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Download our year-end China law review

Topics include:

Adjustments to corporate law
Fair competition law
Data protection law
Key personnel code of conduct
Tax law
Customs law

Please click here to download our 2024 year-end China law review (Pdf)

Contributors

Catherine Yan

Catherine Yan is a Chinese lawyer, also holds a lawyer license of Australia. Before joining Ebner Stolz, she worked for seven years at a Top 5 Chinese law firm. Catherine is specialized on corporate law and all matters of company governance and labor law. Catherine Yan Partner

Dr. Gerald Neumann

Dr. Gerald Neumann is a German lawyer and partner of Ebner Stolz. He works in China for 17 years and focuses on legal and tax matters. He built up the China offices of Ebner Stolz. Dr. Gerald Neumann Partner

Do you have questions about law in China?

Catherine Yan

Partner

Trends & Developments in Chinese eCommerce

Despite the Chinese economy goes down, we notice an ongoing steady growth in Chinese e-commerce business and more international brands are taking active roles with their entry into and business expansion in the Chinese e-commerce market. To ensure successful entry and long-term development, it is of importance to understand how the market operates, what the consumer profile is and where the regulatory limits lie.

We have therefore invited Mr. Damian Maib, Founder & CEO of Genuine, and Mr. Fabian Sinn, Managing Partner of Genuine for an interview on their observations of the current trends in the Chinese e-commerce market and key takeaways for international brands when engaging with Chinese consumers via e-commerce platforms.

With a strong track record in providing comprehensive legal, tax, audit and bookkeeping services, our firm is uniquely positioned to support the compliance needs of e-commerce business operators, from assisting with market entry and daily regulatory compliance checks, such as data privacy, intellectual property, consumer rights protection and compliance with advertisement law to offering guidance on international trade, cross-border transactions and dispute resolution.

Together with Genuine, we aim and ensure that our clients navigate the complexities of e-commerce with confidence.

Interview

Gerald Neumann: How would you describe the current state of e-commerce in China?

Genuine: The Chinese e-commerce market remains the largest and one of the most dynamic globally, currently valued at around $1.43 trillion and projected to grow significantly in the coming years. It’s super fast-paced and competitive, with big players like Alibaba and JD.com facing serious challenges from newer platforms like Pinduoduo and Douyin. While there are challenges, including an economic slowdown and intense price wars, the market continues to evolve with robust infrastructure and innovative consumer engagement strategies.

Gerald Neumann: What are key trends that are currently most relevant in the Chinese e-commerce market?

Genuine: Social commerce and live streaming are huge right now. People love shopping while being entertained—it’s a whole experience. In many categories Social Commerce platforms like Douyin have been the main growth driver in the last 2-3 years and have overtaken traditional platforms like TMALL. AI and data-driven personalization are also shaping how companies interact with customers. Another trend is sustainability—more and more consumers are looking for eco-friendly options. And of course, cross-border e-commerce is booming because Chinese shoppers love international brands.

Gerald Neumann: What makes it unique compared to other markets? And what can other markets learn from China?

Genuine: E-commerce in China is super integrated. Everything from discovering a product to paying and getting it delivered happens seamlessly, often within one app. Social elements are also a big part of the shopping experience—live-streams, influencer recommendations, and group buying all play a role. Other markets could definitely learn from this by making online shopping more engaging and social. We actually increasingly see the livestreaming trend from China being adopted in Western markets. TikTok Shop is quite successful in the US and expanding to European markets like Spain and Germany soon. In addition, German retailers such as Otto, Zalando, DM and Douglas are adopting similar strategies, hosting live sales events to attract younger audiences. Compared to China, it still accounts for a very small share of sales, but with more brands and platforms adopting the trend, it could shape future consumer behaviour in Western markets.

Gerald Neumann: How do consumer preferences in China differ from those in Western markets, and how should companies adapt?

Genuine: Chinese consumers are incredibly digital and expect things to be fast, seamless, and highly convenient. They rely heavily on mobile platforms for almost everything, from browsing to purchasing, and have little tolerance for slow or clunky user experiences. Social proof plays a massive role in their decision-making process—reviews, influencer endorsements, and live-streams are often the key drivers of trust and engagement. Additionally, they’re more open to discovering new products through social commerce and are highly influenced by trends and real-time interactions.

To succeed, brands need to adopt a mobile-first strategy and integrate into platforms where Chinese consumers spend most of their time, like WeChat, Douyin, or Xiaohongshu. Collaborating with local influencers (KOLs) is crucial, as they can help bridge the gap between foreign brands and local audiences. Finally, companies should invest in localizing their products and messaging to align with Chinese tastes, values, and cultural nuances—what works in Western markets often doesn’t resonate in China without significant adaptation.

Gerald Neumann: There has been a lot of negative news about the economic development in China recently. What impact does that have on your business?

Genuine: It’s true the economy has slowed down, and people are being more careful with their spending. But e-commerce is still doing well, especially in categories like health, affordable luxury, and anything that offers good value for money. For us, it means helping brands adjust their strategies to match what consumers are looking for right now.

Gerald Neumann: What are common mistakes foreign brands make in China?

Genuine: A big one is not taking localization seriously. It’s not just about translating your website—you need to adapt your products, marketing, and even your customer service to fit the expectations and habits of Chinese consumers. Another common mistake is failing to invest in brand-building. In such a crowded and competitive market, standing out is crucial. Some brands also underestimate how complex the regulatory landscape can be, which can lead to costly setbacks.

Beyond that, many foreign companies don’t take the time to build up local know-how. Truly understanding the market, the regulatory limits and the Chinese consumer is essential. Success requires careful research and the development of strategies tailored specifically for China, rather than relying on what worked in Western markets. To help our clients navigate these challenges, we launched a weekly e-commerce newsletter this year, sharing key insights and updates about the Chinese e-commerce market to ensure they’re well-informed and prepared.

Gerald Neumann: You are the founder & CEO of a “TP”. What is a TP and how do you help foreign brands in China?

Genuine: A TP, or Tmall/ Trade Partner, is a service provider that helps foreign brands establish and thrive in China’s complex e-commerce ecosystem. We act as a bridge between the brand and the Chinese market, managing every aspect of their online presence. This includes setting up and operating stores on major platforms like Tmall, JD.com, and Douyin, as well as handling marketing campaigns tailored to Chinese consumers.

But it doesn’t stop there. We also take care of logistics and supply chain management, ensuring fast and reliable delivery, which is crucial for maintaining customer satisfaction. On top of that, we provide customer service in local language and style, which is key to building trust and loyalty in such a competitive market.

Our role is to simplify the process for foreign brands, allowing them to focus on their core business while we navigate the unique challenges of the Chinese market—whether that’s dealing with ever-changing regulations, optimizing store performance, or leveraging data analytics to refine strategies. Essentially, we’re here to help brands not only enter the market but succeed and grow in the long term.

How can we help you?

Dr. Gerald Neumann

Partner

Observation: Escalating Difficulties in Company’s Tax Refunds

In 2024, the Chinese government is facing a decline in the country’s tax revenues. The decrease of tax revenues not only leads to more frequent tax inspections but also escalates difficulties when companies across the country apply for various tax refunds. It is a common observation that the application process has become more intricate and time-consuming, for value added tax (VAT) credit refunds, corporate income tax (CIT), individual income tax (IIT) refunds, and so forth.

On 25 October 2024, the Ministry of Finance of the People’s Republic of China published the data for the nation’s fiscal balance for the first three quarters of 2024. According to the report, the general public budget revenue amounted to 163.06 trillion RMB, marking a 2% decrease compared to the previous year. Tax revenue, specifically, totaled 1,317.15 billion RMB, indicating a 5.3% drop from the previous year. The subsequent section presents an overview of the main tax items:

Tax items	Tax revenue (in billion RMB)	YoY growth rate
1. Value Added Tax	5,047.3	-5.6%
2. Consumption Tax	1,266.1	-1.6%
3. Corporate Income Tax	3,226.3	– 4.3%
4. Individual Income Tax	1,075.8	-4.9%
5. Import Value Added Tax and Consumption Tax	1,428.2	1.1%

Source: Ministry of Finance of the People’s Republic of China

Except for the slight increase in import VAT and consumption tax, tax revenues from other major taxes exhibited a downward trend. Under the pressure of tax collection, it is unsurprising that the tax authorities in China tend to exercise more rigorous controls over tax refunds, particularly for companies applying for tax refunds of considerable amounts.

During the review procedure, the tax authorities may request the companies to submit various supporting documents related to the tax refund matter or the company’s general financial situation. These could include the breakdowns of certain financial accounts, commercial contracts and invoices, bank transaction statements, etc.
The understanding of tax rules is often different among different tax authorities. As each tax refund application must be approved by various level of tax officials, the outcome is with huge uncertainty, because the result made by one tax official could be rejected by the superior tax official.
The time frame for the tax refund process has also lengthened considerably. What used to be a relatively quick procedure is now often protracted for an extended period. It is common for companies to undergo rounds of communication and negotiation with the tax authorities until an alignment can be reached.
In some cases, if the tax authorities identify potential risks while reviewing the documents, the application for tax refunds may even trigger a comprehensive tax inspection.
In certain areas, local tax authorities may not implement the tax rules precisely and strictly when they have enough tax revenues. However, in a situation that tax authorities have to chase tax revenues, they may change the interpretation of the tax rules which makes the tax refund more difficult, if not impossible.

The challenges associated with tax refunds have significantly contributed to the complexity and workload of the application process. For companies, this not only entails a financial cost in the form of cash flow but also disrupts their normal financial operations and poses potential risks to the company.

Given these circumstances, it is crucial for companies to adopt proactive tax planning that aligns with business development and financial forecasting, to maintain a stable tax performance. Ensuring the accuracy of tax declarations and payments from the outset is the best strategy. If a tax refund is necessary, a self-review can help prepare companies for potential hindrances in the refund process and minimize adverse effects.

In the current challenging economic climate, we suggest that companies should exercise caution when considering tax refund applications and always maintain a compliant tax position.

How can we help you?

Eloise Yao

Director

General Financial Reporting When Doing Business in China

Over the last three decades, China has progressed to a market-driven system and developed its own accounting and bookkeeping procedures. For overseas companies setting up in China, the oversight of certain accounting standards and financial reporting practices is inevitably considerable.

Statutory Requirement for Financial Reporting in China

According to Article 208 of the Company Law of the People’s Republic of China (China Company Law), a company must prepare a financial accounting report at the end of each fiscal year and have it audited by accounting firm. Therefore, local statutory audits are mandatory according to China Company Law. Meanwhile, the fiscal year for enterprises in China is from January 1st to December 31st, which is a mandatory requirement for all types of enterprises in China.

Auditors will express an opinion on whether the relevant financial statements fairly state the company’s financial position at year-end, operating performance, and its cash flow according to the China Accounting Standards (CAS).

For foreign invested enterprises, annual statutory audit reports not only enhance the degree of accountability and reasonableness of the financial statements, but also serve as a reliable source of opinion on the financial information when they are delivered to the group for consolidations.

China Accounting Standards

Financial reporting practices in China are governed by the China Accounting Standards (CAS) – also known as the Generally Accepted Accounting Principles in China (PRC GAAP). The CAS framework consists of three standards:

Accounting Standards for Business Enterprises (ASBE);
Accounting Regulations for Business Enterprises (ARBE)
Accounting Standards for Small Business Enterprises (ASSBE).

The ASBE is commonly known as “Chinese new GAAP,” which is similar to International Financial Reporting Standards (IFRSs). For example, the accounting treatment for leases under CAS is the same as IFRS: canceling the classification of leasing transactions at the lessee in financial lease and operating lease, and requiring the lessee to recognize the right to use assets and lease liabilities for all leases (except short-term lease and low-value asset lease with simplified treatment), and acknowledge depreciation and interest expenses respectively. As a result, those companies that adopt the new GAAP may be required to consider the major GAAP differences between Chinese GAAP and German GAAP.

ARBE is commonly known as “Chinese old GAAP.” ARBE are more appropriately applied by companies with small or medium operational scales with less complex transitions and accounting systems, and ASSBE uses ASBE as a reference and is intended to make it easier for small and tiny businesses to follow accounting standards and tax laws. The tax calculation methods in the ASSBE are designed to be closer to tax laws, thus simplifying the process of making year-end adjustments.

Converting CAS Compliant Financial Reports between CAS and German GAAP

For foreign invested enterprises, GAAP conversion plays an important role in group reporting, which would not be possible without converting the GAAP differences between different accounting reporting frameworks.

There are several discrepancies between CAS and German GAAP, both of which provide more detailed rules for certain practices.

The chart below gives the main examples of the differences in accounting treatment between CAS and German GAAP:

CAS vs German GAAP

China Accounting Standards	German GAAP
Percentage of completion method is allowed for revenue recognition	Revenue recognition strictly follows the completed contract method
Expenses can only be presented by function	Expenses may be presented either by function or by nature, whichever provides information that is more reliable and relevant
An impairment loss on fixed asset must NOT be reversed under ASBE but allowed under ARBE	An impairment loss on an asset (except goodwill) can be reversed
Operating lease-Leasee (only under ASBE) Recognition of a right-of-use asset and a lease liability followed by depreciation and interest costs captured over lease term	Operating lease-Leasee Rental expense is recognized on a straight-line basis over the lease term

In addition to the above, there are significant differences in the presentation and format of financial statements.

The information on the Chinese financial reports must be converted to fit the reporting standards of the target jurisdiction (German GAAP or Group Accounting Manual), through a process called “mapping”. Accountants must first map the accounts on the financial report to the target accounting standard.

Accountants also need to pay special attention to the differences in the accounting standards used in China and the standards of the target jurisdiction (German GAAP or Group Accounting Manual) and identify any financial activities that may be affected. For certain companies, this is a manual process. Large companies can develop specialized software to perform this function in real-time, depending on their requirements.

How can we help you?

Lily Sun

Partner

Deepening China’s Legal Framework on Data Protection: from the Cybersecurity Law to the Regulations on Promoting and Regulating Cross-border Data Flows

Back in year 2015, China made cybersecurity an integrated part of its national security with the introduction of the National Security Law (NSL). This laid the groundwork for further regulations, and on 1 June 2017, the Cybersecurity Law (CSL) came into effect. The CSL sets broad rules for companies to follow in managing and protecting their online networks. In 2021, China continued to strengthen its legal framework with the implementation of the Data Security Law (DSL) and the Personal Information Protection Law (PIPL). Together, these laws created clearer rules for how data should be handled. With additional guidelines and supporting regulations, China has built a comprehensive system to oversee both data security and cybersecurity for businesses.

In March 2024, the Cyberspace Administration of China (CAC) introduced the Regulations on Promoting and Regulating Cross-border Data Flows (the 2024 Regulation). This new regulation highlights the growing focus on data protection and marks a key step in China’s control over how data can move across borders. With this update, it is a good time to explore several important topics under China’s legal framework for data protection, including data classification, personal information protection and supervision of cross-border data transfers, especially to understand how these rules and changes would impact foreign businesses operating in China.

Obligations of Critical Information Infrastructure Operators (CIIOs) under CSL

The CSL governs the construction, operation, maintenance and use of networks, as well as the oversight of cybersecurity within China. A key provision, Article 31, emphasizes the protection of critical information infrastructures (CIIs) in vital sectors and industries, like energy, transportation, finance, public services, e-government, and communications and information services, as well as other CIIs where any data that, once tampered with, damaged or leaked, may significantly endanger national security, economic operation, livelihood of people and public interest.

CIIOs in China are required to store all personal information and important data collected and generated within the country. If there is a need to transfer abroad, CIIOs must first complete a data security review through CAC’s data export reporting system (https://sjcj.cac.gov.cn), following guidelines set by the CAC and the State Council. Additionally, CIIOs must perform an annual security and risk assessment of their networks, either by themselves or entrusting cybersecurity service agencies. The results, together with any recommended improvements, should be submitted to the relevant authorities, with the Ministry of Public Security currently leading CIIs protection nationally, whereas sectoral regulators will be responsible for developing rules for designating CIIs in their areas of responsibility, and the CAC plays a coordinating role.

DSL and data classification

The DSL governs data processing activities within China and related security check. It has extraterritorial reach with respect to data processing carried out outside China if such activities threaten national security, public interests, or the legitimate rights and interests of Chinese citizens and organizations.

The DSL introduces a data classification system that is structured hierarchically, categorizing data based on its significance. Different levels of protection standards and requirements are executed accordingly. At the top is “core data,” which is defined to include data crucial to national security, lifeline of national economy, important aspects of people’s livelihoods, and major public interests. Any data that is important enough to affect political security will also fall under the category of “core data.”

The next level is “important data,” the detailed definition and scope of which will be outlined in “important data catalogues.” National authorities, alongside regional, departmental and industrial regulators shall have the discretion to develop their own catalogues for important data within their respective domains. So far we note that a nationwide guideline for identifying “important data” has been published already and shall take effect from October 2024 whilst some industries (to name a few, industrial, automotive, telecommunications) have released their own rules or guidance on “important data” identification. Overall, as what is generally provided for in the DSL, “important data” should cover such critical data that, once tampered with, damaged, leaked or illegally obtained or used, may directly endanger national security, economic operation, social stability, and public health and safety.

“Important data” handlers are required to fulfil the following major obligations in their data processing activities: (1) designation of a specific responsible person and establishment of an internal management organization to handle data security, (2) data encryption and back-up, (3) conduct of risk assessment in respect of processing activities and report to regulators, (4) performance of data security review on data export, (5) filing of “important data” catalogue that is stipulated by the data processor itself with regulators. By now this last requirement only applies to handlers in industrial and informatization sectors. With the entry into effect of the upcoming Regulations on Network Data Security Management from 2025, all network data handlers will then be required to identify and file the “important data” they process with regulators.

PIPL and cross-border data transfer

China’s PIPL shares many goals with the EU’s General Data Protection Regulation (GDPR), aiming to strengthen individuals’ rights to control how their personal information is collected and used by third parties. The PIPL also has extraterritorial reach, applying to activities conducted outside China that are aimed at providing products or services to individuals in China or analyzing their behaviors. In the spirit of such enhanced protection for individual data subjects, “personal information” is broadly defined as information that is capable of identifying natural persons to the exclusion only of irreversibly anonymized information. A sub-category of “sensitive personal information” is also introduced which a higher level of protection is accorded to. The sensitiveness relates to data subjects’ biometrics, religious beliefs, health, finances, geographical locations and personal information of young children no older than 14 years.

Before handlers can process any personal information, one of the following conditions should be fulfilled:

obtain informed consent from data subject. Where consent is not required:
if the intended data processing is necessary for the conclusion or performance of a contract to which the individual concerned is a party, or for the implementation of human resource management
if it is necessary for the fulfilment of legal duties or obligations
if it is necessary for responding to public health emergencies or for protecting people’s life, health or property in emergency situations;
for news reporting on a matter of public concern and to the reasonable extent
processing of personal information that has been disclosed and to the reasonable extent
accurate and complete disclosure of all major details relating to the intended processing activities to the data subjects concerned. Major items include:
contact details of processors
how data will be processed and for how long it will be retained. Also, the purpose thereof and the scope of personal information to be involved
methods and procedures for individuals to exercise their rights to protect their personal information

When it comes to “sensitive personal information,” additional requirements are imposed. They are: (1) specific purpose and necessity for the intended processing activities must be identified, (2) separate prior consent is a must, and (3) pre-processing impact assessment should be conducted. This last procedural requirement will also come into play in other circumstances where there is an international data transfer, delegation of data processing activities or provision of the data concerned to other data handlers, or where data processing is required for automated decision making process.

In addition to these requirements that need to be fulfilled before data handlers can proceed with any processing activities, the PIPL imposes several rules on code of conduct when processing is performed.

For example, processing should be limited only to the minimum extent that is required for the purpose intended. Once the purpose is satisfied, data processed should be deleted from record. Several data protection mechanisms should also be put in place. Amongst others, personal data handlers are required to formulate internal management and operational protocols in respect of data processing, as well as contingency plans when security emergencies occur. Regular self-audits, training organization and technical measures implementation are also needed for personal information protection. The PIPL further requires data localization if the volume of data to be processed achieves certain threshold. This volume-based assessment also matters in determination of the question on whether an information protection officer should be appointed. Though for both cases, where the specific thresholds lie is yet to be confirmed by regulators.

International data transfer is another area of practice that may trigger biggest compliance risk for MNCs operating businesses in China, since more often than not and for many foreign investments we observe, the actual administration and management lies overseas.

