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Ebner Stolz Asia

China Immigration Policy Update: PU Letter is no longer necessary for visitors from Germany and Austria

There are some changes simplifying business travel from Germany or Austria into China about the current preconditions.

Please see an overview on the current regulations:

http://sg.china-embassy.gov.cn/eng/lsfw/202206/t20220609_10701031.htm

Germany:

A PU invitation is no longer necessary to apply for business and assembly visas (category M).

In addition, the quarantine obligation has been shortened to a total of ten days.

Please note that the Chinese consular provider in Germany is only open once a week and therefore the processing time is usually one week.

Currently, the following documents are required for a China business and assembly visa (category M):

  1. China visa application completed online
  2. Passport (must be valid for more than 6 months)
  3. Scan of the passport identification page
  4. Current passport photo
  5. Invitation from the company in China
  6. Letter of posting from the employer
  7. Corona Vaccination Certificates
  8. Health Declaration

The responsible consulate reserves the right to request further documents.

Austria

Also in Austria there are some changes making business travel into China more easy.

In addition to the changes regarding PCR testing, abolition of antigen tests and facilitation of flights to China, we would like to inform you that from now on no official PU invitation issued by a local authority in China is required to apply for business visas.

A business invitation issued by the Chinese partner company is sufficient for the application.

Our Ebner Stolz partners DVKG in Germany and ÖVKG in Austria are happy to assist you regarding your business trips into China – please contact them at any time:

DVKG Germany office

DVKG Deutsche Visa und Konsular Gesellschaft mbH

Friedrichstraße 132

10117 Berlin

phone:  +49 30 25764861

e-mail: vertrieb@dvkg.de

internet : www.dvkg.de

ÖVKG Austria office

ÖVKG Visa und Konsular Gesellschaft mbH

Wohllebengasse 12-14/5.Stock/Top5.3

1040 Wien

phone :  +43 1 361 55 20 10

e-mail: vertrieb@oevkg.at

internet: www.oevkg.at

How can we help you?

Lena Li

Corporate Services Manager

  • +86 21 6330 9962, ext. 809
  • lena.li@cn.ebnerstolz.com
  • view profile
  • All team members

China Immigration Policy Update: PU letter is no longer required for work visa and dependent visa applications

Effective from 6 July, the PU Letter will no longer be required for Chinese work visa (Z visa) and Dependent visa (S1 visa) applications.  It has been confirmed by the Chinese embassies in many countries that the applicants can provide the same set of application documents as pre-Covid-19 period for above two types of visa applications without the provision of the PU Letter.

To apply Z visa, the Notification of Foreign Work Permit (NFWP) plus the WHO – approved vaccination certificate are required. The Relationship certificate plus the WHO – approved vaccination certificate are required for the application of S1 visa.

WHO-approved vaccine are as the follows,

  • Pfizer-BioNTech COVID-19 vaccine
  • Moderna (mRNA -1273) COVID-19 Vaccine
  • J&J COVID-19 vaccine
  • Oxford/AstraZeneca COVID-19 vaccine
  • Sinopharm COVID-19 vaccine
  • Sinovac COVID-19 vaccine

For business visit visa with purpose of economic, trade, scientific or technological (M visa), the PU Letter is still required unless the applicant has been inoculated with Chinese produced COVID-19 vaccines.

How can we help you?

Lena Li

Corporate Services Manager

  • +86 21 6330 9962, ext. 809
  • lena.li@cn.ebnerstolz.com
  • view profile
  • All team members

Important Note: Tax incentives on annual bonus and foreigner’s fringe benefits continue to be valid until 2023!

On 31 Dec 2021, the Ministry of Finance (“MOF”) and the State Taxation Administration (“STA”) have jointly stipulated two regulatory circulars (Circular 42 and Circular 43) to extend the following tax incentives to year 2023, mainly including:

  • Annual bonus can be separately taxed from the basic salary using the preferential IIT calculation method;
  • Tax free treatment of the benefits in kinds reimbursed to foreigners
  • Preferential tax treatment to the equity incentives provided by listed companies

Before the stipulation of those two circulars, those preferential IIT treatment were supposed to be abolished on 1 Jan 2022, in accordance with MOF and STA Public Announcement [2018] No. 164 (“Circular 164”). We prepared a newsletter dated 6 September 2021 about the impact of Circular 164. The contents discussed in that newsletter are subject to change now.

Circulars 42 and 43 are regarded as the New Year gift from the Chinese government to the employees working in China. However, if you had already planned for certain changes to the employment contracts, we suggest you conduct an immediate review and consider if it is necessary to make any updates.

If you have any questions of the above or need our further assistance, please feel free to contact us!

How can we help you?

Dr. Gerald Neumann

Managing Partner

  • +86 21 6330 9962
  • gerald.neumann@cn.ebnerstolz.com
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Carry out business activities throughout China – Are you well prepared for the branch registration?

On 27 July 2021, the State Council of the People’s Republic of China published the “Administrative Regulation on the Registration of Market Participants” (State Council Order No. 746), which will come into effect on 1 March 2022. The regulation now standardizes a unified registration obligation for all types of market participants as well as their branches in China. The term of “market participants” is defined as the natural persons, legal persons and unincorporated organizations that engage in profit-oriented business activities in the People’s Republic of China.

According to the regulations, a market participant shall only register one domicile or main business premise as a basis for the business registration. A market participant may render services or carry out business activities outside its registered place in a different province or city. If such activities reach a certain level, the market participant shall file the business registration of a branch.

If a company (or other type of market participant) fails to file for branch registration in accordance with the regulations, the local authorities (i.e., Administration of Market Regulations, in brief “AMR”) have right to order the company to complete the branch registration or to close the unlicensed business operation. It can also impose on the company a penalty up to CNY100,000 or, if the operation adversely impacted society or human safety up to CNY500,000.

However, the critical level at which branch registration becomes necessary is not clearly defined in the available rules. Since the end of 2020, the local AMR authorities have been increasingly taking action against companies that hire field staff for purpose of business operations in the locations without officially registered branches. Recently, some companies are requested by the local authorities to register a branch for any business activities outside the company’s registered place. According to our opinion, once the company rents an office in a different city, then the company shall register a branch.

According to the tax administration rules, upon the completion of the branch registration with AMR, the branch shall file its registration with the tax authority. The tax authority will assess the applicable taxes of the branch and determine the routine tax filing formalities to be fulfilled by the branch.

Although the branch registration is not a new requirement provided by State Council Order No. 746, we estimate the local authorities would intensify their administration on branches registration in their jurisdictions. We suggest you review your business activities in China (particularly services and sales activities) that are carried out by your staff located outside the registered address of your headquarter and seek professional advices from your advisors regarding the legal and tax implications of the branch office registration.

Please feel free to contact us if you need further information or assistance.

How can we help you?

Lena Li

Corporate Services Manager

  • +86 21 6330 9962, ext. 809
  • lena.li@cn.ebnerstolz.com
  • view profile
  • All team members

Coming changes to the Individual Income Tax treatment on expatriates in China

On 27 Dec 2018, the Ministry of Finance (“MOF”) and the State Taxation Administration (“STA”) have jointly stipulated a regulatory circular to clarify the Issues Relating to the Transition of Preferential Policies following the Revision of the Individual Income Tax Law (MOF and STA Public Announcement [2018] No. 164, “Circular 164”). According to Circular 164, two favorable tax policies that have been applicable to the expatriates for a long time will become invalid starting from 1 Jan 2022.

  1. Tax free allowances

Currently, the expatriates working in China can enjoy the individual income tax (“IIT”) exemption on certain benefits-in-kinds provided that those benefits are actually incurred with reasonable amounts and are reimbursed to the employees based on valid tax invoices (regulatory basis: Caishui [1994] No. 20). Applying the above preferential tax treatment, the expatriates in China can benefit from a lower tax rate than the Chinese domiciled individuals who are at the same remuneration levels. For your easy reference, those tax-free benefits generally include:

    1. rental allowances;
    2. meal allowances and laundry expenses;
    3. language training allowance;
    4. children school fees;
    5. home visit expenses (two flights per year of the employee from hometown to China);

Starting from 1 Jan 2022, the foreigners working in China will not be eligible to claim IIT exemption on the tax free benefits (regulatory basis: article 7.2 of Circular 164).

Following the abolishment of the preferential tax treatment, the foreigners can claim the itemized deductions stipulated by the IIT law if those foreigners stay in China for 183 days and above in a calendar year. Considering the itemized deductions shall be limited to the qualified scope and subject to the corresponding deduction limit, the expatriates cannot benefit a lot from the itemized deduction. For example, the deduction limit of the rental expense is RMB 18,000 per year per family in Shanghai, the deduction limit of the children school fee is RMB 12,000 per year per child.

  1. Annual Bonus

According to Circular 164, if an expatriate’s stay time in China reaches the 183-day threshold in a calendar year, he is eligible for a preferential tax treatment on his annual performance bonus. To be specific, the annual bonus will be taxed separately from the other employment income at an applicable IIT rate that is determine by 1/12 of the bonus amount. Such preferential tax treatment on annual bonus will become invalid starting from 1 Jan 2022. The foreigners who stay in China for 183 days and above in a calendar year shall include the annual bonus to his annual income to determine the annual IIT burden (regulatory basis: article 1.1 of Circular 164).

Unless the STA stipulates other preferential rules, the above changes stipulated by Circular 164 will obviously increase the overall tax burden on the employment income derived by the expatriates in China starting from 2022. Considering there are only four months left in 2020, we consider the following measures would help the employer and the employees to get well prepared for the coming changes:

  • review the existing remuneration structure,
  • estimate the potential change to the overall tax burden and
  • Consider the possible ways to manage the cost increase (e.g., allocation of the cost increase).

If you have any questions of the above or need our further assistance, please feel free to contact us.

How can we help you?

Yvonne Zhang

Senior HR and Administration Manager

  • +86 21 6330 9962, ext. 803
  • yvonne.zhang@cn.ebnerstolz.com
  • view profile
  • All team members

Noteworthy changes of the tax implications to the cross-border remittance of services fees and other non-trade items

The payment of service fees, interest, royalties and dividend shall be subject to a tax withholding mechanism and declared with the tax authority (regulatory basis: article 37 of the Corporate Income Tax law). If the payment is above USD 50,000, the Chinese payer shall complete the requested tax formalities and obtain the tax filing notice from the tax bureau before making the bank remittance (regulatory basis: STA and MOF Public Announcement [2013] No. 40).

Recently, the State Taxation Administration (“STA”) has stipulated a couple of tax circulars which introduce changes to the tax treatment pertaining to the settlement of the above mentioned items. We hereby summarize the noteworthy points for your reference as follows:

  1. Starting from 1 September 2021, the Chinese payer is NOT required to withhold the surcharges when withholding VAT for its payment of service fees, interest and royalties.

The above-mentioned “surcharges” generally refer to three types of miscellaneous taxes and charges, i.e., the urban maintenance and construction tax, education fee and local education fee. Those surcharges are currently calculated based on the amount of VAT and consumption tax payment with an aggregate rate ranging from 6% to 12%. Starting from 1 September 2021, those surcharges are not applicable to the import of services, interest and royalties.

According to the Urban Maintenance and Construction Tax Law (President Decree No. 51, “Circular 51”) which takes effect on 1 September 2021, the VAT and consumption tax paid for the import of goods, services or intangible assets are not subject to urban maintenance and construction tax (regulatory basis: article 3 of Circular 51).

On 28 August 2021, the Ministry of Finance (“MOF”) and the STA have jointly stipulated a regulatory circular (MOF and STA Public Announcement [2021] No. 28, “Circular 28”) to further clarify the implementation of Circular 51. According to Circular 28, the above principle in calculating the urban maintenance and construction tax shall apply in a consistent way to the calculation of the education fee and local education fee (regulatory basis: article 2 of Circular 28). In other words, the import of goods, services or intangible assets is not subject to the calculation of the education fee and local education fee.

  1. Starting from 29 June 2021, the put-on-record filing formalities are further simplified when making multiple payments under the same contract.

On 29 June 2021, the STA and the State Administration of Foreign Exchange (SAFE) have jointly stipulated a regulatory circular (STA and SAFE Public Announcement [2021] No. 19, Circular 19). According to Circular 19, for multiple payments under the same contract, the Chinese entity is only required to conduct the put-on-record filing for the first payment that reaches the USD 50,000 threshold.

In view of the above, the Chinese entity’s filing formalities will be simplified when making the subsequent payments under the same contract, which were required to conduct the put-on-record filing whenever the single payment reaches USD 50,000 (regulatory basis: STA and SAFE Public Announcement [2013] No. 40). Kindly note that the above rule is only about the filing procedure for multiple payments under the same contract. The tax declaration and payment obligation shall be assessed based on the relevant tax rules and are not exempted due to the simplified process.

  1. Starting from 29 June 2021, the foreign investor’s dividend reinvestment in China is NOT required to conduct the put-on-record filing with the tax authority.

As stipulated in Circular 19, the dividend reinvestment by the foreign investor is NOT required to be filed with the tax authority starting from 29 June 2021. To give you more background in this regard, starting from 1 Jan 2018, the foreign investor, when using its dividend derived from the Chinese subsidiary to reinvest in China (including setting up new FIEs or the capital increase to the existing subsidiaries), can claim a deferral of the payment of the withholding income tax (“WHT”). Before the promulgation of Circular 19, the dividend reinvestment was required to be filed with the tax authority of the Chinese entity which distributes the dividend to the foreign investor (regulatory basis: STA Public Announcement [2018] No. 53). You may consider approaching the competent tax authority to confirm the local practice and properly keeping the supporting documents internally in case of a review by the tax authority.

If you have any questions of the above or need further information, please feel free to contact us.

How can we help you?

