Doing business in mainland China

Transcription

1 Doing business in mainland China

2 Content Page Foreword 3 Country profile 4 Regulatory environment 7 Finance 9 Imports 10 Business entities 11 Labour 14 Financial reporting and audit 15 Tax 17 Contact details 22 Understanding the business operating environment together with the cultural uniqueness will be a prerequisite to successfully doing business in China. Hua Xu, Managing Partner, Grant Thornton China

3 Foreword Grant Thornton China is the exclusive member firm of Grant Thornton International Ltd (Grant Thornton International) in China. Established in 1981, the firm offers a full range of assurance, tax and advisory services to approximately 140 public companies as well as 2,000 state owned enterprises, private companies and foreign invested enterprises. With a national network of 17 offices in China and Hong Kong SAR, the firm has over 120 partners and approximately 2,700 professionals among which 700 are certified public accountants. For more information, please visit Grant Thornton International Ltd is one of the world s leading organisations of independent assurance, tax and advisory firms. These firms help dynamic organisations unlock their potential for growth by providing meaningful, forward looking advice. Proactive teams, led by approachable partners in these firms, use insights, experience and instinct to understand complex issues for privately owned, publicly listed and public sector clients and help them to find solutions. More than 35,000 Grant Thornton people, across over 100 countries, are focused on making a difference to clients, colleagues and the communities in which we live and work. If you require any further information, please do not hesitate to contact your nearest Grant Thornton member firm. This guide has been prepared for the assistance of those interested in doing business in China. It does not cover the subject exhaustively but is intended to answer some of the important, broad questions that may arise. When specific problems occur in practice, it will often be necessary to refer to the laws and regulations of China and to obtain appropriate accounting and legal advice. This guide contains only brief notes and includes legislation in force as of Grant Thornton refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton International Ltd (GTIL) and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another s acts or omissions.

4 Country profile Summary Basic data (2012 estimates) Population 1,354,000,000 (2012) Area 9.60 million sq. Km GDP (purchasing power parity) US$ 8,300 billion GDP per capita (PPP) US$ 6,094 Exports US$ 2,048.9 billion Imports US$ 1,817.8 billion Literacy rate 95.92% Inhabitants per physician Life expectancy years Urban population 52.60% Local currency Renminbi Geography and population China is situated in eastern Asia on the western shore of the Pacific Ocean, with an area of 9.6 million square kilometres. China's continental coastline extends for about 18,000 kilometres, and its vast sea surface is studded with more than 5,000 islands. Population (2012): By the end of 2012, China's total population in the mainland amounted to 1, million, of which male population reached million, accounting for 51.3 percent and female population, million, taking up 48.7percent. The new birth in the country was million and the birth rate was per thousand; the dead population was 9.66 million and the mortality rate was 7.15 per thousand. The natural growth rate was 4.95 per thousand. Political and legal system The political system in the People s Republic of China (PRC) takes place in a framework of a single-party socialist republic. State power within the PRC is exercised through the Communist Party, the Central Government and their provincial and local counterparts. Under the dual leadership system, each local bureau or office is under the theoretically co-equal authority of the local leader and the leader of the corresponding office, bureau or ministry at the next level up. Apart from the Communist Party, there are eight other democratic parties. Chinese law is one of the oldest legal traditions in the world. In the 20th and 21st century, law in China has been a complex mix of traditional Chinese approaches and Western influences. For most of the history of China, its legal system has been based on the Confucian philosophy of social control through moral education, as well as the Legalist emphasis on codified law and criminal sanction. Following the Revolution of 1911, the Republic of China adopted a largely Western-style legal code in the civil law tradition. The establishment of the People's Republic of China in 1949 brought with it a more Soviet-influenced system of socialist law. However, earlier traditions from Chinese history have retained their influence, even to the present.