Extra requirements and codes of conduct need to be followed by processors transferring personal data abroad:

approval from competent authorities is required for data transfer to foreign regulators and governmental authorities
pre-export impact assessment should be conducted and the results be recorded for three years
complete and accurate disclosure of information on overseas recipient(s), the purpose and manner of processing by the latter(s), scope of personal data involved as well as the methods and procedures for individuals to exercise their rights to protect their personal information
separate prior consent from data subjects is to be obtained
completion of one of the following administrative procedural requirements: i. security review, ii. personal information protection certification, or iii. execution of cross-border data transfer contract

Having said the above, we saw a legal trend with the introduction of the 2024 Regulation to relax the administrative procedural burden that was previously exerted on personal data exporter. Now an extensive list of exemptions has been implemented following the entry into effect thereof; to name a few:

to carry out cross-border human resources management in the company
to fulfill a contract to which the data subject is a party; this will cover a wide range of cross-border activities (e.g., shopping, courier, payment, bank account opening, visa application)
non-sensitive personal information transfers by data handlers that are not critical information infrastructure operators and the aggregate volume of data to be exported is less than 100,000 data subjects within the current year
to conduct international trade, cross-border transportation, academic cooperation, cross-border production and manufacture, as well as marketing, if no important data or personal information is involved in the export

Kindly note that the exemptions from the abovementioned procedural requirements do not however release data handlers from complying with other existing requirements mentioned above, which are obtainment of separate prior consent, completion of pre-export impact assessment, and full disclosure of information on recipient(s).

Practical implications

With the introduction of a categorical and hierarchical protection system based on the importance of data, it is advisable for multinational companies to implement ongoing monitor in terms of the type, significance and quantity of the data collected, stored, processed, transferred and used during their business operations, and implement the appropriate protection mechanisms
Due regard to be accorded to catalogues of “important data” that are or will be issued by regional and industrial authorities as basis for the assessment and identification in respect of the significance of data concerned
Multinational companies seeking to transferring data abroad including without limitation to foreign regulators would be prudent to seek legal advice before undertaking such activities
Marketing activities that use personal data to assess data subjects’ behavior, interest, financial and credit status, health conditions, and to ultimately form a decision through automated decision making systems are regulated under Chinese laws. Pre-processing impact assessment should be completed

How can we help you?

Catherine Yan

Partner

A glimpse into the sprint phase of “Made in China 2025”: A German investor faces new demands for localization of imported products in the Chinese market

Dr. Nataliya Esakova is Partner at RSM Ebner Stolz and Sven Stuckmann is Director at RSM Ebner Stolz.

“We are increasingly in a situation where we have to offer “Made in China” but this involves products that we actually produce in Germany because localization is not worthwhile due to the quantities involved.

So we come to the question, what are the minimum requirements for the “Made in China” label from a Chinese perspective when these products contain components or modules imported from Germany?”

This is not the only recent case among our clients and their Chinese subsidiaries where “Made in China” has been in the spotlight, particularly those involved in government procurement.

Through this inquiry, we will provide you with a practical view of “Made in China” labelling through product localization, as well as a view of China in the context of global industrial chain restructuring from the view angle: What has happened in China’s policy that creates the demand for “Made in China” label?

“Made in China” label in the Chinese legal and practical context

The “Made in China” label is commonly understood as the mark of Place of Origin.

In China, the Place of Origin is interpreted in the Regulation of the People’s Republic of China on Place of Origin of Imports and Exports (“State Council Announcement No. 416”) and the Decree of the General Administration of Customs of People’s Republic of China No. 122 (“No.122”).

 If a product is sourced from multiple countries, the place of origin is the country where the product undergoes its final substantial change and completion.
“Undergoing final substantial change and completion” refers to a change in the tariff classification (HS code), specifically a change in the four-digit tariff classification of the products.
If the change in tariff classification does not reflect a substantial change, a minimum ad valorem percentage of 30% is required as an additional criterion. The ad valorem percentage is calculated as follows:
The ad valorem percentage = (The price of finished goods paid to the manufacturer – Value of main components imported from abroad) / The price of finished goods paid to the manufacturer.

Example from a customs officer
If the raw materials or components are imported from Germany and assembled into finished goods in China, these goods will meet the requirement of substantial change and can be labelled as “Made in China”. If the assembly process in China only involves labelling or packaging, such goods cannot be labelled as “Made in China”.

The demand for the “Made in China” label reflects a small corner of China’s policy portrait at the critical juncture of a historic confluence of the new round of technological and industrial revolution and the transformation of China’s economic development mode.

Government procurement: National policy tending to favor domestic goods

The tendency for domestic goods in government procurement activities is legally based on the Government Procurement Law of the People’s Republic of China (amended in 2014) and the Measures for the Administration of Government Procurement of Imports (2007).

State authorities, institutions and organizations are required to procure domestic goods, unless the goods cannot be procured in China or cannot be procured in China on reasonable commercial terms.

The procurement of imported goods is subject to review procedures and supervision by the Ministry of Finance.

This policy has established the dominant guideline for government procurement activities, while leaving one key point for discussion: whether the goods produced by foreign-invested enterprises in China are domestic goods.

This question was somehow answered in the Foreign Investment Law which was issued in March 2019.

“Made in China 2025”: Strategic vision and planning for building manufacturing power

The ten-year national strategy plan “Made in China 2025”, issued by the State Council of the PRC on 8 May 2015, sets out China’s vision to build a new manufacturing power that will underpin its economic development and strength.

The strategy plan proposes five major projects: the manufacturing innovation center construction project, the intelligent manufacturing project, the industrial foundation project, the green manufacturing project and the high-end equipment innovation project.

Among the principles of the strategy plan, the following points are to be noted.

Major focus on independent capability
With a major focus on the independent innovation and development capability, it promotes independent intellectual property rights, independent supply of key materials, independent design capability, independent research and development in basic and strategic areas from a strategic level.
Principle of opening up and cooperation
The strategy plan aims to remain open to the international market and resources as well as to enhance international exchanges and cooperation.

Under this vision, China has ranked first in the world in the size of its manufacturing industry for 13 consecutive years. With 41 major industrial categories, 207 medium industrial categories and 666 small industrial categories, it has all the industrial categories in the United Nations Industrial Classification and is able to provide more domestic goods.

The government procurement policy is also rooted in this ongoing vision.

New Era of Foreign Investment Law: Equal participation in government procurement

At a time of global industrial chain being deconstructed and reconstructed, China is seeking to attract foreign investment and to build international competitiveness with links to international markets and resources.

The Foreign Investment Law, effective from January 2020, makes clear provisions in the form of a law to promote the equal participation of foreign-invested enterprises in standardization work, fair participation in government procurement and the broadening of financing channels.

It clearly states that, products manufactured by foreign-invested enterprises within the territory of China shall be given equal treatment in government procurement.

In accordance with the Foreign Investment Law, the Ministry of Finance has taken the following measures.

Fair competition
Promote fair competition by issuing two circulars in 2019 and 2021, requiring all regions and departments to eliminate provisions and practices that discriminate against suppliers by imposing unreasonable conditions such as ownership form, organizational form and shareholding structure.
Equal treatment
Enforce the requirement of equal treatment of domestic and foreign-invested enterprises in government procurement activities, by issuing a circular in 2021, requiring all regions and departments to give equal treatment to products manufactured by domestic and foreign-invested enterprises in China in government procurement activities, and to safeguard the right of domestic and foreign-invested enterprises to participate in government procurement activities on an equal basis in accordance with the law.
Strong supervision
Strengthen the supervision and administration of government procurement by improving the mechanisms and channels for questioning and complaining about government procurement and for administrative adjudication.

Following these measures, at a regular meeting of the State Council Information Office in 2023, the director of the Department of Economic Construction mentioned that the Ministry of Finance would continuously work on optimizing a fair and competitive business environment for government procurement. The focus in the next step would be on:

Revision of the Government Procurement Law:
Actively promoting the revision of the Government Procurement Law and the harmonization of the Government Procurement Law and the Bidding and Tendering Law, in an effort to improve the systematic and synergistic nature of the legal system for government procurement;
Clarification of “produced in China”:
Clarifying the specific criteria for “produced in China” in the area of government procurement, and striving to ensure that domestic and foreign-invested enterprises participate in government procurement on an equal basis with respect to the products they produce within the territory of China;
Implementation of inspection procedures:
Carrying out special inspections, to ensure that enterprises can participate in government procurement on an equal basis, and that unlawful and irregular acts such as the differential or discriminatory treatment of foreign-invested enterprises are corrected and investigated.

The promulgation of the Foreign Investment Law and subsequent implementing measures provided a legal basis and perspective for foreign-invested enterprises to participate in government procurement. In this background, foreign-invested enterprises seeking market opportunities in the area may need to give attention to the progress of the Government Procurement Law revision and interpretation in the coming period.

Tax risks arising from localization

Changes in value chains that result in value creation steps being relocated to another country can lead to taxation consequences in the country that transfers (i.e. loses) value creation steps. German tax law in particular contains extensive regulations designed to ensure exit taxation. These also include German transfer pricing regulations on business restructurings.

Business restructurings often entail a so-called relocation of functions. According to the applicable regulations, a relocation of a function is fulfilled, if a function including its associated opportunities, risks and assets or other benefits (related to the function) is entirely or partially transferred to a receiving entity, so that the receiving entity is able to exercise this function or extend an already existing function. In addition, it is necessary that the transferring company is limited in the exercise of the corresponding function. This means that it cannot carry out the respective function to the same extent as it did before the relocation of functions.

A function is a business activity that consists of a combination of similar business activities carried out by certain units or departments of a company. Typical examples of functions are general management, research and development, material procurement, warehousing, production, packaging, distribution, assembly, processing or finishing of products, quality control, financing, transportation, organization, administration, marketing or customer service. It should be noted that, in practice, German tax authorities do not have high requirements on the existence of a function. In cases where individual or several production steps are newly established in China, this view of the German tax authorities must be critically considered.

A transfer of functions may also exist if the function is only temporarily performed by the receiving entity. Moreover, in order to prevent arrangements to circumvent transfers of functions, the transactions of the last five financial years must be taken into account when examining whether a cumulative transfer of functions exists.

If there is a relocation of a function, then not only the individual cross-border intercompany transactions taking place must be considered and remunerated on an arm’s length basis, but rather the whole function transferred combined with all corresponding assets and other advantages as one transfer package (comparable to a company valuation). In selected cases, where a specified escape clause is applicable, an arm’s length pricing approach for the individual transactions and asset transfers taking place is sufficient.

For the sake of completeness, it should be noted that a relocation of a function is an exceptional business transaction and a documentation must therefore be prepared promptly, i.e. within 6 months of the end of the financial year in which the relocation of function took place. The records must be submitted to German tax authorities within 30 days of being requested. In addition, it should be checked whether the relocation of the function is subject to the reporting obligations according to DAC6.

Therefore, we recommend reviewing critically the tax implications of a localization before implementing any steps. We are happy to assist with an respective tax risk assessment.

How can we help you?

Dr. Gerald Neumann

Partner

The EU Chamber of Commerce Survey: Enterprises struggle to cut down costs while China opens up further

The European Union Chamber of Commerce in China (EUCCC) surveyed over 500 European companies in China and found that while China is becoming more open in many sectors, cost reduction is a challenge for more than half of the European companies in China.

The “Business Confidence Survey 2024” was jointly published by the European Union Chamber of Commerce in China (EUCCC) and Roland Berger Strategy Consultants (Roland Berger) on May 10th.

The findings of a survey conducted among 529 member companies of the European Union Chamber of Commerce in China (EUCCC) indicate a substantial rise in the percentage of firms perceiving market opening: 45%. This represents a nine percentage point increase compared to the previous year’s survey. However, the proportion of member firms contemplating business expansion in China in 2024 is a mere 42%, the lowest level observed in recent years. In competition with Chinese firms, 42% of member firms experienced a decline in market share, whereas 29% managed to increase their market share.

This shows, as Jens Eskelund, President of the European Union Chamber of Commerce in China, said during the conference, that a sizable number of European businesses are still growing in China. He underlined the benefits for European businesses of China’s new visa waiver for eleven European countries. “It is imperative that European corporate executives start expressing that they are willing to travel to China the next week whenever a business opportunity arises; in the past, trips to China usually needed to be planned one, two, or even three months in advance. This makes it easier for relations between China and Europe to rekindle.”

The survey findings indicate that European companies operating “in China for the Chinese (market)” are encountering certain levels of pressure, while those operating “in China for the global (market)” are comparatively in a more favorable position. Jens says this is in line with China’s recent improvement in trade statistics.Historically, the former category of enterprises was typically in a more favorable position.

The survey revealed that 52% of member companies intend to reduce expenses, the highest percentage ever surveyed. There are numerous methods to reduce expenses, such as squeezing suppliers, closing unprofitable product lines, and optimizing the supply chain. According to Jens, 26% of companies intend to reduce expenses by laying off employees out of concern for the impact on employment.

There is apprehension in the survey report that the coping strategies used by companies to adapt to the present business climate could ensnare the economy in a detrimental cycle and worsen its difficulties.

Approximately one-third of the member companies indicated that they intend to reinvest retained earnings in China in excess of 10%. A total of 13% of member companies have made the decision to relocate their current operations from China to another country, while 21% have stated that they will establish their supply chains and operations within China to serve the Chinese market.

As the problems in the market get worse, Jens claims that several European businesses are pulling out of China. His contacts with member companies show that the consequences on enterprises are the same whether they ascribe the problem to slow domestic demand or overcapacity. Recent discussions have focused on the existence of overcapacity.

Approximately 10% of member firms expressed concern that overcapacity could occur in the near future, while 36% of member firms reported that overcapacity was present in their industry. For 42% of the member firms, the prices showed a downward tendency.” Continued weak demand has weakened firms’ profitability while exacerbating the overcapacity problem.” As the report stated.

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Yvonne Zhang

An overview of the Value-Added Tax system in China

As one of the major indirect taxes in China, the value-added tax is closely related to the daily operations of companies. When companies purchased goods or services from their vendors, the total amount they paid included the price plus value-added tax. After a 44-year history, the second draft of value-added tax law amendment was released for public opinion in September 2023. Based on previous experience, the final version of the law may be issued in 2024 or 2025. In the following three chapters, we will provide you a glimpse of the history of value-added tax in China, current value-added tax policies in China, and some common issues related to value-added tax.

Chapter One: History of Value-added Tax in China

Pilot phase (1979-1993)
In July 1979, value-added tax was first piloted in Xiangfan, Hubei Province, and gradually piloted nationwide. Under the background of reform and opening up, China entered a new period of socialist modernization construction, and the role of taxation became important. In 1984, the State Council issued “Guo Fa [1984] No. 125” with six draft tax regulations, including the Regulations of the People’s Republic of China on Value-added Tax (Draft). The scope of value-added tax covered 12 categories of goods, such as machinery and equipment, vehicles and bicycles, steel and billets, etc. This marked that value-added tax had officially become a tax in China.
Gradual establishment phase (1994-2003)
In 1994, China reformed its tax structure and officially implemented tax sharing. It divided the revenues, expenditures, responsibilities and powers between the central and local governments. In the same year, the Regulations of the People’s Republic of China on Value-added Tax (“Decree No.134”) issued by the State Council came into effect on 1 January 1994. The Decree No.134 was more comprehensive than Guo Fa [1984] No.125 and expanded the scope of taxation. It raised the concept of small scale taxpayers and issued special invoices to improve the input tax credit system. However, the input tax on purchased fixed assets could not be deducted at that time because of the fixed assets investment inflation.
Transformational reform phase (2004-2011)
In 2004, the Ministry of Finance and the State Administration of Taxation submitted the value-added tax transformation reform plan, which changed the value-added tax base from production-based to consumption-based. The main difference between the two bases was whether or not the companies would be allowed to deduct the input tax on fixed assets. In 2008, because of the global financial crisis, the State Council issued the Regulations of the People’s Republic of China on Value-added Tax (Revised in 2008) (“Decree No.538”) in accordance with the plan to overcome the adverse impact of the global financial crisis.
Business tax to value-added tax replacement phase (2012-2018)
On 1 January 2012, Shanghai became the first city to launch a pilot project to replace business tax with value-added tax for transport and some modern service industries. This pilot project was extended to the whole country on 1 August 2013. The main purpose of the project is to reduce double taxation, which helps companies to reduce their tax burden. Finally, on 1 May 2016, the Ministry of Finance and the State Administration of Taxation issued Circular Cai Shui [2016] No.36 (“Circular No.36”) containing the Measures for the Implementing Rules for the Replacement of Business Tax with Value-added Tax. According to the Circular, all transactions of services, intangible assets and real estate will be included in the scope of value-added tax, and business tax will no longer be required. In 2017, the Regulations of the People’s Republic of China on Value-added Tax (Revised in 2017) consolidated the regulations in Circular No.36 and repealed Decree No.538.
Legislation of value-added tax law phase (2019-now)
In 2019, the Ministry of Finance, the State Administration of Taxation and the General Administration of Customs jointly issued the Announcement [2019] No.39(“Circular No.39”) to promote a substantial reduction of value-added tax, which changed the tax rate from 16%, 10% and 6% to 13%, 9% and 6%. The system of refund of input value-added tax retained for credit was first established in Circular No.39.

On 27 November 2019, the Ministry of Finance and the State Administration of Taxation issued an exposure draft of the value-added tax law for the collection of public opinions. In this draft, it added the regulations of deemed sales and non-taxable items, as well as some tax exemption regulations. The draft law was submitted to the State Council in 2020 and passed at the end of 2022. After the draft law was passed by the 13^th National People’s Congress, it was opened for public opinion for 30 days. The second draft of the amendment to the value-added tax law was released in September 2023.

Chapter Two: Current Value-added Tax Policies in China

Currently, the value-added tax law is still in the legislation process, the Regulations of the People’s Republic of China on Value-added Tax (Revised in 2017) is the main regulation on value-added tax on goods, and Circular No.36 is the main regulation on value-added tax on services.

I. Objects of value-added tax

After the replacement phase, transactions subject to value-added tax include sales of goods, services, intangible assets, real estate and imported goods within the Chinese territory.

II. Tax rates of value-added tax

The normal value-added tax rates for each category are summarized in the following table.

Category of transaction	Value-added tax rate
Sales of goods	13%
Sales of services	9% or 6%
Sales of intangible assets	6% (9% for transfer of land use right)
Sales of real estate	9%

III. Taxpayers of value-added tax

Value-added taxpayers can be classified into General Value-added Taxpayers (“general taxpayers”) and Small Scale Value-added Taxpayers (“small taxpayers”). Different with general taxpayers, small taxpayers enjoy a simplified tax rate of 3% or 5%. With a lower tax rate, no input value-added tax is deductible for small taxpayers. In the second draft amendment, only the 3% rate applies to small taxpayer and the 5% rate is not mentioned.

The criteria for small taxpayers are clearly stated in the second amendment. Taxpayers whose annual taxable income is less than RMB 5,000,000 will be classified as small taxpayers, unless they have reliable accounting records.

IV. Invoice of value-added tax

The invoice of value-added tax can be divided into a special value-added tax invoice (“special invoice”) and a general value-added tax invoice (“general invoice”). A special invoice is required for taxpayers who need to credit input value-added tax to offset against output value-added tax. General taxpayers can issue a special invoice by themselves, while small taxpayers shall apply to the competent tax authorities.

V. Refund of value-added tax retained for credit

When taxpayers have more input value-added tax than output value-added tax, the excess input value-added tax will be carried forward to the next tax period. Starting with Circular No.39 on 1 April 2019, general taxpayers who have retained input value-added tax can apply for a refund if they meet the criteria of the tax authorities. This policy provides taxpayers with more flexibility in their cash flow.

VI. Value-added tax exemption

Sales of certain goods and services specified in the tax regulations may be exempt from value-added tax. According to the Regulations of the People’s Republic of China on Value-added Tax (Revised in 2017) and Circular No.36, the scope of tax exemption includes seven goods and forty services. In the second draft amendment, this scope is summarized into nine categories:

Agricultural products and related services for plants and livestock.
Prophylactic drugs and devices; medical services provided by medical institutions.
Sales of antique books; sales of products that are used by the sellers themselves.
Imported instruments and equipment directly used for scientific research, scientific experiments and teaching.
Imported materials and equipment provided by foreign government or international institution for gratis aid.
Products for the disabled; services provided by the disabled.
Nursing services provided by nurseries, kindergartens, elderly service institutions, and disabled welfare institutions; matchmaking services; funeral services.
Education services provided by schools; services provided by students under the work-study programs.
Admission fees for cultural services provided by memorial halls, museums, cultural centers, cultural relics protection administrations, art galleries, exhibition halls, academies of painting and calligraphy, and libraries; admission fees for cultural and religious activities.