Eloise Yao

Director Tax

  • +86 21 6330 9962, ext. 805
  • eloise.yao@cn.ebnerstolz.com
  • view profile
  • All team members

Tax incentives for Small-scale and Low-profit Enterprises are extended to year 2021

Business-Data-Audit

Since 1 Jan 2019, small-scale and low-profit enterprises that are not engaged in industries prohibited or restricted by the State and that meet the following conditions:

  • taxable profit for the year shall not exceed RMB 3 million;
  • employees shall not exceed 300;
  • assets shall not exceed RMB 50 million;

can enjoy certain tax incentives (regulatory basis: Caishui [2019] No. 13, or “Circular 13”).

On 7 April 2021, the State Taxation Administration (“STA”) has issued a new notice which further reduced the Corporate Income Tax (CIT) burden for the small-scale and low-profit enterprises during the period from 1 January 2021 to 31 December 2022. According to the tax circular (STA Public Notice [2021] No. 8), the CIT for small scale and low profit enterprises is calculated as follows:

  • For the part of the profit within RMB 1 million: effective CIT rate 2.5% (i.e., 12.5% * 20%);
  • For the exceeding amount (i.e., the profit above RMB 1 million but not higher than 3 million): effective CIT rate of 10% (i.e., 50% * 20%).

In view of the above, the small-scale and low-profit enterprises are subject to CIT at maximum 7.5% during 1 Jan 2021 to 31 Dec 2022. If the qualified enterprise’s total profit does not exceed RMB 1 million per year, the effective CIT burden will be 2.5%.

We advise the smaller enterprises in China to review their financial results and assess whether they are eligible to enjoy the above mentioned tax benefits. In addition to CIT, a enterprises classified as small scale VAT payer are exempted from VAT, provided that the revenue does not exceed RMB 150k per month (valid from 1 April 2021 to 31 December 2022). Kindly note that such VAT exemption does not apply to the enterprises that have obtained the general VAT payers status (i.e., general VAT payers are the type of VAT payers that can claim the input VAT credit against the output VAT).

Please feel free to contact us if you need further information or assistance.

How can we help you?

Eloise Yao

Director Tax

  • +86 21 6330 9962, ext. 805
  • eloise.yao@cn.ebnerstolz.com
  • view profile
  • All team members

Social Insurance Administration Tightened in Beijing from Mid of 2020

On 30 June 2020, the Beijing social insurance authority released a strict local policy to tighten its social insurance administration in Beijing. Pursuant to this policy, effective from 5 July 2020, all HR agencies registered in Beijing are no longer allowed to pay social insurance in Beijing for employees who are hired by companies registered in other cities or dispatch employees to companies registered in other cities (local transition periods may apply though). Now, the government requires the HR agencies to stop the affected services, conduct internal review and take corrective actions.

The policy is not a change of social insurance law, but a signal for the stricter implementation of law. In the past, the employees based in Beijing may want to pay social insurances in Beijing to meet the criteria stipulated for household registration, house buying, etc. Many HR agencies are able to pay social insurance for those employees in Beijing on behalf of the companies, without considering whether those companies have legal registration in Beijing. Although this may not be fully compliant with the social insurance law, it has been tolerated by many social insurance authorities for rather a long time.

In view of the above, we suggest you have an internal review to know whether you are affected by the above policy. If the above policy applies to you, it is critical to find alternative solutions for your employees based in Beijing as soon as possible.  Failing to do so may cause disruption to social insurance and tax filing for the affected employees and may lead to high risks in tax and social insurance compliance in China.

Please feel free to contact us if you need further information or assistance.

How can we help you?

Yvonne Zhang

Senior HR and Administration Manager

  • +86 21 6330 9962, ext. 803
  • yvonne.zhang@cn.ebnerstolz.com
  • view profile
  • All team members

Legal Representative and Bank Account Opening

According to our observation, more banks require now the actual presence of the legal representative during bank account opening in the respective branch in China. Before, banks often agreed to have the statutory interview with the legal representative by video which seems now to be obsolete.

We were informed that this new practice is based on a recent instruction by the Chinese central state bank.

With regard to the ongoing travel restrictions due to the Covid 19 outbreak, the regulation is particularly inconvenient for such overseas invested companies which keep the legal representative at the headquarter.

Some branches of foreign banks in Shanghai currently still accept that account opening applications are submitted by another person who has been formally authorized by the legal representative, and only request that the original passport of the legal representative is presented to the bank. However, foreign banks may be quite selective with regard to the opening of new corporate accounts.

How can we help you?

Lena Li

Corporate Services Manager

  • +86 21 6330 9962, ext. 809
  • lena.li@cn.ebnerstolz.com
  • view profile
  • All team members

Questions & Answers with Regard to Government Measures Related to the COVID Outbreak in China

Disclaimer: The answers given below are based on our best knowledge at the time when they were issued. They can only provide a rough overview of the currently announced measures and cannot provide a complete picture of all government measures, which may vary regionally. Further changes and updates should also be expected.

Q: Is there any compensation by the government for the loss of “man-power” caused by quarantine measures and mandatory closures of companies?

A:  The resolution of the executive meeting of the State Council held on 18th February, stated that in order to reduce the impact of the epidemic on the enterprises, especially the micro, small and medium-sized enterprises, it is decided to reduce the specific social insurance, so that there will be a buffer period after the enterprises resume production.

Social Security

  • Small and medium-sized enterprises in China (regions other than Hubei Province) will be exempt from the monthly contributions to endowment insurance, unemployment insurance and industrial injury insurance in the period February to June 2020.
  • The contribution rate for the mandatory medical insurance for the employees will be temporarily reduced by 0.5 percentage points in 2020.
  • After the containment measures for the COVID outbreak are relieved, payments of social security contributions can be deferred up to three months.
  • The annual adjustment of the social security base will be postponed to 1st July 2020.

Rent

Small and medium-sized enterprises having rented premises from state-owned enterprises (including all kinds of development zones and industrial parks, entrepreneurial bases, technology business incubators, etc.) for their production and business activities will be exempt from rental payments in February and March.

Training cost

If enterprises affected by the epidemic organize any kind of online training for employees (including external personnel working in the enterprise) during the closing period, such training shall be subsidized by the special funds of the respective district for local education and shall be subsidized in the amount of 95% of the actual training cost.

Q: Do companies have to pay salaries during the closing period caused by the COVID containment measures?

A: For enterprises closed for up to one month, salaries must be paid according to the amount regulated in labor contracts.

For enterprise closed for longer than one month,

  •  if the employee works during this period, salary can be discussed according to the actual situation, but cannot be lower than local minimum wage (standard stipulated by Shanghai Municipal Government, in 2020, it’s CNY 2,020/month).
  •  if the employee does not work during this period, the enterprise shall pay a cost of living subsidy to the employee, not lower than the local minimum living standard (in Shanghai CNY 880/month).

Q: Can non-working time caused by the COVID containment measures be deducted from the employee’s annual leave?

A: If employees cannot return to work after official work resumption date (10 February 2020) the following two cases need to be considered:

  • Employees under medical quarantine
    If an Employee is under quarantine due to close contacts with a coronavirus infected person, or returns from severely affected areas (as stipulated by the government, e.g. Hubei province), the quarantine period cannot be offset against the employee’s annual leave entitlement.
  • If the absence is cause by other factors such as various containment measures taken by different regions, the company can request that the days of absence are deducted from the employee’s annual leave.

Q: Will the government grant tax relief?

A:  

1)     Preferential tax policies to key material production enterprises for epidemic prevention and control, and enterprises in industries of transportation, catering, accommodation and tourism (cited from the Announcement of the Ministry of Finance, the State Administration of Taxation No. 8, 2020):

  • Newly purchased equipment purchased by enterprises for the manufacturing of key materials for epidemic prevention and control and measures for the expansion of production capacity for such materials can be included in the current cost and deducted before the enterprise income tax.
  • Enterprises manufacturing key material production for epidemic prevention and control can apply to the competent tax authorities on a monthly basis for a full refund of the incremental VAT amount.
  • VAT shall be exempted for the income obtained from the transportation of key materials for epidemic prevention and control.
  • The maximum carry-forward period for losses incurred by enterprises in transportation, catering, accommodation and tourism industries, which are severely affected by the epidemic in 2020, will be extended from 5 years to 8 years.

2)     Preferential tax policies to the donation (cited from the Announcement of the Ministry of Finance, the State Administration of Taxation No. 9, 2020 and the Announcement of the Ministry of Finance No.6, 2020):

  • Enterprises and individuals’ donations via public welfare social organizations or state organs at or above the county level, and the cash and articles that are used for coping with the coronavirus infection are allowed to be deducted in full when calculating the taxable income.
  • Donations by enterprises and individuals directly to hospitals responsible for epidemic prevention and control are allowed to be deducted in full when calculating the taxable income.
  • Donations of products produced by the enterprises and individual businesses, through the public welfare social organizations and the state organs at the county level or above, or directly to the hospitals responsible for the epidemic prevention and control, shall be exempted from VAT, consumption tax, city maintenance and construction tax, education additional.
  • Imported materials donated for epidemic prevention and control shall be exempted from import tariff, import value-added tax and consumption tax.

3)     Preferential tax policy to materials distributed from enterprise to employees (cited from the Announcement of the Ministry of Finance, the State Administration of Taxation No. 10, 2020):

  • Medicines, medical supplies and protective articles (excluding cash) distributed by the enterprises to employees for the prevention of coronavirus infection shall not be included in their wages and salaries, and shall be exempt from IIT.
  • Expenses for medicines, medical supplies and protective articles purchased for business use with valid VAT invoices can be treated as tax deductible and VAT deductible company expenses. Otherwise, such expenses shall be recorded as welfare expenses and can be deducted before enterprise income tax.

Ebner Stolz China supports Atlas Copco in the acquisition of Scheugenpflug AG’s Subsidiary Scheugenpflug Resin Metering Technologies (SIP) Co.,Ltd. in China during the group acquisition of Scheugenpflug AG

Atlas Copco acquires Scheugenpflug AG, which specializes in solutions for adhesive, dosing and potting technology. Scheugenpflug AG becomes part of the “Industrial Assembly Solutions”(IAS) within the “Industrial Technique” division. Ebner Stolz supports buyers with a multidisciplinary advisory team, thereof a financial and tax advisory team in Shanghai.

The audit and tax firm Ebner Stolz advised Atlas Copco on the acquisition of Scheugenpflug AG as part of a financial and tax due diligence as well as in the areas of SPA and valuation services.

Atlas Copco is a global and leading industrial company with around 37,000 employees and customers in more than 180 countries. The Group’s products and services are spread across four business areas and include compressors and vacuum solutions, as well as generators, power tools, assembly systems, metering and joining solutions and corresponding services. In 2018, Atlas Copco generated total sales of around 9 billion euros.

Scheugenpflug AG is headquartered in Neustadt an der Donau and creates solutions for adhesive, dosing and potting technology that are used in various industries. A specialization is in highly automated system solutions such as dosing cells and systems for vacuum potting. The company has more than 600 employees and generated sales of around EUR 80 million in 2018.

The overall project was led by the Ebner Stolz partner Dr. Nils Mengen (Cologne, Financial) and Thomas Herzogenrath (Cologne, Tax). The team in Shanghai was led by the partners Eileen Wu (finance) and Dr. Gerald Neumann (tax) , supported by Mrs. Lily Sun, director transaction services at Ebner Stolz Neumann Wu in Shanghai.

Ebner Stolz Neumann Wu Business Advisory (Shanghai) Co., Ltd. is moving!

Dear Client and Business Partner,

It is our pleasure to inform you that we are relocating from our current office in Huangpu District to new premises (close to Line 12, International Cruise Center Station) on December 23, 2019. As part of our continuing development, our new bright office space will allow us to comfortably continue providing you with the highest level of service. Our new premise is located at the following address:

Unit 1706, Sinar Mas Plaza, No.501 Dongdaming road, Hongkou District, Shanghai 200080, PR China.

中国上海市虹口区东大名路501号白玉兰中心1706单元,邮编:200080

Our phone and fax number, as well as email addresses will all remain the same.

Tel +86 (21) 6330 9962

Fax +86 (21) 5877 3951

www.cn.ebnerstolz.com

Should you have any question regarding our relocation, please feel free to contact us.

Thank you for your support and trust to Ebner Stolz Neumann Wu over the past years. We look forward to welcoming you in our new office.

Ebner Stolz Neumann Wu Business Advisory (Shanghai) Co., Ltd.

Tax Planning for Small-scale and Low-profit Enterprises during the 2019 Year-end Closing

On 17 January 2019, the State Taxation Administration (“STA”) and the Ministry of Finance (“MOF”) released a new announcement regarding the tax reduction policy for Small-scale and Low-profit Enterprises (“Cai Shui [2019] No. 13”). Cai Shui [2019] No. 13 is valid from 1 January 2019 to 31 December 2021.

In this newsletter, we have summarized the tax reduction policy stipulated by Cai Shui [2019] No. 13 for your reference, as well as our suggestions about the issues to be considered during your year-end closing.

1. Background

According to Cai Shui [2019] No. 13, during the period of 1 January 2019 to 31 December 2021, a small-scale and low-profit enterprise can compute its taxable income at a reduced rate of the taxable profit before applying the 20% enterprise income tax rate. To be specific, if its revenue does not exceed RMB 1 million, the taxable income is computed at 25% of the taxable profit (i.e., the effective tax rate is 5%). If the revenue exceeds RMB 1 million but does not exceed RMB 3 million, the taxable income is computed at 50% of the taxable profit (i.e., the effective tax rate is 10%).

The above-mentioned “small-scale and low-profit enterprises” are defined as those entities that having taxable profit no higher than RMB 3 million, staff no more than 300 person and assets no higher than RMB 50 million.

