promotion discusses improved facilitation of foreign investment in encouraged industries, special economic zones, and underdeveloped areas. Local governments are encouraged to offer incentives to promote foreign investment. A process for going abroad to promote foreign investment in China is also described.

A chapter on Investment Protection then describes several means by which the government shall insure that foreign investment is protected. Among other rules, these generally include rules against expropriation of investments except in extraordinary

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circumstances. Rules provide for payment of royalties should the government need to requisition foreign investor properties for the provision of disaster relief, as well as compensation if government authorities violate regulations and cause damage to the invested entity. Again, intellectual property is to be protected in accordance with the law.

The next chapter deals with the Handling of Complaints. This section details a commitment to set up a more effective nationwide mechanism for foreign investors to lodge complaints and seek resolution to issues impacting their business.

The Supervision and Inspection chapter seeks to strengthen the monitoring of foreign investment entities’ compliance with Chinese laws. Inspections shall generally be conducted on a sampling basis or when authorities are alerted to issues via a whistleblower. Information sharing among various government agencies shall also be a key factor in determining when inspections may be required. Details of how inspections are conducted are also included in this chapter.

Legal Liability of foreign investors is discussed in detail, especially as related to violation of any of the provisions of previous chapters in the law, including violation of investment in prohibited or restricted industries; violation of professional permit or access permit rules; violation of National Security Review rules; and violation of reporting rules. Fines are as high as RMB 1 million, but can be higher under certain circumstances. Criminal liability for fraudulent reporting is also discussed. Punishment for any violation may also result in revocation of licenses.

The final chapter deals with Supplementary Provisions of the law, including how the new law will affect existing foreign invested entities under certain conditions such as expiring operational periods or changes of organisational form. Other provisions are specific to investors from Taiwan, Hong Kong and Macau.

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It remains to be determined when the new law shall be finalised and take effect. However, on the same date this law does take effect, the previous laws on Sino-Foreign Joint Ventures (both Equity and Contractual) and Wholly Foreign Owned Enterprises shall be repealed. We will report on any key changes in the laws at that time.

New Regulation for Foreigners Entering China for Short Term WorkOnce again, in keeping with a trend of the last several years, China is tightening the regulations related to visas and other requirements for foreigners entering China to work. In December 2014, the ministries of Human Resources and Social Security, Foreign Affairs, Public

Security and Culture jointly issued Notice 78, Formalities for Foreigners on Short Term Assignments in China (Trial Implementation). The new rules took effect on January 1, 2015 and will impact any company in China that hosts a foreign national for short-term work of no longer than 90 days.

Briefly, Notice 78 states that short-term foreign individuals carrying out the following activities must obtain a Z-visa in the home country before coming to China:

In all cases, the foreigner must obtain (through the sponsor company or organisation) an employment permit from the Ministry of Human Resources (or Ministry of Culture as applicable) and an invitation letter from the local Foreign Affairs office, and subsequently apply for a Z-visa at a Chinese embassy or consulate in the home country. If the work assignment shall be less than 30 days, the foreigner may enter China using the Z-visa, which will only be valid for the 30-day period. If the assignment is for longer than 30 days (and less than 90), the foreigner must convert the Z-visa to a 90-day residence permit. The rules apply to all foreigners, including those from countries that have mutual visa exemption agreements.

Note that these new rules do not apply to foreigners who enter China on M or F visas for the following purposes:

Thus far, it is assumed that the current individual income tax (IIT) provisions shall continue to apply to such workers. That is, foreign workers staying in China less than 90 days (183 days if from a tax treaty county) shall not be subject to IIT here. However, current rules also state that

Performance of activities related to technology, research or management, including the provision of guidance to Chinese business partners;

Providing training (or attending) to athletes in China sports organizations;

Participation in commercial productions;

Participation in film production of any kind; and

Participation of any kind in fashion shows.

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Foreign investor dispatching employees to subsidiaries or representative offices in China to perform short-term duties;

Foreign company dispatch of employees to provide guidance, supervision or inspection on projects for which bids were awarded in China;

Foreign employees are dispatched to perform maintenance, installations, training, etc. for machinery purchased by China-based clients

Participation in sporting events;

Volunteers paid by foreign organisations or those performing short-term work without pay.

1.

2.

3.

4.

5.

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when the foreign worker is an employee of an entity in China, IIT shall be withheld from salary on a monthly basis. Overseas companies and their foreign invested enterprises in China should carefully evaluate the short-term dispatch of employees to China, including the duties as well as who the actual employer is, in order to ensure compliance with both the visa and tax requirements that may apply to the assignment.

Other Foreign Investment Updates of Interest

On the 13th of January 2015, the authorities in the Shanghai Free Trade Zone (FTZ) were instructed by the State Council to develop the pilot system under which foreign investors may hold 100% of the equity in for-profit e-commerce businesses. This news should delight the many such foreign businesses that have tried and failed to register as Wholly Foreign Owned [e-commerce] Enterprises during the last year.

