Chinese law

Chinese law is one of the oldest legal traditions in the world. For most of the history of China, it has been based on the Confucian philosophy of social control through moral education, as well as the Legalist emphasis on codified law and criminal sanction. These influences remain in the Soviet-influenced system of the People's Republic of China and the German-influenced system of the Republic of China.


 

• 1China Advice
• 2Chinese law
  • 2.1Introduction to Chinese legal system
  • 2.2Overview of Chinese law and religion
  • 2.3Overview of Chinese land law
  • 2.4Chinese Labour Arbitration Law
  • 2.5Taxation in China
  • 2.6China-Britain Business Council
  • 2.7US-China Business Council
  • 2.8 China Business Forum
  • 2.9 China News
• 3Chinese Law Resources
• 4Doing Business in China

[top]Introduction to Chinese legal system

General Information

As the third largest country geographically, China’s population is over one and a quarter billion. Subsequent to the fall of communism in the former Soviet Union, China is the largest and most powerful communist government in existence. Administratively, the country is divided into twenty-three provinces, five autonomous regions and four municipalities.


History

China has rich and extensive history spanning several thousands of years of civilization. Historians divide legal history into categories of traditional China and modern China. Traditional China legal history and structure is characterized in some of the following ways: feudalism, imperialism, and rule under emperors. Legal codes existed in traditional China, with the oldest surviving code being the Tang code promulgated in the seventh century AD. The Tang code constituted the foundation for the later developed codes of the Song, Yuan, Ming and Qing dynasties. These codes and statutes of law regulated matters that would be considered under criminal law under the modern legal approach. Further, there was no jurisprudential distinction between criminal and civil law, as penal sanctions occasionally applied to acts that would be covered by civil law today. Disputes between individuals (civil) dealing with family matters or land were generally settled through mediation. Such informal resolutions were conducted by respected leaders or elders in the villages who applied customary rules and concepts of morality to reach harmony between disgruntled individuals.

In traditional China the emperor was vested with the executive, legislative and judicial powers. While the laws created by the emperor were binding on all of his subjects, the same law did not bind the emperor. As the supreme judicial power, the emperor could determine the guilt of accused individuals, dictate the penal sentence, or modify the judgments given by lower judicial authorities.


Modern China

Efforts to modernize the legal system were instituted by the Qing Empire in the very early part of the twentieth century. It became apparent that some aspects of the legal system, such as the harshness of criminal procedure and the lack of commercial law rendered China’s law primitive in comparison to legal systems of other nations. One initiative started in 1904 was the creation of a Law Reform Bureau in 1904, instilled with the task of translating foreign codes and drafting new laws. Another move in the modernization direction was the promulgation of an Imperial Constitutional Outline in 1908. However, before any of the drafted laws were implemented, in 1911 the Qing empire was overthrown. Nevertheless, the successive governments adopted some laws that were partially based on the draft laws of the Qing reform movement.

The Communist Party of China (CPC) was established July 1, 1921. Shortly after the CPC was founded, a politically tumultuous period referred to as the “New Democratic Revolution” encompassed three important struggles that the CPC engaged in. Included in this period were the Second Revolutionary Civil War (1927-37), the War of Resistance Against Japan (1937-45), and the Third Revolutionary Civil War (1945-49). In 1949 the CPC founded the People’s Republic of China (PRC).


Structure of Government

A. Executive Branch
The positions and powers of the President and the Vice President are established in Articles 79-84 in the Constitution of the People’s Republic of China (1982). The NPC elects individuals to fill these positions for a term of five years with a limit of two consecutive terms (Art. 79). Some of the powers entrusted to the President are the promulgation of statutes, the appointment and removal of various State Council members, the issuance of pardons, proclamations of martial law and states of war, as well as receiving foreign diplomats and ratifying or abrogating treaties with foreign nations (Arts. 80-81). The Vice President is to aid the President in carrying out his duties, and may carry out presidential functions delegated by the President (Art. 82).