5 Language There are seven major Chinese dialects and many sub-dialects. Mandarin (or Putonghua), the predominant dialect, is spoken by over 70% of the population. About two-thirds of the Han ethnic group are native speakers of Mandarin; the rest, concentrated in southwest and southeast China, speak one of the six other major Chinese dialects. Non-Chinese languages spoken widely by ethnic minorities include Mongolian, Tibetan, Uyghur and other Turkic languages (in Xinjiang), and Korean (in the northeast). Business hours/time zone Offices in China generally open from 9:00 a.m. to 6:00 p.m., with a lunch break of about an hour. Government-stipulated work days are from Monday to Friday. Most Chinese banks are open from 9:00 a.m. to 4:00 p.m. or 5:00 p.m., and have branches that are open on Saturdays and Sundays. Shops generally open at 9:00 a.m. and close between 7:00 p.m. and 9:00 p.m., and are open on weekends. Public holidays There are currently seven official public holidays in the mainland territory, that is, New Year, Chinese New Year, Qingming Festival, Labour Day, Duanwu Festival, Mid-Autumn Festival and National Day. Economy In 2012, China's gross domestic product (GDP) amounted to US$ 8,300 billion, an increase of 7.8% over the previous year, however, the increase rate was 0.9 percent lower than the one in year Primary industries account for 10.1% of the total GDP, grew 4.5%; secondary industries take up 45.3% and grew 8.1%, and tertiary industries take up 44.6% of total GDP and grew 8.1%. Economic growth Economic growth fell slightly year on year, but it was in conformity with the macro-control policy from the government designated at the beginning of each year, and the growth rate still remained high. China is pledging more efforts to accelerate economic restructuring this year to achieve sustainable growth. Employment levels Standard employment: 5-day week, 40 hours per week, legal holiday according to relevant regulations. Labour force: By the end of year 2012, total employment in mainland China amounted to million. Primary industries, secondary industries and tertiary industries accounted for 33.6%, 30.3% and 36.1% respectively. Employment in urban area reached million, accounting for 48.4 percent, and unemployment rate reached 4.1%. Living standards Mainland China is undergoing remarkable and rapid change. Economic prosperity is now spreading, but there remain some differences between rural areas and the big cities, and between the Eastern seaboard and deep inland. However, as more areas open to tourism, this introduces change, and the opportunity for improved living standards.

6 The living standards vary from city to city. In the cities such as Beijing or Shanghai monthly salaries are increasing steadily. This is accelerating with the new prosperity, foreign trade relations and rapidly rising standards of education in major centres. Cost of living Along with the rise of living standards, prices have also dramatically increased. The rise in the consumer price index (CPI) fell each month from 4.5% in January to 2.5% in December, however, it increases 2.6% year on year, with price for food increases up to 4.8%. Some big cities, such as Shanghai, Beijing and Shenzhen, have become some of the most expensive cities to live in the world. By July 2013, the average price for a newly build apartment reached RMB (approximately US$ 1700) per square metre, with prices for top-range apartments reaching US$ 10,000 monthly rent or more. The average price for commodity housing has increased to 2.5 times more within the last 10 years; and the price in tier one cities such as Beijing, Shanghai, Guangzhou and Shenzhen increased by 3-4 times. Children s education can also become quite costly. If you move out of the big cities, prices for everything drop dramatically, often by more than half. The amount of money you need in China obviously depends largely on your living standards.

7 Regulatory environment Exchange control Monitored by the State Administration of Foreign Exchange (SAFE) and the People's Bank of China (PBoC). For foreign investment enterprises and individuals, revenue and expenses in foreign currencies have to be deposited with or withdrawn from their accounts with the Bank of China or other authorised banks. Foreign investment enterprises and individuals can be remit after-tax profits or income outside China. To open and maintain foreign exchange accounts, foreign-invested enterprises must apply to China's State Administration of Foreign Exchange (SAFE). SAFE determines the amount of foreign exchange the enterprise needs. Enterprises authorized to conduct current account transactions can retain foreign exchange equal to 50 percent of export earnings. Foreign exchange transactions on China's capital account require a case-by-case review and approvals. In April, 2006, the PBOC made the following announcement regarding the partial adjustment of foreign exchange management policies to facilitate trade and investment: In the case that enterprises open, change, or close, foreign exchange accounts used for current account transactions, the administration mode is changed from being based on prior approval to direct processing of the applications by banks in accordance with foreign exchange management requirements and business practices, while at the same time filing with the State Administration of Foreign Exchange (SAFE). In addition, the foreign exchange account limits for current account transactions are increased, and enterprises are allow to purchase foreign exchange in advance to support authentic trade payments. Documents required for sale and purchase of foreign exchange in service trade are simplified with the examination and approval procedures relaxed. Procedures related to sales of foreign exchange to resident individuals are further trimmed and the indicative limits on purchase of foreign exchange are increased up to a yearly quota. Within such a quota, individuals can purchase foreign exchange from banks by presenting their identity documents and declaring the usage of foreign exchange; banks can sell foreign exchange exceeding the quota to individuals after verifying relevant documents to satisfy their real needs. Expanding domestic banks' overseas foreign exchange investment services on behalf of their clients: Qualified banks are allowed to collect RMB funds from domestic institutions and individuals and convert into foreign exchange under a specified limit to invest in overseas fixed income products. Qualified securities brokers such as fund management companies are allowed to collect selfowned foreign exchange from domestic institutions and individuals and use the funds for overseas portfolio investment, including buying stocks. Further expanding overseas securities investment by the insurance institutions: Qualified insurance institutions are allowed to purchase foreign exchange for investing in overseas