VII. Value-added tax refund for export sales

The tax rate for exported goods and services is zero. Certain exports of goods and services may be eligible for a value-added tax refund from the tax authorities. Enterprises shall register with the competent tax authorities and apply for the refund when the export transactions have actually happened.

The criteria of exported goods are the goods physically left the territory of China with a declaration and the export sale has been recorded in the accounting book, while the criteria of exported services are the services provided to foreign entities for complete consumption outside the territory of China within the scope includes research and development services, energy performance contracting services, design services, production and distribution services for radio, film and television programs, software services, circuit design and testing services, information system services, business process management services, offshore services outsourcing business, and technology transfer.

Different types of companies have different calculation methods. For manufacturing companies, the calculation method is “exemption, credit and refund”, which means that the export value-added tax is exempted, the input value-added tax can be credited against the tax payable and the excess part of the input value-added tax can be refunded. Meanwhile, for trading companies, the calculation method is “exemption and refund”, which calculates the refundable value-added tax with the purchase amount and refund rate.

VIII. Super deduction

Currently, there are three super deduction policies which are valid until 31 December 2027. The relevant industries and the super deduction rate are summarized in the following table.

Industry	Rate	Reference
Industrial Masterbatch Enterprises	15%	Cai Shui [2023] No.25
Integrated circuit enterprises	15%	Cai Shui [2023] No.17
High-tech manufacturing enterprises	5%	Announcement [2023] No.43

In the second draft amendment, dedicated preferential policies will be implemented to support the development of small taxpayers, micro-enterprises and key industries, and to promote entrepreneurship and employment in the future.

Chapter Three: Common issues related to Value-added Tax

Situation One: A foreign company purchases a machine for its Chinese factory

A German company has a factory in China for assembling the components into final products. Because of the high transport costs from Germany to China, the German company signed a contract with a Chinese company to purchase the necessary equipment for the assembly and asked the Chinese company to transport the equipment to its factory in China.

According to the criteria mentioned in chapter two, the tax rate for exported goods is zero if the goods have physically left the territory of China with a declaration. In this situation, the equipment does not physically leave the territory of China, so the Chinese company cannot declare the equipment to customs and enjoy a zero tax rate.

Situation Two: Chinese company provides non-exempt services to foreign company

A German company wants to know the Chinese tax regulations regarding Research and Development Super Deduction (“R&D Super Deduction”) and High and New Technology Enterprise (“HNTE”). The German company finds a Chinese consulting firm to help it understand the criteria of R&D Super Deduction and HNTE. The consulting fee charged by the Chinese consulting firm includes the price plus the value-added tax.

According to the criteria for exported services, consulting services do not fall within the scope of exported services that can enjoy a zero tax rate. Therefore, this service is subject to value-added tax at the rate of 6%.

Situation Three: Foreign company providing services to Chinese company is subject to value-added tax

A German company providing intercompany services to its Chinese subsidiary is subject to value-added tax. For example, a German company helps its Chinese subsidiary to maintain the data system and provide online support for the system. The Chinese subsidiary pays the German company a monthly fee for the services.

According to Circular No.36, either the seller or the buyer of the service is located in China, the income from the services is subject to value-added tax. In this situation, the Chinese subsidiary shall act as a withholding agent to withhold 6% tax on behalf of the German company.

Our Recommendations

As value-added tax is the most important tax related to the company’s daily operations, we recommend companies to continuously focus on the legislative status of the value-added tax law, understand the changes and plan in advance. To analyze the future trend of the value-added tax law, companies may not only focus on the background of the current market, but also focus on the history of the value-added tax regulations. To help companies understand the new law correctly, we will continue to monitor the status of the amendment of value-added tax law and will provide relevant updates in due course.

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Eloise Yao

Director

China released the Law on Customs Duties

On 26 April 2024, the Standing Committee of the National People’s Congress passes the Law of the People’s Republic of China on Customs Duties (“Customs Duty Law”), with which China has enacted laws for 13 out of 18 tax types. The new Customs Duty Law will come into effect on 1 December 2024.

Prior to the legislation of the Customs Duty Law, the Regulations of the People’s Republic of China on Import and Export Duties (Revised in 2017) (“Customs Duty Regulations”)is the main regulation on customs duties. The new Customs Duty Law is not an amendment to the revised Customs Duty Regulations, it raises some practical provisions from relevant announcements and regulations to the law and makes the law more comprehensive. In the following article, we will provide you with some key changes under the new Customs Duty Law.

Clarification that the CBEC platform, logistics enterprises and customs declaration enterprises are withholding agents of customs duties

With the development of cross-border e-commerce (“CBEC”), the new Customs Duty Law clarifies the obligation of parties involved in CBEC transactions. According to Article 3, e-commerce platform operators involved in CBEC retail importation, logistics enterprises and customs declaration enterprises are obliged to withhold or collect customs duties on behalf of the consumers.

Taxpayers will be able to consolidate their tax payments

In Article 43, the provisions for consolidated payment of customs duties for taxpayers who meet the requirements and provide a guarantee to the customs authorities are incorporated into the law. Compared to the previous model, which required taxpayers to make a payment for each importation, the consolidated payment module is more convenient for taxpayers.

The duration of tax refund has been extended to three years

Article 51 grants an extension of the refund period when taxpayers find that they have overpaid customs duties. Prior to the new Customs Duty Law, the refund period for overpayments was one year, and the new Customs Duty Law extends this period to three years. The purpose of this extension is to protect the legitimate rights and interests of taxpayers.

The period for Customs to confirm the amount of duty payable has been extended to three years

The period for Customs to review the amount of duty payables has also been extended from one year to three years. If Customs finds that taxpayers have paid less customs duties than they should have, they may require taxpayers to pay the customs duties and any overdue payment within three years.

Taxpayers with unpaid tax payments will be restricted from leaving the country

Article 49 states that Customs may restrict taxpayers or their legal representatives from leaving the country if they fail to pay the full amount of customs duties or overdue payments without providing a guarantee to Customs. This is a new administration regulation that was neither covered in the Customs Duty Regulations nor in the Customs Law.

Customs’ enforcement measures for unpaid taxes

To protect the rights and interests of the country, the new Customs Duty Law provides Customs enforcement measures to collect the unpaid tax payments, including unpaid customs duties and overdue payments. In Article 50, the law states that if taxpayer refuses to pay without reasonable explanation, the Customs may, upon approval, notify the banking financial institution to transfer the amount from the taxpayer’s deposit or remittance, or seize the goods or other property of taxpayer.

The new Customs Duty Law will come into effect from 1 December 2024, so there is still time for companies to study for the new regulations during this period. Since the new Customs Duty Law aims to protect the interests of the country and taxpayers and to promote the foreign trade, we recommend that companies involved in international trade carefully review the regulations and prepare for the upcoming Customs Duty Law in advance.

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Eloise Yao

Director

The China Conundrum: Engagement vs. Diversification

Facing a changing China, global companies reassess their strategies. Georg Stieler examines the factors making China a tough yet vital market, from its role in global supply chains to its technological strides. Understand how businesses navigate these waters, balancing engagement with the need for diversification.

Foreign Direct Investment (FDI) to China is at its lowest level in 30 years. The significant mistrust among international investors is fueled by uncertainties about how China will implement its policies on national security and other areas, as well as concerns over structural reasons for the slower economic growth.

The pandemic and even more so the Ukraine conflict have drastically changed the landscape, prompting multinational companies to reassess their risk profiles. Trade barriers have introduced unprecedented challenges to global supply chains. For example, in mid-February, thousands of luxury cars from the Volkswagen Group were stuck in U.S. ports due to components sourced from Western China, which were found non-compliant with US customs rules. In Brussels, discussions are underway about anti-dumping measures to counter the influx of Chinese electric cars.

All of this reduces the willingness to engage in China. Despite these challenges, the country accounts for nearly 90% of Germany’s trade volume in the Asia-Pacific region. The notion that other countries could seamlessly replace China, as some politicians in Berlin hope, is far from straightforward. How should European companies navigate this strategic dilemma?

The difficulties facing China’s property market and the poor performance of stock markets in mainland China and Hong Kong are widely reported. What frequently goes unnoticed these days are the areas in which China is establishing new benchmarks.

China as the World’s Largest Car Exporter and Leader in Electromobility

Last year, China overtook Japan as the world’s largest car exporter. BYD has surpassed Tesla to become the largest electric vehicle manufacturer globally. This achievement is the result of smart industrial policies. The support for electric vehicles dates back over a decade. The industry was part of Beijing’s Made in China 2025 Strategy, which also encompassed industries such as robotics, wide body aircrafts and 5G chips. Support measures included: purchase and production incentives, tax breaks, disadvantages for combustion engines, and extensive local government assistance, most of which have since expired.

Even if the EU was to protect its market with trade tariffs, there is a high chance that leading Chinese manufacturers would still remain competitive. Chinese companies account for about 65 percent of the global market for lithium-ion batteries. A significant cost advantage for BYD, arguably the most formidable competitor, is the company’s experience in manufacturing lithium-ion batteries. BYD’s batteries are among the cheapest in the world, yet they also rank among the best in terms of energy density. Among the customers are competitors such as Tesla and Toyota. The next frontiers include advanced driver assistance systems (ADAS) and hydrogen technologies.

Like all key industries identified by the Chinese government, the electric car industry suffers from overcapacity. Intense competition forces companies to innovate more aggressively. Design and technology are bolder, partly because Chinese consumers are more technology-savvy.

The majority of manufacturers may disappear: However, many American railway companies in the 19th century also went bankrupt but laid the groundwork for the country’s economic rise.

No Solar and Wind Power Without China

Chinese manufacturers dominate all stages of the solar energy supply chain even more than in the battery sector. Production capacities doubled between early 2022 and the end of 2023.

Chinese manufacturers now account for over 60% of the global wind turbine market. Furthermore, China is responsible for over 80% of the global production of neodymium, a rare earth element essential for electric motors, wind turbines, and other modern electronic products.

As for raw materials overall: China has acted with considerable strategic foresight in this field. After decades of neglect in European mining, there are no companies that could, like the Tsingshan Group, send thousands of employees to an island in the Indian Ocean for a few years to establish nickel production.

New Products Require New Manufacturing Approaches

As early as 2018, Takero Kato, today head of Toyota’s battery car division, reported seeing machines in China that the Japanese did not even know existed. Chinese robot manufacturers have since increased their market share from 32% to just under 45% by the end of 2023. Newcomers like ESTUN have recognized the significant scaling potential of complete solutions for battery manufacturing and dominate this area. Chinese robot manufacturers have successfully replicated this strategy in photovoltaics.

In electronics manufacturing, there’s a shift towards Southeast Asia, yet Apple increasingly relies on electronic contract manufactureres from mainland China rather than Taiwan. Their partner for producing the Vision Pro headset, currently the most sophisticated consumer electronics product in the world, is Luxshare, not the better-known company Foxconn.

Artificial Intelligence: Achilles Heel Semiconductors, Contradictions in Generative AI, and Catch-up in Autonomous Driving

The Achilles heel of China’s AI ambitions is the lack of capabilities to independently produce the most advanced semiconductors and the limited access to these technologies.

China also lags in developing large language models (LLMs). There’s a difficult-to-resolve contradiction between the content-rich nature of generative AI and strict censorship. Moreover, stringent regulations slow down the introduction of new solutions.

Nevertheless, no other country is pushing forward with large national projects to build digital infrastructure as decisively as the People’s Republic. This again could favor the development of future AI applications. Initial progress is visible in autonomous driving, where the gap with the USA seems to be narrowing, thanks to state funding, increased research investments, generous data access, and consumers’ openness to new technologies.

What Do Chinese Companies Do Differently?

“Single-threaded Leadership,” a concept originally introduced at Amazon, has not been formally adopted by Chinese companies but seems to be intuitively practiced by many. The idea aims to reduce management distractions significantly by assigning a leader a clearly defined task, a budget, and a timeframe, usually to solve a specific problem.

As detailed in the Harvard Business Review in early 2023, the household appliance conglomerate Haier is not organized as a top-down pyramid but as a platform of 4,500 self-managing companies that share resources, including back-end resources and other micro-companies’ capabilities, to adapt to market changes. The entrepreneurs have a laser-sharp focus on their specific projects, free from vertical reporting obligations and the need for cross-departmental coordination. The sole focus is on a 12-person business (on average) with a clear goal. Most private Chinese companies lack the entrenched legacy processes that the Agile movement is now trying to combat. Many of today’s private Chinese companies are lean, efficient, and eager to compete on global markets.

The Chinese market often requires different solutions. As shown in a survey from the MIT Sloan Management Review from fall 2022, Chinese companies develop ideas closer to the customer, and innovations are more market-driven. According to the survey, companies in China are about twice as likely as elsewhere in the world to draw on customers, competitors, or operational staff as a source of innovation.

As an employee of an European software company that also maintains a development department in China observed, Chinese colleagues work significantly harder, often at the expense of their own health.

Despite efforts to de-risk, disengaging from China is challenging: A study by the Rhodium Group from New York, published last fall, concluded that moving factories from China to other countries would have little impact on China’s manufacturing power, as these factories would continue to depend on Chinese suppliers for materials and components. China maintains a dominant position in manufacturing various goods, demonstrating its factories’ ability to keep overall costs low even as average wages for Chinese workers have risen. Chinese factories also benefit from favorable loans from domestic banks and a wide range of suppliers for almost any conceivable component and raw material. Logistics costs in China are only a fraction of those in India, which cannot compete with Chinese port and road infrastructure. This means that emerging manufacturing nations like Vietnam, India, and Bangladesh face significant challenges in competing with China.

The stance of German politics is bizarre in this context. Artificially high energy prices, increasing bureaucracy (such as the supply chain law and energy efficiency law), high taxes, and transfer payments reduce incentives to work. Moderna completed the process from signing an investment agreement with the Shanghai district of Minhang to start of construction within three months at the end of 2023. Local government teams worked night shifts to respond to the time difference with Massachusetts promptly. Can we imagine such efficiency in any administration in Germany these days?

Strategic Implications for Western Companies

Successful foreign firms give their Chinese branches more decision-making freedom, adopting the strategies of local competitors. This includes shorter feedback loops in product development, breaking down silos, and softening hard milestones.

Western companies must carefully monitor the new competition, identify scalable new opportunities early, and consider how to leverage parts of the powerful ecosystem to their advantage. This could involve sourcing, production, or even R&D in future industries. For example, if a traditional competitive advantage for an automation company was proximity to the German automotive industry with its leading combustion engine technology, development here must pivot to electric cars (or eventually hydrogen) to maintain a global leadership role.

Consultants serve as a bridge between China and headquarters, systematically identifying and evaluating opportunities. They can convey messages more effectively, as they need to take less account of corporate internal politics. In an era where borders are open again, but the flow of information and exchange remains constrained, this is more crucial than ever.

About the Author

Georg Stieler founded the Shanghai office of Stieler Technologie-& Marketing-Beratung (STM) in 2011. STM is a German boutique consultancy for technology companies. Through close collaboration with both international and local companies, Georg has acquired a profound knowledge of the Chinese industrial and innovation landscape over the last 13 years. He is a sought-after speaker and commentator on China’s economic developments in leading media (FAZ, Handelsblatt, Bloomberg, Reuters, etc.). Georg Stieler Stieler Technologie-& Marketing-Beratung (STM)

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Dr. Gerald Neumann

Partner

China’s Population 2023

On January 17, the National Bureau of Statistics of China announced the population figures for 2023. The data revealed that by the end of the year, the national population stood at 1,409.67 million, a decrease of 2.08 million compared to the end of 2022. Annual births numbered 9.02 million, down by 540,000 from the previous year, resulting in a birth rate of 6.39 per thousand. Meanwhile, deaths totaled 11.1 million, equating to a mortality rate of 7.87 per thousand, leading to a natural population decrease rate of -1.48 per thousand.

In 2023, China’s population experienced negative growth for the second consecutive year. The Total Fertility Rate (TFR) was approximately 1.0, positioning it as the second lowest among the world’s major economies. The TFR in China has seen a significant decline from about 6 before the 1970s to roughly 2 in 1990, then to about 1.5 after 2010, 1.05 in 2022, and around 1.0 in 2023, slightly above South Korea’s figures. Despite the implementation of comprehensive two-child and later three-child policies, these measures have not effectively reversed the downward trend of China’s birth population. The expected surge in births has largely failed to materialize.

*Data sourced from the National Bureau of Statistics

In the short term, a modest rebound in birth numbers and fertility rates is anticipated in 2024, attributed to several factors: 1) the phased realization of pent-up birth plans postponed during the pandemic; 2 an increase in marriages, as evidenced by data from the Ministry of Civil Affairs (MCA), which recorded 5.69 million marriages in the third quarter of 2023, up by 245,000 pairs year-over-year; and 3) the cultural auspiciousness associated with the Year of the Loong, potentially prompting a minor birth peak. However, challenges such as the fading impact of accumulated birth plans, persistently low fertility rates, the shrinking pool of women of childbearing age, and the high costs associated with raising children, complicate efforts to reverse the declining birth population trend without significant, effective pro-birth policies. The slow yet profound demographic shifts demand considerable attention due to their far-reaching implications.

The continuing decline in population growth will inevitably bring about various consequential shifts. Notably:

The shrinking working-age population and the diminishing potential economic growth rate are prompting a transition from a “demographic dividend” to a “talent dividend.
As aging intensifies, we move from a period of demographic advantage to one of demographic burden, coinciding with significant growth in the silver economy.
The trend towards non-marriage has led to an increase in the size of families.
Urban agglomerations are becoming focal points for population and talent, highlighting the need for urgent reforms in the household registration system as the population living away from their registered households grows.
While educational attainment is on the rise, social stratification remains a pressing issue that warrants further attention.

Experts have advocated for the complete deregulation of childbirth policies to restore procreation rights to families. Under full liberalization, those disinclined to have children are unlikely to change their stance, but it would enable those desiring more children to fulfill their wishes without concern over a potential surge in birth rates. Effective support for full liberalization would require a comprehensive approach, including measures such as differentiated tax credits, cash subsidies for home purchases, a significant increase in the enrollment rate of children aged 0-3 years, enhanced protection of women’s rights in the workplace, tax incentives for businesses supporting childbirth, increased investment in education and healthcare to alleviate the direct costs of raising children, and strengthened rights for children born out of wedlock to ensure equality.

The introduction of pro-childbirth policies remains to be seen. The falling fertility rates, while concerning, signal a need for the government to address the looming challenges swiftly. Yet, they might also herald new opportunities, particularly in an era of rapid technological progress, opening up novel business avenues to address the demographic shift towards an aging population.

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Yvonne Zhang

Price Cutting of New Energy Vehicles in China

At the beginning of 2024, Tesla initiated the year’s price reduction trend by launching the “first shot” of price cuts, lowering the prices of its Model 3 and Model Y rear-wheel drive and long-range versions. This move brought the prices of Tesla’s refreshed Model 3 and Model Y to their lowest in the history of the Chinese market. Moreover, consumers are offered a 2.5% ultra-low loan interest rate if they complete their purchase before the end of March.

Following Tesla’s lead, several new energy vehicle brands quickly joined the trend. Li Auto and NIO, citing the upcoming launch of their updated models as the reason, offered discounts ranging from RMB 20,000 to RMB 25,000 on specific models.

According to partial statistics, since the start of this year, over ten new energy vehicle brands have introduced price reductions or limited-time cash discount promotions to draw in more potential customers.

A research report from Ping An Securities highlighted that leading new energy vehicle companies face growth rate pressures in 2024. Consequently, the price war they have sparked is expected to rage on, particularly within the mainstream price range of 100,000 RMB to 200,000 RMB. Additionally, the declining cost of batteries offers further room for manufacturers to engage in price reductions.

A number of new energy vehicle firms have set forth their latest annual sales goals. Predictions from the China Automobile Association indicate that sales of new energy vehicles in China are expected to reach about 11.5 million units in 2024, an increase from 9.495 million units in 2023, which equates to an approximate growth of 21%. The sales growth targets for 2024 set by these companies surpass this projection.

Overcapacity in new energy vehicles significantly influences companies’ decisions to reduce prices. Currently, the capacity utilization rate for China’s new energy vehicles stands at only 13%, indicating a considerable surplus of supply over demand. It is expected that as the industry reshuffle intensifies, the price battle will continue throughout the year.

Cui Dongshu, the secretary-general of the China Passenger Car Association (CPCA), remarked in a personal post that 2024 is a crucial year for new energy vehicle enterprises to solidify their market position, and the competition is expected to be exceedingly fierce.

How can we help you?

Yvonne Zhang

China Tax Update for Q1 2024

In the context of encouraging offshore trade, a new preferential treatment of stamp duty has been issued for enterprises registered in Shanghai Pilot Free Trade Zone and Lingang New Area. At the end of last year, the tax authority also announced the extension of some existing tax benefits.

