IS CHINA OPENING UP?

RECENT TAX & LEGAL UPDATES

 Shanghai Free Trade Zone (FTZ)

The Shanghai FTZ has its official name “China Pilot Free Trade zone” which was launched on September 29, 2013. The FTZ provides an optimized administration which allows foreign companies to set up business in the FTZ within 1 month as compared to 3-4 months which was the normal time length to complete the administrative requirements for business set up. Further, foreign companies are allowed to have a virtual address within FTZ, which, in particular, is beneficial for trading and service companies.

Furthermore, the recent changes come with advantages such as facilitating the cross-border investments and the transactions on outbound investments, free trade account transactions and use of cross-border RMB with the intention of popularizing the zone as an international financial centre.

The negative list has been adopted in China for the first time that is used to manage foreign investment in Shanghai. At the moment, there are 18 sectors on the list that are not allowed to do business but can be updated later on.

Company law amendment

 There are some changes in the Company Law as well making it possible for foreign investors to set up business easily. The minimum registration capital is no more a requirement for certain types of companies.  This means entities are free to choose the sum of the capital they want to inject, when and in which way. Despite this flexibility, from practical point of view, the companies are encouraged to have capital necessary for operational funds, especially in the initial periods after set up.

The amendment remains silent on how it impacts the foreign invested enterprise’s borrowing gap (the amount allowed to be borrowed from overseas, mainly parent company or offshore shareholders).

Foreign exchange reform

Foreign exchange regulations have been simplified removing the State Administration for Foreign Exchange (SAFE) approval for activities, such as capital account opening, capital increase, use of foreign debts, repayment of principal, and service and trade payment. The increased data sharing is expected to provide for better cooperation between SAFE, SAT and GAC (General Administration of Customs). The main reason for this development is to make international trading efficient and easy.

PRC Tax updates

Following the transition from business tax to VAT, which was introduced in a few cities in 2012, the VAT reform was launched nationwide in August 2013. In January 2014, the VAT scope was enlarged covering railway transportation and postal services but does not include financial and construction sector yet. The VAT exemption for offshore outsourcing services is extended to 31 December 2018 as well as for the export services in which they have to apply for VAT exemption.

China-EU tax treaties

China has signed 3 treaties last year (2013), namely with Netherlands, Switzerland and France, respectively based on the date of signature. The treaty signed with France is likely to take force next year January as it has been signed on the 26th of November 2013 and is still being affirmed by both parties. Major changes are as follows:

  • The construction permanent establishment (PE) has been prolonged from 6 to 12 consecutive months.
  • The service PE, which is being counted per month, is going to be counted per day.
  • The withholding tax on dividend will reduce to 5% from 10%, although the owner must have at least 25% stake in the company paying the dividend.
  • Penalty and guarantee fees, which were treated as interests, will be taxed as other income.
  • The other incomes are taxed exclusively in the receiver’s country of residence.
  • The China tax credit that is applicable to the Chinese company holding that holds more that 10% equity in a French company has changed to more than 20% equity.
  • The current Tax Treaty part which allowed French residents to obtain (in France) a tax credit higher than tax actually withhold in China, has been removed in order to achieve tax neutrality.
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