2. Issues to be considered during your 2019 Year-end closing

Referring to the tax reduction policy mentioned above, we suggest you take the following actions to check whether your accounts have been properly kept for 2019 and whether you are eligible to claim the tax reduction policy as a small-scale and low-profit enterprise:

  • Check and ensure the accruals have been properly booked (e.g. Dec reimbursement, unpaid audit fee for 2019, unpaid salary & annual bonus for 2019, etc.);
  • Check the retained earnings and ensure the amount agree with last year’s audited report;
  • Follow up the inter-company reconciliations;
  • Ensure the financial accounts of inventory agree with physical inventory list;
  • Ensure the goods in transits can be tied with the commercial invoice sent by head office in the latest months;
  • Obtain the bank statements and check with the trial balance (during year-end closing, suppose no reconciliations);
  • Check the foreign exchange valuation for monetary assets and liabilities;
  • Check the long-aging receivables and liabilities and confirm with clients. If it is necessary to charge to P/L, please make adjustment;
  • Accrual of enterprise income tax and prepare the supporting filing documents;
  • Ensure no revenue cut off mistake;
  • Relevant supporting documents for year-end accruals shall be obtained in order to present a true and fair financial statement.

3. Summary

To summarize the above, in order to claim the tax relief stipulated by Cai Shui [2019] No. 13 on a timely basis, all small-scale and low-profit enterprises need to pay more attention to their year-end closing to make sure the revenue and expenses are properly accounted in order to justify the claim of the tax relief policy.

If you have any questions regarding the above, please feel free to contact us.

China Simplifies the Tax Procedure Regarding Non-Resident’s Claim of Treaty Benefits Regarding Dividend Payments

On 14 October 2019, the State Taxation Administration (“STA”) released a new announcement to further optimize its tax administration regarding granting treaty benefits to non-residents (STA Announcement [2019] No. 35, “Announcement 35”).

Announcement 35 will take effect on 1 January 2020. Simultaneously, the existing administrative rules stipulated by STA in 27 August 2015 (STA Announcement [2015] No. 60, “Announcement 60”) will be repealed.

In this newsletter, we have summarized the main amendments introduced by Announcement 35 for your reference.

1. Background

To avoid double taxation on cross-border transactions and encourage the cross-border investment, China has concluded the Double Tax Agreement (“DTA”) with 107 countries. Compared with the domestic tax law, those DTAs generally provide a much favorable tax treatment for non-resident taxpayers. For example, the Chinese affiliate is required to withhold 10% income tax on dividend paid to its overseas parent company. Pursuant to the relevant DTA (such as the DTA between China and Germany), the withholding income tax rate can be reduced to 5%.

Non-resident taxpayers are required to fulfill certain formalities with the Chinese tax authority in order to claim the corresponding tax exemption or reduction according to the DTA clauses (i.e., the claim of the treaty benefits). Before the stipulation of Announcement 60, non-resident taxpayers shall apply for pre-approval on the treaty benefits with the Chinese tax authority.

Pursuant to the existing guidance in Announcement 60, non-resident taxpayers can directly claim based on their self-assessment results without seeking pre-approval from the competent tax authority.

Following the revocation of the pre-approval process, the existing Announcement 60 requires the non-resident claimants of treaty benefits or their withholding tax agents (“WHT agent”, normally the payer of income) to file extensive supporting documents with the tax authority to prove those claimants’ eligibility to the treaty benefits. Considering the above filing shall be completed before applying the treaty benefits to the tax declaration, the tax and payment process could practically be delayed by the documentation work.

Now, the tax authority stipulated Announcement 35 to optimize the procedural work, which could further simplify the tax formalities but put higher demand on taxpayer’s tax compliance.

2. Main changes introduced by Announcement 35

Announcement 35 now emphasizes the non-residents shall claim the treaty benefits by way of “self-assessment” of the eligibility to the treaty benefits and shall assume the corresponding responsibilities. Following this principle, Announcement 35 requires the non-residents to properly keep the supporting documents with themselves (normally 10 years) in case of any potential review or tax inspection by the tax authority. 

To claim the treaty benefits, the non-resident taxpayers shall fill in an “Information Reporting Form for Non-resident Taxpayers Claiming Treaty Benefits” (“Information reporting form”) and submit this form to the tax authority, along with the tax declaration form. If there is a withholding agent (either the statutory withholding agent or a designated withholding agent), the non-resident taxpayer shall proactively submit the above “Information Reporting Form” to its withholding agent.

Compared with the reporting forms stipulated in Announcement 60, Announcement 35 simplifies the Information Reporting Form into one page to collect the high-level information relevant to the claim of the treaty benefits, as well as the non-resident taxpayer’s statement on assumption of the corresponding legal responsibilities and the signature.

Another change alters the WHT agent’s tax exposure. Compared with Announcement 60, Announcement 35 does not require the WHT agents to collect the complete materials (the old reporting forms and supporting documents) from the non-residents, or to ensure the information filled in the forms correspond to the relevant treaty clauses. Announcement 35 now makes it clear that, the WHT agent’s responsibility is to obtain the new “Information Reporting Form” from the non-resident taxpayer and to check whether the non-resident taxpayer has completely filled in the form. If the information reporting form is obtained and all the requested areas are filled in, the WHT agent can apply the treaty benefits to the withholding tax declaration. Otherwise, the WHT agent shall refer to the domestic tax law to the withholding tax declaration.

In addition to the above changes, most other provisions under Announcement 35 are similar to those under Announcement 60, such as using the contracts / agreements, board resolutions, and tax residence certificates as supporting documents, the refund of overpaid tax if the non-resident fails to claim the treaty benefits for the tax declaration/withholding, etc.

3. Summary

To summarize the above, on the one hand, the new administrative measure introduced by Announcement 35 is an encouraging improvement regarding the claim of treaty benefits, which will help reducing the administrative burdens and speed up the tax declaration / bank remittance process.

On the other hand, the previous requirements on filing of all the proof documents with the tax authority could provide a certain level of confidence to the non-resident taxpayers regarding their self-assessment results. Pursuant to Announcement 35, the non-residents are fully responsible for the accuracy, completeness and authentication of the information reported to the tax authority, and an improper claim of DTA benefits would impair its credit with the Chinese tax authority. Therefore, the non-resident taxpayers will face a high demand on the tax assessment of the eligibility to treaty benefits as well as the corresponding documentation. 

If you have any questions regarding the above, please feel free to contact us.

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Value Added Tax Reformation in China

On 5th March 2019, the Premier of China released a government work report at the 13th National People’s Congress and announced further tax reductions. In terms of VAT, tax rates shall be reduced. The reduction scope is as follows:

Taxable transaction Applicable VAT rate
Before After
Sales and importation of general goods; provision of processing, repair and replacement services; and provision of leasing services of tangible and moveable assets 16% 13%
Sales and importation of specified goods; provision of transportation, postal, basic telecom services, construction services and leasing services of immoveable property; and sales of land use rights or immovable property 10% 9%
Provision of value-added telecom services, financial services, modern services and lifestyle services; and sales of intangible assets other than land use rights 6% 6%

We will keep you updated once further information has been released.The enforcement time of the VAT reduction is not yet determined. We expect that the State Administration of Taxation will issue a regulation after the National Congress and release more details in this aspect.

Final Implementation Law for Individual Income Tax

On 22 December 2018, China’s State Council released the final implementation regulations for the amended Individual Income Tax (IIT) law (Decree of the State Council No. 707). Draft implementation regulations were released for consultation by the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) on 20 October 2018. We have summarized several changes made to the draft regulations regarding to resident and non-resident tax payers as follows:

Non-resident taxpayers

“Five-year rule” to “Six-year rule” 

  • The five-year rule has been adjusted to six-year rule and foreign employees can avoid paying taxes on worldwide income as a Chinese resident. Although residence will be triggered based on 183 days, a single break in excess of 30 days will continue to create a “tax break” for these purposes.
  • The eligibility for the exemption on foreign sourced income may need to be validated through a “put-on-record” filing.

Tax-exempt benefits will be retained

  • Foreign employees can elect to retain the tax-exempt benefits privilege they currently enjoy. Foreign employees cannot enjoy double benefits from expenses incurred of the same nature under both the non- taxable benefits rules and the specific additional deductions rules.

Resident taxpayers

Itemized deductions

  • The new IIT law allows resident individuals to claim six types of additional itemized deductions against their comprehensive income to compute IIT. The final implementation regulations confirm that the additional itemized deductions may be taken when computing IIT on business income to the extent the individual does not have any comprehensive income.
  • Individuals will be required to submit the information relating to itemized deduction claims for first time declaration to their tax withholding agent or tax bureau, and any subsequent changes should also be notified to the employer.
  • Unclaimed tax deductible expenses incurred in current year cannot be carried over to the following year.

Please see the special deductions breakdown as follows:

Item Key qualifying conditions Amount for deduction (RMB) Who can claim? Supporting Documents
Children’s education Pre-school 3 years onwards 1000/month/child 100% for either parent or 50%/50% by both parents Only for children receiving education overseas: admission notice, student visa etc.

 

No requirement for children accepting education in China.

Compulsory education Primary & middle school
Intermediate education High school, Vocational school
Higher education Degree, Masters, Doctorate
Further education Formal education in China As per above levels of education 400/month (max. 48 months for one formal education) Individual taxpayers Exception for individual that has work but accepts education lower than bachelor degree: by parent or the individual No requirement for formal education.

 

 

For professional education: professional certificate.

Professional education Recognized qualification or certificate in China One-off 3,600 in the year obtaining qualification /certificate
Serious illness medical fees Medical expenses incurred for individual taxpayer, spouse or minor children after the reimbursement by statutory medical insurances in aggregate more than RMB 15,000 Actual expenses in part of exceeding 15,000 but less than 80,000 (deduction shall be claimed at the annual IIT reconciliation of the following year) Medical fees for taxpayer or spouse: either by taxpayer or spouse

Medical fees for minor children: either party of the parent

Original or photo copy of receipts for medical service charges, vouchers for statutory medical insurance reimbursement, list of annual medical expenses issued by medical insurance institute etc.
Housing loan interest Bank loan or housing fund for buying real property in China

Limited to first property only

1000/month (max. 240 months) If jointly owned, either husband or wife to claim Loan agreement and vouchers for re-payment of loan etc.
Housing rent Not owning property in place of work

 

No claim of housing loan interest deduction by the taxpayer or spouse

Specified big cities[1] 1500/month If husband and wife work in the same city, only one side that sign the agreement can claim

If husband and wife work in different cities and not own property in either city, both and claim deduction of own

Rental agreement
Cities with population in urban districts > 1m 1100/month
Cities with population in urban districts < 1m 800/month
Supporting elderly 60 years or older parents as well as grandparents aged 60 and above whose child(ren) has/have passed away Taxpayer is the only one child 2000/month For taxpayer with siblings: split between siblings: maximum claim is 1,000 per month for each Agreement for the allocation among siblings

[1] Specified big cities include Beijing, Shanghai, Tianjin, Chongqing, Shenzhen, Xiamen, Ningbo, Qingdao, Dalian and the capital cities of all provinces.

Cumulative Withholding Method on the Monthly Individual Income Tax

Starting from January 2019, the monthly calculation of the individual income taxes of your employees will change. The tax rate will no longer be just based on the amount of the taxable salary of the current month. Instead, in each month the cumulated amount of taxable salary in the current year is determined and the applicable tax rate is based on this cumulative amount. The details of the calculation method are stipulated in the Announcement of the State Administration of Taxation on Promulgation of the Administrative Measures on Declaration of Individual Income Tax Withholding (Trial Implementation), Article 6:

  • Tax amount to be withheld by the employer for the current period = (taxable income amount subject to cumulative withholding × withholding rate – quick calculation deduction) – cumulative tax credit – cumulative withheld amount
  • Taxable income amount subject to cumulative withholding = cumulative income – cumulative tax-exempt income – cumulative deduction expenses – cumulative special deductions – cumulative special additional deductions – cumulative other deductions determined pursuant to the law

The new calculation method implies that for many employees, the applied tax rate will increase at certain month during the year, i.e. the net salary received by the employee will decrease at the same time, as illustrated in the following example. To avoid confusion it may be necessary to explain this to the employees in advance.

Example:

An employee has a monthly gross salary of RMB 15,000 and the employee’s monthly contribution for social security and housing fund is RMB 2,450. The monthly lumpsum deduction is RMB 5000. Assume that the employee is further entitled to special deductions for the children’s education, housing and support for the elderly in the amount of total RMB 2,000 per month and there is no other reduction or exemption of income and tax exemption. For January to July 2019, for example, the withholding tax for each month should be calculated according to the following method:

January: Taxable income = 15,000 – 5,000 – 2,450 – 2,000 =RMB 5,550; x Tax rate 3% = RMB 166.5

February: Taxable income = 15,000×2 – 5,000×2 – 2,450×2 – 2,000×2 = RMB 11,100; x Tax rate 3% = RMB 333; less tax credit from previous months RMB 166.5 = 166.5 RMB;

July: Taxable income = 15,000×7 – 5000×7 – 2,450×7 – 2,000×7 = 38,850; x Tax rate 10% = RMB 3,885; less quick calculation deduction 2,520 = RMB 1,365; less tax credit from previous months RMB 166.5×6 = RMB 366;

The tax rates are based on YTD income according to the following table. In the example, it can be seen that from January to June, the cumulated taxable income is below the threshold of 36,000 RMB and the applied tax rate is 3%. In July, when the cumulated taxable income exceeds the threshold, the tax rate changes to 10%. Accordingly, the after tax income of the employee in this example will be higher in the period January-June and the decrease in July.