8 fixed-income products and money market instruments. The amount of foreign exchange purchases is subject to a limit proportional to the total asset of an insurance institution. On 1 January 1994, China undertook a reform of its foreign exchange control system and unified the then existing dual exchange rates, namely the official rate and SWAP market rate, into a managed floating rate. In July 2010, the Renminbi has been appreciating to around 6.8 to the US dollar. According to China macro economic regulation and control, the value of Renminbi is expected to be gradually further increased. Legal and Accounting Environment Legal system China established a formal legal system There are four levels of people's courts: local, intermediate, high and the Supreme Court. There are also courts for maritime and military issues. Accounting requirements The governing body of the accounting profession is the Chinese Institute of Certified Public Accountants, which is controlled and administered by the Ministry of Finance. Chinese accounting principles and regulations mainly comprise of Accounting Standards for Business Enterprises ("ASBE") and Accounting Regulations for Business Enterprises ("ARBE"). ASBE, promulgated on 15 February 2006 by the Ministry of Finance, became effective on 1 January It represents significant convergence with the International Financial Reporting Standards, although differences still exist. ASBE now applies to listed enterprises and large and medium size State-Owned Enterprises. All other types of enterprises are encouraged to follow the new accounting standards or may adopt ARBE (except small-scale enterprises or finance and insurance enterprises which have their own set of accounting regulations). Audits are required for enterprises with foreign investment.

9 Finance Summary At present, Chinese financial institutions consist of banking and non-banking financial institutions. Banking system Banking financial institutions include commercial banks and policy banks. The Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China and China Construction Bank are the major commercial banks in China. In addition to these State-owned banks, there are joint-stock banks, foreign banks and local commercial banks. At present, there are three policy banks in China, namely, National Development Bank of China, Import & Export Bank of China and Agricultural Development Bank of China. Capital markets Two stock exchanges have been established in Shanghai and Shenzhen. As the central bank of China, the People's Bank of China controls and supervises banking sectors. While the China Securities Regulatory Committee plays the role of the regulating body of the securities industry, the China Insurance Regulatory Committee is in charge of all supervision of insurance companies in mainland China. Other sources of finance Non-banking financial institutions include insurance companies, security firms, trust and investment companies, finance companies, leasing companies and credit union.

10 Imports Summary The General Administration of Customs of China is the government organization responsible for supervising all imports and export of goods into and out of mainland China and enforcing the China Customs Law and relevant regulations. Import restrictions There are import restrictions on specific items. licences are required for the import of chemical devices and substances, and import prohibition may apply in certain circumstances for goods like opium, industrial and chemical waste residue. Likewise, there are export restrictions on goods such as automobiles, rice and corn. Customs duties After 15 years of negotiations, China has finally been given formal approval to join the World Trade Organisation since 11 December 2001, which brings China into the multilateral trading system. All goods imported into mainland China are subject to customs import duty unless specifically exempted. There are preferential rates available to its trading partners and listed on the harmonized tariff schedules. In addition to customs import duty, imported goods are subject to VAT and Consumption Tax (for 14 categories of specified goods). Exported goods by manufacturing companies in China may be entitled to a VAT refund under the exemption, credit and refund system. Refund rates range from 5% to 17% depending on the nature of goods. In order to implement its latest economic and trading policies and strategies, the Chinese government may adjust VAT refund rates from time to time. Compliance According to China Customs Law, all goods imported into mainland China must be declared to Customs within 14 days after the means of transport's arrival at mainland China. The customs declaration can be made by the importers or through qualified customs agents.

