Actually utilized foreign funds totaled 72.406 billion US dollars, marking and increase of 19.42% over 2004. The figure was over 12 billion US dollars above the estimate of 60.3 billion US dollars issued by the Ministry of Commerce in January, 2005. The figure issued in January, 2005 did not include foreign direct investment (FDI) utilized in the fields of banking, insurance, and securities, which accounts for the difference. The retrospective figure better reflected an important characteristic of China’s utilization of foreign funds,  demonstrating the importance of service trades. China’s banking, insurance, and securities services witnessed actual foreign direct investment as it hit a record high of 11.8 billion US dollars in 2005. This record demonstrated the extent to which China has opened up itsmodern service industry..

China approved 44,001 FDI projects in 2005, an increase of 0.8% over the previous year. Within the total of FDI actually used, manufacturing industries and real estate industries accounted for 70.4% and 9%, down 0.6 and 0.8 percentage compared with  2004, respectively. Leasing and commercial services, transportation, storage and shipping services accounted for 6.2% and 3%, up 1.6 and 0.9 percent, respectively.

 

Foreign direct investment by sector in China in 2005

The country realized 6.9 billion US dollars in overseas direct investment (excluding the financial sector) in 2005, up 25.8% over 2004; 21.8 billion US dollars in overseas contract projects, up 24.6%; and 4.8 billion US dollars of business volume from cooperative labor services involving other countries, up 27.5%.

      

Foreign direct investment by industry in China in 2005

Industry	Number of projects	％	Contractual foreign funds	％
Total	552,960	100	12,856.73	100
The primary industry	15,521	2.81	251.44	1.96
The secondary industry	411,728	74.46	8,830.73	68.69
The tertiary industry	125,711	22.73	3,774.56	29.36

 

Foreign direct investment by region in China in 2005

Region	Number of projects	％	Contractual foreign funds	％	Actual use of foreign funds	％
Total	552,960	100	12,856.73	100	6,345.06	100
Eastern region	457,944	82.82	11,174.76	86.92	5,383.71	84.85
Central region	59,947	10.84	1,003.07	7.80	562.96	8.87
Western region	35,051	6.34	678.90	5.28	277.58	4.37
Sector concerned	18	0.00			120.81	1.90

 

Section I:  Basic Policy on Attraction of Foreign Funds

Ⅰ.Industrial policy

Chinese Government published the full test of a new edition of the Indicative

Regulations on Foreign Investment in 2002. It amended the Indicative Catalog of Industries for foreign Investment (catalog for short) and its attachments in the end of 2004, which became effective on January 1, 2005. According to the new catalog, China will mainly encourage foreign funds to flow into the following areas in the coming period of time: 1. Transformation of traditional agriculture, development of modern agriculture and promotion of agricultural industrialization. 2. Basic infrastructure facilities and industries such as transportation, energy and raw materials. 3. High-tech industries such as electronic information bioengineering, new materials, aviation and aerospace, and setting up research and development (R&D) centers in China. 4. Using advanced and suitable technology to transforming traditional industries including machine building, light industry and textile industry to help the country realize equipment upgrading. 5. Comprehensive utilization and recycle of resources, environment protection facilities and urban public facilities. 6. Advantage industries in west China in support of the country’s strategy of west development. 7. Project with products all for export.

Starting from the day of implementation of the catalog, foreign-funded projects under the encouragement category of the catalog shall enjoy a preferential policy of exempting from tariff on import of equipment and value added tax on import links.

2.Regional PolicyⅡ

China’s opening to the outside world first started in east coastal areas, and then pushed to the inland areas by stage and step. East China boasts sound investment environment and more preferential policy as most of the reform measures and polices were first carried out in the area. The country’s five special economic zones, 14 coastal open cities and Shanghai Pudong New Area are all in the east part of the country. Up to now, most of the foreign-funded enterprises are located in these areas, but very few in central and west parts of the country.

In Recent years, as the country has moved its focus of economic development strategy westward, the Chinese Government has worked out policies and measures to support development of central and west China, and has increased investment in the areas to step up construction of infrastructure facilities for water conservancy, transportation and communications. While supporting East China to develop fund- and technology-intensive industries and export-oriented production, the government has made active efforts to direct and encourage foreign businesses to invest in central and west China.

China’s present policies concerning encouraging foreign businesses to invest in central and west parts of the country mainly include:

-- Drafting and promulgating the Catalog of Advantage Industries for Foreign Investment in Central and West China. Projects listed in the catalog enjoy the policies under the encouragement category of the Indicative Catalog of Industries for Foreign Investment.

-- Fore foreign-invested enterprises under the encouragement category launched in central and west parts of the country can have 15% reduction of corporate income tax for three years after the expiration of the implementation period of the existing tax preferential policy.

-- Foreign-funded enterprises launching new investment project in central and western parts can enjoy corresponding preferential treatment for foreign-funded enterprises on condition that they have foreign funds contribution exceeding 25% in the project.

-- Pilot work in areas and projects permitted by the state for opening to foreign investment can be conducted in central and western areas spontaneously in principle.

-- Foreign-funded enterprises from coastal area are permitted to operate foreign-funded enterprises and domestic capital enterprises on contract management terms in central and west China.