Individual income tax rates (applicable for consolidated income)

Grade

Annual taxable income amount

Tax rate (%)

Quick Calculation Deduction

1

RMB36,000 or less

3

0

2

The part exceeding RMB36,000 and up to RMB144,000

10

2,520

3

The part exceeding RMB144,000 and up to RMB300,000

20

16,920

4

The part exceeding RMB300,000 and up to RMB420,000

25

31,920

5

The part exceeding RMB420,000 and up to RMB660,000

30

52,920

6

The part exceeding RMB660,000 and up to RMB960,000

35

85,920

7

The part exceeding RMB960,000

45

181,920

Implementation Rules of Preferential Tax Deduction Policy for Small Low-Profit Enterprises and Small Scale Tax Payers

On January 17, 2019, the Ministry of Finance and the State Administration of Taxation (“SAT”) released the “Notice on implementing the preferential tax deduction policy for small low-profit enterprises” (Caishui [2019] No.13). The implementation period of this notice is from January 1, 2019 to December 31, 2021.

We have summarized several key points of this implementation for small low-profit enterprises as follows:

1. Small-scale Tax Payers:

  Conditions Small-scale Tax Payers
Value-added Tax < RMB 100,000 Exempted

The sales amount for sale of goods, labor services, services and intangible assets does not exceed RMB100, 000 shall be exempted from VAT.

2. Small low-profit enterprise:

  Conditions Small low-profit enterprises
Corporate Income Tax The portion of annual taxable Income < RMB 1 million The portion of annual taxable Income*25%*20%
The potion of annual taxable income > RMB 1 million, but < RMB 3 million The portion of annual taxable Income*50%*20%

Notes: regardless if a small low-profit enterprise pays enterprise income tax by way of levying based on accounts examination or levying based on assessment, the enterprise may enjoy the aforesaid incentives.

The small low-profit enterprises shall satisfy three criteria:

  • Annual taxable income amount does not exceed RMB 3 million
  • Staff headcount does not exceed 300
  • Total assets do not exceed RMB 50 million

The stated number of employees and total assets should be determined based on the quarterly average number of the enterprise for the whole year.

Implementation Rules for Individual Income Tax

In our previous newsletter, we had already reported on the changes due to the “Amendment on Individual Income Tax Law”: https://cn.ebnerstolz.com/2018/09/china-seventh-amendment-on-iit-law/?en

On 20 October 2018, the Ministry of Finance and the State Administration of Taxation released the Draft “PRC Individual Income Tax Implementation Rules and Draft Measures on Itemized Deductions”, seeking consultation from the public. The consultation program closes on 4 November 2018.

We have summarized several key points regarding to resident and non-resident tax payers as follows:

Foreign individuals

Five-year rule will be retained

  • The five-year rule will be remained so that foreign employees can avoid paying taxes on worldwide income as a Chinese resident. Although residence will be triggered based on 183 days, a single break in excess of 30 days will continue to create a “tax break” for these purposes.
  • The eligibility for the exemption on foreign sourced income may need to be validated through a “put-on-record” filing.

Tax-exempt benefits will be retained

  • Foreign employees can elect to retain the tax-exempt benefits privilege they currently enjoy.
  • If the foreign employees elect to claim itemized deductions under the new system when they meet the necessary conditions, they cannot enjoy tax exemption on fringe benefits, such as children’s tuition, and housing rental, and simultaneously claim deduction for such expenses under the itemized deduction system.

PRC domicile individuals

Documentation requirements on itemized deductions

  • Individuals will be required to submit the information relating to itemized deduction claims for first time declaration to their tax withholding agent or tax bureau, and any subsequent changes should also be notified to the employer.
  • Unclaimed tax deductible expenses incurred in current year cannot be carried over to the following year.

By issuing the public consulting notice regarding to the specific additional deductions on individual income, we can see China is establishing the framework of a comprehensive deduction system and paves the way for further deepened IIT reformation in the future, and will substantially reduce the tax burdens for both foreign employees and Chinese resident employees.

Please see the special deductions breakdown as follows:

Item Key qualifying conditions Annual standard fixed amount for deduction (RMB) Who can claim?
Children’s education Pre-school 3 years onwards 12,000 50% for each parent / 100% for either parent
Compulsory education Primary & middle school
Intermediate education High school, Vocational school
Higher education Degree, Masters, Doctorate
Further education Formal education As per above levels of education 4,800 Individual taxpayers
Professional education Technical / professional certificates 3,600
Serious illness medical fees Medical expenses > RMB 15,000 Actual expense not exceeding 60,000 Individual taxpayers
Mortgage interest Limited to first property only 12,000 If jointly owned, either husband or wife to claim
Housing rental Not owning property in place of work Big cities 14,400 If joint rental, either husband or wife to claim
Mid-size (population) > 1m 12,000
Smaller (population) < 1m 9,600
Supporting elderly 60 years or older parents or other obligations by law Single child 24,000 Split between siblings: maximum claim is 1,000 per month for any person
Not Single Child 12,000

China Expands Scope of Withholding Tax Deferral Treatment on Direct Reinvestments From Foreign Investors

On September 29th 2018, China’s Ministry of Finance, State Administration of Taxation and National Development and Reform Commission and Ministry of Commerce jointly issued Cai Shui [2018] No. 102 (Circular 102) to widen the scope of withholding tax deferral treatment on direct foreign investment encouraged projects to all non-prohibited foreign investments.

Circular [2018]102 replaces Circular [2017]88 and becomes retroactively effective on 1 January 2018.

Prior to the issuance of Circular 102, Circular 88 indicates that the withholding tax deferral policy only applied to foreign investors who directly reinvested their attributable profits from their Chinese tax resident investees into one of the designated encouraged industries.

Under Circular 102, the scope of the withholding tax deferral treatment on direct reinvestment is expanded to all foreign investments that are not prohibited for foreign investors.

An overseas investor qualifies to temporary waive the withholding income tax of the direct investment shall satisfy all the following criteria:

  • The reinvestment profits shall include equity investment activities.
  • The attributable profits of an overseas investor should arising from retained earnings.
  • Cash investment-relevant monies shall be transferred directly and shall not be circulated among other domestic or overseas accounts prior to making direct investments; Non-cash investment-relevant asset ownership shall be transferred directly and shall not be held on behalf, or temporarily held, by other enterprises or individuals prior to making direct investments.

In addition, if overseas investor is entitled to temporary waiver for withholding of income tax pursuant to the provisions but does not claim the entitlement, it may apply to claim the said entitlement within three years from the date of actual payment of the relevant taxes, and request for the refund of the paid tax.

It can be predicted that this policy will greatly promote overseas investors make profit reinvestment in China.

China: Seventh Amendment on Individual Income Tax Law

On 31 August 2018, the seventh amendment on Individual Income Tax Law of China (the “Seventh Amendment”) is officially approved and announced. The last amendment on PRC Individual Income Tax Law was made in 2011 (referred as “Old IIT Law (2011)”). The major topics in the Amendment are summarized as follows.

1. Tax Resident Individual
In the Seventh Amendment, the term for being tax resident in China is changed from staying one year to 183 days or longer within a tax year in China (see details in below chart).

Category Old IIT Law (2011) New IIT Law (2018)
Tax Resident Any individual who has a domicile Note1 within the territory of China or; Any individual who has a domicile Note1 within the territory of China or;
Who has no domicile but has stayed in the territory of China for one year or longer. Who has no domicile but has stayed in the territory of China for 183 days or longer cumulatively within a tax year.
Non-tax Resident Any individual who has no domicile and does not stay within the territory of China or; Any individual who has no domicile and does not stay within the territory of China or;
Who has no domicile but has stayed within the territory of China for less than one year. Who has no domicile but has stayed within the territory of China for less than 183 days cumulatively within a tax year.

Note1: The “individuals domiciled in within the territory of China” mentioned above means individuals who by reason of their permanent registered address, family or economic interests, habitually reside in China.

Tax residents are subject to Chinese IIT on income derived from China and overseas (worldwide income). Non-tax residents are subject to Chinese IIT only on income derived from China. However, as the Chinese IIT regime not only has the IIT law but also a series of administrative regulations that provide more specific guidance on the taxation, the actual impact on the expats due to the amendment of IIT law might be different for each individual. 

2. Applicable Individual Income Tax Rate
Under new IIT Law, four types of incomes, including salaries and wages, remuneration for personal services, authors’ remuneration and royalties), are combined as one new tax category called “comprehensive income” (referred as “Comprehensive Income”), which is subject to progressive tax rates ranging from 3% to 45%, with seven tax brackets.

In old IIT Law (2011), these four types of income are subject to different tax rate and brackets. For easy understanding, we summarized the old and new regulations in below charts.

Old IIT Law (2011) New IIT Law (2018)
Category Tax Rate Category Tax Rate
Wages and Salaries 3% – 45% (7 brackets progressive tax rates) Comprehensive Income ▶ 3% – 45% (7 brackets progressive tax rates)
▶ Expanding the tax brackets of lower tax rates (i.e. 3%, 10% and 20%),
▶ Reduce and unchanged tax brackets of higher tax rates (i.e. 25%, 30%, 35%, and 45%)
Remuneration for personal services 20 % – 40% (3 brackets of progressive tax rates)
Authors’ remuneration 20%
Royalties 20%

 

Grade Old IIT Law (2011) New IIT Law (2018)
Annual (monthly) taxable income (RMB) IIT Rate Annual (monthly) taxable income (RMB) IIT Rate
1 No more than 18,000 (1,500) 3% No more than 36,000 (3,000) 3%
2 18,000 – 54,000  
(1,500 – 4,500)
10% 36,000 – 144,000
(3,000-12,000)
10%
3 54,000 – 108,000
(4,500 -9,000)
20% 144,000 – 300,000
(12,000 – 25,000)
20%
4 108,000 – 420,000
(9,000 – 35,000)
25% 300,000 – 420,000
(25,000 – 35,000)
25%
5 420,000 – 660,000
(35,000 – 55,000)
30% 420,000 – 660,000
(35,000 – 55,000)
30%
6 660,000 – 960,000
(55,000 – 80,000)
35% 660,000 – 960,000
(55,000 – 80,000)
35%
7 More than 960,000 (80,000) 45% More than 960,000 (80,000) 45%

3. Basic Deductions and Special Additional Deductions
Under new IIT Law, the basic deduction for Comprehensive Income is RMB 5,000 per month (old regulation for Chinese individual: RMB 3,500 for salaries; old regulation for foreigner: RMB 4,800 for salaries). The additional basic deduction (RMB 1,300) for foreigner is abolished.

Furthermore, the Seventh Amendment introduces the principle of special additional deduction. According to the Seventh Amendment, the special additional deductions include the expenditures on children education, continuing education, critical medical treatment, housing loan interest, housing rent and support for the elderly etc. However, the detailed scope, conditions and implementation steps are to be determined and announced by PRC State Council.

4. Schedule of Implementation
According to the Seventh Amendment, the new IIT Law will be enforced in two steps:
Step 1 – The new IIT tax rates and new standard basic deduction (RMB 5,000) will be implemented with effect from 1 October 2018;
Step 2 – The seventh amendment shall be fully implemented with effect from 1 January 2019.

Summary
Although the Seventh Amendment has been officially announced, certain topics still need to be clarified. For example, whether the current “five-year-rule” for foreign expatriates will be abolished; whether foreign expatriates can still enjoy tax-exempted benefits on reimbursement basis; the detailed scope and conditions for special additional deduction are to be determined.

VAT Refund for Export Business in China

In the Chinese value added tax (VAT) regime, it is generally not planned that the tax authorities refund any input VAT credit to tax payers, if the balance of input VAT exceeds the output VAT in a fiscal period.

Exceptions to this rule are made, if the input VAT credit is related to the cost of exported goods. In this case, the tax payer can apply for the so-called VAT refund. It refers to the refund of input VAT and consumption tax paid by the exporting entity in the course of purchasing or manufacturing the exported goods.

This political tool to boost the China economy also promotes foreign invested operations in China. It is a potential benefit for a Trading WFOE/JV or Manufacturing Company. The VAT refund can improve the cash flow of an exporting enterprise by realizing VAT credits. The purpose is to enhance competitiveness of Chinese exporting enterprises when entering the international market.

In order to qualify for the VAT refund, exporters must initially register with the tax authorities, providing their business license and export approval documentation to the competent authorities and providing evidence that they have implemented a robust accounting system, which allows to track the portion of their cost related the exported goods. Usually, the tax authority will also conduct an onsite inspection of the applying enterprise. Once the registration is completed, applications for VAT refund can be submitted at any time, but no later than 1 year from the date of the export customs declaration of the respective shipments. The applicant must provide evidence for the production and procurement cost. Since this can be quite complex for manufacturing enterprises, many companies – foreign and domestic invested–establish a separate trading company for the export, which can purchase the export goods from the affiliated production company as well as other third-party manufacturers. For combined trading/manufacturing enterprises there are limitations to receive the export VAT refund: e. g. refund may only be possible for traded goods which are similar to the self-manufactured goods. We recommend to carefully review the business model and inquire with the local authorities in advance.

We emphasize that the VAT refund is not an additional revenue but only the realisation of an existing input VAT credit. While the domestic VAT rate for the sale of goods is 16%, the percentage of the VAT refund can be lower and ranges from 0% to 16%, depending on the HS code of the exported goods, as declared to customs authorities upon export. This means that in many cases, only part of the input VAT can be refunded. After completion of the refund procedure, the non-refundable portion can no longer be set off against domestic output VAT but must recognised as additional cost of goods. The declaration of the specific HS codes for the exported goods should be handled with care to ensure that the HS code matches the actual specifications of the goods. If there are different matching options, the enterprise should ensure that the most beneficial option in terms of VAT refund is chosen.

If you have any questions regarding the input VAT and VAT refund procedures, please feel free to contact us.

New Options for Shareholder Loans

Loans provided by an overseas shareholder to its subsidiary (or joint venture) in China belong to the category of cross-border capital account transactions. Such transactions are generally subject to approval by SAFE (State Administration of Foreign Exchange). The maximum amount of overseas borrowing is limited by specific regulations. After the “Macro-prudential Management of Full-covered Cross-border Financing” (“Circular No. 9”) were issued in May 2017, there are currently two different options, when registering a cross border borrowing agreement:

1. Old method – can still be chosen during a transition period after the implementation of Circular No. 9. Currently it is not known, how long the transition period will last.