11 Business entities Summary Foreign investors may operate in mainland China through different legal vehicles. The most common entities used by foreign investors in practice are: - Wholly foreign owned enterprise (WFOE) - Representative office (RO) - Equity joint venture (EJV) Wholly foreign owned enterprise (WFOE) A wholly foreign owned enterprise is 100% owned by foreign investors. The Foreign Enterprise Law governs the establishment of a wholly foreign owned enterprise. It is a distinct and separately taxable entity. Formation Accountants and lawyers can assist with the formation of a company. The whole process usually takes 3 to 6 months, but if a company requires an immediately operational company, these can be purchased from a company formation agent. If the business scope is not in special area that should get pro-permit from government, the name and the business scope of the ready-made company can be changed easily. Total investment / capital funds Total investment amount = paid up capital + foreign loans The total investment amount requires approval from Ministry of Commerce. The minimum ratio of the registered capital to the total investment as follows shall apply to all the foreign investment enterprises: (US $ million) Total Investment ( TI ) Less than 3 Between 3 and 10 Between 10 and 30 More than 30 Minimum Registered Capital 70% of the TI Higher of 2.1 or 50% of the TI Higher of 5 or 40% of the TI Higher of 12 or one-third of the TI

12 Normally at least the 15% of the paid up capital should be injected within 3 months after issuance of the Business License of the foreign investment enterprise, and the rest funds should be ready within two years time. Management and officers A company is managed by its directors who are elected by the shareholders. The company could establish a board of Directors as the final decision making authority. It is not compulsory to have a management board. but at least one executive director and one supervisor are compulsory. Filing requirements / Audit requirements Every company registered in the mainland China must maintain a public file at the company s office. These files include licenses, certificates, chops, account ledges, financial statements, information on legal representative/directors, the company secretary and shareholders. The WFOE has to prepare and complete the tax filing and declarations according to the local administration authorities requirements. The WFOE must finalize the annual audit before the end of May. The annual audit includes a statutory annual financial statement audit, the annual foreign exchange audit and the annual tax audit if so required by local in-charge tax authority. Failure to maintain the file properly or meet the deadline of declarations may result in fines, penalties or in extreme cases, prosecution against the legal representative. The WFOE must conduct an annual joint inspection, which is organized by local administration authorities. This must be completed before the end of June every year. If the WFOE fails the annual joint inspection, the competent authority is empowered to terminate the operation of WFOE by revoking its business license. Representative office (RO) A representative office can be established by a foreign company to render preparatory services such as liaison, coordination and market research on behalf of its parent company. It is important that a representative office cannot engage in any direct profit-making activities. Formation Accountants and lawyers can assist with the formation of a representative office. The process usually takes 3 to 6 months. The representative office deregistration would in fact be more complex and time consuming than office establishment Tax payment method In accordance with circular "Tentative Measures for the Administration of Taxation on Representative Offices of Foreign Enterprises" (Guoshuifa [2010] No.18 (Circular 18)), there are two types of tax payment methods for a representative office, based on the nature and business scope of the RO s investor company: Actual basis method: (obtain revenue and pay taxes same as WFOE.) Deeming method; either expense-plus by converting the profit based on expenses or actual revenue deemed profit and pay taxes. Considering the high deemed profit rate, removal of exemption, introducing of arm's length principle to ROs, establishing an RO in China will become less favourable than ever. Investors should carefully review the proposed business model in China and consider the most appropriate form of establishing its presence in China, i.e. whether an RO or a WFOE. Equity joint venture (EJV) An equity joint venture is a limited liability Chinese legal entity, formed by one or more Chinese parties and one or more foreign parties under the Sino-foreign Equity Joint Venture Enterprise