-- Capital cities of various provinces, autonomous regions and municipalities are permitted to select one development zone which has been constructed to apply for treatment as that of State-class economic and technological development zone. Up to now, the country has approved upgrading of 11 zones into State-class ones.

Like the west development strategy, the Chinese Government is now working on  rejuvenating northeast China, which is an important strategic measure taken by the government in economic development. The Chinese Government encourages foreign investors to invest in the once heavy industrial base in northeast China to participate the process of transformation of the base. To further promote participation of foreign investors in transformation of State-owned enterprises, learn from foreign advanced technology and management experience and realize rational allocation of resources, China has recently announced the Interim Regulations on Foreign Enterprises Investing in and Acquiring Domestic Enterprises, encouraging the use of the method of transnational merger and acquisition which are generally used internationally to attract foreign funds, allowing foreign enterprises to acquire domestic enterprises by purchase of stock right, and simplifying related examining and approving procedures. At the same time, governments of the three provinces, Liaoning, Jilin and Heilongjiang, in Northeast China have announced preferential policies to attract foreign investment according to the actual conditions in the area.

Ⅲ.Financial Support

1. Foreign-invested enterprises (FIE) which need to raise part of the funds for production and operation can apply for loans from banks in China according to the Chinese laws and regulations, and enjoy the same treatment as domestic capital enterprises in terms of terms, interest rate and service charge on loans. Foreign-investment enterprises can borrow money directly from foreign banks so long as they complete related foreign debt registration procedure, and the borrowed foreign exchange funds shall reported to the State Administration of Exchange Control (SAEC) for putting on record.

2. When FIE raising funds in China, Chinese commercial banks are permitted to become the guarantee of stockholders as entrusted by foreign companies. FIE are permitted to apply for Renminbi yuan loans from designated Chinese banks in form of exchange hypothecation. All foreign exchange funds of FIE can be used as hypothecation. Overseas financial institutions or foreign financial institutions in China can provide credit security for Renminbi yuan loans under exchange hypothecation. They country has canceled special restriction on registration procedures under exchange hypothecation and guarantee items, and special restriction on providing credit grade of foreign banks for exchange guarantee. Renminbi loans with foreign shareholder guarantee and exchange guarantee shall be issued in conformity with the industry policy, which can be used to satisfy the need of fixed asset investment and working funds, but not allowed to be used for exchange purchase.

3. The country has set up a special industrial investment fund to make up the present shortage of share capital of the Chinese side when FIE making additional investment. At the same time, Chinese commercial banks are allowed to issue certain proportion of share capital loans to Chinese shareholder under the prerequisite of the additional share capital of foreign shareholders in Sino-foreign joint venture and cooperation enterprises shall be available at the same time.

4. The country permits FIE in China to provide hypothecation to overseas branches of Chinese banks with the overseas assets of foreign investors to get loans from braches at home and abroad of Chinese commercial banks.

5. FIE which have met the requirement can apply for floating shares on China’s A-share and B-share stock market.

6. The country provide insurance service in such fields as political risk, performance and guarantee to foreign investors investing in areas of state priority support including energy and transportation by following a steady and proactive principle.

Ⅳ.Special Economic Zones

Chinese Government decided to carry out reform of economic system in 1978, namely,  implementing the policy of opening to the outside world in a planned way and by step. Starting from 1980, the country set up five special economic zones in Shenzhen, Zhuhai and Shantou in South China’s Guangdong Province, Xiamen in East China’s Fujian Province, and the southernmost Hainan Province. In 1984 it opened 14 coastal cities to foreign investors. They are Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai. After 1985, the country has designated more areas as economic areas opening to foreign investment, including the Yangtze River delta, the Pearl River delta, southern Fujian Province delta, Shandong Peninsular, Liaodong Peninsular, Hebei and Guangxi, thus forming an economic open zone along the coastal line. In 1990, the Chinese Government decided to develop and open the Pudong New Area in East China’s Shanghai Municipality, opening wider to the outside the cities along the Yangtze River, forming a Yangtze River open zone with Pudong as the leader. Since 1992, the country has again decided to open a number of cities along the borders, opened capital cities of provinces and autonomous regions in the inland areas, and set up 15 bonded zones, 49 state-class economic and technological development zones and 53 high-tech industry and development zones in some large and midsize cities. The moves have helped the country to form an all-round, multi-layer and wide-area pattern of opening to the outside world in integration of coastal, riparian, border and inland areas. These special economic zones have more flexibility in utilization of foreign funds, import of foreign technology and conducting foreign economic cooperation. At present foreign investors enjoy preferential treatment in some fields.

Currently, the special preferential tariff policy for special economic zones has been abolished. With the progressing of China’s economic reform and opening to the outside, China will unify its tariff policy within the scope of administration.

 

Section II: Taxation System and Preferential Policy

China adopts low tax rate policy for foreign-funded enterprises and implements preferential tax policy for industries and regions under state support of investment. Up till now, the country has 13 types of taxes adaptable to foreign-funded enterprises, foreign enterprises and foreigners (excluding agricultural tax, tariff and ship tonnage tax). The 13 taxes are: Value added tax, consumption tax, business tax, income tax for foreign-funded enterprises and foreign enterprises, individual income tax, tax on resource, VAT on land, stamp tax, urban real estate tax, tax on use of vehicle and ship license plate, animal slaughter tax, contract tax and fee on cultural construction.