I. Stamp duty exemption policies on offshore trade in Shanghai Pilot Free Trade Zone and Lingang New Area

In February 2024, the MOF and the STA issued the tax circular Cai Shui [2024] No. 8 to support the development of offshore trade in pilot free trade zones. According to the new preferential policy, the stamp duty is exempted for offshore trade contracts if the taxpayers that carry out the offshore trade are registered in Shanghai Pilot Free Trade Zone and Lingang New Area.

The offshore trade refers to a resident enterprise purchasing goods from a non-resident and reselling them to another non-resident enterprise. The goods do not physically enter or exit the customs territory of China. This policy will be in effect from 1 April 2024 to 31 March 2025.

II. Continued implementation of land appreciation tax preferential treatment in the context of enterprise system reform and restructuring

According to the Announcement [2023] No. 51 issued by the Ministry of Finance (“MOF”) and the State Taxation Administration (“STA”), land appreciation tax exemption policies for enterprises that change the system and conduct restructuring are extended to 31 December 2027.

The extension policies basically keep the key points of the original policies as stipulated in Announcement [2021] No. 21 issued by the MOF and the STA. Companies qualified for land appreciation tax exemption are limited to these that carry on enterprise reform including overall enterprise system reform, enterprise merger, enterprise split and real estate investment as equity. The preferential policy is not applicable if one of the enterprises involved is a real estate development enterprise.

III. Continued exemption of consumption tax on oil products regenerated from waste mineral oil

In September 2023, the MOF and the STA issued the Announcement [2023] No. 69 to continue the exemption of consumption tax on the industrial oil produced with recycled waste mineral oil until 31 December 2027.

To be exempted from consumption tax, all of the following conditions shall be met:

Enterprise shall obtain the permit for (Comprehensive) Operation of Hazardous Wastes issued by the authority of ecology and environment.
The raw material shall consist of at least 90% of waste mineral oil.
Finished products must include lubricating base oil, and the lubricating base oil produced with each ton of waste mineral oil shall not be less than 0.65 tons.
Products made with waste mineral oil shall be accounted separately from products made with other raw materials.

This policy is proposed to support and promote the comprehensive utilization of resources and environmental protection.

How can we help you?

Eloise Yao

Director

Trial Implementation of Advance Tax Rulings in Shanghai

On 29 December 2023, the Shanghai Municipal Tax Service enacted the Administrative Measures of Shanghai Municipal Tax Service on Advance Tax Rulings (for Trial Implementation) (hereinafter referred to as “the Measures”). The Measures provide taxpayers with written rulings for specific complex tax-related matters that are expected to occur in the future. This will increase the certainty of applying tax policies, reducing tax risks, and avoiding negative consequences.

I. Target of Advance Tax Rulings

According to the Measures, “Advance Tax Rulings” are services provided by tax authorities and the service results are delivered in form of a written confirmation. From a legal point of view, the advance tax rulings are not subject to the rules of administrative reconsideration and administrative procedures.

II. Scope of Advance Tax Rulings

The Measure is only applicable to taxpayers registered in Shanghai. The scope includes specific complex matters expected to occur in the future.

However, any of the following matters do not fall within the scope of advance tax rulings:

Matters that do not have a specific project plan or will not occur within the next two years.
Matters without a reasonable commercial purpose or those that are definitely prohibited by the relevant laws and regulations of the State.
Matters that are already covered by existing laws and regulations.
Other matters to which advance tax rulings are not applicable.

III. Application process for Advance Tax Rulings

Taxpayers applied for Advance Tax Rulings shall submit an application to the competent tax authority presenting the transactional arrangements, tax position, impact on operations and tax consequences etc. Tax authority will communicate the application with taxpayers. After conducting necessary review and investigation, tax authorities will issue a ruling stating the opinion from tax authority. After issuing the advance tax ruling, tax authorities could perform follow-up review.

The Opinion on Advance Tax Rulings shall only apply to the matters specified in the Application Form for Advance Tax Rulings. It cannot be applied directly to other taxpayers or similar matters.

If the transactional arrangements have substantial change or the tax rules are changed, the advance tax ruling shall be revoked by tax authority. However, taxpayers could notify tax authorities within 30 days and apply for advance tax rulings again.

IV. Our observations

In the background that tax authorities tend to adopt procedures such as “record filing” or “self-assessment tax filing and documents maintenance” in China, taxpayers have to bear certain tax risks, in particular for complex transactions or being in a situation that the tax rules are not clear enough.

In practice, taxpayers usually consult the tax authority on no-name basis to ensure that they are complying with the tax rules. But after completing the tax filings, they may still face the risk of receiving an announcement of adjustment from the tax authority, which may result in make-up of taxes and overdue interest. With the advance tax ruling, more certainties are granted to the enterprises which may assist the management of enterprises in making business decisions.

For example, an overseas group has a restructuring project involving subsidiaries in China and overseas. Due to the complexity of the transaction, it may be difficult for the overseas group to determine the tax obligations in China. In this situation, the Chinese subsidiary may submit an application to the competent tax authority before the implementation of the restructuring and require an advance ruling. With the advance riling, the uncertainty of the tax exposures would be largely eliminated.

The Trial Implementation of Advance Tax Rulings is an effort made by the Chinese tax authorities for the first time. Even though the Advance Tax Ruling is released by Shanghai tax authority, it is still an important step in the Chinese tax administration.

How can we help you?

Eloise Yao

Director

Upcoming Regulatory Update: How existing companies shall adjust their capital contribution time in line with the revised Company Law

The release of the revised Company Law on 29 December 2029 has attracted a great deal of attention among the owners and management of companies in China, particularly on the tightened capital contribution requirements. Just before the Chinese New Year of 2024, we see a further step in the implementation of the revised Company Law: The Chinese government released the Draft Provisions on the Implementation of Registration Administration System for Registered Capital for public opinion.

The Draft Provisions explicated the capital contribution requirements for companies in a variety of circumstances. In this article, we focus on the implications of the Draft Provisions for the limited liability companies which is the most common form for foreign investors.

We refer to existing companies as those registered before 1 July 2024.

Newly established companies: 5-year capital contribution period

From 1 July 2024, newly established companies must make a full capital contribution within 5 years of incorporation. This has to be stipulated in the Articles of Association of the companies.

Companies established before July 2024: “3+5” adjustment schedule

The Draft Provisions provide for a three-year transition period, i.e. from 1 July 2024 to 30 June 2027, for companies registered before the promulgation of the new Company Law. During this transition period, companies whose capital contribution period exceeds the statutory 5 years will have to adapt themselves to comply with the new regulations.

Exceptions:

Companies whose remaining capital contribution period is less than 5 years from 1 July 2027 do not need to make an adaption.
Companies undertaking major national strategic tasks, involving people’s livelihood, national security or major public interests may make capital contributions in accordance with the original capital contribution time with the approval of the competent department of the State Council or the people’s governments at the provincial level or above.

Example:
Company ABC was established on 1 December 2019 and its shareholder subscribed a registered capital of RMB 1 million by 30 November 2038. Until 1 July 2027, it would have a remaining capital contribution period of more than 5 years, so it must apply for registration to adjust its capital contribution period during the three-year transition period (1 July 2024 to 30 June 2027). For example, it can apply for registration on 1 June 2027 to reformulate its Articles of Association and change the capital contribution period to 30 May 2032.

Increase of registered capital: 5-year capital contribution time

From 1 July 2024, increased registered capital must be paid in by the shareholders that have subscribed to the increased amount within 5 years of the registration of the capital increase.

Companies with unusual registered capital structure

The Draft Provisions provided more clarify on the situation of “companies with clearly abnormal capital contribution amount and timeline”.

The registration authority may reject the company’s registration applications if it sees an apparently excessive amount of registered capital, which is in contrary to general knowledge and the industry characteristics, indicating the inability of full capital contribution.
For companies registered before 1 July 2024 with a capital contribution period of more than 30 years and a capital amount of more than RMB 1 billion, in order to verify the business status of these companies, the registration authority may require the companies to provide statements, organize an evaluation by professional organizations or consultation with other government departments. If they are found to have abnormal capital contribution amount and period, the authority may require such companies to make adjustments in accordance with the new Company Law within 6 months.

Reduction of registered capital during 3-year transition period

For companies established before 1 July 2024, the Draft Provisions put forward the possibility of reducing the registered capital during the 3-year transition period. According to the Draft Provisions, existing companies that meet certain conditions may apply to reduce their registered capital (not reducing paid-in capital) with a relatively simplified approach, provided that no objection has been raised by creditors during the 20-days public announcement period.

The conditions include:
(I) there is no outstanding debt, or the debt is obviously less than the paid-in share capital of the company;
(II) all shareholders undertake to be jointly and severally liable for the debts of the company prior to the capital reduction to the extent of their originally subscribed capital contribution; and
(III) all directors undertake not to impair the company’s ability to repay its debts and the company’s going-concern capacity.

Companies that do not meet these conditions should refer to the regulations of the Company Law on the regular formalities of capital reduction when considering a reduction of their registered capital.

Please contact us if we can support you.

Important notes:
We draw your attention to the scenario that in certain areas, e.g. some industry parks, there may be specific requirements on the amount of registered capital for companies registered in their area. In such a case, the company should also discuss with the relevant parties to clarify the implications if it is considering to reduce its registered capital.

Disclosure of information to the public

The revised Company Law and the Draft Provisions provide that a company shall, within 20 working days from the date on which the information is formed, make relevant capital contribution information public through the National Enterprise Credit Information Publicity System:

The amount of capital subscription and contribution made by its shareholders;
The method and date of the capital contribution;
changes of shareholding information.

As supporting documents, the company shall upload to the system the register of shareholders, financial statements and other relevant materials showing the capital paid in by shareholders.

Simplification of company registration formalities

The Draft Provisions stipulates that the company registration authority shall optimize the registration procedures and formalities to facilitate the companies’ adjusting the period and amount of their capital contribution. It remains to be seen how local registration authorities will respond to these regulations in practice.

Conclusion

The Draft Provisions provide clarification and interpretation of the new capital contribution requirements, especially for companies registered before 1 July 2024. We advise shareholders and management of affected foreign-invested companies to observe the regulatory progress, review their capital contribution status and if applicable, consider the possible adaptations to their capital contribution time to comply with the new Company Law.

How can we help you?

Lena Li

Manager

A foreign management executive’s insight into today’s China and SEA region

Mr. Martin Schneider is the Chairman & CEO of Brainforce AG. Brainforce is a global management consultancy company headquartered in Switzerland providing senior interim managers to clients to sort out problems and implement solutions.

Mr. Schneider is invited to share his opinions from his observations and experience on today’s China and SEA region.

Interview

Gerald Neumann: Dear Mr. Schneider, thank you for sparing your time to take this interview. As a frequent traveler across Asia, which countries do you find most appealing from investment perspective?

Mr. Schneider: Mr. Neumann, it is a pleasure to share with you my experiences and observations. I have been working with China and many South East Asian Countries for the past 28 years, at both the industrial, and the interim executive management services provider side. To your question: China, due to its gigantic market size and growth situation has been the winner for foreign direct investments in Asia for the past at least three decades. However, the situation is changing, and diversification is of essence. ASEAN countries offer alternatives. For the upcoming decade, I would consider Thailand to be continue to be one of the most stable and business-friendly country to invest in, followed by the Philippines as a “newcomer”.

Gerald Neumann: China’s economic growth seems to be slowing down compared to previous years, despite its massive market and accountable workforce. To reboot the foreign capital inflow, the Chinese government has recently initiated some favorable measures, including a bold move to grant visa-free entry for short-term visitors from six countries (incl. Germany). How do you see the economic fundamentals and the recent business climate in China, and its impact to foreign companies?

Mr. Schneider: For this question, I look at three aspects: Firstly, China’s absolute GDP has grown to one of the largest economies in the world. Mature Markets typically generate GDP growth rates in the 2-4%/year range “only”. China will follow the macroeconomic reality. Secondly, China’s population starts to shrink and is dramatically aging at the same time. The infrastructure in place serves its current population of 1.4 billion already well. The real estate market has grown to a serious bubble. A recent global research study projects China’s population to shrink to some 750-900 million by year 2100. “China’s universities produce millions of graduates each year, but many cannot get a decent job and end up unemployed or become production line workers”, wrote the South China Morning Post recently. Therefore, China may face a lasting overall consumer weakness, even if the share of the middle class will continue to grow. Thirdly, the “China First” policy favors the substitution of foreign brands by local ones, even if those original brand products are produced in China. In consequence, the accessible market size will shrink for many foreign products.

Gerald Neumann: Despite of the sound premiums paid to expatriates, the multinational companies are still experiencing high turnover and a shortage of expatriate managers and engineers working in China. Do you have made similar observations with your clients? Can the local managers make up for the shortage to some extent?

Mr. Schneider: From my observations, the premiums paid to expatriates have been decreasing continuously. Along with the substantially increased cost of living especially in recent years, China is not so attractive anymore for foreign executives. The living conditions for foreigners have worsened also in other aspects: (1) Westerners feel uncomfortable with the higher surveillance of people’s activities and imposed internet restrictions. Also, the negative State propaganda on Western political and economic systems, cooled down the local Chinese interest in foreigners. We have seen many foreign executives leaving China to South East Asia or other emerging markets, particularly since the pandemic. The vacancies have been filled mainly with local managers. I observe an increasing disconnect between Chinese subsidiaries and European headquarters. Maybe this is one reason why there is an increase in compliance cases which has been creating more opportunities for our interim executives in China.

Gerald Neumann: Will you consider sending an interim manager from your company to work for a limited time at a client subsidiary company in Asia? What is the alternative?

Mr. Schneider: We have seen a fundamental shift from “flying-in” interim executives from abroad to deploying local interim executives. Reasons for this include the challenges for work permits and cost saving. There are a sufficient number of very suitable local senior interim executives that can take over a managing function on a consultancy contract basis within days. In contrast to a permanent executive hire, an interim executive deployment can be an excellent complimentary solution as he/she is immediately available. Considering seniority, experience and high flexibility in workload and duration, make it an overall cost-effective solution. Last but not least, such a solution is particularly suitable if there are compliance issues to resolve, due to the contractual set-up, allowing for appropriate, unbiased managerial actions in the company.

Gerald Neumann: With your years of experience doing business in China, do you feel a strong impact from the political landscape in China today? Which industries, respectively products do you think have been most affected by the political changes in recent years?

Mr. Schneider: The current political landscape in China put an end to the “gold digger rush” of the past 30+ years. China has never been easy to deal with, but most companies had too high benefit expectations from the China boom. While many companies have been successful, many others have not earned an adequate risk premium during the boom years. The overly rigorous government measures during pandemic messed up supply chains globally and lowered the confidence in China’s economic policy. Western companies have become cautious and started to adjust their China strategy.
I believe that the political changes are affecting particularly industries with (1) traditional products which have local alternatives already, (2) products which are mainly sold through Chinese public tenders, (3) and products which were produced in China mainly for low-cost reasons (“extended workbench”).

Gerald Neumann: As more and more multinationals adopting a China plus One strategy to diversify their investments by entering/moving into SEA countries, do you also observe similar phenomenon for companies from German speaking countries? Do you consider it a necessary move?

Mr. Schneider: The pandemic was an eye-opener for companies globally. It was too risky to put all eggs into one basket, i.e. to build a China-focused supply chain and market strategy The multinationals have been taking action already, Apple being a prominent example. Talking to our mid-cap and SME clients from German speaking countries, most of them are working on similar strategic adjustments. The level of strategic adjustments will correlate with the development of geopolitical tensions and ideology prioritization in China. Therefore, it is wise to diversify supply chain and markets to be better prepared for challenging times.

Gerald Neumann: Which specific country in the SEA region (e.g. Thailand, Vietnam, Malaysia, Singapore, etc.) do you consider most suitable for mid-cap companies from German speaking countries? Any specific reasons?

Mr. Schneider: Overall, Thailand, and the Philippines as a “newcomer”, are my favorites for mid-cap, resp. SME companies from German speaking countries. Vietnam, Malaysia and Singapore may be a choice also, depending on the preferences of evaluation factors and the special company case. I generally look at the following key factors: (1) the ease-of-doing-business, (2) the ease of logistics, i.e. importing/exporting goods and money, (3) an open local market access, (4) a stable, business-driven political system with a liberal economic policy, (5) the availability of skilled labor at reasonable cost (engineering, production, quality, etc.), (6) local English language skills for business and in daily life, (7) value-for-money of goods and services locally, (8) the level of IP-protection, resp. its enforcement, and (9) the standard of living as a foreigner at reasonable cost. Thailand has one of the best track records for these factors among emerging markets in Asia, and this for more than half a century. More recently, mid-cap companies may also look at the Philippines which went somewhat forgotten during the past 40+ years. A remarkable policy shift away from a China focused policy has happened recently there, supported by a strong democratic legitimation. American, European; Japanese and Korean companies are highly welcomed. This will open new business opportunities for especially SMEs and mid-caps from Germany, Switzerland and Austria.

Gerald Neumann: Mr. Schneider, thank you again for your time with us and the valuable input. Have a nice day!

How can we help you?

Dr. Gerald Neumann

Partner

German Carmaker’s New Strategy for Smart Driving in China

On December 8, CARIZON, a groundbreaking joint venture between Volkswagen Group’s software company CARIAD and Horizon, was formally announced. This collaboration will see intelligent driving solutions based on Horizon’s chips integrated into Volkswagen Group’s all-electric models in the Chinese market.

Beijing Horizon Robotics Technology Research and Development Co., Ltd., established in 2015, specializes in smart chip research, development, and self-driving algorithms. Following several rounds of financing, Horizon recently secured a strategic investment from Chery Automobile. Despite not disclosing the financing amount and valuation since its USD 900 million Series C financing in February 2021, Volkswagen’s recent investment of 2.4 billion Euros in its partnership with Horizon, securing a 60 percent stake in the joint venture, marks a significant commitment.

The electric vehicle (EV) market in China is increasingly intertwined with smart technology. Mr. Guan Mingyu, Global Managing Partner of McKinsey & Company, noted at the Conference on the Internationalization and Development of the Automotive Industry that Chinese consumers prioritize in-vehicle intelligence and autonomous driving features in EVs, whereas European and American consumers focus more on powertrain performance. This cultural difference presents unique challenges for multinational car companies operating in China.

For the first nine months of 2023, Volkswagen Group reported the delivery of 531,500 pure electric vehicles, with European sales reaching 341,000 units, a 60.9% year-on-year increase. However, Chinese sales accounted for only 117,000 units, a modest 3.9% increase, lagging behind the average growth rate of 24.9% in China’s pure electric vehicle industry.

Volkswagen stands out among multinational carmakers for its aggressive electrification strategy. Beyond its partnership with Horizon, Volkswagen China has established an intelligent cockpit joint venture with Thunder Soft. Additionally, Volkswagen collaborates with Xiaopeng Automobile to develop two all-electric mid-size SUVs featuring Xiaopeng’s intelligent driving system. Audi, Volkswagen Group’s luxury brand, continues its smart driving project with Huawei, expecting new models by 2025.

Meanwhile, in the field of electric vehicles in China, BMW and Mercedes-Benz are taking a different path. On November 30, both companies simultaneously disclosed that they had signed a cooperation agreement to establish a joint venture. This venture aims to build and operate a supercharging network in China, with each company holding a 50:50 share ratio. The network, designed to be accessible to all brands of electric vehicles, is a strategic move to compete with TESLA and Chinese EV maker NIO. According to the plan, the first batch of charging stations is expected to start operations in key new energy vehicle cities in China in 2024. By the end of 2026, the goal is to have at least 1,000 supercharging stations and approximately 7,000 supercharging piles established. This initiative is a direct response to the existing infrastructure of TESLA, which has built over 1,800 supercharging stations with more than 11,000 supercharging piles, and NIO, which boasts 2,009 stations and 9,400 piles.

Fitch Rating’s Automotive Industry Outlook 2024 report suggests that electric vehicles and smart driving could reach a critical mass in China by 2024. As the market becomes more competitive, the deployment of German carmakers’ current strategies may help them regain some of the market share lost in China’s electric vehicle sector over the past three years.

How can we help you?

Yvonne Zhang

November Year-on-Year Export Growth Turns Positive for the First Time Since April

China’s exports in November 2023 recorded a slight increase on a month-on-month basis. The year-on-year growth in exports, measured in U.S. dollars, was 0.5% for November, marking an improvement of 6.9 percentage points compared to the same period last year. This shift from negative to positive growth is notable, although according to the wind consensus estimate, the rate fell marginally short of the anticipated 0.7% growth.