13 Law. It is a distinct and separately taxable legal entity. Basically, at least 25% of the joint venture's shareholding has to be held by foreign investor(s). The joint venture will be managed by a board of directors with appointees from both sides. Investors in an equity joint venture share profits and losses strictly in accordance with their respective contributions to the registered capital of the venture. Filling requirements / Audit requirements Every company registered in the mainland China must maintain a public file at company s office. These files include licenses, certificates, chops, account ledges, financial statements, information on legal representative/directors, the company secretary and shareholders. The EJV needs to prepare and complete the tax filing and declarations according to the local administration authorities requirements. The EJV must finalize the annual audit before end of May every year. Failure to maintain the file properly or meet the deadline of declarations may result in fines, penalties or in extreme cases, prosecution against the legal representative. The EJV must conduct the annual joint inspection which is organized by local administration authorities before end of June, the EJV which fails to pass through the annual joint inspection would not continue the operation in next year. Other entities Co-operative joint venture (CJV) A co-operative joint venture is sometimes referred to as a contractual joint venture. The establishment of a co-operative joint venture is governed by the Sino-Foreign Co-operative Joint Venture Enterprise Law. It may be formed as a separate legal entity with limited liability, or an entity similar to a partnership. Investors in a co-operative joint venture share profits and losses in accordance with the provisions in the co-operative contract. Foreign Invested Commercial Enterprise (FICE) On 16 April 2004, the Ministry of Commerce promulgated the Measures for the administration of foreign enterprises in the commercial sector ( the Measures ) and became effective on 1 June According to the Measures, foreign companies are allowed to establish companies in China engaging in the following areas: Commission Agency Wholesaling Retailing Franchising Non-profit organization Based on the nature and industries, there are different application procedures. A limited number of non-profit organizations (or non-government organizations) can obtain permits from local government and obtain an operation license.

14 Labour Summary The Standing Committee of the National People s Congress passed the new Labour Contract Law ( Labor Contract Law ) on 29 June 2007 and it became effective on 1 January The Labour Contract Laws applies to all enterprises, individually-owned economic organizations and private non-enterprise work units in China. Under the Labour Contract Law, there must be written labour contracts to establish labour relationships. There are four types of labour contracts, being: Contracts with fixed terms of service; Contracts with unfixed terms of service; Contracts where the terms of service equals the period required to complete the tasks; and Collective contract. The Labour Contract Law contains details on compulsory limits on probation periods under different circumstances as well as minimum wage. It also provides details on situations where the employers and employees may terminate the contracts and the relevant compensations.

15 Financial reporting and audit Domestic corporations Filing/publication requirements All companies incorporated in China must submit annual financial statements with the Administration for Industry & Commerce, the Chinese registrar of companies, for annual inspection. Listed companies must prepare and lodge audited financial statements with the China Securities Regulatory Commission (CSRC, China s SEC). State-owned enterprises must submit annual audited financial statements with the State-owned Assets Supervision and Administration Commission. Company with subsidiaries should prepare group accounts. Accounting standards The MoF has the responsibility and ultimate authority for establishing accounting standards used in the preparation of financial statements for all entities. Meanwhile, the CSRC has responsibility to ensure that information presented in public offerings of securities and periodic financial information presented by listed companies is complete and not misleading. In addition, the CSRC publishes rules related to financial statement disclosure for listed companies. There are three sets of accounting standards for different kinds of companies: Accounting Standards for Business Enterprises Accounting System for Business Enterprises Accounting Standards for Small -sized Business Enterprises Accounting Standards for Business Enterprises Accounting Standards for Business Enterprises, issued on 15th February 2006 by the MoF, achieved high convergence with the IFRS. It has been adopted by all listed companies and financial institutions, and almost all large and medium-sized enterprises. There is no statutory requirement for the adoption of Accounting Standards for Business Enterprises by other enterprises, but early adoption is encouraged. Accounting Standards for Business Enterprises differs from IFRS mainly in one area: IFRS permits the reversal of impairment loss of long term assets such as equipments, plants, intangible assets and investments. Chinese Accounting Standards for Business Enterprises does not permit such reverse. Accounting System for Business Enterprises Non-listed large and medium-sized enterprises which are not required by government supervision agencies to adopt Accounting Standards for Business Enterprises, including foreigninvested companies, can choose to apply either Accounting System for Business Enterprises or Accounting Standards for Business Enterprises. Accounting System for Business Enterprises differs from IFRS in a number of areas. For example: Development costs may be capitalised under IFRS providing strict criteria are met, those not meeting the criteria must be expensed. Accounting System for Business Enterprises requires most development costs to be expensed