Ⅰ.Income tax of foreign-funded enterprises and foreign enterprises

The Income Tax Law for Foreign-Funded Enterprises and Foreign Enterprises is now the only tax law adaptable to foreign-funded enterprises and foreign enterprises.

1. Tax rate

China adopts different rates of income tax for foreign-funded enterprises and foreign enterprises in the income tax law according to their different forms of operation.

a. The taxable income of enterprises engaging in production and operation is set at a tax rate of 30%, at the same time, they shall also pay 3% of local income tax based on the taxable income, totaling 33% in tax burden.

b. Foreign companies, enterprises and other economic organizations which have set up organs and outlets with income gaining from stock dividend, interest, rent and loyalties and other income are levied with withholding income tax at a rate of 20%.

2. Preferential taxation regulations

(1) Preferential treatment for supporting newly-launched enterprises.

Production-type foreign-funded enterprises with operation term exceeding ten years are exempt from enterprise income tax in the first two years starting from the year of making profit, and enjoy 50% reduction in enterprise income tax in the vest three years. Production-type foreign-funded enterprises refer to foreign-funded enterprises of the following sectors:

a.  Machine building and electronic industry;

b.  Energy industry (excluding petroleum and natural gas development and exploitation);

c.  Metallurgical, chemical and building materials industries;

d.  Light, textile and packing industries;

e.  Medical equipment and devices, and pharmaceutical industries;

f.   Agriculture, forestry, animal husbandry, fishery and water conservancy;

g.  Construction industry;

h.  Transportation (excluding passenger transportation);

i.    Scientific and technological development, geological survey, and industrial information consulting which directly serve production, and equipment production, and precision instrument repairing service;

j.    Other industries fixed by taxation administration department of the State Council.

(2) Preferential policy on investment in specific economic sectors and regions

a.  After the period of tax exemption and reduction treatment becomes due according to related regulations, foreign-funded enterprises engaging in agricultural, forestry and animal husbandry production and located in less-developed remote areas can continue enjoying tax reduction by 15%-30% for ten more years after being approved by taxation administration department of the State council.

b.  Production-type foreign-funded enterprises launching energy, transportation and such projects of infrastructure facilities can have 13% reduction of enterprise income tax as approved by taxation administration department of the State Council.

c.  Foreign-funded enterprises in Shenzhen, Zhuhai, Shantou, Xiamen and Hainan special economic zones, foreign enterprises setting up organs and getting places for production and operation in the special economic zones, and production-type foreign-funded enterprises in economic and technological development zones, and foreign-funded enterprises in state high-tech industrial development zones designated by the State Council and being listed as high-tech enterprises in China enjoy 15% reduction of enterprise income tax.

d.  Foreign-funded enterprises in coastal economic open areas, special economic zones, old towns of cities where economic and technological development zones located, or other areas designated by the State Council, which have launched project under the state encouragement category can have 15% reduction of enterprise income tax.

e.  Production-type foreign-funded enter-p rises in coastal economic open areas, special economic zones and old towns of cities where economic and technological development zones located enjoy 24% reduction of enterprise income tax.

f.   Sino-foreign joint venture enterprises engaging in port and berth construction with operation period exceeding 15 years are exempted from enterprise income tax in the first five years starting from the profitable year, and enjoy 50% reduction of enterprise income tax in the next five years after being approved by local taxation administration department.

g.  Foreign-funded enterprises engaging in infrastructure facility projects such as airport, port, berth, railway, highway, electric power station, coal mine and water conservancy in the Hainan Special Economic Zone and foreign-funded enterprises engaging in agricultural development and operation with operation term exceeding 15 years are exempted from enterprise income tax in the first five years starting from the profitable year and enjoy 50% reduction of enterprise income tax in the late five years after their application approved by the taxation administration department of Hainan Province.

h.  Foreign-funded enterprises engaging in energy and transportation construction projects such as airport, port, railway, highway and electric power station in the Shanghai Pudong New Area with operation term exceeding 15 years are exempted from enterprise income tax in the first five years starting from the profitable year and enjoy 50% reduction in the late five years after their application approved by the taxation administration department of Shanghai Municipality.

i.    Financial institutions including foreign banks, Sino-foreign joint venture banks, branches Of foreign banks and accounting firms, foreign investors injecting capital in China or branches with operation funds exceeding 10 million US dollars allocated by the headquarters with operation term exceeding 10 years, which are set up in special economic zones and other areas approved by the State Council, enjoy tax exemption of enterprise income tax for one year starting from the profitable year and 50% reduction of enterprise income tax in the next two years.

j.    Sino-foreign joint venture enterprise in state high-tech industrial development zones as approved by the State Council, which has been listed as a high-tech enterprise, with operation term exceeding ten years enjoy exemption of enterprise income tax in the first two years starting from the profitable year after being approved by local taxation administration department.