Within 15 working days after signing the loan agreement, the borrower in China has to submit the loan agreement and other application documents to SAFE for the approval and registration of the shareholder loan.

The maximum amount of all shareholder loans ever obtained is limited by the gap between the total investment amount (as stated in the Articles of Association) and the registered capital (as per business license). It is required that the registered capital has been paid in in accordance with the schedule in the Articles of Association. SAFE may require an audited capital verification report for the application procedure. If a shareholder loan with term longer than one year is (partially) repaid, such repayment will not increase the limit available for new loans. Repayment of short-term shareholder loans (term not exceeding one year) will however free up the respective amount in the limit.

Example:
ABC China is a 100% subsidiary of ABC Germany, with a total investment of 1 Mio EUR and a registered capital of 700 TEUR, which has been completely paid in. The maximum amount of a shareholder loan is therefore 300 TRMB. If ABC China borrows 200 TEUR for 3 years with repayment of 100 TEUR after 2 years and 100 TEUR after 3 years, the total amount of further shareholder loans possible under the “Old method” will be 100 TEUR (300 TEUR – 200 TEUR).

2. New method, based on (“Circular No. 9”), available since May 2017.

After signing the loan agreement and at least 3 days before the disbursement of the loan, the borrower in China has to submit the loan agreement and other application documents to SAFE for registration of the shareholder loan.

Under the new method, the maximum outstanding of all shareholder loans is calculated from the applicant’s equity (based on the latest audited financial statements), the currency and the term of the loans according to the following scheme:

Max cross border borrowing
(in multiples of net equity)
Term of the loan
up to 1 year > 1 year
RMB foreign currency RMB foreign currency
Max cross border borrowing
(in multiples of net equity)
1.33 1 2 1.33

Existing loans taken out before the application according to the old or the new method will be deducted from the available limit. After switching to the new method, it is not possible to switch back to the old method later.

Example:
ABC China has a net equity of 850 TRMB per audited financial statements of 31-Dec-2017. The maximum amount for shareholder loans in EUR with term > 1 year would be the equivalent of 1.33 * 850 = 1,133 TRMB = 151 TEUR (at exchange rate 7.5). ABC China has already received a 5-year loan in EUR from its shareholder ABC Germany, the remaining outstanding amount of this loan is 80 TEUR. Therefore, the upper limit for additional borrowing of EUR with term > 1 year would be 151 – 80 =71 TEUR

It should be noted that the approval procedures and criteria applied by the regional SAFE bureaus may differ from the principles outlined above. Before making any decision with regard to shareholder loans, we recommend to contact the SAFE bureau in charge in advance.

EUROPEAN FINANCE FORUM: “CHANCES AND PITFALLS FOR GERMAN SMEs IN CHINA”

Monday, July 23, 2018  6:30 PM

Venue: CMS Hasche Sigle, Lennéstraße 7, 10785 Berlin

Speaker: Dr. Gerald Neumann, Managing Partner of Fan, Chan & Dr. Neumann Business Advisory Co., Ltd.

About the topic:

SME’s face specific challenges in China with regard to the size and complexity of the market. While the Chinese market is now open for decades and we find plenty of experience in Germany for the Chinese business environment nowadays, the challenges for SME’s keep the same or even increase with the regard to the lower GDP growth in China. The event aims through case studies to explain how to successfully enter into the Chinese market by avoiding major pitfalls.

About the speaker:

Dr. Neumann was previously engaged at Deutsche Bank AG in corporate finance sector for eight years and has strong corporate finance background. Since 2017 he is engaged in the finance industry in P.R.China and is specialized in tax and accounting.

For more information and registration please click here.

New CIT regulations on increase of maximum deductible employee education fee

Caishui [2018] No. 51

On 7 May 2018, the Ministry of Finance and SAT issued a regulation to increase the maximum deductible employee education fee from 2.5% to 8% of total salaries. The exceeding part could be transferred to next years for deduction. The new cap of yearly deduction rate is applied from the year 2018 and onwards.

New CIT regulations on fixed assets depreciation

Caishui [2018] No. 54

The Ministry of Finance and SAT jointly issued a regulation on 7 May stipulating that equipment and tools that are purchased during the period 2008-2020 could be recognized one-off as cost of sales in the current period and fully deductible for CIT purpose on the condition that the unit price is below 5 million CNY. No depreciation is required. For equipment and tools over 5 million CNY, depreciation shall still be done with reference to related tax regulations.

Equipment and tools refer to the fixed assets other than buildings and construction structure.

Im Fokus der deutschen Finanzverwaltung

Guest Article by Sten Günsel (Ebner Stolz)

Eine Vielzahl von Deutschen sind erfolgreich im Ausland tätig – als leitende Angestellte oder Spezialisten international operierender Firmen, als Selbständige bzw. Unternehmer. Sie leben und arbeiten in China bzw. Hong Kong. Sind Sie im Fokus der deutschen Finanzverwaltung?
Darauf lässt sich auf dem Papier keine individuelle Antwort geben, jedoch sind klare Trends und Praktiken des deutschen Fiskus ersichtlich. Diese sprechen eine klare Sprache – auch Deutsche im Ausland sollten die deutschen Steuervorschriften kennen und ernst nehmen.
In der schier ausufernden Fülle und Komplexität des deutschen Steuerrechts lassen sich vier Bereiche benennen, die Sie als mögliche Betroffene kennen sollten:

1. Das deutsche Steuerrecht unterscheidet zwischen der unbeschränkten und der beschränkten Steuerpflicht. Idealerweise sind Sie nur noch beschränkt steuerpflichtig, da damit die Nachweispflicht über die Besteuerung Ihrer weltweit erzielten Einkünfte in Deutschland entfällt. Sind Sie dagegen unbeschränkt steuerpflichtig, prüft der deutsche Fiskus nicht nur, ob Sie im Ausland Steuern zahlen, sondern auch wie viel. Dazu wird die Bemessungsgrundlage unter die Lupe genommen – oft mit dem Ergebnis, dass Teile des nach deutschem Steuerrecht ermittelten Einkommens nicht im Ausland besteuert werden. In diesem Fall besteuert Deutschland nach und zwar in Übereinstimmung mit dem Doppelbesteuerungsabkommen.

Woran knüpft die unbeschränkte Steuerpflicht? Maßgebend ist der Wohnsitz -dieser ist im Steuerrecht definiert und hat mit dem Wohnsitz im melderechtlichen Sinne wenig zu tun. Sie können abgemeldet und dank einer in Deutschland vorgehaltenen Wohnung dennoch steuerpflichtig sein.

2. Zahlungen deutscher Firmen ins Ausland werden untersucht. Dabei lassen sich zwei Fallgruppen bilden. Zum einen geht es um Zahlungen an Mitarbeiter – hier wird geprüft, ob diese für einen deutschen Arbeitgeber arbeiten. Wenn ja, sind alle deutschen Arbeitstage in Deutschland steuerpflichtig, soweit ein Doppelbesteuerungsabkommen gilt (China). Fehlt dieses – Hong Kong – dann sind alle Einkünfte und nicht nur die für den Tag der betrieblichen Weihnachtsfeier in Deutschland zu versteuern. Zum anderen geht es um Zahlungen an Mitarbeiter verbundener Unternehmen wie Dritte. Hier wird geprüft, wem das Konto gehört, auf das die Zahlung geht. In Zweifelsfällen ergehen Mitteilungen ins Ausland und es wird dem Zahlenden der Betriebsausgabenabzug verwehrt.

3. Geschäftsführer und Unternehmer sind aber auch durch das deutsche Außensteuergesetz betroffen. Es gab hier in der Sache keine Rechtsänderung – es wird lediglich die sog. Hinzurechnungsbesteuerung von den Finanzämtern auch tatsächlich durchgeführt. Betroffen sind Inhaber und Muttergesellschaften von Auslandsgesellschaften, die weniger als 25% Steuern im Ausland zahlen. Wird beispielsweise die Vertriebs- bzw. Dienstleistungsgesellschaft im Ausland von einem Deutschen geführt, so wird dies als Fall der Mitwirkung im Sinne des Außensteuergesetzes interpretiert und führt zu Steuernachzahlungen in Deutschland.

4. Schenkungen und Erbfälle werden unter die Lupe genommen – Steuern in Deutschland können anfallen, wenn eine der Parteien in Deutschland ansässig ist – Anknüpfungspunkt ist auch hier der steuerliche Wohnsitz – bzw. das Vermögen in Deutschland ist. Das Doppelbesteuerungsabkommen Deutschland – Volksrepublik China entfaltet keine Wirkung.

Diese Aufzählung ist (leider) nicht abschließend, sondern nur eine Aufnahme aktueller Fälle.

Die deutschen Finanzämter haben sich gerüstet – es ist Fachpersonal vorhanden. Jeder Fall mit Auslandsberührung ist dem internen Spezialisten für Internationales Steuerrecht vorzulegen. Dieser kennt die Materie und stellt Ihnen Fragen zu Ihren persönlichen Verhältnissen. Sind Sie gerüstet, die passenden Antworten zu geben?

Unified standard for small-scale VAT payers

According to circular Caishui [2018] No. 33, issued by the Ministry of Finance on April 4, 2018, the following new rules will apply effective May 1, 2018

  • The threshold to become ordinary VAT payer will be unified to annual revenue of 5 million CNY.

  • Companies already registered as ordinary taxpayers with annual revenue below this threshold can become small-scale taxpayers. The application of transfer-back to small-scale taxpayer could be filed before 31 December 2018.

Adjustment of VAT rates as of May 1, 2018

According to circular Caishui [2018] No. 32, issued by the Ministry of Finance on April 4, 2018, the following new rules will apply effective May 1, 2018:

  • For the manufacturing and trading industry and other sectors that are subject to 17%, the VAT rate will be lowered to 16%.
  • For transportation, construction and basic telecommunication services and other sectors that are subject to 11%, the VAT rate will be lowered to 10%.
  • The deduction rate for purchased agricultural products is lowered from 11% to 10%. If the agricultural products are purchased for production, sale or consignment process of the goods that are subject to 16% VAT, the deduction rate will be 12%.
  • For products and services, for which the export VAT refund rate was 17% in the past, the export VAT refund rate will be adjusted to 16%.
  • For products and services, for which the export VAT refund rate was 11% in the past, the export VAT refund rate will be adjusted to 10%.
  • For exported services and products purchased by the exporter before May 1, 2018, the VAT refund rates valid before the Adjustment will still be applied until July 31, 2018.

 

New Value-added Tax Regulation implements since 1 July 2017

The State Administration of Taxation issued series of new tax announcements which come into force since 1 July 2017. We highlight the key new regulations in the article hereinafter.

1. Taxpayer identification number for ordinary VAT invoice

Pursuant to Announcement of the State Administration of Taxation [2017] No.16, from 1 July 2017, when an enterprise purchaser requests an ordinary VAT invoice (in Chinese: 增值税普通发票), it shall provide the seller with its taxpayer identification number (in Chinese: 纳税人识别号) or unified social credit code (in Chinese: 统一社会信用代码).

The ordinary VAT invoices without taxpayer identification number or unified social credit code cannot be used as tax evidence. This means that expense/cost with such unqualified ordinary VAT invoices cannot be deducted before the enterprise income tax filing. We strongly recommend arrange training to the relevant staff to obtain proper tax invoices in accordance with this new regulations.

2. Deduction time limit for input VAT extended to 360 days

In China, the general value-added taxpayers may apply for input VAT credit upon verifying the VAT invoices obtained from the sellers. Pursuant to Announcement of the State Administration of Taxation [2017] No. 11, special VAT invoices (in Chinese: 增值税专用发票), uniform invoices for the sale of motor vehicles (in Chinese: 机动车销售统一发票) and special customs payment certificates for import VAT, issued on and after 1 July 2017, shall be verified within 360 days as of the date of invoicing.

For the value-added tax deduction vouchers mentioned above which are issued on or before 30 June 2017, the deduction time limit shall remain as 180 days according to old regulations (Guo Shui Han [2009] No. 617).

Individual income tax (“IIT”) regulation on commercial health insurance promoted nationwide

The State Administration of Taxation, Ministry of Finance, China Insurance Regulatory Commission jointly announced the Cai Shui [2017] No. 39 (Circular 39) to promote the pilot polices for individual income tax on commercial health insurance nationwide effective from 1 July 2017. The expenses for purchasing qualified commercial health insurance products by individuals are deductible from the IIT taxable income up to CNY 2400 per year (CNY 200 per month). If the enterprise employers purchase qualified commercial health insurance products for their employees, such expenses shall be included in the salaries of employees and be subject to the above deduction limit as if the commercial health insurance products are purchased by the employees. Qualifying commercial health insurance products refer to health insurance products offering personal income tax incentives and meeting to certain requirements. 

You may check with the commercial health insurance supplier to see whether the purchased products are qualified to apply tax deduction or seek for qualified commercial health insurance products.

Fan Chan & Dr. Neumann opens its office in Beijing

To be able to provide on-site tax and accounting services in the Greater Beijing area, Fan, Chan & Dr. Neumann established a new company in Beijing.  Starting from March 2017, we have opened an office in the Beijing Lufthansa Center, in direct neighborhood of the German Embassy and the German Center Beijing. Christian Vogt is the partner at Fan, Chan & Dr. Neumann who supervises our business in Beijing and takes care of our clients in the area.

Christian Vogt joining Fan, Chan & Dr. Neumann

Starting from January 2017, Mr. Christian Vogt has joined Fan, Chan & Dr. Neumann as a Partner and Senior Consultant.

Christian is one of the founding shareholders of Fan, Chan & Dr. Neumann and has more than twenty years of financial and management experience in China and is business fluent in Mandarin Chinese. Until April 2016, he was the General Manager of Deutsche Leasing China. Previously he worked at Dresdner Bank Shanghai for 14 years, thereof 3 years as General Manager. Christian has special expertise in cost controlling and budgeting projects and the related data analysis. He has also several years of experience as a consultant and supervised the liquidation of the China subsidiary of renowned German  trading company as interim manager.