The State Council is the government of the PRC under the authority of Articles 85-98. It is the highest organ of state power, and of state administration (Art. 85). The State Council consists of the Premiers, Vice-Premiers, State Councillors, Ministers in charge of ministries, Ministers in charge of commissions, Auditor-General, and the Secretary-General. The State Council’s term of office is five years (Art. 86). The State Council is given a number of functions and powers, including but not limited to: the adoption of administrative measures, rules and orders, submission of proposals to the NPC, creation and execution of a plan for national economic and social development, conducting foreign affairs and concluding treaties and agreements with foreign nations; protection of the rights of Chinese nationals abroad, and exercising any other functions that the NPC may delegate to it (Art. 89).


B. Legislative Branch
The National People’s Congress (NPC) is deemed to be the “highest organ of state power” in Article 57 of the Constitution of the People’s Republic of China (1982). The NPC is partially composed of a permanent body called the Standing Committee of the National People’s Congress (Articles 57, 65-69). The NPC is the unicameral body vested with the authority to establish the laws in China pursuant to Article 58. Deputies to the NPC are elected to their positions for five-year terms (Art. 60). Some powers of the NCP are to amend the Constitution, enact laws, elect the President and Vice President of the PRC, elect the President of the Supreme People’s Court, deciding questions of war and peace, and various removal powers (Articles 62-63). When the NPC is not in secession, the Standing Committes can enact amendments and additions to laws passed by the NPC (Art. 89)

Legislation is also created at more local levels by the people’s congresses of provinces, municipalities, autonomous areas and cities. The Constitution provides the structure, authority, and duties of the Local People’s Congresses in Articles 95-111. All of the local regulations that are passed by these lower people’s congresses must comport with the Constitution, laws passed by the NPC, and the people’s congresses above each of the local congresses in the hierarchy.

The stages of a typical bill in the NCP are presentation, examination, passing the bill and publication of the enacted law.

For additional information regarding the NPC, visit:

CNN.com In-Depth Specials - China's National People's Congress


C. Judicial Branch
The judicial system of the PRC is established in Articles 123-135, and consists of the people’s courts, the Supreme People’s Court, the people’s procuratorates, the Supreme People’s Procuratorate, military procuratorates and other special people’s procuratorates. Article 129 refers to the people’s procuratorates as “state organs for legal supervision.” In 1983 the NPC amended the Organic Law of the People’s Procuratorates, which included an enumeration of the powers and functions of the procuratorates. The functions seem to set up an organization which initially performs similar to a prosecutor in the United States, in that it oversees investigations by the public security organs and decides which cases will be prosecuted. However, the oversight of the procuratorates extends beyond investigation and trial, into supervision of the legal activities of the people’s courts, the execution of judgments, and the activities of prisons.

There is a hierarchy within the court structure from the top down: The Supreme People’s Courts, the Higher People’s Courts, the Intermediate People’s Courts, and the Basic People’s Courts. The Basic People’s Courts are comprised of more than 3,000 courts at county level, which are further subdivided into about 20,000 smaller units referred to as people’s tribunals located in towns and villages. There are 376 Intermediate People’s Courts and 31 Higher People’s Courts located in the provinces. See Albert HY Chen, An Introduction to the Legal System of the People’s Republic of China 107-108 (1998). Additionally, there are a number of specialized courts, for example those dealing with railway transportation, forest affairs, the People’s Liberation Army (PLA) and maritime issues. Jurisdiction is allocated partially through the Constitution, the 1979 Organic Law of the People’s Courts, the Law of Criminal Procedure, the Law of Civil Procedure, and the Law of Administrative Procedure.

Litigants are generally limited to one appeal, on the theory of finality of judgment by two trials. Cases of second instances are often reviewed de novo as to both law and facts. Requests for appellate review take the form of appeals and protests (in criminal cases). Appeals are lodged by parties to the case, defendants and private prosecutors. Protests are filed by the procuratorate in criminal cases when it is believed that an error has occurred in the law or facts as determined by the judgment or order of the court of first instance. In civil cases the procuratorate does not possess a right to file a direct protest, but it can initiate adjudication supervision via a protest. Adjudication supervision refers to a type of discretionary post-“final” decision review, which may occur in certain situations in criminal cases.