k.  Foreign-funded enterprises engaging in service industry in special economic zones with foreign investment exceeding 5 million US dollars and operation term exceeding 10 years enjoy exemption of enterprise income tax in the first years of starting making profit, and 50% reduction of enterprise income tax in the next two years after being approved by taxation department of special economic zones.

l.    Foreign-funded export-oriented enterprises can enjoy 50% reduction of enterprise income tax after the preferential period of tax exemption and reduction is due according to related policies, but they are required to export more than 70% of the output value of products in the year. For special economic zones, economic and technological development zones and other export-oriented enterprises which have already handed enterprise income tax on a rate of 15% can have 10% reduction of the tax if they have met the above conditions.

m.       Foreign-funded advanced technology enterprises can still have an extension of three years of 50% reduction of enterprise income tax so long as they are still confirmed as advanced technology enterprises after the preferential period of tax exemption and reduction is due according to the related regulations.

(3) Preferential policy on encouraging re-investment

Foreign investors in foreign-funded enterprises who put profit directly into additional investment in the enterprises, increase registered capital or use it as capital investment in their other enterprises with operation term not less than five years can get back 40% of their paid income tax for the part of additional investment after their application being approved by taxation administration department.

(4) Preferential policy on making up loss

Foreign-funded enterprises and foreign enterprises occur a loss in production and operation in China can use the income of next tax year for making up the loss. If the income of next tax year is still not enough for compensation, which can shift to the next year, with the longest compensation time not exceeding five years.

(5) Preferential policy on withholding income tax

a.  Profits of foreign investors gained from foreign-funded enterprises are exempted from income tax.

b.  Interest income of loans provided to the Chinese government and state banks by international financial organizations is exempt from income tax.

c.  Interest income of foreign bank low-interest loans provided to China’s state banks is exempt from income tax.

d.  Royalty fees on special technologies for scientific research, development of energy, development of transportation, production of agriculture, forestry and animal husbandry, and development of important technology can enjoy 10% reduction of income tax as approved by the taxation administration department of the State Council. Advanced technology or technology with preferential conditions can be exempted from income tax.

(6) Encouraging foreign businesses to invest in technological development and innovation.

a.  Foreign-funded enterprises under the category of encouragement and B-category of restriction, and technological transformation of foreign-funded enterprises of advanced technology and export-oriented types can enjoy tax exemption in import and import link for import of technology, parts and spare parts for self-use equipment within the approved production and operation scope, which cannot be made domestically or found in China in term of performance.

b.  Self-use equipment and supporting technology, parts and spare parts (excluding commodities listed in the Catalog of Import Commodities with no Tax Exemption in Foreign Investment Projects, including ship, aircraft, special-purpose vehicle and construction machinery) of foreign-funded R&D centers with the cost included in the total investment are exempted from tax on import and import links. They are required to be used in laboratories which cannot form production scale or limited to intermediary test.

c.  Purchase of domestically made equipment by foreign-funded enterprises under the category of encouragement and B-category of restriction with the cost included in the total investment can have all the VAT back on purchase of domestically made equipment, and if the  equipment is in the scope of exemption of import tax, the equipment can have all the VAT back on domestically made equipment. According to related policy, foreign-funded enterprises are exempted from enterprise income tax in purchase of domestically made equipment for technological transformation and production of high-tech products in keeping with the State industrial policy.

d.  Foreign-funded research and development centers importing self-use equipment and supporting technology, parts and spare parts are exempted from import tariff and import link tax in technological transformation with self-raised funds and within the approved scope of operation.

e.  Foreign enterprises transferring technology to China are exempt from business tax. Advanced technology or technology with preferential condition are exempted from enterprise income tax after approved by taxation administration department of the State Council. Income of foreign-funded enterprises (including foreign-funded R&D centers) from transferring their own technology is exempted from business tax.

f.   Foreign-funded enterprises reporting more than 10% year-on-year increase in expenditure on technological development are allowed to deduct the taxable amount of the year based on 50% of the actual expenditure on technological development after being approved by taxation administration department.

At the same time, various provincial governments have also drafted preferential policies on reduction and exemption of local income tax for different sectors and projects for attracting  foreign investment.

Ⅱ. Tariff

China has made active efforts in lowering tariff rate in recent years in order to speed up integration with world economy. The Chinese Government announced cut of import tariff rate of commodities under 4,971 tax items on April 1, 1996, bringing the average tariff level from 35% to 23%, and in 2004. The general tariff rate lowered further to 10.4% in 2004. The reduction of the general tariff rate in China will provide more opportunities of market access for foreign products and is also beneficial to other countries in expanding export to China.

To further expand utilization of foreign funds, starting from January 1, 1998, China has granted exemption of tariff and value added tax to foreign businesses investing in projects under the encouragement category and B-category of restriction listed in the Indicative Catalog of Industries for Foreign Investment and projects funded by loans from foreign governments and international financial organizations in import of self-use equipment and import of technology and rational amount of parts and spare parts affiliated to the imported equipment according to the contract, excluding commodities listed in the Catalog of Import Commodities with no Tax Exemption in Foreign Investment Projects.

One thing is important that China’s various tax laws and regulations contain various preferential policies and measures. The best way for foreign investors to make a full use of the policy is to find an accounting office which is familiar with Chinese taxation laws and policies at beginning of the investment.