View Christian Vogt’s team profile

Loosening foreign investment administrations

On 3 September 2016, the Standing Committee of the National People’s Congress announced the decision on Revising Four Laws including the PRC Laws on Wholly Foreign-owned Enterprises, Sino-Foreign Equity Joint Ventures, Sino-Foreign Cooperative Joint Ventures and the Protection of the Investments of Taiwan Compatriots. On the same day, the Chinese Ministry of Commerce disclosed the Interim Measures for the Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises (Draft for Comment) for public comments as supporting measures (the final version is to be announced).

According to this new amendment on Four Laws, for foreign invested enterprises the relevant approval items not involving the special access administrative measures prescribed by the State shall be subject to record-filing administration. Since 1 October 2016, the record filling under negative list mode for investment administration, which was only adopt by China Pilot Frees Trade Zones, implement throughout the whole China. With loosening the administration on foreign invested enterprise, the benefits of new system are expected to encourage more and more foreign investment national wide.

FCN Join the Congress on Investing in Germany and Sino-German Cooperation

On 22 September 2016 the congress on investing in Germany and Sino-German cooperation was held at Jiaozuo, a major industrial hub in central China, Henan province. Around 100 guests attended the conference including speakers of the German Trade and Invest (GTI), the representatives of German provinces North Rhine-Westphalia and Baden-Wuerttemberg, consulting firms and key leaders from local enterprise and government bureaus. Dr. Neumann spoke about investors requirements for overseas investments.

Comprehensive Implementation of VAT in All Industries

On March 2016, the Standing Committee of the State Council announced detailed policies on comprehensive VAT reform in Cai Shui [2016] No. 36 <Circular on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax> (“Circular 36”).

Starting from 1 May 2016, four service industries, construction, real estate, finance and consumer services, will be subject to VAT rather than Business Tax. This means VAT reforms will be implemented across all industries and the ending of dual tax system with Business Tax. After 66 years’ implement, the Business Tax officially stepped down from the stage of history of China. Let’s have an overview of the milestones of this pilot program of VAT in lieu of Business Tax in below chart.

VAT

According to Circular 36, VAT tax rates for services are 0%, 6%, 11% and 17% and the levy collection rate is 3% as listed in below:

No. Description Tax Rate
1 Transportation, Postal, Basic Telecommunication, Construction, Lease of real estate, Sales of Real Estate, Transferring Land Use Right Services. 11%
2 Lease of movable tangible assets Service. 17%
3 Cross-border Taxable Services provided by Domestic entity or individual. 0%
4 Other services. ( including but not limited to Consulting, Finance and Value-added Telecommunications Services) 6%

This pilot program is aim to upgrade the industrial structure and improve the VAT chain. More companies may choose to outsource services and as a result the service industry will be promoted by this new VAT policy.

Draft of updated law against unfair competition released after 23 years

Guest Article by Rainer Burkardt (Burkardt & Partner)

Introduction to the topic:

The legislative affairs office of the state council released a draft revision of the law against unfair competition. The Law of the People’s Republic of China against Unfair Competition currently effective has come into force 23 years ago. As the face of China is changing rapidly and the China from two decades ago is a different China than today, China´s market is in dire need for a new law against Unfair Competition.

This article shall introduce some interesting key points of the draft law against unfair competition and the effect on companies in China, if the law is enacted.

I. Introduction

On February 25, 2016 the legislative affairs office of the state council released for the first time after 23 years a draft revision of the law against unfair competition (“Draft Anti-Unfair Competition Law”) for public review.

The current Law of the People’s Republic of China against Unfair Competition (“Current Anti-Unfair Competition Law”) is effective since December 1, 1993 and has not been amended since its effective date.

In the past there have already been plans to change the Current Anti-Unfair Competition Law. However, until recently, the PRC legislator prioritized other projects, as the new anti-monopoly law from August 1, 2008 or in the revised trademark law from May 1, 2014 for promoting fair trade within the PRC.

As the Current Anti-Unfair Competition Law dates from a time when the People’s Republic of China (“China”) mainly produced for an export market, whereas nowadays the local market becomes or is already more important and there is a fierce competition between Chinese companies and foreign invested companies in China for the Chinese customer, there is no doubt that China is in need of a new anti-unfair competition law.

The Draft Anti-Unfair Competition Law, which is open for comments until March 25, 2016, changes 30 of the 33 articles of the Current Anti-Unfair Competition Law, if enacted in its current draft version.

This article highlights some of the most interesting changes of the Draft Anti-Unfair Competition Law and also suggest additional  changes which to our opinion are missing in the Draft Anti-Unfair Competition Law.

II. Logos and trade names

The Draft Anti-Unfair Competition Law introduces a protection for non-registered trademarks, whereas the term “non-registered” most likely refers to “not registered in China”.

In the past it was difficult for foreign but also domestic trademark owners, who did not register their trademarks in China to take actions against trademark infringements. This problem has already been addressed and at least partly solved in the existing PRC trademark law.

However, unfortunately the Draft Anti-Unfair Competition Law also introduces a threshold that a trademark, which has a not been registered in f China is required to be a “well-known” trademark to effectively act against infringements. Respective disputes in the past have shown that proving to be a well-known trademark is difficult and often – especially for the so called “hidden champions” – not possible.

As the administration of industry and commerce (“AIC”) is responsible for  anti-unfair competition cases as well as for trademark related disputes, it is likely, that the AIC will apply the same thresholds for recognizing a trademark as a “well-known trademark” also in anti-unfair competition cases.

III. Anti-Monopoly

The Draft Anti-Unfair Competition Law restructures anti-unfair competition based on a “dominant market position”.

These changes were necessary to complement the Antimonopoly Law from 2008.

In comparison to the Antimonopoly Law the Draft Anti-Unfair Competition Law sets a lower threshold for a “dominant market position”.

Whereas the antimonopoly law defines a “dominant market position” as a “position held by undertakings that are capable of controlling the prices or quantities of commodities or other transaction terms in the relevant market, or preventing or exerting an influence on the excess of those undertakings to the market” – in short a dominant position in the field of industry over all -, the Draft Anti-Unfair Competition Law defines a relative dominant position as sufficient conditions for restrictions, meaning by legal definition that the company requires to have a “position in terms of funds, technologies, market entry, sales channels, purchase of raw materials and other aspects in the course of a specific transaction and the transaction counterparty is dependent on such business operator and test difficulties in turning to other business operators” or in short in the specific relationship is dominant and without alternatives. This “relative dominant position” may protect weaker counterparties of transactions, of which the dominant party is not strong enough to dominate the market, but still strong enough to make the weaker party dependent, e.g. due to a special technology or a wide sales network.

Whether such protection will actually be effective for “small businesses” or whether in practice will be a paper tiger will depend on the practical application of the regulation.

IV. Commercial bribery

In the light of the recent anti-bribery campaign, especially the part in the Draft Anti-Unfair Competition Law regarding bribery has received special attention. Other than the Current Anti-Unfair Competition Law the Draft Anti-Unfair Competition Law offers a legal definition of commercial bribery.

Remarkable are the changes from the Current Anti-Unfair Competition Law, which only considers “off-the-book rebates” as bribery, whereas at the Draft Anti-Unfair Competition Law considers “any payment of economic benefits without making a truthful record thereof in the contract or other accounting documents” as an indication for bribery.

Also the Draft Anti-Unfair Competition Law clearly states that a company is responsible for bribes of an employee which is made for the benefit of the company and it furthermore includes bribery to third parties which have influence on a transaction.

If the Draft Anti-Unfair Competition Law is enacted, especially the documentation requirements will be an issue. Companies will have to keep a close eye on such new requirements, as to avoid being considered having provided bribes.

V. Trade secrets

Though the core regulations regarding trade secrets in the Draft Anti-Unfair Competition Law are similar to the Current Anti-Unfair Competition Law, it is remarkable that the Draft Anti-Unfair Competition Law introduces a “shift of burden of proof”, with the consequence that  a holder of a trade secret who can proof that such secret is used by another person, such other person is obligated to proof that the trade secret was obtained legally.

This shift of burden of proof will, if the Draft Anti-Unfair Competition Law is enacted, on the one hand offer a better protection for the holder of trade secrets and on the other hand companies will have to carefully document, on how they obtain their business information.

VI. Anti-Dumping

It is also noteworthy that the prohibition of sales of products under their production cost from the Current Anti-Unfair Competition Law was removed completely in the Draft Anti-Unfair Competition Law.

The removal of the anti-dumping clause cannot be explained by making reference to the anti –dumping laws from 2001, as those anti-dumping laws only refer to the import of “dumping prized products”. At the time being it is unclear, whether an anti-dumping prohibition shall be abandoned for domestic products, which seems unlikely, or whether such prohibition shall be moved to another law or into the catch all clause as maybe introduced by the Draft Anti-Unfair Competition Law.

VII. Misinformation

It is especially noteworthy that the Draft Anti-Unfair Competition Law includes a prohibition for businesses  to spread malicious evaluation, incomplete information or information, to injure another person’s business credit or product reputation which cannot be proven. This addition is most likely contributable to the malicious, but not uncommon, business practice to spread rumors about competitors on social networks. Even without such prohibition, Chinese courts already started to counteract this behavior, as in the case of a well know fast food chain, which was slandered by a news portal, by spreading information that the chain processes mutated chicken for its products. The courts granted a damage compensation for the fast food chain against the publisher of the news.

If enacted, the Draft Law will further support such verdicts.

VIII. Network Services

Also unfair competition regulations in telecommunication service industry  were added in the Draft Anti-Unfair Competition Law. However, the definitions are wide and it remains to be seen how the scope will be applied in practice.

 IX. Catch all clause

The Draft Anti-Unfair Competition Law includes a “catch-all” clause, which provides the AIC with the power to define further elements of an unfair competition.

Such clause may be a blessing, as the AIC may react quicker on new unfair competition methods than the legislator, but it may also be a curse, as the state council in the past tended to overregulate and thereby may smother legitimate business practices.

X. Responsibilities and penalties

As to be expected, the Draft Anti-Unfair Competition Law tighten penalties, which are in place since 23 years – e.g. in case of misinformation the fine under the Current Anti-Unfair Competition Law is limited to RMB 200,000.-. The Draft Anti-Unfair Competition Law constitutes a maximum fine of up to RMB 1 million or five times of the illegal business revenue if provable. However, it is more interesting that the Draft Anti-Unfair Competition Law includes an “assistance clause”, based on which a party which is clearly aware or should be aware of acts of unfair competition facilitates acts of unfair competition, e.g. by warehousing, transporting or providing technical support. Based on such new clause- such party may be fined with a penalty of up to RMB 1 million. However, such fines may be mitigated if the accused supports the investigations into the acts.

XI. Conclusion

Even though some urgent requirements for a fair-market have already been addressed by other laws like the trade mark law or the anti-monopoly in the past, the Draft Anti-Unfair Competition Law introduces several changes, which are required to bring the Current Anti-Unfair Competition Law up to the requirement of the modern marked.

However several amendments, which the business community may has hoped for, like a simplification of protecting unregistered trademarks are still missing and even worse, some important regulations like the anti-dumping prohibition maybe abolished in the future.

Also several regulations of the Draft Anti-Unfair Competition Law like the anti-unfair competition clauses regarding networks require further clarification. It can therefore be concluded that the Draft Anti-Unfair Competition Law is a step in the right direction, but clearly requires further refinement in its details. 

Note: This article is for your information only and does not contain any specific statements to individual cases. We therefore assume no liability for the content of the article.
 

About the Author

Mr. Burkardt’s practice focuses on foreign direct investments, mergers and acquisitions, and labor law. He predominantly counsels for companies headquartered in Austria, Germany and Switzerland in the automotive, chemicals, food, machine building and engineering industries that are entering or operating in China. 

Living and working in China for 18 years, Mr. Burkardt belongs to the few German lawyers who own a longtime China experience.

He was a member of the Board of Directors of the German Chamber of Commerce in Shanghai from 2008 to 2010 and was appointed as the trusted lawyer of the Consulate General of Austria in Shanghai by the Austrian Government in 2009.

For two years, he served as Vice-chair of the European Union Chamber’s Legal Working Group, Shanghai before he was elected as Chairman in 2010. Since 2013 he is appointed arbitrator at the Shanghai International Economic and Trade Arbitration Commission (SHIAC).

He is the author of articles in several PRC-related magazines, co-author of the WKO Fachreport and a frequent speaker at PRC-related seminars.

Website of Burkardt & Partner Rechtsanwälte (in German)

Company Social Insurance Burden Reduced in Many Cities of China

In order to reduce the operation cost of companies, many local governments issued new regulations to reduce social insurance payment ratio since beginning of 2016.

Shanghai government announced that the payment ratios of pension insurance and health insurance borne by the company are reduced by 1%, the payment ratios of unemployment insurance borne by the company is reduced by 0.5% since 1 January 2016. Guozhou government announced that the payment ratios of unemployment insurance borne by the company is reduced by 0.7% since 1 March 2016. During the second half year of 2016, the health insurance borne by the company will be gradually reduced by 5.5%. Besides the companies from Tianjin, Yunnan, Gansu and Fujian governments may also enjoy the lower social insurance burden in different degrees.

On 14 April 2016, Ministry of Human Resources and Social Security and Ministry of Finance jointly issue a circular <Ren She Bu Fa [2016] No.36> to reduce the Social Insurance Payment Rates. As of May 1, 2016, all provinces and cities shall reduce the local social insurance payment ratio.
 

