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Investing in China

02/03/2012


​With the recession in the U.S. and the European sovereign debt crisis, many companies are looking elsewhere for investment opportunities. China is a vast market and presents many opportunities for companies. With a large population and a growing and emerging middle class, the country boasts a robust and growing economy. Many experts view China as an up and coming economic superpower.

Of course, there are risks to foreign investments, and if you’re thinking of investing in China, it is critical to make a thorough investigation of the country, how it operates, and what you can expect. Below is some preliminary information on five key aspects involved in investing in China.

Forms of business vehicles

There are several forms of business vehicles to choose from when investing in China.

The first is the wholly foreign-owned enterprise. This is a limited liability company that is, of course, wholly owned by one or more foreign investors.

The second is an equity joint venture. This is also a limited liability company but it includes at least one foreign investor and at least one Chinese investor. As a foreign investor, you and any other foreign investors will have to contribute at least a quarter of the registered capital. The chairman of the board of directors can be a representative of the foreign investors or the Chinese investors, and all investors share the profits according to the amount of capital they have contributed.

If you prefer to share profits according to other terms than capital contributions, you can consider a third option, the co-operative joint venture. You can form a co-operative joint venture as a separate legal entity, but you do not have to; they can also be formed on a contractual basis. If you do choose to form one of these vehicles as a separate legal entity, the amount of registered capital contributed by foreign investors must total at least 25 percent.

Lastly, if you have a company and only want to conduct certain activities related to promotion and marketing in China, you can set up a representative office. In this case, you cannot engage in any business activities, such as making sales, signing contracts, or collecting money.

Setting up a foreign investment enterprise

There are several steps to setting up a foreign investment enterprise:

1. Apply to the Ministry of Commerce

You will need to supply articles of association, a joint venture agreement, if applicable, and a feasibility study report. The Ministry has 90 days to approve or disapprove your application.

2. Apply for a business license

This is done with the State Administration of Industry and Commerce once the Ministry of Commerce has given approval. You must apply within 30 days of approval by the Ministry.

3. Find out how much capital you will need

The Ministry of Commerce will set the minimum amount based on the scale and nature of the business. Capital can take the form of cash, fixed assets, intellectual properties or land use rights.

4. Establish a board of directors and management office

The board will make major decisions, including appointing a general manager, and undertake strategic planning. Management operates the business. The positions of board chairman and general manager can be filled by foreign or Chinese representatives.

Foreign currency control

Foreign currency control is done through the State Administration of Foreign Exchange. Every foreign investment enterprise must register this organization and can open separate bank accounts for current and capital account items.

  • Current account items: goods, services, interest, gifts, compensations, dividends and remunerations
  • Capital account items: investment in securities, lending/transfer of intangible properties or fixed assets, and direct investment

In most cases, foreign investment enterprises must get approval from the State Administration of Foreign Exchange before conducting foreign exchange transactions on capital account items.

Taxation considerations

Your enterprise will be subject to China’s Corporate Income Tax law. Resident enterprises—those established under China’s laws or those established under another country’s laws but with overall management and control in China—are subject to corporate income tax on worldwide income. Non-resident enterprises, established under the laws of another country and managed and controlled from another country, must pay corporate income tax on income sourced in or connected with China.

The corporate income tax rate is 25% and may be lower. Note that passive income, which would include such things as dividends, interest, royalties, capital gains and rental income, is subject to withholding tax at 10% if it is derived by non-resident enterprises.

Other taxes to be aware of include:

  • Value-added tax
  • Business tax
  • Consumption tax
  • Resources tax
  • Land appreciation tax
  • Individual income tax
  • Customs duties

In an effort to encourage foreign investment, China has signed tax treaties with many countries, including Canada. These treaties reduce double tax burdens.

Other considerations

There are over 300,000 Canadian passport holders living in Hong Kong. This would make it the 16th largest Canadian city. With its western developed system of law, world class financial system and educated workforce, Hong Kong is provocative entry point into China for Canadian companies. Through a special tax arrangement between China and Hong Kong, companies that are tax residents of Hong Kong can have a lower withholding tax rate on dividends (5%), interest and royalties (both at 7%).

Chinese culture is one of the world's oldest and most complex. The area in which the culture is dominant covers a large geographical region in China with customs and traditions varying greatly between towns, cities and provinces. Most social values are derived from Confucianism and Taoism. In essence these ancient philosophies revolve around the concept of harmonious relationships. The Chinese believe that if proper behaviou​r through duty, respect and loyalty are shown in the relationships between a ruler-subject, husband-wife, father-son, brother-brother and friend-friend, society as a whole will function smoothly. These beliefs is embedded in Chinese society and has strong influences in forming business practices. Companies wanting to operate in China will need to understand and incorporate these nuisances within their business protocols.

As always, professional advice that takes your company’s unique situation into account is vital to your success. Fully understanding the legal and regulatory landscape in China and how it may affect your operation will ultimately give board and management the information needed to best position the company for success in this emerging market.

This article has been prepared for informational purposes only and is not intended for any other purpose. We do not assume any responsibility or liability for losses occasioned by you in reliance on this information. We would be pleased to discuss with you the issues raised within the context of your particular circumstances. Please contact your local MNP Public Companies advisor.