 

Section III:  Forms of Foreign Investment

Ⅰ. Legal Framework of Foreign Investment

Laws and regulations concerning foreign- invested enterprises (FIE) are the general term of legal instrument China drafted for readjusting the economic relations of foreign-invested enterprises emerging in the process of establishment, alterna- tion, termination and operation management.

Laws and regulations concerning foreign- invested enterprises mainly include three basic laws and their implementation bylaws, namely, the Law on Sino-Foreign Joint Venture Enterprises of the People’s Republic of China, the Law on Sino-Foreign Cooperation Enterprises of the People’s Republic of China, and the Law on Foreign Capital Enterprises of the People’s Republic of China. Foreign-invested companies of limited liabilities are adaptable to the Corporate Law of the People’s Republic of China and related stipulations in the above legal documents. Contract of foreign-invested enterprises is an economic contract involving foreign investment is under the binding of China’s Contract Law.

China had ten new and amended economic laws and regulations becoming effective on June 1, 2004. New changes and stipulations made in the laws and regulations concerning foreign businesses mainly include:

——Abolishing regional restriction for foreign commercial enterprises in wholesales service: According to the Administration Rules on Foreign Companies Investing in Commercial Sector issued in April 2004, foreign companies, enterprises and other economic organizations and individuals shall abide by the rules in founding foreign-funded commercial enterprises and operation.

——Allowing foreign businesses to set up shipping enterprises in China. The Administration Regulations Concerning Foreign Companies Investing in International Shipping Industry standardizes the administration of foreign-invested enterprises engaging in international ocean shipping service in China and the subsidiary operation business concerning international ocean shipping.

——In order to keep abreast of the revised Foreign Trade Law of the People’s Republic of China, the State Council, the highest governing body of China, starting from April 15, 2004, had made amendments on the Anti-Dumping Regulations of the People’s Republic of China, the Anti-Subsidy Law of the People’s Republic of China and the Safeguard Measures Rules of the People’s Republic of China. After the amendments, the three major trade relief documents became effective on June 1.

Ⅱ.Basic Forms of Direct foreign investment

China’s utilization of foreign funds is generally divided into two parts, namely direct

Investment form and other investment forms. The most used form is the direct investment, covering Sino-foreign joint venture enterprise, Sino-foreign cooperation enterprise, wholly foreign owned enterprise and joint development. Other investment forms covers compensation trade and processing and assembling.

1.Sino-foreign joint venture enterprise

Sino-foreign joint venture enterprise also calls equity joint venture enterprise, which is launched in China by foreign companies, enterprise, and other economic organizations and individuals in cooperation with Chinese company, enterprise and other economic organizations. It is featured by joint investment and operation, and risk and profits and loss sharing. Contribution of various partners in the joint venture is converted into certain proportions of stake, with foreign partner required to have contribution in the joint venture not lest than 25%.

Sino-foreign joint venture enterprise is a form first and most used in utilization of foreign direct investment in China. It has taken lion’s share in the country’s utilization of foreign funds.

2. Sino-foreign cooperation enterprise

Sino-foreign cooperation enterprise also calls contract cooperation enterprise. It is an

enterprises launched in China by foreign companies, enterprise, and other economic organizations in cooperation with Chinese company, enterprise and other economic organizations by joint investment or providing cooperation conditions. The right and obligations of various sides in the enterprise are defined in contract signed by various investment parties. Foreign cooperation partners usually provide all or the most part of funds in the Sino-foreign cooperation enterprise, while Chinese side provides land, workshops, equipment and facilities, and certain amount of funds in some cases.

3.Wholly foreign owned enterprise

Wholly foreign owned enterprise refers to enterprise founded by foreign companies, enterprises, other economic organizations and individuals in China according to related laws and regulations with all investment of self-owned funds. According to the foreign enterprise law, founding foreign enterprise in China is required to be good to the national development of the country, and meet at least one of the following conditions: Adopting advanced world technology and equipment; and exporting all or most of the products to other countries and regions. Wholly foreign owned enterprises is generally launched in the form of company with limited liabilities.

4.Joint development

Join development is a short for onshore and offshore petroleum exploitation and

development. It is one of the economic cooperation forms generally used in the world in the field of development of natural resources. It has the features of high risk, and high investment and yielding. Joint development is generally divided into three stages, namely, exploitation, development and production. Compared with the above three forms, joint development has very small proportion in the total use of foreign investment.

5.New investment forms

With consistent expansion of investment areas and opening of domestic market, China is active in exploring and developing news forms of utilization of foreign funds.

a.  BOT: China has started using BOT form in launching infrastructure facilities projects.

b.  Investment company: Chinese Ministry of Foreign Economic Relations and Trade issued the Interim Regulation on Foreign Businesses Investing in Investment Companies in April 1995 in a bid to encourage big overseas companies to launch their series of investment plans.

c.  Foreign-invested equity company: Equity company can be founded by forms of sponsorship or placement. The existing foreign-invested companies of limited liabilities can apply for changing into equity companies. 

d.  Acquisition and merger: Transnational acquisition and merger have become a main form of direct foreign investment. At present, China is studying and drafting related policies on the issue.

