• Share

    Share via...

    • Facebook
    • WhatsApp
    • LinkedIn
    • Twitter
    • E-Mail
    • Pinterest
  • Career
  • Home
  • About us
  • Expertise
    • Tax Compliance and Advisory
    • Audit and Assurance
    • Transaction and Compliance
    • Accounting and Controlling
    • Payroll and Human Resources
    • Corporate Services
  • Team
  • News & Events
  • Locations
  • Career

Ebner Stolz Asia

Einladung zum 2023 Ebner Stolz China Day in Stuttgart

China hat im letzten Jahrzehnt seit der Ernennung von Xi Jinping als Nachfolger von Hu Jintao eine tiefgreifende Transformation der Gesellschaft, Politik und Wirtschaft erlebt. Während viele Prozesse schleichend verliefen, hat sich das Ausmaß des Wandels während der Corona Pandemie an der völlig anderen Politik deutlich gezeigt. Viele Entscheidungen sind aus wirtschaftlicher Sicht unverständlich und ideologisch getrieben.

Hintergrund

Vor dem Hintergrund dieser Entwicklung folgte die 17. Asien Pazifik Konferenz der deutschen Wirtschaft in Singapur im November 2022 einem roten Faden: Risikostreuung der deutschen Investments im Ausland, und das meint China. Die Konferenz unter dem Vorsitz von Bundeswirtschaftsminister Robert Habeck war geprägt von der tiefen Unsicherheit, die von der veränderten politischen Landschaft in China ausgeht. Klar ist, und das wurde sowohl von der Politik also auch von den hochkarätigen Unternehmensführern vor Ort betont, dass der Standort China nicht aufgegeben werden soll. Jedoch, und das wird DIE prägende Wirtschaftspolitik der nächsten Dekade sein, soll die Abhängigkeit von China deutlich reduziert werden. Hier sind sich, selbstverständlich bei unterschiedlichen Meinungen in den Details, alle Interessenvertreter der Wirtschaft einig.

Der Ebner Stolz China Day hat zum Ziel, die aktuelle Situation in China darzustellen und Wege für eine betriebswirtschaftliche Umsetzung dieser neuen Wirtschaftspolitik aufzuzeigen. In verschiedenen Panels und Workshops möchten wir umfassend Unternehmensthemen in China diskutieren, insbesondere in den Bereichen Investmentstruktur in Asien, Personalmanagement, Vertriebs- und Einkaufsmanagement sowie Finanzen, Steuern und Compliance in China.

Ort und Datum

Zeit: Donnerstag, 30. März 2023, 10-17 Uhr

Venue: Mercedes-Benz Arena Stuttgart

Gebühr: 130 Euro exkl. MwSt

Inhalte:

  • Panel: Die politische und wirtschaftliche Entwicklung in China in den letzten fünf Jahren und Ausblick
  • Panel: Fallbeispiele zur Neustrukturierung des China- und Asiengeschäfts
  • Sprecher vom VfB Stuttgart
  • Workshop zum Personalmanagement in China
  • Vortrag und Diskussion des neuen Lieferkettengesetzes und der Umsetzung in China
  • Workshop zum Vertriebs- und Einkaufsmanagement in China
  • Workshop M&A: Praktische Umsetzung von Asset-Deals in China
  • Diskussion: Hong Kong, Bangkok und Singapur: wie entwickeln sich die Standorte in Asien?

Sprecher und Panelteilnehmer

  • Jun Ren ist CEO von TUEV Nord Asia Pacific.
  • Dr. Gerald Neumann und Christian Fuchs sind Partner bei Ebner Stolz. Gerald Neumann leitet die Standorte in Shanghai, Peking und Bangkok.
  • Patrick Heid ist Rechtsanwalt und Partner in der Kanzlei GvW Graf von Westphalen und leitet seit zwölf Jahren den GvW Standort in Shanghai.
  • Rouven Kasper ist Vorstand Marketing & Vertrieb beim VfB Stuttgart und war vormals als President Asia für einen führenden europäischen Bundesligaverein in Shanghai tätig.
  • Thaddäus Müller ist für Fiducia Executive Search mit Büros in Shanghai, Singapur und Hongkong tätig.
  • Georg Stieler ist Mitglied der Geschäftsleitung der Stieler Technologie- & Marketing-Beratung und berät hochkarätige Kunden wie KUKA, Siemens und Mercedes-Benz in China.
  • Eddy Yeung ist Counsel bei Ebner Stolz und berät ausländische Unternehmen beim Markteintritt in Hong Kong.