Social Insurance
 
Reducing standards
 
Basic pension insurance
  • required employer contribution rate shall be reduced to 20%, if previous rate is above 20%;

  •  required employer contribution rate shall be reduced to 19%, if previous rate is 20% and the cumulative balance of the basic pension insurance fund for enterprise employees by the end of 2015 is sufficient to pay for more than nine months of such contributions;

  •  the reduced rates shall be implement temporarily for two years.

Unemployment insurance 
  • individual contribution rate shall not exceed 0.5%

  • overall unemployment insurance payment rate may be reduced periodically by 1-1.5% on the basis of the one-percentage-point reduction in 2015 

  •  the reduced rates shall be implement temporarily for two years.

work-related injury insurance & maternity insurance payment
  • continue to implement the decisions of the State Council on the reduction of the average payment rate for work-related injury insurance by 0.25% and the reduction of the maternity insurance payment rate by 0.5

Myths and necessary adjustments in the “New China”

Guest Article by Dr. Timo Wiegmann (TMG China)

THE “NEW NORMAL” IN CHINA IS FORCING FOREIGN COMPANIES TO RETHINK AND ADAPT TO NOTICEABLY CHANGING CIRCUMSTANCES

Dr-Timo-Wiegmann

Dr. Timo Wiegmann

For companies in the manufacturing industry, China has become over the past three decades an increasingly important production footprint. Initially, the goal was purely to exploit the huge reservoir of cheap Chinese labor in order to produce cost-effectively for the world market. Today, entirely different topics are for most companies on their China-Agenda. The goal: to strengthen their own competitiveness in China and to be locally successful with products and services specially tailored to the Chinese market. With the announcement of the “Made in China 2025” strategy, the Chinese government has now set a clear indication of the future environment and the resultant requirements for the China-Engagement of foreign companies in the coming years: significantly reduced growth rates and an economy that shall be especially stimulate by domestic consumption, sustainability, innovation and a consistent high-tech orientation. For manufacturing companies, this realignment provides a multitude of new growth potential that should be exploited.
.

Whenever the Media reports about the Chinese economy in recent weeks and months, it would usually be done in a way that the reader could almost inevitably get only one single impression: China is having serious problems.

It is correct, that the gross domestic product (GDP) of the second largest economy in the world is currently growing slower than it has been in the last 25 years. The country can today only fulfill contigently it’s in recent years determined role as the global growth engine. Foreign trade is weakening. The debt has reached a dimension with most recent 28 billion US dollars which corresponds to almost three times of its own economic performance. In addition to that, mid of 2015 turbulences on the stock market came on top with falling stock prices up to 40 percent within a few weeks – with the result that a market value worth about four billion US dollars have been lost.

Well, should we be genuinely worried about the second largest economy in the world?

In our view, definitely not. Most of what is being commonly spread to the public about the Chinese economy and its future outlook is based on a number of prejudices:

Myth 1: The prospects of the Chinese economy are gloomy and the country is facing a longer period of stagnation.

It is true that China has abandoned the double-digit growth rates of the past. The overall economic performance shall probably rise this year by nearly seven percent. For the upcoming years, economic growth in a range between five and seven percent is expected from today’s perspective. Designating this development as “a long period of stagnation” is absurd, at least on totally unsubstantiated grounds especially if one considers the growth rates we talk about in Germany, Europe and the US.

Today’s growth of around seven percent generate a higher economic output than the fourteen percent from the year 20071 because the economic performance is today many times higher than at that time. This is pure mathematics. It is also interesting to note in this context, that the current decline in overall economic growth rate is accompanied by an increase in the growth rate in the service sector by more than eight percent (8.4 percent). Private consumption lay in the first half of 2015 by more than 10 percent (10.4).2 Perspectively, this is mainly a good sign.

In 2013, the Chinese per capita income (calculated at the official market exchange rates) amounted to the equivalent of almost 7,000 US dollars to just 13 percent of the US per capita income (53,000 US dollars). The disposable income was not sufficient for excessive consumption. For about five years now, this has begun to change more and more. Income has been continuing to rise for years (see Figure 1).

The population in China is becoming increasingly richer, even though the potential for income growth in the household sector is still very large: In 2010, only eight percent of the Chinese population belonged to the middle-class (defined as a category with an annual income between 15,000 and 33,000 US dollars). According to forecasts, by 2020, nearly 60 percent of the population would belong to this group. The foreseeable or expected trend in personal income may be considered a reliable indication that the economic outlook for China shall be anything but gloomy.

Figure 1: Development of the per capita income in China over the past ten years

Myth 2: China’s economic miracle is based on extensive planning by the state and not on the performance of the private sector

It is true that the state and state-owned enterprises together account for around a third of China’s total investment expenditures3. In highly developed industrial nations, this proportion amounts to less than 5 percent. However, the private sector in China is nowadays already responsible for two thirds of the economic performance. The Chinese economic miracle is therefore not majority based on government investment programs. Furthermore: The efficiency of investment in the private sector is significant higher than that of state enterprises. All of the approximately 250 million additional jobs created in China since 1980 were created in the private sector. And also, in the end, the private sector draws predominant responsibility for export. Myth 2 is therefore likewise not able to withstand a fact check. Lastly it remains myth three:

Myth 3: Chinese companies are good at copying, but not at generating their own substantial innovations4

In Chinese culture, to copy something is imposed as a particial expression of mutual recognition, like a homage to something good. Copying has therefore been a long tradition in China. The annoying problem of piracy is thereby not alleviated; it will be greatly enhanced by a good knowledge why imitating in many sectors within China is part of typical business practice.

This impression overlook, that China has always been a center of innovation. Whether paper, silk, the compass, printing with movable characters, gunpowder or the melting of iron: Many inventions of global importance have their roots in ancient China.

But even today, managers should have China on the radar for their ability to innovate: manufacturing simple products in large quantities and cheaply selling them all over the world – the political leadership of the country has this strategy long past. By 2025, they rather intend to have achieved the transformation from low-cost producers to a high-tech country. But that is not enough: Upon the 100th anniversary in 2049, the People’s Republic should ascend to being the leading “industrial superpower”.5

And that is only possible through innovation. One of the cornerstones of the “Made in China 2025” strategy, which was personally presented by Premier Li Keqiang during the People’s Congress in March 2015, is also the promotion of innovation. China already invested around 200 billion US dollars per year toward innovation. The volume has quadrupled in ten years and is roughly equivalent to two percent of the gross domestic product. Furthermore: Companies are consistently and devotedly supported by the government – by its own admission – due to their innovation activities. According to the future strategy, the aerospace, mobile communications, data processing, e-commerce, biotechnology, high-speed trains and renewable energy fields shall be particularly encouraged in the future6.

That means: China shall no longer only be the workbench of the world but shall seek salvation in selected fields of high technology. The government has recognized that the wage and labor cost increases in recent years no longer quite fit the existing business model of its economy, which produces preferably cheap mass-produced goods. The “Made in China” brand should mainly stand for innovation, quality and efficiency in the future.7 The second-largest economy shall therefore to play a leading role the near future with pioneering technologies and innovations and create additional business opportunities. In some areas such as telecommunications or consumer electronics, this has already been attained. And also: The country has been the world leader in patent applications for years now.

Figure 2: Patent applications in major countries

Figure 3: Trend of patent applications with the five major global patent offices

Even though the quantity and rapid rise in patent applications still does not provide information on the quality of underlying innovations – the bias of a technologically backward China as always referred to this context by western industries should be quickly adopted. As the Mercator Institute for Chinese Studies, one of the world’s largest institutions for research and knowledge about the current China, recently put it in a nutshell: “If China succeeds in implementing its plans, then the country will be on equal footing a competitor with Germany in the field of leading-edge technology”.8

ON THE PATH TO A HIGH-TECH LOCATION

On the path to become a top leading economic power that not only plays a dominant role because of its sheer size and huge domestic market, but also wants to be play at the forefront in innovation and in the high technology, China still has to do some homework. The “Made in China 2025” strategy describes the roadmap to modernize the country and transform the economy from the former low-wage country to a high-tech location. In the course of the planning the Chinese government normally considers an average growth in the gross domestic product of five to seven percent per year. From the political leadership, this dimension has been called the “new normal”. At least 30 to 50 percent of the projected growth shall come from improved factor productivity or from higher automation. This means: in the future, China will more develop better jobs while the supply of cheap labor shall continue to decline. Foreign companies can instead expect a larger number of higher educated and skilled workers. Nearly one in five of the world’s “Technical Graduates” is toady a Chinese nationality.

The planned transformation of the economy and the implementation of the “2025” strategy should be considered against the background of some basic trend developments that shall shape the further progress of the country to a large extent:

Trend 1: Urbanization

China’s society was characterized as traditionally rural. In the course of reform and economic opening, more and more residents were then attracted from the countryside to the cities. Such strong migratory pressures which will particularly acute in tier 2 and tier 3 cities in western China. Following example shall show the expected dimension in the urbanization: Every year, 18 million people are attracted to the cities. It means, that every eight years a new Japan is created. For foreign companies, these cities are becoming more attractive – also and especially in view of the improved infrastructure and the availability of higher qualified potential employees.

Trend 2: Efficiency

In the past, China was the factory of the world and of course will keep this meaning in the future. However, in the next years, we will see a much higher degree of automation in production in Chinese companies. Thus leads to substantial positive economies of scale. Already, 80 percent of air conditioning units, 90 percent of global PCs, 75 percent of solar panels and 60 percent of all shoes are produced today in China. This will not change. But, we shall see in other industries that Chinese companies will exploit the the economies of scale in mass production and will threaten the global market – often on a competitive technological level.

Since labour supply in the face of the imminent decline in working age population and at the same time, the income of workers is continuously increasing, the trend toward higher technicalization and automation in production is logical. This is also officially expressed with the “Made in China 2025” strategy. The political leadership bases its automation and digitization efforts to a large extent on the German “Industry 4.0” approach. And even if the country still has a long way to go: companies should assume that the automation process shall proceed quickly. A patent analysis of the Fraunhofer IAO from March 2015 shows that China especially is a nose ahead in basic technologies for Industry 4.0. Even with the number of patent applications, the country is well ahead of the USA and Germany.9 China is leading not only in terms of the number of patents, but, according to the IAO analysis, also in some highly innovative developments, especially in the fields of energy efficient wireless sensor networks and network structures.

Today, the Middle Kingdom is also the largest market for robotics – one of the most important business regions of foreign suppliers such as Kuka and ABB Robotics. As part of the further spread of robots and other technologies, more and more jobs for simple routines shall disappear. At the same time, there shall be a noticeable increase in higher-value jobs.

Trend 3: Consumption

An increasing number of Chinese people can afford more and more consumption. Today, there are around 300 million consumers in the “Middle Class” with an annual income between 15,000 and 33,000 US dollars. Another 250 million are on the way there. In 2025, according to planning by the political leadership of the country, already 60 percent of the population has reached this income level. Furthermore: Since almost five years, a trend for consumption in China is quite clearly being recognized. This means: More and more Chinese people can not only afford, but they also want to consume more. How the consumer behaviour shall evolve in the future, it is currently not possible to forecast seriously. The fact is, however, that a total of far more income – and hence income for consumption purposes – shall be available. But even if a growing number of people become consumers on the market, it does not mean that sales shall be simple: The Chinese are very selective and very difficult to assess in their individual consumer behavior.

Trend 4: Financial Power

In China, an enormous amount of money is in bank accounts – of companies and of individuals: 15 billion US dollars in the form of bank deposits and in capital accounts. These funds could increasingly flow in future investments. In China, it is already not particularly difficult for investors to come across financial resources. They are plentiful. The challenge for consumers is rather that potential investors are unsure of what to do with their wealth and exactly where to be involved financially. Innovative foreign companies here offer very interesting options to acquire capital and to benefit from the enormous financial power of China. For this purpose, however, they must succeed in order for it to distinguish itself as an attractive potential partner.

Trend 5: Tremendous Availability of Qualified Talents

With more than one billion people, it is only logical that a number of well-trained talents can be found within. There are many things to accuse the Chinese education system, but for sure not of it being without strictness and rigor. Whoever manages to get through it with good grades is highly qualified and smart.

Meanwhile, a growing number of qualified young people from universities are pushing into the market. This year, there were already 17.5 million graduates who left Chinese universities with successful results.10 This growing pool of qualified young academics offers foreign companies interesting opportunities in order to take some of the sting out of the shortage of skilled labor and the associated “competition for highly qualified heads” mainly among mathematicians, scientists, computer specialists and people of related disciplines. Foreign companies, however, should keep in mind that despite the increasing number of qualified young people in individual disciplines, the competition when recruiting shall become harder and also the retention of qualified professionals to their own companies – depending on industry and location – shall remain an ongoing challenge: In China, the targeted headhunting of key personnel belongs to the recruitment culture.

Trend 6: Internet as Economic Factor

Of the approximately 1.37 billion inhabitants of China, almost half are connected to the Internet. China has therefore more than twice as many Internet users than, for example, in the US. One in five Internet users worldwide comes from the Middle Kingdom.11

To whoever takes the metro in China, for example, it immediately becomes apparent: Everyone is somehow involved with his or her smartphone. And the Chinese using the Internet not just for fun, figures from Electronic Commerce showing: The number of online shoppers has already exceeded 300 million. Sales on the Internet are extremely high. The Commerce Department estimates that transactions worth 3 trillion RMB (around 430 billion euros) were made via Internet platforms in 2015. That makes a total of more than 10 percent of the total trade turnover of the vast nation.12

Whoever wants to be successful in business as a company in China needs a convincing web presence. The Internet is a real economic factor in China – especially for businesses that sell to end users. Here, a professionally designed, functioning Online-Shop is now one of the fundamental success factors. Every business in China is therefore required to consider how it can use the Internet in the best possible way as part of its business strategy implementation.