Ⅲ.Establishment and Termination of Foreign-Invested Enterprise

1． Establishment procedures

According to the existing laws and regulation, establishment of foreign-invested enterprise (FIE) implements the item-by-item examining, approving and registration system by the government. Applying for establishment of Sino-foreign joint venture enterprise and cooperation enterprise usually needs to go through four steps:

a.  Delivering project proposal on establishment of the enterprise. After getting approval from related department (planning department or technical transformation department), various investment parties can start various works focusing on project feasibility study.

b.  Delivering project feasibility study report. After obtaining the approval, various investment parties can start negotiation and signing of contract on founding of the enterprises and legal documents such as enterprise rules and regulations.

c.  Delivering enterprise contract and rules and regulations. Approved by foreign economic relations and trade department, the approving organ issued approval certificate for the foreign-invested enterprises.

d.  Investors go through enterprise registration procedures in administration department of industry and commerce with the approval certificate.

The procedure for establishment of foreign capital enterprise is simple. After getting written approval of the preliminary application report from governmental examining and approving department, applicants can deliver formal application, company regulations and rules and other required documents to related department. After obtaining the approval, the same step of “d” to go though registration procedures with the approval certificate.

2． Operation term and termination of enterprise

a.  Operation term: Operation term of foreign-invested enterprises is set through negotiation among investors according to related state policies and concrete conditions of different industries and projects. It is generally set at 10-30 year, but some may be extended to as long as 50 years.

During the operation term, enterprises have the autonomy in management.

The government shall not conduct nationalization and requisition of foreign-invested enterprises. For particular cases, requisition is needed for the social and public interest, the government shall give the matching amount of compensation for the requisition, which shall be conducted through legal procedures.

b.  Termination: When the termination condition occurs, foreign-invested enterprises shall deliver application for the termination for examining and approving by competent department. The approval date is the date of termination of the enterprise.

3． Examining and approving department and authority

According to laws and regulations, application for establishment of foreign-invested

enterprise shall be examined and approved by the government. Project proposal and feasibility study report shall be examined and approved by planning administration department (technical transformation project shall be examined and approved by economic and trade administration department) in cooperation with relevant departments. Enterprise contract and rules and regulations shall be examined and approved by administration department of foreign economic relations and trade.

Projects which restrict foreign investment by the State, need state coordination in construction and production conditions, involve quota and license control in product export, or exceed the examining and approving authority of local governments shall be examined and approved by competent departments of the State Council.

Projects not in the scope of restriction shall be examined and approved by governments of provinces, autonomous regions and municipalities and authorized departments. The authority limit for local governments is set at projects with investment of less than 30 million US dollars.

Section Ⅳ： Bilateral Investment Protection Agreement and Bilateral Taxation Agreement

Ⅰ. Bilateral Investment Protection Agreement

Since 1982, China has signed investment protection agreements with 106 countries, including Britain, Germany, France, Japan, Australia and the Republic of Korea (ROK), of which more than 50% have become effective.

According to China’s laws, investment protection agreement is in the scope of international treaty which has stronger legal force than that of domestic legislation.

The bilateral investment protection agreement signed by China mainly covers the following areas:

1．Protection of investment and property

Based on the agreement, the scope of investment protection includes: Movable property, immovable property, corporate equity, stock, copy right, industrial property right and franchise right.

2．Treatment for investment and investment-related business activities given by host country to investors

The Chinese Government promises in the investment protection agreement to give just and fair treatment for investment and investment-related business activities of foreign investors, and equal treatment to investors no matter which countries they come from. This means that foreign investors can enjoy the most favored national treatment on the basis of the investment protection agreement.

3．Requisition, nationalized measures and compensation of investment property of foreign investors

In the investment protection agreement, China promises to not nationalize the investment property of foreign investors for protection of their interest. For particular cases, requisition is needed for serving the social and public interest, the government shall give fair and reasonable compensation on the basis of nondiscrimination and by following related legal procedures. The amount of compensation fund shall be paid in free convertible currency and is permitted to remit overseas freely.

4．Repatriation of investment and income

According to the investment protection agreement, investment and legal income of foreign Investors is free to remit overseas from foreign exchange account of foreign-invested enterprises.

5．Solution to investment dispute

Investment dispute occurred between foreign investors and government in China shall be dealt with in court of China jurisdiction in principle. Chinese Government permits international submission on compensation of requisition and nationalization out of the consideration of the interest of foreign investors. As China has joined the treaty on dealing with investment dispute between state and citizens of other countries, the Chinese Government is considering of enlarging the scope of disputes for international submission.

Besides the above, the agreement also include such contents such as keeping the commitment by the government of host country, subrogation claiming of investment insurance, use and effect force of the agreement. The investment protection agreement is a macro guarantee system covering all investment activities of investors.

Ⅱ. Bilateral taxation agreement

To solve the taxation issue with other countries, starting from September 1983, the Chinese Government has signed all-round agreement on double tax hedging and tax evasion prevention with such countries as Japan and France. By the end of 2004, China signed agreement on double tax hedging with 85 countries, of which 76 have become effective.