Do you have questions about this event?

Dr. Gerald Neumann

Managing Partner

  • +86 21 6330 9962
  • gerald.neumann@cn.ebnerstolz.com
  • view profile
  • All team members

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 lifts its ban on the current border entry policy

Published by the National Health Commission of the PRC on 28 June, China is lightening its restrictions for overseas arrivals into the country with 7-day centralized quarantine plus 3-day ‘health monitoring’ at home or in a designated hotel.

The new policy was noted in the 9th edition of the State Council’s report on COVID-19 epidemic prevention and control.

During the ‘7+3’ period, the nucleic acid tests are taken on day one, two, three, five and seven, and on the 3rd day of the  ‘health monitoring’. Tests will be done via throat swab only.

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

New COVID Situation in China: Tax Relief Policies Released to Support Small and Medium-sized Enterprises and Small-scale and Low Profits Enterprises

In the context of the recent rebound of the epidemic situation in China, Chinese government introduced a series of tax relief policies to lighten the burden especially for Small and Medium-sized Enterprises and Small-scale and Low Profits Enterprises. We prepared a summary of these policies which were published in the first quarter of 2022.

  1. Reduced CIT rate for Small-scale and Low Profits Enterprises

According to Announcement [2022] No. 13 of the Ministry of Finance and the State Taxation Administration, from January 1, 2022 to December 31, 2024, the annual taxable income for Small-scale and Low profits Enterprises, which exceeds CNY 1 million but does not exceed CNY 3 million, is further reduced by 50% for CIT.

As stipulated in Cai Shui [2019] No. 13 and Announcement [2021] No. 12 of the Ministry of Finance and the State Administration of Taxation, the existing tax relief policies for Small-scale and Low Profits Enterprises are as follows: if the taxable income does not exceed CNY 1 million, the taxable income is computed at 12.5% of the taxable profit and is subject to CIT rate at 20% (i.e., the effective tax rate is 2.5%). If the taxable income exceeds CNY 1 million but does not exceed CNY 3 million, the taxable income is computed at 50% of the taxable profit and is subject to CIT rate at 20% (i.e., the effective tax rate is 10%).

  1. Policies Relating to Income Tax Deduction for Equipment and Instruments of Small and Medium-sized Enterprises

According to the Announcement [2022] No. 12 of the Ministry of Finance and the State Taxation Administration, for equipment and instruments that are newly purchased by Small and Medium-sized Enterprises during the period from 1 January 2022 to 31 December 2022 with a unit value of CNY 5 million or above, and if the minimum depreciation period is 3 years, i.e. electronic equipment, 100% of the unit value could be deducted on a one-off basis for the current year. For equipment and instruments with a minimum depreciation period of 4, 5 or 10 years, i.e. fixed assets except electronic equipment and buildings, 50% of the unit value could be deducted for the current year, and the remaining 50% could be depreciated in the remaining years pursuant to the provisions for income tax deduction.

This new policy encourages to promote their equipment update and technology upgrade.

  1. Continued Implementation of the Deferred Payment of Certain Taxes and Levies by Small and Medium-sized Enterprises in Manufacturing Industry

According to the Announcement [2021] No. 30 of the State Taxation Administration, Small and Medium-sized manufacturing enterprises could enjoy 3-month deferral for the tax payments of the fourth quarter of 2021.

Medium manufacturing enterprises with an annual sales amount of between (including) CNY 20 million and (excluding) CNY 400 million may defer payment of 50% of the taxes mentioned above for the first two quarters of 2022. Micro and small-sized manufacturing enterprises with an annual sales amount of less than CNY 20 million can defer the payment of all taxes mentioned above for the first two quarters of 2022.