Focusing on exports to the G3 countries (U.S., E.U., Japan), the year-on-year decline narrowed to 4.7% in November, showing a significant recovery from the 10.7% decline observed in October. Notably, exports to the U.S. rebounded impressively, shifting from a 10.7% year-on-year decline in October to a 7.3% increase. The decline in exports to Japan also narrowed, though exports to the E.U. saw an expanded year-on-year decline. Exports to North Asian economies experienced a modest year-on-year growth of 0.6%. In emerging markets, exports to ASEAN economies fell by 7.1% year-on-year, a smaller decline compared to the 15.1% observed previously. A remarkable increase was seen in exports to BRI economies (Brazil, Russia, and India), which surged to 17.9% from a mere 2.3%.

In November 2023, China saw a notable increase in the exports of key commodities, including automobiles, ships, cell phones, and home appliances. The year-on-year growth rates for these commodities were impressive, with automobiles recording a 27.9% increase, ships a remarkable 112.5% rise, cell phones growing by 54.5%, and home appliances by 10.3%. When compared to the figures from October, these growth rates show considerable variations: the growth rate for automobile exports decreased by 17.0 percentage points, whereas for ships, it surged by 78.4 percentage points. Cell phone exports increased by 32.6 percentage points, and home appliances saw a modest rise of 2.8 percentage points.

Conversely, labor-intensive products such as textiles, clothing, furniture, and toys experienced declines in November, falling by 11.7% and 8.5% year-on-year, respectively. Industrial products, including exports of iron and steel, non-ferrous metals, and chemicals, also declined by 12.8% and 6.1% year-on-year. Notably, electromechanical products, which encompass integrated circuits and automatic data-processing equipment, saw a 4.0% year-on-year decline in exports for November.

In summary, while the bottoming out of the tech cycles has supported exports from economies in the supply chain, Mainland China’s exports are yet to demonstrate strong growth momentum. The export growth is expected to continue fluctuating around current levels in the near term and is unlikely to rebound significantly. Potential challenges, including a potential recession in the U.S. and the high base effect, could exert downward pressure on exports in the second quarter of next year. However, stabilization is anticipated in 2024, with the total export volume expected to remain consistent with the levels of 2023.

How can we help you?

Yvonne Zhang

Social insurance alert

The Shanghai authorities recently issued several policies governing the new practice of social security collection and the contribution of employment injury insurance. We summarize the key points of these policies and their implications below.

I. Transition of social security collection from the Social Security Bureau to the Tax Authority

Announcement on the Optimization and Adjustment of the Process of Declaration and Payment of Social Security Premiums, Announcement No. 2 of 2023, by the State Administration of Taxation Shanghai Municipal Tax Authority, jointly with other competent authorities in Shanghai Municipality (effective from 1 December 2023)

According to the announcement, from 1 December 2023, employers shall make social security declaration and payment directly with the tax authority. In the past, the declaration and payment were handled separately with the social security bureau and the tax authority.

This is a further step in the transition of the collection authority from the social security administration to the tax authority, which has been under discussion nationwide for years.

In addition to Shanghai, authorities in some other municipalities and provinces in China also made similar announcements to implement the new practice in their justifications from December 2023.

The new practice divides the responsibilities as follows.

The Social Security Bureau is in charge of:

Social security registration for employers;
Social security registration for employees;
Social security contribution records;
Verification of social security benefits (e.g. pension, work-related injury insurance).

The Tax Authority is in charge of:

Social security declarations by employers;
Social security payments by employers.

However, in most areas, the transition of certain crucial responsibilities such as the determination of the social security contribution base and the conduct of social security inspection, is still pending. The exception is Guangdong Province (excluding Shenzhen and Dongguan), which has taken a regulatory step further by assigning the entire chain of social security responsibilities from social security information registration, declaration, determination of contribution base, collection, inspection, dispute settlement etc. to the relevant tax authorities.

What are the implications of this new practice?

Late payment interests
Let’s take Shanghai as an example. In the past, supplementary social security declarations and payments were handled by the social security authority and were not subject to late payment interest. With the integration of social security declaration and payment into the tax system, supplementary social security payments will be subject to a late payment interest at a daily rate of 0.05%.
Social security inspection
In the long term, the transition of social security collection function to the tax authority implies the possibility that the tax authority will be able to identify irregularities in the social security contribution base on the basis of the income information collected in the tax system and thus, if necessary, carry out a social security inspection. This may result in further restrictions on the flexibility of the social security arrangement for certain employers.

II. Work-related injury insurance relationship is effective upon successful registration by the employer

Opinions of the Shanghai Municipal Bureau of Human Resources and Social Security on Several Issues Concerning the Implementation Measures for Work-Related Injury Insurance of the Shanghai Municipality, Announcement No. 28 of 2023, by Shanghai Municipal Human Resources and Social Security Bureau (effective from 1 December 2023)

The Opinions aim to clarify the uncertainties and resolve the problems in the implementation practice of the work-injury insurance in Shanghai.

According to the Opinions, the work-related injury insurance relationship of the employees shall take effect from the time the employer registers them for work-related injury insurance.

This implies a potential liability for work-related injuries in the period upon employment start before the registration with the social security authority, despite the fact that the full social security declaration for the first employment month can be made in the month following the start of employment. This can be seen as an indication that employers shall make the registration for onboarding employees as early as possible.

III. Work-injury insurance for Overage Employees and Interns in Shanghai

Opinions on the Trial Implementation of Participation in Work-Related Injury Insurance by Employees Beyond the Statutory Retirement Age and Interns in Shanghai, Announcement No. 30 of 2023, by the Shanghai Municipal Human Resources and Social Security Bureau, jointly with other competent authorities in Shanghai Municipality (effective from 1 December 2023)

According to the Opinions, from 1 December 2023, employers within the jurisdiction of Shanghai Municipality may register their overage employees (not over 65 years old) and interns (enrolled students in Shanghai) for the work-related injury insurance under a specific type of insurance.

Adapting to the needs in the practice of the new era, this will further strengthen the work-related injury insurance system, protect the legitimate rights of employees and diversify the work-related injury risks at the employers.

In the context of these new regulations, we recommend that employers conduct regular compliance checks to review their social security declaration practice and make corrections where appropriate and necessary.

How can we help you?

Lena Li

Manager

Restrictions to offshore trade in China tends to be eased

Over the past decade, offshore trade in China has been quite restricted due to the strict documentation requirements by the banks for cross-border settlements. Exceptions were only made for companies registered in certain areas under special customs supervision, such as a free trade zone. However, in the recent two years, some restrictions have been eased gradually, which makes it feasible to conduct offshore trade for companies registered in a regular area that is not subject to any special customs supervision.

In December 2021, the People’s Bank of China and the State Administration of Foreign Exchange jointly issued a notice (“Yinfa [2021] No. 329”) to support new forms of offshore international trade. The notice takes effect on 24 January 2022.

The so-called “new forms of offshore international trade” refers to trade between residents and non-residents of China in which goods do not enter or exit China’s (first-line) customs borders or are excluded from the customs statistics, including but not limited to offshore resale (such as intermediary trade or transit trade), global sourcing, overseas contract manufacturing, and overseas procurement for construction contracts.

According to Yinfa [2021] No. 329, banks are encouraged to optimize financial services to facilitate companies to settle cross-border payments arising from new forms of offshore trade. In order to qualify for the offshore trade, on the one hand, companies shall have superior forex ratings. In specific, only companies classified as Category A in the Foreign Exchange Administration Classification for Trade in Goods are allowed to settle cross-border transactions for new forms of offshore international trade. On the other hand, the transactions shall be genuine, lawful, and commercially rational and logical.

We suggest carefully reviewing the trade mode and consulting with the local banks in advance before conducting the offshore trade.

How can we help you?

Eloise Yao

Director

China Tax Update for Q4 2023

In Q4 2023, the transition to e-invoicing system has been further developed in China and some amendments to the existing tax laws were published by the National People’s Congress for collection of public opinions. In Hong Kong, the Legislative Council passed two bills regarding the stamp duty rate reduction and the taxation on foreign-sourced disposal gains respectively.

I. Transition to E-invoicing System in the last eight provinces in China

The fully digitalized e-invoicing system has been rolled out nationwide in Q3 2023. In Q4 2023, with the last eight provinces announcing to launch the fully digitized electronic invoices, the e-invoicing system has covered all provinces/regions in China.

The e-invoicing progress in last eight provinces are summarized as follows:

#	Province	Tax circulars	Issued date	Effective
1	Beijing	Announcement [2023] No. 3 of Beijing Municipal Taxation Bureau, STA	27 October 2023	1 November 2023
2	Shandong	Announcement [2023] No. 2 of Shandong Provincial Taxation Bureau, STA	27 October 2023	1 November 2023
3	Hunan	Announcement [2023] No. 4 of Hunan Provincial Taxation Bureau, STA	27 October 2023	1 November 2023
4	Anhui	Announcement [2023] No. 4 of Anhui Taxation Bureau, STA	27 October 2023	1 November 2023
5	Guizhou	Announcement [2023] No. 9 of Guizhou Taxation Bureau, STA	26 October 2023	1 November 2023
6	Ningxia	Announcement [2023] of Ningxia Hui Autonomous Region Taxation Bureau, STA	27 October 2023	1 November 2023
7	Qinghai	Announcement [2023] No. 6 of Qinghai Taxation Bureau, STA	27 October 2023	1 November 2023
8	Tibet	Announcement [2023] No. 2 of Tibet Autonomous Region Taxation Bureau, STA	24 November 2023	1 December 2023

II. Extension of VAT exemption policy for interest-free intercompany loans

In September 2023, the Ministry of Finance (“MOF”) and the State Taxation Administration (“STA”) issued the Circular [2023] No. 68, which extends the effective period of VAT exemption policy for interest-free intercompany loans between intergroup enterprises to the end of 2027. Before the extension, the preferential VAT treatment were supposed to be ended at 31 December 2023.

III. New legislation progress of Mainland China

1. VAT Law (draft for collection of public opinion)

On 1 September 2023, the National People’s Congress (“NPC”) issued the Second Draft of the amendment to the PRC Value Added Tax Law for collection of public opinions. Compared to the first draft, the main changes in this version are as follows:

The standards for small-scale taxpayers are clearly stated, with taxable income not exceeding five million RMB.
When the revenue of a taxpayer is significantly high or low without proper reasons, the tax authorities should use refer to the relevant clauses in the “Administrative Law of the People’s Republic of China on the Levying and Collection of Taxes” to determine the revenue of the taxpayer.
If the input VAT exceeds the output VAT, taxpayers opt to carry forward the excess to the next period or claim a tax refund.
Remove the rule that the simplified tax calculation method cannot be changed within the prescribed period once chosen by the taxpayer.
Clearly state the situations that are eligible for dedicated preferential policies. For instance, supporting the development of small and micro-enterprises, key industries, as well as promoting entrepreneurship and employment.
The tax payment obligation arises on the date on which the transaction deemed as taxable is completed.

2. Amendments to the Implementation Regulations for Invoice Administration

On 20 July 2023, the State Council announced to revise the Implementation Regulations for Invoice Administration for the third time. In accordance with the “Decision of the State Council on Revising and Repealing Some Administrative Regulations”, the main changes compared with the 2019 version are as follows:

Add a regulation stipulating that hard copy invoices and electronic invoices shall have the same legal effect.
No permits are required for vendors of invoices. Instead, tax authorities shall determine the vendor of invoices following the relevant provisions on government procurement procedures.
When determining the types, quantity of invoices and method of collection, the tax authorities consider the risk level. Entities or individuals are not required to present the invoice purchase register to the tax authorities when collecting invoices.
For prohibit acts regarding invoice administration, the following actions have been added: stealing, intercepting, tampering with, selling or disclosing invoice data.
Verification of the tax agent’s identity is required when issuing an invoice.

3. New Administrative Dispute Resolution Law

On 1 September 2023, the Administrative Dispute Resolution Law of the People’s Republic of China was amended and passed at the 5^th Session of the Standing Committee of the 14^th National People’s Congress. Compared with the previous draft, the main changes of the new law are as follows:

Departments with different functions and levels are clearly differentiated to assist applicants in identifying the appropriate department to apply to.
The scope of administrative dispute resolution is expanded to include additional situations such as decisions on compensation and work-related injuries, unlawful actions by administrative organizations, and violations of legal rights in the disclosure of government information.
Applicants may authorize one or two lawyers or a legal aid agent to participate in the administrative consideration and to submit their applications online. If the application documents are incomplete, the administrative organ shall notify the applicant in writing within five (5) days, listing the items that need to be corrected once and for all.
A new chapter is added to regulate the procedures for the administrative dispute resolution hearing. This chapter outlines the standards for suspending and terminating administrative dispute resolution, as well as the practical requirements for administrative dispute resolution hearing cases.
The decision process for administrative dispute resolution is optimized. The standard for changing, cancelling and confirming administrative dispute resolution decisions has been clarified and additional rules for the respondent have been added to strengthen the enforcement of administrative dispute resolution decisions.

IV. HK Stamp Duty Rate Reduction

On 15 November 2023, the Stamp Duty (Amendment) (Stock Transfers) Bill 2023 was passed by the Legislative Council of Hong Kong. According to the amendment, the rate of stamp duty on stock transfers is reduced from 0.13% to 0.1%, which came into effect on 17 November 2023.

The stamp duty rate reduction is aimed to lower investors’ transaction costs, improve market sentiment, and enhance the competitiveness of Hong Kong’s stock market.

V. HK IRD’s New Bill for Taxation on Foreign-sourced Disposal Gains

On 29 November 2023, the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Bill 2023 was passed by the Legislative Council of Hong Kong. The Bill seeks to refine Hong Kong’s foreign-sourced income exemption (FSIE) regime by expanding the scope of assets in relation to foreign-sourced disposal gains to cover all assets other than shares or equity interests. The refined FSIE regime will come into effect on 1 January 2024.

Under the existing FSIE regime of Hong Kong, multinational enterprises (MNEs) are not required to have adequate economic substance in Hong Kong to enjoy tax exemption for their offshore passive income. According to the latest requirements of the Guidance on FSIE regime updated by the EU in December 2022, all types of passive income (including dividends, interests, royalties and capital gains) shall be subject to the economic substance test. So Hong Kong was landed on the European Union’s (EU) “watch-list” of markets with risks of double non-taxation.

Under the refined FSIE regime of Hong Kong, the scope of assets in relation to foreign-sourced disposal gains is expanded, which brings Hong Kong’s FSIE regime in line with the updated Guidance on FSIE regime of the EU. With the introduction of the new Bill, Hong Kong Government requests the EU to swiftly remove Hong Kong from the EU watch-list in order to benefit local MNEs in Hong Kong.

We suggest that MNEs entities in Hong Kong closely monitoring the on-going development of the FSIE regime and assessing the potential tax impact accordingly.

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Eloise Yao

Director

Significant Changes of the New Company Law (Revision 2023)

The new Company Law which will take effect on July 1, 2024, contains significant changes of the capital contribution as well as the corporate governance. that are likely to affect every foreign-invested company in China: companies will be required to pay in the registered capital within five years while the impact on existing companies is unclear now.

I. Tightened Capital Contribution Timeline

1. The registered capital shall be paid in full within five years from the establishment of the company

Article 47 of the Revised Company Law states that all shareholders of a limited liability company shall pay up the registered capital in full within five years from the date of the establishment of the company in accordance with the Articles of Association.

This provision will affect both new and existing companies. According to Article 266 of the new Company Law, existing companies whose capital contribution period exceeds the 5-year period stipulated in the new Company Law shall “gradually adjust” their capital contribution period to comply with the new Company Law.

To clarify how existing companies shall adapt to the new regulations, we still need to wait for further implementing rules or interpretation of the Chinese government.

2. Stricter rules on outstanding capital contributions

If the shareholder does not fulfill his obligation to make the capital contribution upon expiration of the grace period stated in the written notice of call by the Board of Directors, the shareholder shall forfeit his equities for which the capital contribution has not been paid upon issuance of a written notice of forfeiture by the resolution of the board of directors.

Such forfeited equities shall be transferred according to law, or the registered capital thereof shall be reduced, and the equities shall be written off. If the equities are not transferred or written off within 6 months, other shareholders of the company shall make corresponding capital contributions in full amount in proportion to their capital contributions.

Shareholders may be held liable to the company itself for losses caused to the company due to capital contributions not being made in full or in time.
Shareholders may be held liable for unpaid or insufficient capital contributions of co-shareholders up to the amount of the unpaid or insufficient capital contribution portion.

II. Regulatory Changes to the Corporate Governance Structure

1. Audit committee

Currently, the corporate governance structure has a two-tier board system consisting of the board of directors and the board of supervisors (or a supervisor). The new Company Law allows companies to choose a one-tier board system by setting up an audit committee in the board of directors. This audit committee can replace the board of supervisors or the supervisor.

2. Small companies may further simplify their corporate governance structure

In addition to the option of a supervisor instead of a board of supervisors in the current Company Law, for limited liability companies with a small scale or a relatively small number of shareholders, the new Company Law introduces the option of not having a supervisor if all the shareholders of the company reach a consensus. (Article 83)

3. Employee representative

Limited liability companies with more than 300 employees shall include employee representative(s) in their board of directors unless the board of supervisors has been established with an employee representative included. Such employee representative(s) on the board of directors shall be democratically elected by the company’s employees. This will further ensure the involvement of the employee representative in the management system.

III. Regulatory changes to the Shareholders’ Powers and Obligations

1. Shareholders may request to inspect the accounting vouchers of the company themselves or through external firms

In addition to the accounting books, the new Company Law states that shareholders may request to inspect the accounting vouchers and may authorize an accounting or law firm to assist them in inspecting the relevant materials. This provision further enhances shareholders’ right to information.

2. Profit shall be distributed within six months upon resolution by the shareholders’ meeting

The Board of Directors shall distribute the profit within six months after the shareholders’ meeting has passed the resolution on the distribution of profit. (Article 212)

IV. Regulatory Changes to the Responsibilities of the Management

1. Shifting in management responsibilities

The responsibility to decide on the company’s business policies and investment plans has been shifted from responsibility of the shareholders’ meeting to the responsibility of the board of directors.
The responsibilities of the general manager are not included in the new Company Law, which provides greater flexibility in determining the functions of the general manager.

2. Stricter liability rules for directors and senior management

The new Company Law contains several new provisions that impose stricter diligence requirements and greater liability exposure on directors and senior management of the companies in China. For example,

Directors, supervisors, and senior managers have a duty of diligence to the company, and they shall exercise reasonable care normally expected of managers for the best interests of the company when performing their duties.
Directors have a duty to verify the capital contributions made by the shareholders of the company and to issue reminders in case of undue or insufficient contributions.
When a director, supervisor or senior manager directly or indirectly enters into a contract or conducts a transaction with the company, he/she shall report the matter to the board of directors or shareholders’ meeting for resolution.
No directors, supervisors or senior managers shall take advantage of his/her position to seek for himself/herself or any other person any business opportunity that belongs to the company except under certain circumstances permitted by the law.
No director, supervisor or senior executive shall engage in any business that is similar to that of the company for himself/herself or for any other person, unless he/she reports the matter to the board of directors or the shareholders’ meeting and obtains the approval by resolution.

V. Other regulatory changes

1. Legal liability of the company for the activities carried out by its management

The company is liable for the legal consequences of the civil activities carried out by the legal representative on behalf of the company.
If a director or senior manager causes any damage to any other person in the performance of his or her duties, the company shall be liable for compensation. If a director or senior manager acts with intent or gross negligence, he/she shall also be liable for compensation.

2. Possibility of making capital contributions in the form of stock rights and creditor’s rights

The new Company Law introduces two additional options of non-monetary assets for capital contribution: stock rights and creditor’s rights.

3. Shareholders’ meeting and board meeting by means of online correspondence

The convening and passing of resolutions at shareholders’ meeting and board meeting may be carried out by means of online correspondence, unless otherwise provided under the Articles of Association (“AoA”).

4. Quorum requirements

The new Company Law introduces mandatory quorum requirements for the convening and the passing of resolutions at the shareholders’ meeting or the board meeting. Pursuant to these requirements,

More than half of the equity interest of a company needs to be represented when passing a resolution at the shareholders’ meeting. (Article 66)
More than half of the directors need to be present at a board meeting and a resolution is passed by the affirmative vote of more than half of the directors. (Article 73)

Conclusion

Although there are still uncertainties and room for interpretation regarding some of the changes under the new Company Law, we advise shareholders and management of foreign-invested companies to review their current set-up and to consider and discuss the possible adaptations under the new Company Law well in advance. Particular attention should be the capital contribution obligations and the governance structure of the company. Following the first draft of the revised Company Law published in December 2021, a second draft in December 2022 and a third draft in August 2023, the final draft of the revised Company Law of the People’s Republic of China was approved on 29 December 2023 during the 7^th Session of the Standing Committee of the 14^th National People’s Congress. The law will take effect on July 1, 2024.