1．Adaptable scope of the agreement

The agreement is adaptable to inhabitants of agreed countries, including corporate inhabitants and natural person inhabitants. The scope of adaptable categories of taxes mainly refers to the category of income tax. China has listed the tax items including enterprise income tax, local income tax and individual income tax.

2．Contents of taxation agreement and agreed treatment beneficial to investment

The taxation agreement China has signed with other countries adopts the clause structure of standard copy of such document used in the United Nation and economic cooperation and development organizations, and provides taxation treatment which is beneficial to investment according to different types of income.

a.  Tax collection on business profits is limited to permanent organs founded in China. Taxes shall not be collected for profits gained by enterprises from agreed countries which have no permanent organs in China, and the same treatment to Chinese enterprises in the agreed countries.       

b.  For investment income from such items as stock dividend, interest and royalty, the income source country shall have the priority of tax collection, and adopt restrictive tax rate in tax collection so as to help inhabitants of agreed countries pay tax at low rate on the investment income in the counterpart agreed countries. Taxation agreement China signed with other countries stipulates that the restrictive tax rate shall not exceed 10% of the total amount of stock dividend, interest and royalty fee.

c.  For taxation on income and profits of property, countries where the immovable property located have the right of collection.

d.  For taxation on individual labor payment and salary, in principle, countries where they inhabit collect the tax; but for income gained from engaging in labor activities in counterpart country, and those meeting the restrictive requirement can also pay tax in the counterpart.

3．Method to abolishing double taxation

China adopts tax credit method to abolish double taxation. In the taxation agreement China signed with other countries, it usually covers a clause regarding tax exemption and reduction as full taxation for tax credit. This means that investors have been granted with tax reduction and exemption in China, and the counterpart country shall deduct the part of tax they paid in China as they have paid the full tax with no reduction and exemption.

4．Procedures for obtaining agreement treatment

Transnational investor who want to obtain the taxation treatment given by the agreement must follow the procedure rules in the taxation agreement of agreed countries to provide relevant documents and go through necessary application procedures.

 

SectionⅤ: Enterprise Management Guide

Foreign-invested enterprises, as independent legal entity, operate independently after being approved by governmental examining and approving department and registered in administration department of industry and commerce. There is no subordinate relationship to administrative organs between the Chinese Government and foreign-invested enterprises, but foreign-invested enterprises must accept the directing and supervision of the government in accordance with related laws, regulations and policy in production and business activities. 

Ⅰ. Use of Land

China adopted public ownership of land, including state ownership and collective ownership. Land in cities belongs to the state, and land in the countryside and suburbs of cities are collective owned except land owned by the state according to related laws and regulations.

1. Following are the five forms of gaining the use right of state-owned land by foreign-invested enterprises

a.  Pay transfer:

The State as a land owner transfers the right of land use to foreign-invested enterprises in a fixed period of time, which pay transfer fee in lump sum for the land use right. Foreign-invested enterprises can obtain the land use right by forms of bidding, auction and signing contract. After signing the transfer contract with land administration department and paying all the agreed transfer fees, foreign-invested enterprises can go through required registration procedures and get the land use certificate. The land use right obtaining by this form can be transferred again, leased out and used as mortgage.

b.   Administrative allocation:

Foreign-invested enterprises and land administration department sign the land use contract, go through registration procedure and obtaining land use certificate. Land user pays the lump-sum fee on places and land development and pay land use fee annually.

c. Chinese party takes land use right as contribution in joint venture and cooperation enterprises. This means that Chinese enterprises make evaluation of their workshops, equipment and land use right as contribution to joint venture and cooperation enterprises with foreign companies.

d. Housing and land leasing: Such form means that foreign-invested enterprises take on lease of houses and places or piece of land from state-owned enterprises, urban collectives and township enterprises, and pay the rents. What merits more attention is that the leasing of houses by Chinese enterprises is actually a leasing-out of the land use right. If the leased land provided by Chinese enterprises is gained by form of the pay land transfer, the leasing is legal business activity. If the leased land provided by Chinese enterprises is gained by form of administrative allocation, they shall go through procedure required for pay transfer and pay transfer fees, otherwise their leasing is illegal.

e. Foreign-invested enterprises can also obtain land use right with a fixed period of time from other land users by form of transfer. The period of time of the transferred land is the remained period of time of the originally fixed period of the land.

2.Two methods for foreign-funded enterprises to obtain the right for use of collective-owned land

a. Collective-owned land shall be first turned into state-owned land by state requisition and then put on for transfer to foreign-invested enterprises. Collective-owned land is not permitted to be transferred and leased out directly.

b. Rural collective economic organizations or township enterprises make evaluation of collective-owned land as contribution or cooperation terms to the joint venture and in founding joint venture and cooperation enterprises with foreign companies. Such project shall be approved by county-level government.

3.Points for attention

a. All investment projects involving turning farmland into construction land shall be approved by the central government no matter what areas they are and whether they need state acquisition.

b. Investment involving land acquisition from peasants and rural collectives shall be approved by the central government or provincial government.