  1. Further Implementation of “Six Taxes and Two Surcharges” Relief Policy for Micro and Small Enterprises

From January 1, 2022 to December 31, 2024, small-scale VAT payers, Small-scale and Low Profits enterprises and individually-owned businesses enjoy a reduction of Six Taxes and Two Surcharges within the range of 50%, which includes resource tax, urban maintenance and construction tax, property tax, urban land use tax, stamp duty (excluding stamp duty on securities transactions), arable land use tax, education surcharge and local education surcharge. The specific tax reduction rate is determined by the local government.

  1. Further Implementation of VAT Credit Refund Policy for Small-scale and Low Profits Enterprises and Manufacturing Industries

Before April 2019, it is generally not permitted refund any input VAT credit to taxpayers in China except the input VAT credit which is related to the cost of exported goods (please refer to our article “VAT Refund for Export Business in China” dated August 28, 2018). From April 2019, the incremental VAT credit accumulated after the end of March 2019 could be refunded. Excess input VAT accumulated before the March 31, 2019 cannot be refunded under the previous policies.

Incremental VAT credit refund is further increased to manufacturing, scientific research and technical services, ecological and environmental protection, electricity and gas, transportation and other related industries. The existing VAT credit of medium manufacturing enterprises could be refunded in lump sum by 30 June 2022. 

  1. Announcement on Matters Relating to the Exemption of Small-Scale Taxpayers from Value-Added Tax

Based on Announcement [2022] No. 15 of the Ministry of Finance and the State Taxation Administration and Announcement [2022] No. 6 of the State Administration of Taxation, effective from April 1, 2022, during the period from 1 April 2022 to 31 December 2022, which are subject to VAT levy rate at 3% are exempted from VAT. Items that are subject to VAT prepayment at pre-levy rate of 3% are suspended from VAT prepayment.

Unless the taxpayers opt for waiving the benefit of VAT exemption, tax-free invoices for the corresponding sales income shall be issued in accordance with the regulations.

“Small-scale VAT payers” refer to those enterprises whose annual turnover is below CNY 5 million and which do not voluntarily register as general VAT payers. The small-scale VAT payers pay output VAT at 3%, but cannot claim input VAT credits on purchases.

We advise Small and Medium-sized Enterprises or Small-scale and Low Profits Enterprises in China to review their financial results and assess whether they are eligible to enjoy the above mentioned tax benefits.

How can we help you?

Dr. Gerald Neumann

Managing Partner

  • +86 21 6330 9962
  • gerald.neumann@cn.ebnerstolz.com
  • view profile
  • All team members

China Recent Transfer Pricing Regulation Update

Multinational enterprises (MNEs) generally need to prepare a transfer pricing documentation to assess whether their transfer pricing arrangements for intercompany transactions are in line with the arm’s length principles. In 2021, the economies in most countries were gradually recovered but were still impacted by the coronavirus (COVID-19) pandemic. As such, MNEs need to consider potential transfer pricing planning opportunities that may help reducing the tax risks caused by the pandemic. We hereby summarize the recent transfer pricing updates in China.

1.     Simplified procedures for unilateral APAs

With the development of the OECD’s base erosion and profit-shifting (BEPS) plan, many taxpayers incline to reach a long-term agreement with the tax authority to manage the tax uncertainty, i.e. advance pricing arrangements (APAs). On 26 July 2021, the State Taxation Administration (STA) released guidance (STA Public Notice [2021] No. 24) regarding the simplified procedures for unilateral APAs.

Under STA Public Notice [2021] No. 24, the procedures for unilateral APAs are simplified from original 6 stages to 3 stages and set a timeline of “90 days + 6 months” for the approval. This means that the tax authorities shall perform on-site interview, conduct evaluation and notify the taxpayer whether the application is accepted within 90 days from receiving the application documents. Upon accepting the application, the negotiation and signing shall be completed within next 6 months.

According to China APA Annual Report 2020 issued by the STA, China has signed a total of 116 unilateral APAs and 90 bilateral APAs from 2005 to 2020. The number of signed APAs in recent years has been increasing rapidly. We expect that more enterprises will apply for APAs to offer more tax certainty for cross-border related party transactions after the implementation of simplified procedures for unilateral APAs.