Abb4

Figure 4: Number of online buyers in China and their proportion to the entirety of all buyers

With the political leadership classifying the Internet and the continued development of the Chinese industry to be of eminent importance, it made the presentation of the “Internet Plus” action plan apparent in July of this year. It foresees the application of advanced online technologies – mobile Internet, cloud computing, Big Data and the Internet of Things – in traditional industries.13 The action plan elaborates the development objectives as well as supporting measures for a more efficient use of the Internet in selected key sectors. Namely it includes the agriculture, energy, finance, public utilities, logistics, e-commerce, transport, biology and artificial intelligence. As it seems, the government’s aim is the integration of the Internet in the economic and social sectors to further strengthen and make new industry methods as from 2018 for a main driving force of growth.

The pictures of crisis on the state of the Chinese economy that are particularly drawn in Western media are, in our view, appear badly exaggerated in part. To speak of a crisis or even an economic crash is entirely unfounded with growth of around six to seven percent. China’s economy shall also take a leading role in the global economy with a deceleration in growth – though on the basis of changing industrial structures and as part of a “new” normal.

Manufacturing companies need to rethink their China strategy:

Innovative product and service portfolios combined with an effective sustainability strategy determine future success with increasingly nascent sophisticated Chinese consumers

Partnership conditions ensured for financing and mobilizing capital in the implementation of innovative products and services

The significant increase in the degree of automation and the adjustment of production structures enable a cost-effective provision of services with wages that continue to rise mainly in coastal industrial centers

The continual balancing of the operations network or production footprint to compensate regional factor cost differences between East and West China increases and secures future income in and outside China

Long-term strategy and business model hedging is primarily determined by the willingness and ability to inspire, bind and promote Chinese talents

Only those who are really laying a foundation can successfully act in China in the future, thus ensuring growth and profitability.
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.

Sources:

1 Source: “The Economist”, 9/12/2015

2 Source for both figures: GIGA Institute of Asian Studies, 7/9/2015

3 “The Economist”, 9/12/2015

4 On the importance of China as a center for R&D and innovation, also see the interview on page 26: “Choosing the right R & D location is critical to success in China”

5 The challenge to Germany, Die Zeit/Online 5/27/2015

6 Source: Handelsblatt/Reuters 5/19/2015

7 The Mercator Institute for Chinese Studies: How does China’s innovation policy prepare for the future, September 2015

8 http://www.zeit.de/wirtschaft/2015-05/china-industrie-technologie-innovation

9 “Industry 4.0: China in the fast lane”, IAO Press Release, 3/30/2015

10 By comparison: in 1998, there were just 1 million university graduates in China

11 http://www.internetlivestats.com/internet-users-by-country/

12 Source: Hong Kong Trade Development Council, March 2014

13 Innovation News DIHK, August 2015/Consulate General of the People’s Republic of China in Munich

FCN supports Zschimmer & Schwarz with the acquisition of Interpolymer Corporation

FCN Fan, Chan & Dr. Neumann Shanghai advises Zschimmer & Schwarz
on the Chinese Accounting & Tax aspects of its acquisition of Interpolymer Corporation and the restructuring of the Interpolymer Hong Kong entity and its tax impact in mainland china
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zsc_gruppe_logo

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FCN has advised Zschimmer & Schwarz Chemie GmbH (“Zschimmer & Schwarz”), a global supplier of high performance chemical specialties and auxiliaries headquartered in Lahnstein, Germany, on the Chinese and Hong Kong accounting & tax aspects of its acquisition of Interpolymer Corporation, U.S.A. (“Interpolymer”), a worldwide specialist and technology leader for tailor-made specialty polymers.

FCN acted as Zschimmer & Schwarz’ PRC financial counsel on the accounting & tax due diligence of Interpolymer’s Chinese group companies. In a later stage, FCN executed the new group structure on Hong Kong level as tax and corporate advisor.

The FCN team was led by Dr. Gerald Neumann, Ms Eileen Wu (both Shanghai) and Ms Vickie Fan (Fan Chan Hong Kong) and further included Ms Eloise Yao, Ms Lily Sun (both Shanghai) and Ms Denise Wong (Fan Chan Hong Kong).

A family-owned business founded in 1894, Zschimmer & Schwarz develops and produces chemical specialties and auxiliaries for the leather, fur, ceramic, textile and fiber industries as well as for cosmetics, cleaning applications and phosphonates. The Interpolymer acquisition expands the existing business portfolio with polymer-based solutions. With this acquisition, the Zschimmer & Schwarz group now comprises 28 companies worldwide, among which, 19 companies have their own production facilities.

FCN provides tax and audit advisory in China and currently counts 30 auditors, tax experts and accountants.

Taxation of Commercial Health Insurances

China launches pilot Individual Income Tax policy for commercial health insurance

The Ministry of Finance (MOF), State Administration of Taxation (SAT) and China Insurance Regulatory Commission (CIRC) have released Circular 126 which outlines the pilot Individual Income Tax (IIT) policy for commercial health insurance products.

Until 2015, commercial health insurance expenses did not qualify for individual income tax exemption.

Under the new Circular, the certain qualifying health insurance products in pilot areas can be deducted for IIT purposes. The changes have come into effect from 1 January 2016.

Pilot areas include Beijing, Shanghai, Tianjin and Chongqing as well as 27 designated cities located in 27 provinces. Individuals whose IIT is filed in the pilot areas may be eligible for income tax deductions for certain health insurance premiums, up to certain limits.

It is important to know that only such commercial health insurance products are eligible for preferential IIT treatment that are developed according to the guiding framework outlined in Circular 126 and Circular 118.

The purchase of qualifying health insurance products by individuals in pilot areas can be deducted for IIT purposes up to RMB2,400  (US$400) per year.

For more details, please contact us.

2015 Annual Individual Income Tax Deadline

The deadline of the 2015 individual income tax (“IIT”) filing is coming soon. Particularly such individuals whose annual income in 2015 exceeded RMB120,000 are required to file the annual tax return in the local tax bureau.

Expatriates who used to work in China in 2015 and meet one of the following points shall submit the annual individual income tax filing: 

  1. The individual’s annual income in 2015 exceeded RMB120,000 (excluding the expatriates that stay in China for less than one year).
  2. The individual’s wage and salary income is earned from more than one employer in China.
  3. The individual’s income is received from outside of China but the employee worked in China.
  4. Individuals who have taxable income, but do not have a withholding agent (such expatriates use the so called self-declaration system to pay the IIT).
  5. Other situations stipulated by the State Council

To calculate the amount of annual income, following type of income shall be considered: 

  • Income from wages and salaries
  • Income from production or business operation of individual industrial and commercial households,
  • Income from contracted or leased operations,
  • Income from remuneration for personal service,
  • Income from author’s remuneration,
  • Income from royalties,
  • Income from interest, dividends and bonuses,
  •  Income from lease of property,
  • Income from transfer of property,
  • Contingent income and other income specified as taxable by the finance department of the State Council.

The deadline for the annual individual income filing is March 31st 2016. Please contact us for further information.

Chinese New Year 2016 – Year of the Monkey

2016 is the Chinese Year of the Monkey. During the Chinese New Year festival, we recommend the following traditions for a prosperous year:

  • Clean the house thoroughly on Sunday, New Year’s Eve. A clean home means sweeping away any misfortunes to make room for a fresh, ordered start to the New Year. 
  • Look out if you’re a monkey. According to Chinese philosophy, those born with the same zodiac sign as the year’s designated animal are going to have a particularly difficult year. Those born in the Year of the Monkey – 1908, 1920, 1932, 1944, 1956, 1968, 1980, 1992 and 2004 – are urged to lie low.
  • Decorate your home with red lanterns.
  • Come together as a family, travelling home to relatives, especially for a reunion dinner on New Year’s Eve.
  • Wear new and red clothes. Red symbolises prosperity, so monkeys are advised to wear red (underwear included) to up their good fortune quotients.
  • Give red envelopes with money inside to children.
  • Settle debts by New Year. This is especially an important rule for companies to pay off suppliers and even more employees before the New Year festival starts.

We wish you a Happy Year 2016!

The team of Fan, Chan & Dr. Neumann Business Advisory in Shanghai

 

State Council Decisions cancels Certified Tax Advisor license in China

On 22 July 2014, the PRC State Council issued a decision on cancelling and adjusting a batch of administrative examination and approval items (“Guo Fa [2014] No.27”). According to Guo Fa [2014] No.27, the State Council decided to cancel and delegate 45 administrative examination and approval items, cancel 11 occupational qualification licensing and certification items, and modify 31 items subject to examination and approval before registration at administration for industry and commerce into the ones subject to examination and approval after registration at administration for industry and commerce.

It is noticed that some popular certificates such as the Certified Tax Agent (“CTA”) and Certified Public Valuer (CPV) are among the catalogue of 11 professional qualification licensing and certification items to be cancelled decided by the State Council. According to the meeting memo of State Council reported by Xinhua Website, certain certificates like CTA and CPV will not be certified by the government anymore, but we expect that a new system to replace the old CTA and CPV may be announced and clarified in the nearby future.

The E-hongbao story

What is a HongBao? Literally translated, it means red envelope and explains the tradition in China to hand over monetary presents in China in a red envelope. While in Western countries at certain occasions a gift is expected, China is almost exclusively using the HongBao to give kindness to people.

Red Envelope

Certainly, this does not apply to business gifts, here presents like tea, precious chopsticks are common. Today, the HongBao has already widely been established online – the so called e-hongbao. This practice especially is widely applied during the Chinese New Year. Shanghai residents gave more “e-hongbao” through online payment platform Alipay than any other city in China at the start of the Chinese New Year holiday.

Alipay, which is founded by the e-commerce giant Alibaba, reported that across China more than 100 million people gave or received digital red envelopes during the Chinese New Year celebrations.

A modern way on the traditional practice of giving red envelopes — hongbao — of cash to children at Chinese New Year, senders of Alipay digital hongbao transfer cash from their Alipay account to the recipient’s. China’s most generous red e-hongbao givers were residents of Tianmen City in Hubei, whose Alipay hongbao contained on average 139 yuan (app. 9 Euro or 10 US$).

Alipay said digital hongbao containing a sum of 88 yuan were among its most popular for Chinese people believe the number has auspicous meanings, with 3.2 million exchanged.

While Alibaba’s Alipay is well-established as an online payment platform, fellow online giant Tencent is trying to promote its WeChat online messaging app for small transactions as well as for chatting and posting pictures and links. WeChat provided its own e-hongbao service, with 3.27 billion sent between February 18 and 23 — just over 1 billion on New Year’s Eve alone.

Shanghai trams will return after 40 years

Trams are expected to return to Shanghai after an absence of more than 40 years, with plans for 13 kilometers of tram lines announced by the Shanghai government.

Tram car 'en fete' in Shanghai, 1908. Source: Wikipedia

Tram car ‘en fete’ in Shanghai, 1908. Source: Wikipedia

The first line shall run between Xupu and Nanpu bridges along the Huangpu River and is supposed to start in 2017, according to a three-year riverside public space construction plan.

The city government did not give a statement how long the work is expected to take. Under the plan, the line will mostly run in Xuhui district, which is a major district in downtown Shanghai. The new tram line shall help avoid traffic jams and provide a low-carbon transport option for residents and tourists, the city’s Huangpu Riverbanks development general office said.

Trams were first introduced in Shanghai early in the 20th century and at their peak more than 300 ran in the city. The network was closed in the early 1970s.

Today, the only tram route is a 9.8km line with 15 stops at Zhangjiang High Tech Park in the Pudong New Area. In downtown Shanghai are no tram lines.

Two tram routes are also planned for suburban Qingpu District. The northern line is set to stretch 5.15 kilometers and have 12 stops while the 9.15km southern line may have 18 stations. Under the long-term urban plan announced by the Shanghai Transport Commission in 2014, the city will have around 800 kilometers of tram tracks in the future.

Further green projects including bicycle lanes are planned along the river with rental stations linking hubs and subway stations, plus designated lanes for jogging.

Shanghai Free Trade Zone easies overseas financing

On August 22, 2013, the State Council approved the establishment of the Shanghai Free Trade Zone (SFTZ) which was officially launched on September 29, 2013. While the actual new achievements are not clear especially with regard to regultations and policies detailly explaining and defining the advantages for investors.

We frequently update for our visitors news about the SFTZ.

Source: Wikipedia

Foreign Invested Companies in China are still limited in assuming overseas financing. In general, the financing is limited to the gap between the share capital and the total investment. Particularly, loans from the investing company are required to be registered and are limited in amount.

Companies in the Shanghai Free Trade Zone may now borrow from overseas without the prior consent from authorities which was announced by the Shanghai headquarters of the People’s Bank of China on 12 February 2015. Banks and securities brokers have also been allowed to finance overseas.

Further, under the new regulation, companies in the SFTZ are no longer limited to borrowing Chinese yuan only.The scale of the foreign financing has also been extended and may be up to twice the company’s capital under the new control method where the mid-term or long-term funds in particularly RMB funds are encouraged to be used.

New DTA between Switzerland and China effective from 15 December 2014 – Which impact on profits gained in previous years?

The new Chinese – Swiss treaty for the avoidance of double tax now privileges the dividend payments gained by the companies who have a direct shareholding of at least 25% to 5% withholding tax rate instead of the previous 10%. It is not clear whether the new regulation also applies for such profits gained by the company in previous years but distributed on or after 1 January 2015.

According to the Announcement of the State Administration of Taxation on the Entry into Force of the Agreement between the Government of the People’s Republic of China and the Swiss Federal Council for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital and the Protocol, effective by 6 January 2015, the Agreement and the Protocol shall take effect as of November 15, 2014 and apply to the income obtained on or after January 1, 2015.

“Income” according to the DTA as well as this announcement means the income gained by the investor. Therefore, this regulation makes clear that also for previous years profit, the 5% regulation shall apply. FCN interviewed the Shanghai tax bureau and received an oral confirmation of this practice for Shanghai.

We hint that in China the execution of new laws and regulations may take time and certain test cases are required. We recommend consulting with your local tax bureau for the applied practice.

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