Read more here

[top]Overview of Chinese law and religion

A brief overview of law and religion in the People's Republic of China

Brigham Young University Law Review, 2003 by Huanzhong, Chen

I. CURRENT RELIGIOUS POLICY IN CHINA

The current state of religious freedom in China can be compared to the proverbial half glass of water; while some people see the glass as half full, others view it as half empty. How one views the situation largely depends on the position and political orientation of the viewer. Most would likely agree that given the almost complete absence of religious freedom twenty years ago in China, to have the glass half full today demonstrates remarkable progress. Perhaps more importantly, the water continues to rise.

Throughout its long history, China has had an interesting and sometimes tumultuous relationship with organized religions, both domestic and foreign. Because this conflict has appeared throughout Chinese history and across many different governments, it may appear to some to be an inherent feature of Chinese culture. Indeed, unlike most Western societies, China was primarily and officially dominated for more than two thousand years by the semi-religious influence of Confucian philosophy.

The principal religions currently registered in China are Buddhism, Taoism, Islam, Catholicism, and Protestantism. Currently citizens of China are free to express their religious beliefs and may choose a religious affiliation within these five major religions. According to official statistics, China has over one hundred million followers of various religious faiths. There are more than eighty-five thousand sites for religious activities, most of which were built prior to 1949, when the Communists took over China.

Buddhism has a two thousand year history in China. China currently has approximately sixteen thousand Buddhist temples and about 320,000 Buddhist monks and nuns.

Taoism was founded in China more than seventeen hundred years ago. China now has over one thousand Taoist temples and more than ten thousand Taoist priests and nuns.

Islam was introduced in China in the seventh century. China currently has ten national minorities, including the Hui and Uygur, with a total population of twenty million adherents to Islam.

Catholicism was introduced in China intermittently in the seventh century, but it did not spread widely until after the Opium War in 1840. At present, China has five million Catholics, five thousand clergy members, and more than five thousand Catholic churches and meeting houses.

Protestantism was first brought to China in the early nineteenth century, and it also spread widely after the Opium War. There are now about fifteen million Protestants, more than twenty thousand Protestant clergy members, more than twelve thousand churches, and roughly twenty-five thousand Protestant meeting places throughout China.

Recent archeological discoveries in eastern China suggest that Christianity may have been introduced to China hundreds of years earlier than historians have traditionally believed. Early Christian relics have been found that date back to the time of China's East-Han Dynasty, which was in power during the second century A.D., or about the same time as the Roman Empire.

Read more here

[top]Overview of Chinese land law

Source: Finance Asia (8/23/2004)

Since all land in the People's Republic of China ("PRC") belongs to the state, corporate entities and individuals are not permitted to own land although they may own the property above the land. Given this division of ownership, the legal framework governing land in China includes legislation regulating land-use rights on the one hand and legislation regulating ownership of the buildings and structures on the other hand. Legislation is also in place concerning the requisition, development and protection of land in the PRC.

The Land Administration Law of the People's Republic of China (the "Land Law") is the fundamental law governing land matters in China. It came into effect on January 1, 1999, replacing the 1986 law.

In order to understand how the land administration system will affect their projects in the PRC, foreign investors must be aware of the nature of the land-use rights that they are dealing with. Among other things, they will need to know if their land-use rights will increase land-acquisition costs and land-related environmental obligations and liabilities.


Land-Title System

Although the Land Law introduced many changes, it has not altered the existing land-title system in China. Under this system, there are two types of land ownership: state ownership and collective ownership. There is no private land ownership under Chinese law. According to China's 1982 Constitution, all land in urban areas is owned by the state and is called state-owned land (guoyou tudi). All agricultural land and homesteads in the suburban and rural areas are owned by rural collectives and called collective land (jiti tudi). Uncultivated land in mountain and other remote areas is also state-owned.

Commercially, land-use rights (tudi shiyongquan) are of greater relevance than land ownership (tudi suoyouquan). Chinese law prohibits transferring ownership of state-owned land, but permits the Chinese government to grant, lease, or allocate the right to use state-owned land. For collective land, Chinese law has imposed so many restrictions that the transfer of ownership of collective land, while theoretically possible, is practically infeasible. But rural collectives may provide land-use rights and land contracting or the lease of collective land on a fixed term (tudi chengbao jingyingquan) to peasants and other land users, subject to stringent legal procedures.