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Lena Li

Manager

15-day China visa-free policy for France, Germany, Italy, Netherlands, Spain and Malaysia

On 24 November 2023, the spokesperson of the Chinese Ministry of Foreign Affairs announced that, China has decided to expand the scope of its unilateral visa-free policy and implement unilateral visa-free entry for six more countries on a trial basis. According to the official notice, from 1 December 2023 to 30 November 2024, travelers with ordinary passports of France, Germany, Italy, the Netherlands, Spain and Malaysia may enter China on a visa-free basis for the purposes of business, tourism, visiting relatives and friends, transit through China. The visa-free stay must not exceed 15 days.

Travelers that do not meet the conditions of visa-free entry shall still apply for a Chinese visa before entering the country.

This is a major step in a series of loosened entry policies by the Chinese government in the post-pandemic period in order to further promote the exchange of people and to maintain a high level of opening up to the world.

Following the announcement by the Ministry of Foreign Affairs, Chinese embassies in France, Germany, the Netherlands and Malaysia also released information on their official websites to notify the policy.

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Lena Li

Manager

Hague apostille, the new legalization approach for China since 7 November

As announced in March, the Convention Abolishing the Requirement of Legalisation for Foreign Public Documents (hereinafter referred to as “the Convention”) has officially entered into force in China on 7 November 2023.

According to the Convention, documents within the scope of the Convention can be sent directly to China for use after apostille, without having to be sent to the Chinese Visa Application Service Center for consular legalization, as was previously the case.

Notice on the discontinuation of consular authentication services by the Chinese Embassy

The Chinese embassies in a number of countries covered by the Convention have issued notices that they will no longer provide consular authentication services as of 7 November. Documents within the scope of the Convention issued in the countries of origin and intended for use in China can be submitted to the competent authority in the countries of origin for an apostille.

In Germany, the Federal Office for Foreign Affairs (“BfAA”, das Bundesamt für Auswärtige Angelegenheiten) is responsible for issuing apostille for the public documents issued by the German authorities including Federal Ministries, the Federal Office of Justice and the Federal Court. The corresponding documents must be pre-certified by the relevant federal authority before being sent to the BfAA for the apostille process.

On 13 November 2023, BfAA has officially included China (Mainland) in the list of countries in which the Hague Apostille Convention shall apply in relation to Germany.

The Chinese Embassy pointed out that the completion of the apostille does not guarantee that the official documents will be accepted by the relevant party in China. The Embassy recommends checking with the relevant authority in China in advance to confirm the specific requirements in terms of format, content, time limit, translation etc. before going through the apostille process.

Practice in China

Following the entry into force of the Convention and the end of the consular authentication services, relevant authorities in China have been in discussion to clarify the implementation of the new legalization approach. At the time of writing, we obtained the following information from the relevant Chinese authorities.

Chinese work visa for foreign employees

The Science and Technology Committee and the Talent Service Center, responsible for issuing work permits for foreign employees, confirmed that they can now accept degree certificates and no criminal record certificates with Hague apostille, instead of the consular authentication that was required in the past for certain categories of work permit in China.

Registration of Chinese subsidiaries

The Administration for Market Regulation (AMR authority), responsible for company registration, released information that they still accept certificates of incorporation that have completed the consular authentication process before 7 November 2023. However, it is still under discussion how to regulate the new legalization requirements for the purpose of company registration in the context of the Convention. We are in regular contact with the authority and will keep you updated.

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Lena Li

Manager

September’s Manufacturing PMI Hits 50.2: First Expansion Since Q2

As macroeconomic policies took effect, the Manufacturing Purchasing Managers’ Index (PMI) reentered the expansion zone in September, while service sector sentiment rebounded, ending a five-month decline.

Data source: National Bureau of Statistics

On September 30th, the National Bureau of Statistics revealed that the Manufacturing PMI for September was 50.2, an increase of 0.5 percentage points from August, marking its first entry into the expansion range since April. Meanwhile, the non-manufacturing business activity index climbed to 51.7, an increase of 0.7 percentage points from the previous month, halting its decline since April. Notably, two key industries experienced a PMI resurgence, pushing the composite PMI up by 0.7 percentage points to 52.0, signifying a quicker expansion in business and production activities.

In September, the manufacturing PMI sub-indexes indicated sustained improvements in production and demand. The manufacturing production index reached 52.7, and the new orders index was at 50.5—increases of 0.8 and 0.3 percentage points from August, respectively, marking their highest levels since April. Sector-wise, industries like oil, coal, fuel processing, automobiles, and electrical machinery reported production and new orders indexes exceeding 53.0, signifying a rapid release of production and demand in these sectors.

While external demand showed improvement, it remains in contraction. In September, the new export orders index rose by 1.1 percentage points to 47.8—its highest since April. However, it has remained below the threshold for the past six months.

To fulfill production requirements, enterprises increased their purchases. Consequently, the purchasing volume index in September edged up by 0.1 percentage points to 50.7, marking its second month of expansion.

As some bulk commodity prices persist in rising and market demand rebounds, there’s continued upward pressure on manufacturing prices. In September, the main raw material purchase price index stood at 59.4, while the factory price index was at 53.5. These represent increases of 2.9 and 1.5 percentage points from August, respectively, reaching their highest levels since May 2022.

Regarding business size, both large and small enterprises saw improved operating conditions, although disparities persist. In September, the PMI for large enterprises rose by 0.8 percentage points to 51.6, its highest point in six months. Meanwhile, the PMI for medium-sized enterprises held steady at 49.6, and that of small enterprises reached 48.0, a 0.3 percentage point increase from the previous month.

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Yvonne Zhang

Is China Still a Viable Investment Destination?

Amid inflationary challenges, geopolitical tensions, and global economic uncertainties, the question arises: Is China still a good investment? This topic was a focal point at the Milken Institute Asia Summit 2023 in Singapore on 13 September. Insights gleaned from the discussions painted a clearer picture of China’s future investment landscape.

China offers compelling investment opportunities rooted in its long-term development trajectory

In both the “Global Investment Outlook” and “China Investment Outlook” discussions, a consensus emerged: China is navigating a multifaceted set of challenges as it re-evaluates its historical economic model, seeking a fresh approach to ensure sustained growth and employment for the coming two decades. Positioned distinctly in a different economic cycle compared to the US and other developed nations, China’s strategy for the next decade is geared towards consumption-driven growth. Thus, the spotlight should be on opportunities aligned with this long-term trend.

Investment Opportunities in China:

Digitization: China’s digital evolution surpasses mere consumer-based digitization. It is unique in its integration with the supply chain, sparking innovation and enhancing productivity throughout its manufacturing ecosystem.
Sustainable Living: This is underscored by the comprehensive shift towards electric vehicles, covering everything from components to battery assemblies.
Healthcare: With an ageing population, there is a rising demand for healthcare services and technological innovations.
Consumer Sector: The future path of China’s consumer sector is marked by two significant shifts: the growing middle class and the changing shopping behaviors. More young generations take pride in China’s state-owned brands, shifting their purchasing choices to local brands. Furthermore, the way people receive information has transformed, leading to the rise of innovative businesses. It’s important to note that a significant portion of the world’s new middle-class shoppers will hail from Asia, with many from China. Even though fewer people from other countries have visited China in the last three years, businesses in the shopping sector have grown significantly.

The Chinese market stands out for its clear structural advantages, but understanding where to invest requires more detailed research

China boasts a robust pool of engineers, a productive and cohesive supply chain, and a vast domestic consumer base. This solid foundation provides an ideal environment for new technologies to develop and thrive locally.

The energy transition, rooted in sustainable development and complemented by cutting-edge technologies and innovative manufacturing, is a cornerstone of policy support. Several technological strategies are prominent, particularly advanced manufacturing techniques that support the global shift towards a greener economy.

As China’s economic focus shifts from sheer speed to quality-driven growth, transient speculative investments that were once “quick in, quick out” will diminish. Future investors will place an emphasis on thorough research to pinpoint enduring investment areas and opportunities.

China remains open for business; investors should adopt a ‘macro’ perspective

The pivotal challenges for future global economic development include the green transition and healthcare innovations. Geopolitical tensions risk driving inflation, resulting in escalating living costs. Addressing these challenges necessitates cost competitiveness across all sectors. The keys to business and economic triumph lie in efficiency and a cooperative market approach, attributes that are inherent in the Chinese market ecosystem.

On 14 May 2020, China’s Central Government introduced the “dual circulation” concept, emphasizing synergies between domestic and international businesses. While the terminology is new, it embodies China’s three-decade practice but with shifted industry focuses. For example, the semiconductor sector relies on domestic circulation, while sectors like the automotive industry demonstrate China’s transition from being a major car importer to the world’s leading exporter. This emphasizes that, while China is a vast market, it remains globally integrated and will never shut its doors to the world.

Current unfavorable factors suggested to be integrated in investment decision-making

Economy downturn: Although the third quarter macroeconomic data shows a moderating trend, it is undeniable that China’s economy is undergoing a cyclical adjustment. The adjustment originates in the dwindling real estate, one of the country’s pillar industries. The situation is expected to remain quo until a new economic growth point emerges.
Trade conflict with U.S.: China – U.S. trade fell by 14.5% in the first half of the year from a year ago, a direct consequence of U.S. moves to levy Section 301 tariffs on Chinese imports with about 10,000 categories of goods. Industries to some extent relying on export, for example, steel and aluminum industries will be affected.
Geopolitical risk: Close attention is recommended to be paid to China’s attitude in some of the regional conflicts around the world this year, although China has consistently called on the conflict parties to resolve disputes by calm, restrained and peaceful measures and avoided being involved in any dispute. However, we cannot rule out the policy uncertainties brought about by China’s being held hostage to the changing state of affairs.

How can we help you?

Yvonne Zhang

China Tax Update for Q3 2023

In Q3 2023, the State Taxation Administration (“STA”) of China together with relevant authorities announced several new preferential tax policies and granted further grace period for certain existing ones, in a move to revive the economic growth and boost market confidence in China.

I. Extended preferential tax policies

From the Individual Income Tax (“IIT”) perspective, the following preferential policies regarding tax-exempt fringe benefits for expatriates, annual bonuses and stock options are extended until the end of 2027. See our earlier article for more information — Tax Alert: China’s IIT Preferential Policy for Expatriates Extended.

#	Tax circulars*	Issued date	Tax category	Preferential tax treatment
1	Bulletin [2023] No. 29 issued by STA & MOF	18 August 2023	IIT	Tax exemption for eight categories of fringe benefits applicable to expatriates
2	Bulletin [2023] No. 25 issued by STA & MOF	18 August 2023	IIT	Preferential IIT treatment applicable to stock options of listed companies obtained by resident taxpayers**
3	Bulletin [2023] No. 30 issued by STA & MOF	18 August 2023	IIT	Preferential IIT treatment applicable to annual bonus received by resident taxpayers**

*STA=State Tax Administration, MOF=Ministry of Finance
**Including expatriates who stay in China for no less than 183 days with a tax year

In terms of Corporate Income Tax (“CIT”), Value-added Tax (“VAT”) and local surcharges, the following tax incentives are also extended until the end of 2027.

#	Tax circulars*	Issued date	Tax category	Preferential tax treatment
1	Bulletin [2023] No.12 issued by STA & MOF	2 August 2023	CIT	Preferential CIT rate of 5% effectively (i.e. 20% CIT rate on 25% taxable income) for Small-scale & Low-profit Enterprises**
2	see above	see above	Local surcharges	50% exemption of local surcharges, incl. Resource Tax, Urban Maintenance & Construction Tax, Education Surcharges & Local Education Surcharges, Property Tax, Stamp Duty (excl. Security Stamp Duty), Urban Land Use Tax and Arable Land Use Tax, applicable to Small-Scale & Low-profit Enterprises for CIT purposes or Small-scale taxpayers for VAT purposes
3	Bulletin[2023] No. 19 issued by STA & MOF	1 August 2023	VAT	VAT exemption for Small-scale Taxpayers*** with monthly revenue less than or equal to RMB 100,000, and preferential VAT rate of 1% (reduced from 3%) for other Small-scale Taxpayers
4	Bulletin [2023] No. 37 issued by STA & MOF	18 August 2023	CIT	One-off deduction of the cost of fixed assets not exceeding RMB 5 million per asset
5	Bulletin [2023] No. 38 issued by STA, MOF, NDRC & MEE	24 August 2023	CIT	15% preferential CIT rate applicable to qualified service providers entrusted by pollutant processing enterprises or government authorities to provide operation & maintenance services for pollution prevention facilities
6	Bulletin[2023] No. 13 issued by STA and MOF	2 August 2023	SD	Exemption of Stamp Duty (“SD”) for loan agreement signed between financial institutions and Small-Scale & Low-profit Enterprises for CIT purposes or Small-scale taxpayers for VAT purposes*
7	Bulletin[2023] No. 41 issued by STA, MOF & MOC	28 August 2023	VAT	VAT refund for domestically-manufactured equipment purchased by qualified R&D institutions

*STA=State Tax Administration, MOF=Ministry of Finance, MOC=Ministry of Commerce, NDRC=National Development and Reform Commission, MEE=Ministry of Ecology and Environment

** Small-scale & Low-profit Enterprises for CIT purposes refer to taxpayers with annual taxable income of less than RMB 3 million, number of employees less than 300 and total asset of less than RMB 50 million.

***Small-scale Taxpayers for VAT purposes refer to the taxpayers with annual turnover for VAT purposes less than or equal to RMB 5 million.

II. Increased amount of certain IIT itemized deductions for resident individuals

Itemized deductions for personal living expenses for resident individuals were introduced in the 2019 IIT Reform to align with the international tax practice. Expatriates who stay in China for at least 183 days within a tax assessment year can choose to claim itemized deductions that are also applicable to Chinese residents, or the traditional tax exemption on eight categories of fringe benefits available to expatriates only. Once elected, the IIT treatment cannot be changed by the expatriate during the tax year.

In Q3 2023, several itemized deductions (also referred to as “special additional deductions”) for IIT purposes are further increased per Guo Fa [2023] No. 13 as follows:

#	Item	Deductible amount
1	Nursing expenses for Children under three years old	~~RMB 1,000/month for each child~~ RMB 2,000/month for each child
2	Children’s education expenses	~~RMB 1,000/month for each child~~ RMB 2,000/month for each child
3	Continuing education expenses (for diploma education or certain professional qualifications)	RMB 400/month, up to 48 months for diploma education; and one-off deduction of RMB 3,600 in the year upon the issuance of relevant certificates for professional qualifications
4	Healthcare costs for serious illness	based on actual cost up to RMB 80,000
5	House mortgage interest	RMB 1,000/month up to 240 months
6	Expenses for supporting the elderly over 60 years old	~~RMB 2,000/month~~ RMB 3,000/month (allowed to be shared among siblings with some limitations)
7	Housing rent	RMB 1,500/1,100/800 per month

Expatriates working in China can compare the above itemized deductions with the tax exemption of fringe benefits specifically applicable to expatriates, make their choice at the beginning of the year and notify the employer accordingly. It is said that the latter policy for expatriates will be gradually replaced by the former itemized deductions and the transition period has recently been extended to the end of 2027 as stated in Section I.

Based on our observation, the tax exemption of fringe benefits applicable to expatriates only still appears to be more favorable in most cases, provided it is well planned and supported by proper documents, e.g. invoices (fapiao). Our professional team composed of HR & Payroll experts can provide advisory or compliance services in this regard upon your request.

III. Nationwide transition from paper-based invoicing system to E-invoicing system

As the STA pushes ahead with the Taxation Digitalization, the fully digitalized e-invoicing system was initially piloted in several cities in September 2020 and has been fully rolled out nationwide this year.

Under the new digitalized e-invoicing system, taxpayers can issue, submit and verify fully digitalized e-fapiao with QR codes online via the unified e-invoicing service platform. There is no need for cumbersome tax invoice control devices. Prior to the transition, taxpayers are required to revoke all existing paper or electronic blank invoices.

Please note that the digitalized e-fapiao is required to be archived in XML format according to Cai Kuai Bian Han [2023] No. 18 issued by Ministry of Finance, for at least 10 years as required by the prevailing tax laws. Hence, the data management would play an essential role in the day-to-day tax management of enterprises in China going forward.

Meanwhile, the Golden Tax System (“GTS”) Phase IV is under construction and is expected to be implemented next year. We will keep you in tune for the further progress of Taxation Digitalization in China.

IV. Draft amendment of Company Law open for public opinion containing capital contribution requirement

On September 1, 2023, the National People’s Congress (“NPC”) issued Third Draft of the amendment to the Company Law of the People’s Republic of China (“Third Draft Amendment”) open for public comment. Compared to the earlier version, the main changes are as follows:

Companies would be required to pay up the registered capital in full within 5 years of incorporation. (At present, investors can choose to subscribe the registered capital for 20, 30 or even 50 years, depending on the expected span of operation.) It is uncertain whether any transitional arrangements will be introduced.
The founding shareholder would be jointly and severally liable for any significant underpayment of the capital contribution.
The legal representative would have to be either a director or a manager of the company.
Shareholders can engage external firms to exercise their right to inspect the company’s financial and legal documents.
The convening and resolution making of shareholders’ meeting and board meeting may be carried out by means of online correspondence, unless otherwise provided under the Articles of Association (“AoA”).

We will continue to monitor the developments with respect to the amendment of the Company Law and will provide relevant updates in due course.

Do you have questions?

For any questions about accounting, tax and regulatory matters in China, please do not hesitate to reach out to us.

How can we help you?

Eloise Yao

Director

Policies are issued by Chinese Government to Facilitate Foreigners’ Stay

In connection with the release of the Opinions of the State Council on Further Optimizing the Environment for Foreign Investment and Strengthening Efforts to Attract Foreign Investment by the State Council of China on July 25, the Chinese government recently announced the implementation of a series of policies focusing on facilitating foreigners’ stay in China.

We summarize the polices that are of particular relevance and importance to foreign investors.

1. Exemption from Passport Retention for Foreigners’ applying for residence permits, Press Conference of the Ministry of Public Security, 3 August 2023

The Exit-Entry Administration Bureau may not require to keep the original passport after the valid passport has been verified on the spot in accordance with the regulations, in order to make it easier for the foreigner to handle relevant matters with the passport. This policy will in particular facilitate the travel of the applicants during the application period.

Further implementation details of this policy are still to be clarified.

2. Facilitating the issuance of visa for foreign business people at ports of entry into China, Press Conference of the Ministry of Public Security, 3 August 2023

Foreigners who come to China for business negotiations, trade exchanges, installation and maintenance, exhibitions and conferences, investment and entrepreneurship, and who are not able to apply for visas to China from abroad in time, may apply for visas to enter China at the ports of entry by presenting invitation letters by companies and other supporting documents.

Those who need to make multiple round trips for business purposes may exchange their visas for multiple-entry visas for three years after entering China.

3. Announcement on Continued Implementation of Individual Income Tax Policies on Subsidies and Allowances for Foreign Individuals, Ministry of Finance and State Administration of Taxation, 18 August 2023

According to Announcement [2023] No. 29 of the Ministry of Finance and the State Administration of Taxation, Foreign individuals may opt to apply tax exemption policies for allowances such as housing allowance, language course fee, children’s school fee etc.

The tax exemption policy for specific allowances for foreign individuals was firstly stipulated in the Notice on Several Issues Relating to Individual Income Tax Policies (Cai Shui Zi [1994] No. 020) and had a last-minute extension notice on 31 December 2021 for two years ending on 31 December 2023.

This is the second extension after the revision of the Individual Income Tax Law in 2018. The announcement remains in force until 31 December 2027.

4. Announcement on Continued Implementation of Individual Income Tax Policies for Annual One-off Bonus, Ministry of Finance and State Administration of Taxation, 18 August 2023

According to Announcement [2023] No. 30 of the Ministry of Finance and the State Administration of Taxation annual one-off bonus may continue to be taxed separately from the basic salary using the preferential IIT calculation method.

This extension announcement is valid until 31 December 2027. Prior the announcement, the preferential individual income tax policy for one-off annual bonus was expected to expire at the end of 2023.

The Opinions of the State Council on Further Optimizing the Environment for Foreign Investment and Strengthening Efforts to Attract Foreign Investment provide guidance on promoting foreign investment from legal and finance aspects. We expect to see more concrete policies in the spirit of the Opinions in the coming periods.

How can we help you?