In late December 2014 the State Council released another notice describing its intention to extend many of the successful reforms developed in the Shanghai FTZ to the rest of the country. Targeted policies will include those related to foreign investment administration, trade facilitation, finance reforms, and expansion of the service industry.

Also In December, the State Council announced that three more FTZs will be established in Tianjin, Guangdong and Fujian respectively. The focus of the reforms in each of the FTZs is expected to be slightly different. As we have reported, the Shanghai FTZ focus has been on expanding foreign access to financial services and other investments, logistics, and reforms to Customs regulations. It is expected that Guangdong’s focus may tend more toward trade and finance with Hong Kong, while Fujian may concentrate on similar relationships with Taiwan. We will report details as they come available.

2014 Foreign Direct Investment (FDI) Statistics Wrap Up According to the Chinese Statistics Bureau, 2014 brought a total of 23,778 newly approved Foreign-invested Enterprises (FIEs), up by 4.4% over 2013. At the same time the actual use of foreign investment reached USD $119.56 billion, an increase of 1.7% over 2013. As has been the trend over the last five or six years, Wholly Foreign Owned Enterprises (WFOEs) account for over 79% of the new registrations and used FDI, while Equity Joint Ventures (EJVs) account for around 20%. Contractual Joint Ventures and Share Companies make up the other 1%.

In addition to Hong Kong and Singapore, which are always at the top of the list due to large numbers of foreign holding companies in those locations, the largest shares of

investment in China during 2014 came from Taiwan, Japan, South Korea, the USA, Germany, the UK, France and Holland, in that order.

Articles contributed by:

Henry Tan; Nexia TSFlora Luo; Nexia TS (Shanghai)Scott Heidecke; Nexia TS (Shanghai)

Shanghai – International Desk Headquarter

Appraisal

Assurance Services

Internal Audit

Business Advisory

Corporate & Personal Taxation

Pre IPO Advisory

Mergers and Acquisitions

Insolvency & Corporate Recovery

Forensic Technology Investigations

Litigation Support

Outsourcing & Contract Staff

Offshore Company Registration

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Nexia China

About UsNexia China is an umbrella firm set up by the Nexia TS Singapore, Smith and Williamson and China member firms. Nexia China at its international desk provides IFRS, assurance, taxation and business setup and other advisory at our national office, Nexia TS (Shanghai) Co. Ltd and Shanghai Nexia TS Certified Public Accountants, which are managed by Nexia TS Public Accounting Corporation Singapore.

Our LocationsAdditionally we have Nexia China member firms with offices in 21 cities including Beijing, Shanghai, Guangzhou, Tianjin, Chongqing, Hangzhou, Wuhan, Nanjing, Changsha, Zhengzhou, Jinan, Harbin, Shijiazhuang, Weifang, Xi’an, Jiaxing, Nanchang, Taiyuan, Shamen, Nanning, and HK. Nexia China’s presence in other cities is through branch offices or associates of the member firms. Nexia China has adequate resources in excess of 1,500 partners and staff throughout China.

Our ServicesNexia China has successfully helped many foreign firms set up in different parts of China and also provided China tax advisory and consultancy services.

We are able to provide services in the following domains:

Nexia China is an independent member firm of Nexia International, a worldwide network of independent accounting and consulting firms ranking within top 10 worldwide with a total income of USD2.9 billion, 600 offices in over 100 countries with more than 23,000 partners and staff.

Your Personal Advisers

Nexia China & Nexia International does not accept any responsibility for the commission of any act, or omission to act by, or the liabilities of, any of its members. Nexia China & Nexia International does not accept liability for any loss arising from any action taken, or omission, on the basis of this publication. Professional advice should be obtained before acting or refraining from acting on the contents of this publication. Membership of Nexia China & Nexia International, or associated umbrella organisations, does not constitute any partnership between members, and members do not accept any responsibility for the commission of any act, or omission to act by, or the liabilities of, other members.

CHINA

Nexia China Pte Ltd

Nexia TS (Shanghai) Co Ltd Unit 2104 Hong Kong Plaza 283 Huai Hai Zhong Road Lu Wan District Shanghai 200021, China

Tel: (8621) 6390 6000 Fax: (8621) 6390 6300 Email: [email protected] www.nexiats.com.cn

For all enquiries on China, Contact Person:

Mr Henry Tan [email protected]

Ms Flora Luo [email protected]

SHANGHAI NATIONAL OFFICE SHANGHAI No. 6F, 239 Jiang Ning Road Shanghai 200041

Room Q, 20 floor, Heng Ji Building,No. 99 East Huaihai Road, HuangpuDistrict, Shanghai 200021

BEIJING12-18F, Guo An Plaza No. 1 GuanDongDian Bei Street Beijing 100020

GUANGZHOU 17th Floor Fu Qian Building A No. 618-620 Jiefang North Road Guangzhou 510030

SICHUAN, CHENGDU4th Floor Heng Feng BuildingNo. 6 Tianxian Bridge South RoadChengdu 610021

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