16 Accounting System for Business Enterprises does not permit gain/loss from debt restructuring to be recognized in profit/loss, whilst under IFRS it is allowed Financial instruments are classified by term of maturity under Accounting System for Business Enterprises, while IFRS classifies financial instruments by the intention to hold the instruments fair value measurement is not allowed under Accounting System for Business Enterprises Accounting Standards for Small-sized Business Enterprises Accounting Standards for Small-sized Business Enterprises applies to small companies which are not financial institutes or group companies, with no publicly traded stock and/or bond, and satisfy all of the following tests by industry (to name some select industries): Industry Number of Staff Sales (RMB, million) Assets (RMB, million) Manufacturing <300 <20 - Construction - <60 <50 Wholesale <20 <50 - Retail <50 <5 - Logistics <300 <30 - Hotel and Restaurant <100 <20 - note: USD1=RMB as of Dec.31,2012 Small companies have the freedom to adopt Accounting Standards for Business Enterprises or Accounting System for Business Enterprises rather than Accounting Standards for Small-sized Business Enterprises. Audit requirements Chinese auditing, independence and ethics rules for public accountants performing audits and review were drafted by the Chinese Institute of Public Certified Accountants (CICPA) and approved by the MoF. This set of rules consists of China Standards on Auditing, Review, Other Assurance, Related Services & Quality Control (Chinese auditing standards), and Code of Ethics for Chinese CPAs which is highly converged with the International Standards on Auditing and applies to audits and review for all kinds of entities. All companies have to prepare annual financial statements and have them audited by certified public accountants who are registered with the CICPA in accordance with the Companies Law. Branches of foreign companies Representative offices of foreign companies are the most common form of branches of foreign companies. As representative offices cannot engage in any direct profit-making activities, their financial statements are prepared on a tax basis and audited for tax purposes.

17 Tax Enterprise income tax Introduction The Chinese Enterprise Income Tax (EIT) law provides unified tax treatment for all enterprises and other organizations that obtain income within the People s Republic of China, including foreign-invested enterprises (FIEs) established in China and non-tax resident enterprises which derive income within China territory. Taxation of tax resident enterprises The EIT law introduces the concept of Tax Resident Enterprise (TRE). TREs are subject to EIT on their worldwide income. Enterprises that are registered in China are naturally treated as TREs. A Foreign Enterprise (FE) (i.e. a non-china incorporated enterprise) having its effective management in China, will also be treated as a TRE. Effective management has been defined as the "overall management and control of the production, business, employees, finance and assets" of an enterprise. Taxation of non-tax resident enterprises Non -TREs are taxed on their China-source income only. If the Non-TRE has a permanent establishment (PE) in China, the non-prc source income effectively connected with the PRC establishment is also taxed EIT at 25%. If a FE without an establishment in China derives income in the nature of interest, rent and royalties, it will be subject to 5% business tax and withholding income tax at a standard rate of 10% under EIT law (unless a double tax treaty/arrangement applies). Capital gains Capital gains and losses are treated in the same manner as other taxable income and losses. However, PRC-sourced capital gains derived by Non-TRE, such as gains from the disposal of a FIE, are subject to a 10% withholding tax (unless a double tax treaty/arrangement applies)..profits on sales of land and buildings in China are subject to Land Appreciation Tax ranging from 30% to 60%. Land Appreciation Tax is deductible for income tax purposes. Tax losses Tax losses can be carried forward for a period of not more than five years to offset against future taxable income. Tax losses cannot be carried back. Filing requirements The calendar year is used as the tax year. An enterprise may adopt its own accounting date only with the approval of the tax bureau. A quarterly income tax return is required to be filed within fifteen days from the end of each quarter. An annual income tax return is required to be lodged before 31 May each year. Accounts are to be prepared in Chinese or in Chinese with a recognized foreign language and are kept for at least 10 years. Investment incentives The new EIT law provides various tax incentives to both FIEs and domestic enterprises: High-New Technology Enterprises (HNTE) A preferential income tax rate of 15% is applied to HNTE. The HNTE shall possess core proprietary intellectual properties and should satisfy the following conditions: recognized as within the scope of High-New Technology supported by the Chinese Government; annual Research and Development (R&D) expenses shall not be less than a prescribed percentage of the enterprise's annual turnover;