Ⅱ. Environment Protection

Environmental protection is a fundamental state policy of China. China has worked out and implemented a series of laws and regulations on protection of environment and resources, and prevention of pollution of air, water and sea. Foreign-invested enterprises are required to provide report on impact of environment to China’s environment protection administration department when drafting enterprise feasibility study report. Foreign-invested enterprises which will or may cause pollution will not be approved by the state. Upon completion, foreign-invested enterprises must report to the environmental protection administration department for appraisal and approval of their environmental protection equipment. Routine production of foreign-invested enterprises must accept supervision and administration of environmental protection administration department.

Ⅲ. Management of Labor Force

Foreign-invested enterprises have the full autonomy in employment, and any departments, units and individuals have not right to interfere in. But China has formulated the Labor Law and the Decision of the State Council on Working Hours of Workers and Office Staffs for the purpose of protecting the legal right of workers.

Foreign-invested enterprises are generally not allowed to employ ordinary overseas personnel including people from Hong Kong, Macao and Taiwan. For special technical and high-tech personnel and high-profile management personnel who cannot be found in China and have to be employed overseas, foreign-invested enterprises must report to labor administration department for approval. People employed overseas must go through procedures for residence and employment in China.

As China’s economy developed, labor costs rose, with an increase of average wages paid to workers and staff in different regions. The average wage paid to workers and staff totaled 18,400 Yuan in 2005, up 14.1% over 2004. Of this, the average wage eastern regions was the highest, totaling 22,400 Yuan. In central regions in China,the average was the lowest, at 14,800 Yuan. that the average wages in western regions and northeastern regions were 15,700 Yuan and 15,600 Yuan respectively. Central regions witnessed the highest growth rate in average wages paid to workers and staff, up 18%. Northeastern regions followed, while eastern regions the experienced the smallest growth in average wages.

 

 

Ⅳ. Import and Export

According to China’s related laws and regulations, foreign-invested enterprises have the right of conducting import and export starting from the date of establishment. They can conduct own-account import of machinery, equipment, raw materials, fuel, parts, fitting, elements, transportation tools and office articles needed by their production and operation within the approval scope, and export their own products, or entrust other foreign trade enterprises to play as agents in import and export of materials and products.

Ⅴ. Foreign Exchange Control

Starting from July 1, all sales and buys of foreign exchange of foreign-invested enterprises shall be done on the bank’s surrender system. To encourage foreign direct investment, China implements national treatment for foreign-invested enterprises in exchange control, allowing foreign-invested enterprises to open account for exchange settlement within the maximum limit set by the State Administration of Exchange Control (SAEC) to retain exchange income under current account and only the extra part of the income shall sell to designated banks. There is no restriction on payment of transaction under current account of international payment and expenditure for foreign-invested enterprises. They can purchase foreign exchange in designated banks or directly conduct overseas payment directly from the exchange account after getting authenticity verification in SAEC. Foreign parties of foreign-invested enterprises are permitted to open exchange account for retaining foreign exchange, which can be sold to banks after being approved by SAEC. Foreign-invested enterprises can borrow money directly from banks at home and abroad, but need to report to SAEC for registration afterward to obtain permit for payment of debt or service fees. Exchange funds of foreign investors got from dividends after clearance of foreign-invested enterprises can remit overseas or be honored in banks after being approved by SAEC.

Ⅵ. Others

Foreign-invested enterprises shall also have a good understanding of China’s administration policy and system on finance, accounting, taxation, industry and commerce, and bide by them.

 

Section VI: Establishing Representative Office in China

Foreign enterprises which have the need to set up permanent representative organs in China must go through such formalities of submitting application, obtaining approval and registration. Those failed to get the approval or registration are not allowed to establish representative organs in China.

Ⅰ Application for setting up permanent representative organs in China by foreign enterprises shall be approved by the following departments according to features of different sectors:

1. Trade, manufacturing and cargo shipping agent firms shall report to the Ministry of Commerce for approval;

2. Banking, securities and insurance companies shall report to the country’s supervision and administration commission of banking, securities and insurance industries for approval;

3. Ocean shipping and ocean shipping agent firms shall report to the Ministry of Communications for approval.

4. Air transportation shall report to the Civil Aviation Administration of China (CAAC) for approval.

5. Other industries shall report to competent commissions, ministries and administrations of the Chinese Government on the basis of different business features of the industries.

Ⅱ Foreign enterprises shall submit the following certificates and materials when applying for setting up permanent representative offices in China:

1. Application signed by chairman of the board of directors or general manager, with contents covering name of the representative organ, person in charge, business scope, terms of operation and location of the organ.

2. Official business license issued by countries or regions where the enterprises are located.

3. Capital credit certificate issued by financial institutions which have business contacts with the enterprise.

4. Certificate of authorization and resume of staffs working in the permanent representative organs.

5. For financial and insurance enterprises which apply for setting up permanent representative organs in China, beside the above required certificates and materials, they shall also submit materials on asset, statement of profit and loss, organization regulations and rules, and name list of the board of directors of the headquarter corporation.

Ⅲ Upon approval of the application for setting up permanent representative organs, foreign enterprises shall go through registration formalities in the State Administration for Industry and Commerce of the People’s Republic of China with the approval certificate within 30 days starting from the day of the approval. The registration formalities include filling forms, handing registration fee and receiving registration certificate, and those fail to get the registration in the time limit shall return the approval certificate.