The 1990 Urban Land Regulations and the 1994 Urban Real Estate Law authorize local land bureaus at county and municipal levels to grant long-term land-use rights (churang tudi shiyongquan) to local and foreign land users, but only over state-owned land, and not over collective land.

To obtain granted land-use rights, the land user must sign a land-grant contract with the local land bureau arrived at by means of a competitive mechanism (bidding, auction or a listing process) or negotiation and must pay a substantial land-grant fee up front. The grantee will enjoy a fixed land-grant term and must use the land for the purpose specified in the land-grant contract. Prior to the expiration of the term, the government may take back the land, but only for reasons of public interest, and in such a case the government must compensate the grantee for the value of the unexpired term and the costs of the superstructures. The maximum term of a land grant ranges from 40 years for commercial use to 70 years for residential use.

Apart from security of tenure, the other important legal feature of granted land-use rights is marketability; that is, granted land-use rights may be transferred, leased, or mortgaged in accordance with the law and the terms of the land-grant contract.

Other types of land-use rights include "allocated land-use rights" (huabo tudi shiyongquan), which are obtained through administrative approval by the government without the payment of a land-grant fee, and "collective land-use rights," which are obtained through contracts with rural collectives. In contrast, these non-granted types of land-use rights (feichurang tudi shiyongquan) lack either marketability or security of tenure. Hence foreign banks normally do not accept these non-granted types of land-use rights as security for lending, particularly in limited-recourse project finance transactions. Generally speaking, the government may take back allocated land-use rights at any time without any compensation. Many Chinese joint-venture parties possess only non-granted types of land-use rights, because their rights were acquired long before the creation of the land-grant system in 1990.

One of the main problems that emerged with the system for granting land-use rights was that the vast majority of land grants were conducted by agreement rather than by auction or a tendering process. According to unofficial statistics, as of June 2002, approximately 95% of all land-use rights had been granted via private, bilateral agreements between local land bureaus and grantees. The problem is that when the agreement method is used, there is generally little or no competitive pricing or transparency. It is believed that the state has lost billions of dollars in state revenue through the granting of land-use rights at prices below market value.

On July 1, 2002, regulations came into effect that prohibit grants by agreement for land to be used for commercial purposes. The purpose of the regulations is to promote transparency and ensure that market prices are maintained. The land-use rights for commercial land must be granted by means of auction, a tendering process or a new kind of "listing" process. When land-use rights are granted by means of the "listing" process, the land is listed at a land exchange center and interested parties are given a certain period of time within which to submit bids.


Restricted Approval Procedure

The Land Law provides for the strengthening of the approval procedure for non-agricultural use of cultivated land. The New Land Law divides land into three types: "agricultural land" (nongyongdi), "construction land" (jianshe yongdi), and "unutilized land" (weiliyongdi). Agricultural land includes cultivated land, forested land, grassland, and other land used for agricultural production or irrigation. Construction land includes land for construction of buildings, mining, transportation facilities, water-conservancy projects, and military purposes. Unutilized land refers to all land that is neither agricultural nor construction land - usually state-owned land in uncultivated mountain areas.

The Land Law brought about five major changes in the approval procedures for using cultivated land for non-agricultural purposes. First, the law significantly restricts the existing approval mechanism based on the size-limit. Provincial governments may only approve land requisitions of up to 35 hectares of cultivated land (previously 70 hectares), or 70 hectares of non-cultivated land (previously 140 hectares). Requisition of larger sites must be approved by the State Council.

Second, the Land Law placed further restrictions over basic cropland, used to produce staple and cash crops. The State Council must approve all requisitions of basic cropland for construction use, regardless of the land size.

Third, the Land Law introduced an agricultural land-usage conversion (nongyongdi zhuanyong) procedure for approval of new construction land. This is aimed at stopping local authorities from circumventing the law by sub-dividing large sites into smaller sites. It appears that virtually all new conversions of agricultural land into construction land must be either specifically approved by the State Council or the provincial governments, or receive prior general approval from these bodies.