18 income derived from High-New Technology products or services shall not be less than a prescribed percentage of the enterprise's total income; the total number of R&D personnel shall not be less than a prescribed percentage of total employees of the enterprise; and any other conditions specified in High-New Technology Enterprise Management Rules. Small-scale Enterprises with Low Profitability The EIT rate applicable to small-scale enterprises with low profitability that meet certain conditions shall be reduced to 20%. Tax exemptions The following incomes derived by the enterprises shall be exempted from EIT: interest from state treasury debts; qualified dividends, profit distributions and other returns on equity investments derived by a TRE from another TRE; dividends on equity investments derived by a Non-TRE from another TRE, to the extent that the dividends, profit distributions and other returns are effectively connected with the establishment or place of business in the PRC of the Non-TREs; Revenue of the qualified non-profit organizations. Encouraged business Exemption and reduction of tax is applied to income derived from the following projects: agriculture, forestry, animal husbandry, fishing industries; infrastructure projects; environmental protection, energy and water savings projects; and technology transfers under certain conditions. Super-deduction on certain expenses The new EIT law provides for a 150% deduction on R&D costs and 200% deduction for disabled employees' wages provided certain criteria are met. Recycling business Enterprises engaged in recycling, i.e. use of a prescribed raw materials to generate taxable income, can enjoy a 10% deduction on its total income in calculating its taxable income. Special deduction on qualifying expenditures Special equipment purchased by an enterprise for environmental protection, energy and water saving, manufacturing safety etc can be eligible for an income tax credit for the year in which the equipment is purchased and used. The tax credit is calculated based on 10% of the purchase price of the equipment. The excess credit can be carried forward to the next 5 years. Equipment disposed of or leased out within 5 years will have the credit clawed back. Enterprise income tax transfer pricing China has established a comprehensive and strict legal regime for transfer pricing, with Guoshuifa [2009] No.2 being the core circular. To a large extent, the regime follows international norms such as "arm's length principle" and "interquartile range", while still keeps its own distinctions (wider definition on related party, for instance). In terms of disclosure, an enterprise is obliged to maintain contemporaneous transfer pricing documentation if its annual amount of intercompany dealings crosses the diminims (i.e., RMB 200 million for buy-sell transactions or RMB 40 million for all other types of transactions combined). Loss-making, single-functioned manufacturer/distributor/contract R&D provider is also obliged to maintain the documentation, regardless of its intercompany transaction amount.

19 Failure to fulfil such obligation could result in, among others, cash penalty, transfer pricing investigation and transfer pricing adjustment under a deemed profit basis. China State Administration of Taxation ("SAT") has been widely recognized as one of the toughest authorities in the region when it comes to transfer pricing investigation and adjustment. Generally, enterprises with significant intercompany transactions and abnormal profit pattern (i.e., consecutive losses, low profitability and fluctuating profitability) are more likely to be targeted. Transfer pricing adjustment may cover not only the EIT, but the applicable turnover tax (VAT or BT) as well. Moreover, any such tax adjustment made for fiscal year 2008 and onward is subject to a surcharge of contemporaneous bank lending rate plus five percent, albeit the five percent can be waived if the audited enterprise can duly submit to the tax authority transfer pricing documentation or other requested information. In the context of rigid transfer pricing investigation and adjustment, more and more enterprises are resorting to advance pricing agreements ("APA") as an effective means of achieving greatest legal certainty. This practice is also openly encouraged by SAT. Up to now, SAT has already concluded a large number of unilateral APAs, as well as dozens of bilateral APAs with Japan, Korea, US, and some EU countries. China also adopts thin capitalization clauses to limit the interest payment for excessive intercompany debts. The standard ratios of related party debts to total equity are: 5:1 for financial business; 2:1 for all other types of business. Interest payment to a related party on the portion of debt over the proscribed ratios will be disallowed for income tax deduction purpose, unless ad-hoc documentation can be provided to prove the arm's length nature of such intercompany financing. Individual income tax Individual Income Tax Law ("IIT Law") provides that the IIT shall be levied on the following income: Wages and salaries; Income from production or business operations derived by individual industrial and commercial households; Income from contracting for or leasing the operation of enterprises or institutions; Income for personal services; Income from author's remuneration; Royalties; Interest, dividends and bonuses; Income from lease of property; Income from transfer of property; Casual income; and Other income specified as taxable by the Ministry of Finance. IIT is levied on wages and salaries at the progressive rates from 3% to 45%. Starting from 1 March 2008, a monthly deduction of RMB 2,000 (RMB 4,800 for foreigner) is allowed in calculating the amount of IIT payable on wages and salaries. Where a non-mainland-china domiciled individual working in the PRC receives wages and