Lena Li

Manager

Finally no COVID-19 testing required for entering China

The Ministry of Foreign Affairs of China announced at a regular press conference on 28 August 2023 that, starting from 30 August 2023, international travelers are no longer required to undergo COVID-19 testing before entering China.

This is a further step since the requirement for pre-boarding nucleic acid testing was replaced by the self-administered COVID-19 rapid test (antigen test) on 29 April 2023.

Following this announcement, embassies and consulates in a number of countries have issued their latest policies on traveling to China accordingly. Passengers are no longer required to confirm a testing result on their entry declaration.

With the recent progress of the Chinese government’s measures to facilitate international travel, we are seeing an increase in the workload at Chinese embassies and consulates and recommend that you plan your visa process for travel to China well in advance.

How can we help you?

Lena Li

Manager

Restructuring of China Investments, Part 1: Participation Models for Local Managing Directors

In this series, we consider that the vast majority of foreign managers have left China in the last three years. Even before the Corona Pandemic, the exodus of foreign employees was slowly beginning, with the speed then changing from gradual to rapid in recent years.

Many German-speaking investments in China, which are often significant revenue generators for the entire group, are now managed by Chinese managers. Successful Chinese managers are always entrepreneurs in their own right. Therefore, today we would like to discuss how such managers can be bound to the company.

Our guests are Mr. Rainer Burkardt, founder and managing director of Burkardt & Partner Rechtsanwälte in Shanghai, who has been working as a consulting lawyer in China for twenty-six years, and Mr. Thaddäus Müller, partner at Fiducia Executive Search with offices in Shanghai, Hong Kong, and Singapore. The interview is conducted by Dr. Gerald Neumann, partner at Ebner Stolz in Shanghai, Bangkok, and Stuttgart.

Interview

Gerald Neumann: Thaddäus, you have more than 15 years of experience in China. What distinguishes Chinese managers from German-speaking managers?

Thaddäus Müller: The cultural differences are significant. In general, I have observed that Chinese employees identify much less with their employers than in Europe. Employees change companies more often and quickly take advantage of company dissatisfactions or tempting offers from other employers compared to Germany. This also applies to managers who have overall responsibility for the company. Additionally, Chinese employees, at all levels, expect clear hierarchies. In China, a management team is less often and more frequently a single managing director. Other managers or employees with managerial roles are considered clearly subordinate.

Gerald Neumann: Rainer, do you see it the same way?

Rainer Burkardt: In principle, yes. However, it depends on the type of company. Chinese employees are more likely to leave large multinational companies with an impersonal management structure than medium-sized companies with direct and intensive contact with the managing director. German-speaking family-run companies have an excellent reputation and often have an outstanding corporate culture. This is highly appreciated.

Gerald Neumann: Are those incentives that you mention to candidates for your clients, Thaddäus?

Thaddäus Müller: Absolutely. Our German-speaking clients not only compete with other German-speaking employers for qualified candidates but also – and increasingly so – against local Chinese companies and, of course, against US companies. Compared to both employers, I see advantages for German-speaking employers regarding company culture, but perhaps not necessarily in terms of compensation. American companies often offer significantly higher pay, especially when it comes to the variable component.

Gerald Neumann: Does that mean German-speaking entrepreneurs pay too little?

Thaddäus Müller: Not necessarily. However, successful Chinese managers expect high variable components, and local employers and Anglo-American companies often offer higher pay.

Rainer Burkardt: Truly successful managers know their market value and value to the company, especially when the subsidiary in China operates independently and is not managed as a branch office by the parent company abroad. In these cases, the salary expectations from Chinese managers often exceed what the parent company is willing to pay. In such cases, alternative solutions need to be considered other than fixed salaries.

Gerald Neumann: What options are there for designing variable salary components in China?

Rainer Burkardt: Generally, the same legal structuring options are available abroad. Initially, performance-based annual bonuses can be granted with flexible criteria. Sales managers receive commissions based on sales, while for managing directors, the bonus is usually linked to the subsidiary’s business success but sometimes also to the success of the entire corporate group.

Gerald Neumann: So, can we assume that Chinese managers would accept a higher variable component, Thaddäus?

Thaddäus Müller: That’s how I would see it. The aforementioned cultural factor applies here. If a candidate is unwilling to accept a high variable component, it should be questioned whether they are truly the right candidate.

Gerald Neumann: From a tax perspective, a one-time annual bonus is subject to reduced rates; at least, that is the current regulation. Are there any other legal differences compared to German labor law, Rainer?

Rainer Burkardt: Chinese labor law is much less differentiated than, for example, German labor law. Additionally, there is significantly less security due to insufficient high-level court rulings and academic commentary literature to clarify ambiguous laws and handle disputes. This means that the employment contract must have clear and unambiguous provisions. Unfortunately, we often encounter very complicated or imprecise contract wordings that quickly end up in labor court. It should be noted that Chinese labor courts often rule in favor of the employee, especially when it involves a foreign-invested company.

Gerald Neumann: Should compliance aspects also be taken into consideration?

Rainer Burkardt: I highly recommend that. Compliance is a hot topic for foreign companies in China. When discussing a managing director with overall responsibility, compliance should be one of the main factors in determining the variable part of their compensation. For sales managers, attention should be given to ensuring that the eligible revenue for commission includes an appropriate margin and that the transaction is completed, meaning the purchase price is paid to prevent kickbacks and fictitious transactions.

Gerald Neumann: We regularly advise our clients to maintain low liquidity in China, actively manage their working capital, and report on it. Can this also be a bonus criterion?

Rainer Burkardt: Yes, that is now being used as a bonus determinant, and I think it’s a good idea. Local managing directors often need to pay more attention to these financial indicators, and they have clearly defined criteria for measuring success.

Thaddäus Müller: Based on my observations, candidates also accept this. However, as Rainer mentioned, clear regulations are necessary. As I mentioned before, the important thing is that a sufficiently high variable component allows for attractive compensation. Managers want to participate in the success. Of course, the employer can also set a cap to ensure the overall package remains within a reasonable range.

Gerald Neumann: Participating in the success could also mean granting Chinese managers shares in the company in China or even in Germany. Is that also requested, Thaddäus?

Thaddäus Müller: Not so much, actually. The focus is more on high compensation from the employee’s side. There are, of course, special cases, but they are more common when the employer and employee have known each other for a longer time. However, it’s still a rare occurrence, especially in family-owned companies.

Rainer Burkardt: I recommend granting shares only if you have known the manager for a longer period of time and if they have delivered the desired business results in the past. However, it is important to ensure that the corresponding corporate agreements continue to allow the German parent company maximum freedom in implementing important investment decisions, that the participation of the Chinese manager can be terminated without their involvement or ideally even against their will, and that the financial requirements for the Chinese manager’s participation are kept as low as possible. It should be noted that in certain equity participation models, the wholly-owned subsidiary can become a joint venture with the Chinese manager as a shareholder.

Gerald Neumann: Can there be a phased plan in place for this?

Rainer Burkardt: Certainly. The company can initially grant the manager a well-compensated employment contract with performance-related bonuses, with the prospect of acquiring shares after a certain period of time. However, I would be cautious about granting a legally binding option at this stage. Certain parameters should be outlined early on to bind the manager and avoid future disappointments. However, in my opinion, such options should only be granted after thoroughly analyzing the tax and legal advantages and disadvantages of the respective equity participation model.

Gerald Neumann: Can the employee potentially save parts of their salary from acquiring shares?

Rainer Burkardt: Yes, that is generally conceivable. Personally, I would prefer to structure it more simply and communicate to the employee early on that they may need to provide a monetary consideration for the shares.

Thaddäus, Rainer, thank you for your insightful explanations!

Part 2 of our series “Restructuring China Investments” will be published in August 2023 and will focus on the sale of production to local investors in China.

About our interview partners: A brief introduction of Rainer and Thaddaeus

Thaddaeus

Thaddäus is a partner at Fiducia Executive Search in Asia and has been with the company for 18 years. He holds a degree in business administration and has a passion for HR and recruiting. He and his team assist industry leaders and international medium-sized companies (mainly from the DACH region) in finding the right talent for key specialist and leadership positions in China and Southeast Asia.

Prior to his work at Fiducia, Thaddäus worked in the automotive industry and the textile division of W.L. Gore, a large American technology corporation. Thaddäus studied at the Catholic University of Eichstätt-Ingolstadt and the Stellenbosch Business School in South Africa.

Rainer

Rainer Burkardt is the Founder and Managing Director of the PRC-licensed law firm Burkardt & Partner Rechtsanwälte in Shanghai. Having been living and working in China for 25 years, Mr. Burkardt belongs to the few German lawyers who possess long-lasting, on-the-ground China experience. His expertise lies in providing practical legal advice predominantly to SMEs from Austria, Germany, and Switzerland on their investments in China.

Since 2009, Mr. Burkardt has been the trusted lawyer of the Consulate General of Austria in Shanghai. He had served as Vice-chair of the European Union Chamber’s Legal Working Group, Shanghai, for two years before he was elected as Chairman in 2010. Since 2013, he has been appointed as an arbitrator at Shanghai International Economic and Trade Arbitration Commission (SHIAC).

How can we help you?

Dr. Gerald Neumann

Partner

The Outlook for Entrepreneurs in China: A Survey of Entrepreneurs in China during Economic Resurgence

UBS Evidence Lab conducted the 12th Chinese Entrepreneur Survey from March 7 to April 6, 2023. The survey involved the participation of 527 high-level executives who hold decision-making and investment responsibilities within their respective companies. As the Chinese economy resumes its growth trajectory after three years of implementing pandemic control measures, this survey aims to provide insights into the perceptions of these entrepreneurs regarding the current business landscape. It specifically explores their expectations for revenue, capital expenditure, strategic outlooks for the second half of the year, as well as any shifts in the trend of supply chain realignment.

Expectations for revenue, capital expenditure, and ease of recruitment have shown an upward trend in the first half of 2023.

The survey reveals that 81% of companies anticipate an increase in their sales revenue during the first half of 2023. Moreover, nearly 80% expect to receive new export and domestic orders, which marks a notable improvement from the September 2022 survey. This surge in demand can be attributed to the rapid reboot of the economy and the normalization of economic activities. Additionally, 63% of respondents predict an enhancement in net margins within their industry for the first half of this year, surpassing the proportion recorded in the September 2022 survey. In line with these optimistic business expectations, 33% of respondents believe that companies possess more substantial pricing power, with 6% intending to raise prices in the first half of 2023—both figures demonstrating an increase compared to previous survey results.

The survey indicates a more positive outlook on capital expenditure for the first half of 2023. On a net percentage basis, 68% of respondents anticipate an increase in capital spending among companies in their industry, surpassing the figures of 55% in the September 2022 survey and 34% in the May 2022 survey. Notably, the textile, apparel, footwear, consumer electronics, automotive, technology hardware, and utilities sectors exhibit stronger capital expenditure intentions, fuelled by the recovery in consumer demand and governmental policy support. Overall, 66% of respondents plan to allocate more capital this year compared to 2022, representing an increase from the September and May 2022 survey results. Technology upgrades remain the primary driver for capital expenditure, while investments and equipment upgrades related to the pandemic have declined in impact. The influence of export demand from both developed and emerging markets on capital expenditure has decreased, aligning with the recent slowdown in global economic growth.

Recruitment and staff retention have experienced a decrease in challenges, reflecting the weakness in the labour market, particularly with regards to high youth unemployment. During the first half of this year, 40% of respondents believe that recruiting and retaining staff has become less difficult, marking the first time since the survey’s inception in 2017 that a majority of respondents hold this perspective. In contrast, the September and May 2022 surveys indicated a higher number of respondents stating that recruitment had become more challenging. These findings align with the latest UBS China Labor Market Survey, which reported an increased willingness to hire and a decrease in hiring difficulties during the first quarter. Notably, data from the National Statistics Bureau reveals that the youth unemployment rate (16-24-year-olds) has reached a record high of 20.4%. By the end of March, approximately 2.46 million recent graduates were seeking employment but faced temporary setbacks, constituting around 40% of the youth unemployment population. Typically, improved business sentiment and operating conditions require more time to translate into increased hiring.

Enhanced New Order Expectations and Capital Expenditure Intentions for the Second Half of 2023

Entrepreneurs are expressing a more positive outlook for the remainder of the year, with expectations for revenue and new domestic orders showing improvement. An impressive 82% of respondents anticipate an increase in their company’s revenue during the second half of the year, while 75% expect a rise in new export orders. Additionally, a net share of 59% of respondents have higher expectations for net profit margins.

With the overall sentiment and expectations about business activity on the rise, companies are strategically focusing on key areas for growth in 2023. These areas encompass expanding their domestic market share, implementing price increases for products or services, and exploring opportunities for expansion in overseas markets. Notably, the proportion of companies planning to cut costs is marginally lower than last year, with 5% in 2023 compared to 9% in 2022. In fact, 28% of respondents have indicated that they have no plans to cut costs in the next 12 months, marking the highest proportion since the inception of the survey questions in 2019.

Companies are displaying a greater sense of optimism regarding their capital expenditure plans for the second half of 2023. A notable 63% of respondents expect to increase their capital spending. Equipment and machinery upgrades continue to be a key area of focus for capital expenditure, while there has also been an uptick in the proportion of spending allocated to R&D. This shift is driven by the increasing pressure to decouple from the US and China.

When considering different sectors, capital spending intentions are particularly strong in healthcare, technology and hardware, consumer electronics, utilities, and semiconductors. Conversely, companies in telecommunications services, materials, and essential consumer goods are adopting a more cautious approach. This trend aligns with the solid maintenance of manufacturing investment and explicit policy support for sectors such as innovation and technology.

However, it is important to note that the sharp decline in industrial and corporate profits during the first four months of 2023 (down 20.6% year-on-year), the decrease in capacity utilization (74.3% in the first quarter, compared to a previous high of 78%), and the recent weakening in the chain of economic growth may pose challenges to manufacturing investment. Nevertheless, if corporate profit margins and confidence improve, a higher willingness to invest in capital will serve as a driving force for investment growth in the future.

Expectations of supply chain shifts

Among 185 manufacturing exporters or suppliers heavily involved in the export business, the inclination to relocate supply chains away from Mainland China has weakened. By 2023, 37% of respondents had already moved some production overseas (compared to 46% in the September survey), and 15% had plans for further relocation. Additionally, 32% of participants expressed intentions to relocate production in the future. Overall, 46% of manufacturing exporters intend to relocate some production out of Mainland China, marking a decline from the figures in April 2021 and September 2020 (approximately 70%). This decline may be attributed to the fact that a portion of these companies have already completed their relocation efforts, with 23% having relocated some production and having no further relocation plans. This figure is slightly higher than the results from the September 2022 survey (20%) and previous rounds (11% on average for 2020 to May 2022). Among those who have decided against relocating production from Mainland China, only 15% stated they would invest the majority of their incremental export supply chain overseas, 13% acknowledged plans to do so in the future, and 73% affirmed that they had no intentions to do so.

The inclination of companies to relocate their production back to Mainland China has also decreased. Among 117 manufacturing exporters or suppliers with a notable share of exports and an established overseas production base, only 18% have either relocated some of their overseas production back to Mainland China or have plans to do so. This figure represents a decline from the 29% reported in the September 2022 survey, but it is comparable to the findings from the May 2022 survey. Conversely, 30% of respondents have no current or future plans to relocate production back to Mainland China, marking the highest proportion observed in the past few years.

Despite the current landscape, the ongoing trend of two-way supply chain shifts is expected to persist. Among those impacted by supply chain disruptions, 55% reported shifting their production from overseas to local domestic suppliers. However, 81% of these respondents expressed a possibility of re-shifting to overseas suppliers once the outbreak subsides (an increase from 75% in the previous survey), while 16% mentioned the potential for a partial shift back (consistent with the findings of the September 2022 survey). Respondents’ cautious outlook on US-China relations, the persistent pressure to decouple or mitigate risks, the gradual alleviation of global supply chain bottlenecks, and companies’ concerns about reducing production costs are expected to continue driving production relocation overseas. Simultaneously, the recovery of domestic demand and the allure of a vast consumer market are anticipated to attract more companies to consider relocating production to Mainland China.

How can we help you?

Yvonne Zhang

New policy allows expats with PhDs working in Shanghai to apply for “green cards” IMMEDIATELY

Aside from its international business environment, the city of Shanghai has been for years at the forefront of attracting overseas talent also in terms of visa policy benefits.

What is new?

Recently, the Exit-Entry Administration Bureau of the Shanghai Public Security Bureau made an update in the announcement on its official website that foreigners with doctoral degrees who work in Shanghai can directly apply for permanent residence permit, also known as China’s “green card”, without having to calculate the salary level, tax payment and years of continuous work in Shanghai that are required for employment-type applicants. Previously, this policy only applied to overseas Chinese with doctoral degrees.

According to the policy, the overseas spouse of qualified applicants and their unmarried children that are under the age of 18 can apply for permanent residence together with the overseas applicants.

Required documents

The key documents required for the application of the permanent residence permit are as follows.

Original doctoral degree certificate:
Doctoral degree certificates issued by overseas institutions must be certified by the Service Center of the Ministry of Education in China (website: https://zwfw.cscse.edu.cn/).
Original certificate of no criminal record issued within 6 months from the date of application:
The certificate must be issued by the relevant state-level authority and legalized by the Chinese embassy or consulate. Applicants who have continuously resided in a country other than the country of their passport for more than 2 years since reaching the age of 18 must also provide evidence of a clean criminal record in that country.
Original certificate of no criminal record in China:
The certificate shall show no criminal record with all passport numbers used by the foreign applicants during their stay in China.

This policy will facilitate the stay of overseas talents who have a long-term development plan in China and saves huge administrative efforts due to extensive formalities of visa renewal, change of employer in China, etc. It further demonstrates the city’s commitment to attracting and retaining overseas talent and promoting academic cooperation.

How can we help you?

Lena Li

Manager

Intergovernmental cooperation: China-Germany Youth Interns Exchange Programme finally launched in May 2023

In the context of the large number of German investors entering the Chinese market in recent decades, many German students and young professionals are also interested in China when considering their overseas experience.

The “China experience” is seen as an enhancement of employability and a highlight in personal profiles.

What has changed?

While it is not always easy for these German students to find a way in, many Chinese companies are reluctant to accept overseas interns because they do not have access to quality resources and are not well informed about visa regulations and other relevant compliance issues. Or worse, we have heard of cases where companies faced legal risks because they had overseas interns working for them on a tourist visa or other type of visa that was not intended for an internship.

With the signing of the Joint Intent Statement of Youth Interns Exchange Programme between China and Germany in July 2018, this situation has seen a chance to change. This programme is a joint initiative between China and Germany, which aims to encourage companies and institutions in China to offer internship opportunities to German students and graduates. The programme enables German candidates to apply for internship visas in full compliance with the Chinese regulations. The following year, an implementation plan was signed in Beijing by government representatives from both countries, marking the official launch of the China-Germany Youth Interns Exchange Programme.

What happened right after this first launch, is well known to all of us. Due to the almost complete interruption of the international connection during COVID-19, the programme was suspended and was not actually implemented until May 2023.

Now, after a recent exchange with AHK (German Chamber of Commerce Abroad), the only authorized organization in this exchange programme to check the qualifications and issue the confirmation letter for the qualified German interns, the programme is finally launched in May 2023. AHK recently has been in contact with the relevant Chinese authorities to coordinate the implementation details.

Summary

What are the eligibility requirements for the China-Germany Youth Interns Exchange Programme?

Nationality: German citizenship.
Age requirement of the applicant: 18-35 years’ old.
Diploma or student status requirement: Graduates of German universities, technical schools or vocational schools who have received their degree within the last 12 months prior to the application date, students who have completed at least 4 semesters of a bachelor’s, master’s or doctoral degree in German universities, students at technical schools or vocational schools.
Requirement on the correlation between the applicant’s major field of study and the internship position: The internship position shall be relevant to the major or qualification of the German intern.

How does the application process look like?

Confirmation of eligibility for the exchange programme with AHK;
Apply for a confirmation letter from AHK;
Apply for a foreigner’s work permit notice with Shanghai Service Center for Foreigners’ Working in China;
Apply for Z visa with Chinese visa application center in Germany;
Arrival in China with Z visa;
[For an internship of more than 90 days] Apply for a work permit with Shanghai Service Center for Foreigners’ Working in China;
Apply for a residence permit with the Exit-entry Administration Bureau in Shanghai.

What are the main documents required for the application?

An internship agreement in bilingual version which contains information about the validity, description of the internship position, working hours, amount and payment of subsidies, arrangement of international medical insurance, termination clauses, internal regulations and obligations that are relevant to interns etc.
Certificate of studies or certificate of diploma;
Certificate of international medical insurance during the internship;
Certificate of no criminal record to be notarized and legalized by the Chinese consulate;
Health check report arranged at the designated center in China.