2.     FAQs on Anti-Avoidance During the Pandemic Prevention and Control released by the STA

In September 2021, following the OECD’s “Guidance on the Transfer Pricing Implications of the COVID-19 Pandemic”, the International Taxation Department of the STA released the “FAQs on Anti-Avoidance During the Pandemic Prevention and Control”, which offers guidance on five transfer pricing questions, including transfer pricing investigation, losses arising from the impact of the pandemic, preparation of the TP documentation, the impact of government subsidies granted due to the pandemic and advance pricing arrangements.

Due to the different impacts of pandemic on different industries and enterprises, some Chinese subsidiaries may earn higher profits than routine years and some may earn lower profits or incur losses. In response to the above questions, China tax authorities emphasize that the arm’s length principle shall be adopted during the transfer pricing investigation. If there are additional costs or operating expenses incurred due to the pandemic, the impact shall be considered in comparability analysis. When preparing the transfer pricing documentation, the specific impacts of the pandemic on related party transactions, value chains, etc. shall be analyzed.

If the enterprises believe that government subsidies have an impact on transfer pricing arrangements, relevant information shall be provided in the transfer pricing documentation to support the comparability analysis.

In the event that the implementation of the signed APAs is substantially affected by the epidemic, the details shall be reported to the tax authority and it is possible to terminate or amend the signed APAs.

We suggest taxpayers considering how to respond to transfer pricing challenges arising from the pandemic.

 

For further information or assistance, please feel free to contact us:  

Dr. Gerald Neumann

Partner

Email: gerald.neumann@cn.ebnerstolz.com

 

Eloise Yao

Director

Email: eloise.yao@cn.ebnerstolz.com

 

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.

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.

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

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.

New Sino-German Double Taxation Agreement Enters Into Force

On 28 March 2014, a new Double Taxation Agreement (“New DTA”) was signed between the governments of the PRC and Germany to replace the current DTA signed on 1985. Both the Chinese and German sides have completed the legal procedures in their countries necessary for the effectiveness of the New DTA. The New DTA entered into force on April 6, 2016, and will apply to the income obtained on 1 January 2017 and thereafter.

As one of the major changes of the New DTA, reduced rate of 5% and 15% will apply to withholding income tax (WIT) on dividends additional to 10% in current DTA. The following chart shows the changes and criteria concerning the WIT rate on dividends.

WIT Rate Current DTA New DTA
5% Nil The beneficial owner is a company (other than a partnership) which holds directly at least 25% shareholding of the company paying the dividends.
10% The recipient of the dividends is the beneficial owner. In all other cases rather than adopting 5% or 15%.
15% Nil The dividends are paid out of income/gains derived directly or indirectly from immovable property (defined in Article 6 of New DTA) by an investment vehicle which distributes most of this income/gains annually and whose income/gains from such immovable property is exempted from tax.

We especially emphasize that a partnership company cannot enjoy the reduced 5% WIT according the New DTA. For a German investor who is partnership company, a special investment vehicle registered in Hong Kong may continue to minimize the overall WIT to 5%.

Further to the changes on dividends WIT, the clauses regarding Permanent Establishment, interest, loyal fee, capital gains and etc. have been revised as well. We recommend considers the changes when business plan for future to seek better economic benefit.

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.

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.
.
.

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

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

 

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.

Sign up for our newsletter to receive news and insights on business in China

Check your inbox or spam folder to confirm your subscription.

Representing you through 3 offices in China and Southeast Asia

Beijing
Bangkok
Shanghai
  • Shanghai
  • Bangkok
  • Beijing

Get in touch

  • Site Links
    • Home
    • About us
    • Team
    • News & Events
    • Career
  • Expertise areas
    • Tax Compliance and Advisory
    • Audit and Assurance
    • Accounting and Controlling
    • Corporate Services
    • Payroll and Human Resources
    • Transaction and Compliance
  • News & Events
    • All News & Events
    • Our Events
    • Accounting & Controlling News
    • Audit and Assurance News
    • China News
    • Corporate Services News
    • Ebner Stolz News
    • Payroll and HR News
    • Taxes and Tax Advisory News
    • Transactions News
  • Follow us on linked.in
  • Imprint
  • Privacy Policy