20 salaries from a foreign employer and the payment is not ultimately borne by an establishment in Mainland China, his IIT exposure depends on the length of residence in the PRC in a year as follows: Not more than 90 days - exempt from IIT. More than 90 days but less than 5 years mainland-china-source income during the period of residence in mainland China is subject to IIT. Over 5 years - From the 6th year, worldwide income is subject to IIT. In addition, bilateral tax treaties in some cases provide an additional source of rules for interpreting the term "residence". For example, under China-US Double Tax Treaty, an individual will generally be subject to IIT only if his stay in mainland China is more than 183 days in a calendar year. Where there is a conflict between the IIT Law and the term of a treaty, the treaty will prevail over the IIT Law. An individual will be required to file IIT returns with the local tax office and pay tax on a monthly basis, either personally or through the employer within seven days after each month. Incomes (ii) and (iii) are subject to IIT at the progressive rates from 5% to 35%, income (iv) is subject to IIT at the progressive rates from 20% to 40% whereas incomes (v) to (x) are levied at 20%. The dividends and bonuses gained by foreigner individuals from FIEs shall be exempted from IIT. Turnover tax On 1 January 1994, mainland China implemented the turnover tax system, which comprises of value added tax (VAT), business tax (BT) and consumption tax (CT). Value Added Tax (VAT) According to the China Provisional Regulations for Value Added Tax ("Provisional Regulations"), VAT applies to individuals and enterprises on importation of movable goods into mainland China, sale of movable goods in mainland China and provision of processing and repairing services in mainland China. Tax rates: 17%- Basic rate 13%- Grains, edible plant oil, utilities, publications and certain agricultural products 0%- Export (Pursuant to tax circulars issued subsequent to the Provisional Regulations, VAT refund rates for export sale vary depending on the specific nature of goods. Thus, VAT on export sale is in effect not subject to zero rate for certain items.) VAT Payable: VAT payable = Output VAT - Input VAT during the period Output VAT = Turnover x Tax rate However, not all input VAT paid is deductible or refundable in the determination of the amount of VAT payable. For small-scale taxpayers are chargeable to VAT at the rate of 3% on their turnover and input VAT arising on purchases is not allowed to be set off against the output VAT. VAT reform From Aug 1, 2013, income from the following activities shall be subject to VAT instead of BT:- Transportation 11% R&D technical services, IT services, cultural innovation services, logistics auxiliary services, attestation and consulting services, and broadcasting, film and television services 6% Leasing of tangible (moveable) assets 17% Business Tax (BT)

21 Any individual or entity that engages in the provision of services (other than processing and repairing or those are subject to VAT), transfers intangible assets or sells immoveable properties in mainland China is subject to business tax in accordance with the PRC Provisional Regulations for Business Tax. Rates: 3% - 20% depending on the nature of services. The majority are taxed at 3% - 5%. Consumption Tax (CT) Consumption Tax is levied on individuals or entities that manufacture, subcontract or import into mainland China chargeable items as specified in the PRC Provisional Regulations for Consumption Tax. Those chargeable items include tobacco, alcohol, cosmetics, precious jewelries and precious jade and stones, firecrackers, processed oil, automobile tyre, motorcycles, motor vehicles, golf and golf facilities, luxurious watches, yachts, disposable wooden chopsticks and wooden floor boards. Rates: The consumption tax shall be computed on the basis of the good's value, volume or the combination of the value and volume (compound tax). Export sale is exempt from CT. Other taxes Other principal taxes levied on foreign investors include: Customs Duty Land Appreciation Tax Resources Tax Stamp Duty Urban Land Use Tax Vehicle and Vessels Tax Deed Tax

22 Contact details China International Business Centre 10th Floor, Leatop Plaza 32 Zhujiang East Road, Pearl River New Town, Tianhe District, Guangzhou , China T +86 (0) F +86 (0) W Shannon Tan Partner, assurance and advisory services T +86 (0) E Shannon.tan@cn.gt.com Hua Xu Managing partner

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