With the background of intergovernmental cooperation, the Youth Interns Exchange Programme provides a good approach for German students and graduates to enrich their personal visions, Chinese language knowledge and Chinese culture through the internship experience.

It also benefits Chinese companies which look for international insights from the young generation and flexibility in personnel planning depending on the specifics of the projects.

How can we help you?

Lena Li

Manager

No more pre-boarding nucleic acid testing for all passengers entering China after 29 April 2023

The Ministry of Foreign Affairs of China announced at a recent regular press conference that China will further optimize the regulation of remote COVID-19 testing for international travelers.

From 29 April 2023, instead of nucleic acid testing, all incoming passengers can take a self-administered COVID-19 rapid test (antigen test) within 48 hours before boarding. Airlines will no longer check the pre-boarding test certificate.

Policy details

Following this announcement, embassies and consulates in a number of countries issued their latest policies on traveling to China. According to the new policy, after receiving the negative result of the antigen test, passengers must complete a short health declaration on the website https://htdecl.chinaport.gov.cn. The declaration can also be made through the official WeChat program. During this declaration, they will be required to confirm their negative antigen test result.

Once in China, passengers are generally not required to undergo any further tests.

With the recent progress of the Chinese government’s measures to facilitate the international travel and the resumption of international flights, we are seeing an increase in the workload of Chinese embassies and consulates and recommend that you plan your visa process for your trip to China well in advance.

How can we help you?

Lena Li

Manager

China Economy Resumes Growth: The Government Plans Further Action

As China’s epidemic prevention and control measures loosen, China’s economy is beginning to bounce back. The market resumption is evidenced by several major economic indicators.

Major Economic Indicators

1. Purchasing Managers’ Index (PMI)

Data Resource: National Bureau of Statistics

The complex PMI broke through the critical 50-point mark in January 2023 and has achieved continuous growth since then. In fact, the PMI stood at 52.9 in January and then increased to 56.4 and 57 in February and March, respectively.

The PMI is one of the crucial indicators that measure market confidence laterally, i.e., whether procurement managers decide to purchase goods for future production or operations and the quantities they decide to purchase.

2. Producer Price Index (PPI) and Consumer Price Index (CPI)

Data Resource: National Bureau of Statistics

The PPI has continued its downward trend, decreasing from -0.7% in December 2022 to -0.8% in January 2023 and -1.4% in February. On the other hand, the CPI rose by 2.1% YoY in January, with food prices rising by 6.2%, non-food prices by 1.2%, consumer goods prices by 2.8%, and service prices by 1.0%.

However, with the conclusion of the Chinese Spring Festival, the growth in food prices has slowed down. In February, the CPI growth rate decreased by 0.5% MoM but still showed a YoY increase of 1%.

3. Industrial Added Values

Data Resource: National Bureau of Statistics

In January and February, Industrial Added Values above that designated size increased by 2.4% YoY (excluding price factors), with a MoM increase of 0.12%.

While the momentum of short-term rebound is apparent, the insufficient demand and reduced expectations resulting from epidemic prevention in the past years are expected to undergo significant changes.

2023 Government Report

The Government Report published on March 5^th this year sets the target GDP growth for 2023 at about 5%, which is at the lower limit of the market forecast range.

The National Development and Reform Commission states that this target is based on the 20th National Congress of the Communist Party of China, which made it clear that China must reach the level of moderately developed countries by 2035, which means China needs to maintain reasonable economic growth while improving quality and efficiency to meet the goal. The target also reflects the requirements of steady growth with stable employment and prices to improve people’s livelihood.

In the 2023 Government Report, the following several working priorities can be highlighted from the perspective of economic & social policy.

Accelerate the modernization of the industrial system to speed up the digitalization of traditional industries and small and medium-sized enterprises, making them higher-end, smarter, and more eco-friendly.
Intensify efforts to attract and utilize foreign investment by expanding market access, continuing to open the modern services sector, ensuring national treatment for foreign-funded companies, improving services for foreign-funded companies, and facilitating the launch of landmark foreign-funded projects.
Expect continuous progress in housing and medical care. More quality medical resources will be channeled toward the community level and more evenly distributed among regions.
Stabilize grain output and advance rural revitalization. In addition to keeping total grain acreage at a stable level, China will also invigorate the seed industry and support the development of agricultural science, technology, and equipment.
Continue the transition to green development by advancing energy conservation and carbon reduction in key areas and intensifying pollution prevention and control.
Expand domestic demand. The report said the incomes of urban and rural residents would be boosted through multiple channels, and priority would be given to the recovery and expansion of consumption.

The working priority of attracting and utilizing foreign investment has gained significant attention, with China’s actual use of foreign capital in 2022 amounting to 1,232.68 billion RMB, equivalent to 189.13 billion USD, a YoY increase of 6.3%.

In March, a few leaders of big beasts, such as Apple CEO Tim Cook and Executive Chairman Jay Y. Lee, visited China after three years of strict zero-COVID policies while other foreign giants expressed their intentions to increase their business in China. For example, McDonald’s plans to open another 900 stores, Starbucks plans to add 3,000 stores, and Tyson and Homer have also stated their intentions to increase their investment in China.

These plans show the confidence of foreign investors in China, despite the downward pressure on the global economy.

Measures Adopted to Attract and Utilize Foreign Investments

“We need to improve the business environment significantly!” said Mr. Long Guoqiang, Deputy Director of the Development Research Center of the State Council.

The government has implemented several practical measures to attract and utilize foreign investments to instill greater confidence.

On January 1, 2023, the ‘Catalogue of Industries Encouraging Foreign Investment (2022 Edition)’ officially took effect, with a total of 1,474 entries, which added 239 entries and modified 167 entries compared to the 2020 Edition. Industries listed in the Catalogue can enjoy preferential policies such as tariff reduction and the preferential supply of land, etc.
The Central Economic Work Conference in 2023 proposed implementing national treatment for foreign-funded enterprises, ensuring their participation in government procurement and bidding, and strengthening the protection of intellectual property rights and the legitimate rights and interests of foreign investment.
To expand the opening-up of the service industry to foreign investments, the government will implement comprehensive pilot projects in Shenyang, Nanjing, Hangzhou, Wuhan, and Guangzhou. Previously, China launched the same projects in five provinces and cities, including Beijing, Tianjin, Shanghai, Hainan, and Chongqing. Nearly 70 policy innovations have been implemented in the areas such as scientific R&D and financial services in Beijing, and 151 differentiated pilot measures in the rest four provinces and cities to accelerate the exploration of opening up the service industry.
Shanghai is being positioned as the global asset management center, and the Shanghai government has been making efforts to introduce new policies for years. In the “Action Plan for Promoting Confidence, Expanding Demand, Stabilizing Growth, and Promoting Development” issued by the Shanghai Municipal Government in January, it was particularly emphasized that greater efforts should be made to encourage foreign capital enterprises to reinvest profits and guide them to invest more in the industries of advanced manufacturing, modern service, high-tech, energy conservation, and environmental protection. The “Action Plan” also mentioned that maximum convenience for the entry and exit of personnel from foreign-funded enterprises should be provided in international trade and investment negotiation activities. Therefore, Shanghai has also released the “Action Plan for Optimizing the Business Environment Version 6.0”, which is a strong signal of its goal to build an international first-class business environment to serve the entities in the market for development acceleration. Compared with the previous five versions, the “Action Plan V6.0” is more committed to providing a full scale of online services that meet most needs of an enterprise, which will greatly enhance efficiency. Furthermore, the “Action Plan V6.0” particularly highlights establishing synchronous business administrative recognition in the Yangtze River Delta, such as the unified standardization of administrative licensing in the area.

Summary

As the Chinese proverb goes, “A year’s plan starts with spring.”

Based on the figures and policies presented in the first quarter, it is clear that the market is recovering. Additionally, the Chinese government is anticipating the market acceleration and has made preparation accordingly.

Will China’s economy meet expectations at the end of 2023? We will have to wait and see.

How can we help you?

Yvonne Zhang

Accounting practical focus on Q1

In this section, we aim to provide you with practical insights every quarter. Instead of analyzing standards, the information we offer focuses on “Hot Topics” for future consideration or challenges you may be currently facing.

Changes and challenges in Q1 2023

For middle market clients in China, the accounting standards in 2023 remain constant, with no material changes to apply. However, Chinese entities continue to encounter challenges in implementing the systems and requirements of their Headquarters. We have recently seen various examples of internal control system extensions, compliance systems updated, and preparation for the “Lieferkettengesetz.” All of these topics require local management to provide documentation, information, and judgments. A common challenge we have observed in practice is the lack of the bridge function to lead these new documentation efforts to success. Additionally, Covid restrictions have delayed multiple projects.

During the Covid lockdown and the following months, we received multiple questions regarding cash management. In practice, we encountered two extremely different cases. On the one hand, some companies had an increased need for proper cash planning due to the Chinese New Year, the Covid outbreak, and the challenging 2022. As financing for subsidiaries in China often takes time to become effective (e.g., registration of a loan, capital increase), proper planning is crucial during such challenging times to keep the operation running smoothly.

On the other hand, due to the previous pandemic policies, certain businesses were highly profitable and were able to generate sustainable profits. These profits increased the cash position of the subsidiary in China, and the headquarters decided to keep these profits in China due to the complexity of the situation in China and the low interest rates in Europe. However, with the recent increase in interest rates and changes in Covid policies, the headquarters may now want to reduce the open receivables from China and adjust the cash position in China based on operational needs. This may require a dividend payment.

In both cases, after the Covid restrictions are lifted, an analysis of the business, receivables, and liabilities between Intercompany is recommended to prepare for future challenges.

If you and your company are facing such challenges or would like to discuss them, please feel free to contact us!

How can we help you?

Christian Vogt

Partner

China Joins Apostille Convention

China has recently announced its decision to join the Convention Abolishing the Requirement of Legalisation for Foreign Public Documents.

Authentication of signatures or seals on cross-national commercial documents by a series of government agencies is a traditional practice in international trade that is often required to secure transactions. This process is commonly referred to as legalization.

Different countries have varying requirements for the legalization of foreign documents, with some requiring a “three-step legalization” or a “four-step legalization” (as shown in the example below). This process is necessary for the acceptance of foreign documents in various situations, such as company registration and work visa application, but it is often time-consuming and costly in certain countries.

Diagram 1: Overview of traditional legalization process

A simpler process is needed

The growing frequency of global trade has created a need for simplifying the authentication process for cross-national documents. The Convention Abolishing the Requirement of Legalisation for Foreign Public Documents, also known as the Hague Convention, was initiated in 1961 as a crucial practice for exempting commercial documents from consular legalization among its member countries.

After decades of adhering to comprehensive legalization practice, China made an announcement on its joining the Hague Convention (“the Convention”) during a regular press conference held by the Ministry of Foreign Affairs on March 10^th, 2023. The Convention will become effective in China from November 7^th, 2023. Under the Convention, the traditional consular legalization process will be replaced by a simplified process known as the Apostille or Hague Apostille. This involves attaching an Apostille certificate to authenticate the effectiveness of the official seal or the signature of the public official who has signed the public document from the home country. The Apostille process has several advantages, particularly in terms of time and cost, and is recognized by over 120 contracting countries worldwide. For example, in the UK, the Apostille can be obtained within one day under certain conditions.

The Apostille process

The Apostille is usually processed as described below:

Diagram 2: Overview of the Apostille process

Here is a sample of an Apostille certificate:

Apostille
1 Country:		[home country]
This public document
2. has been signed by		[name of public officer]
3. acting in the capacity of		[position of the public officer]
4. bearing the seal/stamp of the		[name of the government authority]
Certified
5. at	[authority name]		6. the	[date]
7. by	[information of public officer]
8. No.	[reference no.]
9. Seal/stamp	[seal of authority]		10. Signature	[Signature of officer]

Further insights

For decades, China has imposed strict requirements on the consular legalization of foreign public documents. Foreign investors have had to undergo lengthy formalities to obtain full legalization of their certificates of incorporation in order to establish their offices in China or to file a change in their company name or signatories. Foreign individuals have also been required to present their legalized degree certificates, certificates of non-criminal record, and other qualification documents when applying for a work visa.

With the implementation of the Convention, we believe that such administrative burdens will be reduced in China. Additionally, we have observed that some Chinese registration authorities in certain cities or administrative districts have already started to ease the requirements for the legalization of foreign public documents. For example, in certain districts of Shanghai City, the Administration of Market Regulation authority no longer requires the legalization of the certificate of incorporation when the investor has a change in its signatories.

We believe that China’s participation in the Convention will further facilitate international trade and the exchange of overseas talent.

How can we help you?

Lena Li

Manager

China’s aviation industry has faced significant regional differences in the recovery of international flights

With fewer COVID-19 restrictions, China’s aviation industry, which has been struggling for three years, has finally rebounded.

The domestic flight volume in China has been growing steadily and has now surpassed pre-pandemic levels, thanks in part to the increased travel during the Spring Festival.

However, the recovery of international flights has been slow, with only a 20% return compared to pre-epidemic levels. This is below the widely anticipated level of 30% in the industry.

International flight plan for the summer and autumn seasons revealed

On March 26^th, the Civil Aviation Administration released the international flight plan for the summer and autumn seasons. The plan revealed that 116 airlines plan to schedule 10,580 regular international passenger flights per week, which is a significant increase from the current weekly average flight of over 2,000 flights. However, the number of flights is only 60% of the average weekly flight of 17,524 in the 2019 summer and autumn seasons. Moreover, the flight plan is generally considered to be the upper limit number, and there are still many uncertain factors for the eventual recovery level.

Based on data from Flight Manager, a civil aviation platform, China’s international flight routes in the 12^th week of 2023 (March 20^th – 26^th) were dominated by Southeast Asia, accounting for 53.2% of the international flight volume. East Asia ranked second at 19.3%, followed by Europe at 8.7%, West Asia at 5.5%, Oceania at 3.9%, South Asia at 2.9%, Africa at 2.9%, North America at 2%, and Central Asia at 1.6%.

Middle East and Southeast Asia

The factors influencing the varying level of route recovery across different regions are multifaceted and intricate. The Middle East and Southeast Asia have been receptive to Chinese tourists, which has positively impacted flight volumes. In fact, international flights from Middle Eastern countries that maintain friendly ties with China’s policies, such as Qatar and Kuwait, have unexpectedly returned to pre-epidemic levels. Moreover, flights from the United Arab Emirates, Saudi Arabia, and Jordan have even surpassed pre-epidemic levels. Airline companies are currently concentrating on boosting their efforts in Southeast Asia for the upcoming summer and autumn aviation seasons.

The situation regarding China’s international flights in East Asia is quite complicated. While South Korea, China’s fifth largest trading partner, resumed flights in early March and quickly surpassed Singapore in flight volume, coming second only to Thailand with a recovery rate of over 16%. Japan, China’s fourth largest trading partner, has yet to announce the results of their negotiation, and their recovery rate is still less than 10%. Despite this, industry insiders believe that with the active economic exchange, the demand will continue to grow, especially as Eastern Asia routes have traditionally been profitable.

Europe and Australia

Regarding flights between China and other regions, the recovery rate for flights to Europe and Australia both exceeded the average level of 20%, at 20.8% and 27.4% respectively, surpassing those of Japan and South Korea. On February 16^th, the rotating presidency of the EU, Sweden, announced that 27 EU countries had reached a consensus to gradually lift the epidemic restrictions on Chinese visitors. On March 14^th, the Chinese Ministry of Foreign Affairs announced foreign visa and entry policies, which confirmed China’s long-standing commitment to opening up and demonstrated the tangible results of China’s commitments made during “Two Sessions” held in March. However, European airlines are facing higher flight costs due to their inability to fly over Russian airspace. Benjamin Smith, CEO of Air France KLM, stated that European airlines are forced to choose longer routes to Asia to avoid Russia, which gives Chinese companies an “unfair” advantage.

United States

The resumption of flights between China and the United States has been hampered by bilateral relations. In mid-February, the US Department of Transportation rejected the plan of American Airlines to add new flights to China during the summer and autumn seasons. The two major American airlines, Delta Airlines and American Airlines, were unable to increase flights to China in March. According to the principle of reciprocity, if US airlines are unable to add flights between China and the United States, the US government will not approve applications for additional flights from Chinese airlines.

From January 8th to the end of March, only a few new routes were established between China and the United States, except for some flights transiting in South Korea during the epidemic period. Currently, the only operational routes are Beijing/Shenzhen/Xiamen/Guangzhou – Los Angeles, Shanghai/Guangzhou– New York, and Shanghai – Detroit. China Airlines operates 8 flights per week, and US Airlines operates 12 flights per week.

A senior civil aviation official has stated that negotiations on air rights and the optimization of entry policies are still the main constraints on bilateral international routes. “Air rights” refers to the transit rights and transportation business rights in international air transportation. When exchanging these rights, the principle of reciprocity is generally adopted, including the execution of an equal number of international flights by both countries.

Impact of Russia-Ukraine conflict

At the beginning of 2022, European and American countries closed their airspace to Russian airlines due to the Russia-Ukraine conflict. In response, on February 28^th of that year, Russia also closed its airspace to 36 countries, including the European Union, the United Kingdom, the United States, and Canada. As a result, European and American airlines have had to divert routes to and from Asia, increasing flight time and fuel costs. However, Chinese airlines can still fly over Russia, which gives them a competitive advantage in the market, and this has led to a lack of motivation for European and American airlines to increase flights to China.

In terms of the long-term outlook, there may not be an explosive growth trend in the recovery of long-distance routes in Europe, while substantial changes in US routes are not expected until this October.

How can we help you?

Yvonne Zhang

Current CIT Policies for Small-scale and Low Profits Enterprises

For small-scale and low profits enterprises in China, a lot of tax relief policies have been released by
the Chinese tax authorities in recent years.

Overview

The following table summarizes the current corporate income tax (“CIT”) policies for small-scale and low profits enterprises:

Taxable income	Applicable CIT rate	Reduced rate on taxable income	Effective CIT rate	Effective period
CNY 0-1 million	20%	12.5%	2.5%	1 January 2021 – 31 December 2022
CNY 1-3 million	20%	25%	5%	1 January 2022 – 31 December 2024

Explanation and impact

We can see from the table that the tax incentive policy on the taxable income no higher than CNY 1 million has expired as of 31 December 2022. Currently, the State Taxation Administration has not an-nounced the renew policy yet. If this policy is not extended, the CIT shall be calculated at 20% for tax-able income no higher than CNY 1 million from January 2023.

However, the existing incentive tax policy for taxable income between CNY 1 million and CNY 3 million remains valid until the end of 2024. According to the ability-to-pay principle of taxation, generally the effective tax rate for taxable income of CNY 0-1 million shall not be higher than that for taxable inco-me of CNY 1-3 million. So we expect that the tax incentive policy will likely continue for taxable income no higher than CNY 1 million or change to the same policy for taxable income of CNY 1-3 million.

With the first quarter of 2023 coming to an end soon, it is time to file the provisional CIT return for Q1 in China. We advise small-scale and low profits enterprises in China to keep a close eye on policy changes in the near future. We will also update the policies once the new policies are announced.

How can we help you?

Eloise Yao

Director

China resumes issuing all types of visas to foreigners from March 15, 2023

On 14 March 2023, the Department of Consular Affairs, Ministry of Foreign Affairs and Chinese Embassy in a range of countries announced adjustments in the visa and entry policy for foreigners coming to China, aiming to further facilitate the exchange of international travelers. The new policy starts from March 15, 2023 Beijing time.

Overview

Reactivate Chinese visa that was issued before March 28, 2020 and remains valid.
Visa authorities abroad resume processing the applications of all types of visas for foreigners’ China visit (including visa for tourism and medical treatment).
Chinese port visa authorities resume processing the applications of all types of port visas that satisfy the legal conditions.
Resume visa-free entry to Hainan Province, visa-free cruise trips to Shanghai, visa-free entry to Guangdong Province for tour groups of foreigners from Hong Kong and Macau, and visa-free entry to Guilin City, Guangxi Zhuang Autonomous Region, for ASEAN tour groups.

How can we help you?

Lena Li

Manager

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

Partner

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):

China visa application completed online
Passport (must be valid for more than 6 months)
Scan of the passport identification page
Current passport photo
Invitation from the company in China
Letter of posting from the employer
Corona Vaccination Certificates
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

Manager

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 9^th 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 3^rd 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

Manager

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.

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%).

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.

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.

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.

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.

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

Partner

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

Manager

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?

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

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
Taxable transaction	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

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.

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

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

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.