Fourth, the Land Law specifically requires project owners to attach the local land bureau's preliminary examination report when they submit the feasibility study of their projects for approval.

Fifth, the legal effect of master land-use plans (tudi liyong zongti guihua) and annual land-use plans (tudi liyong niandu jihua), was enhanced significantly by the provisions of the Land Law.

All local land-use plans (and their subsequent amendments) require the approval of the State Council or the provincial governments. Land-use approvals given in violation of the relevant land-use plans will be legally void.


Financial Disincentives

The Land Law also introduced more financial disincentives to using cultivated land for construction purposes. It stipulates that 30 percent of the land revenues generated from all new conversions of cultivated land into construction land must be surrendered to the central government. (Previously, local governments kept land revenues from all types of land.) In contrast, local governments will be allowed to keep all land revenues generated from the use of existing construction land.

Moreover, the requirements of the Land Law have increased the costs of requisitioning cultivated land. It stipulates four statutory items of compensation in the requisition of cultivated land, namely, a land compensation fee (tudi buchangfei), resettlement allowance (anzhi buzhufei), fixtures and young crops compensation fee (fuzhuowu he qingmiao de buchangfei), and vegetable land development fund payments (xincaidi kaifa jianshi jijin). As a further financial disincentive, the Land Law has reinforced the levy and collection of the new cultivation fee (kaikenfei). Any land user who obtains approval to convert a plot of cultivated land must cultivate a new plot of land of the same size and quality. Land users may undertake the cultivation themselves, but it is more common for users to pay a fee to local governments to do so.

As a result of the financial measures introduced by the Land Law, greenfield projects that need to use cultivated land, such as new infrastructure facilities, will incur significantly higher land costs. This has resulted in increased demand for existing construction land and, consequently, higher prices.


Tightening Up

In spite of the above measures, the problem of the encroachment of farmland has not gone away. China has recently introduced new restrictions in hopes of curbing the problem. In April 2004, China imposed a nationwide moratorium on the conversion of agricultural land into non-agricultural construction land for "a concentrated period of around half a year." The moratorium is to continue beyond that period in all areas that fail a land market assessment until specified land regulation and rectification requirements are met.

China has also been clamping down on the use of land in China's numerous "development zones." Pursuant to a December notice issued by the State Development and Reform Commission, the Ministry of Land and Resources, the Ministry of Construction and the Ministry of Commerce, unauthorized extensions of development zones were to be stopped and occupied land could be taken back depending on whether land regulations, land use plans and urban plans had been complied with. Unconfirmed press reports suggest that by April 2004, 3,763 development zones had been revoked and the total planning areas for development zones in China had been reduced from 35,400 square kilometers to 17,000 square kilometers.

It has also been reported that in March 2004 the Ministry of Land and Resources temporarily suspended approval of construction land in 26 cities, including Beijing, for failure to comply with construction land supply recordal requirements.


Legal and Practical Implications

Broadly speaking, the PRC Land Law has several major legal implications. First, land acquisition for investment projects in China has become more time consuming, and the risk of penalties and legal invalidity due to non-compliance is higher than under the earlier regime.

Further, the Implementing Regulations for the Land Law authorize the government to lease (rather than grant) land-use rights A major difference between a land grant and a land lease is that a land grant would require a substantial downpayment and a "peppercorn" annual land-use fee, whereas a land lease instead calls for a higher annual rent but no huge downpayment. Foreign investors should consult their legal advisers to evaluate the alternative ways to acquire land.

Another subtle but important implication is that the Land Law has reaffirmed the legality of contribution of land-use rights as capital for granted or allocated land. It is still unclear as to what the legal procedures might be for collective land such as whether specific approval by the local land bureau would be required. Whether this mode of land acquisition would give joint ventures a security of land tenure is also unclear.

The PRC Land Law and subsequent restrictions on construction land may leave foreign investors with mixed feelings. But on the whole, the Law and its ancillary regulations represent a significant step forward in stopping the alarming loss of arable land and developing a more rational and transparent land system in China.

[top]Chinese Labour Arbitration Law

New Chinese Labour Arbitration Law

May 2008

With the increased number and complexity of labour disputes arising in China, the current regulations for dispute resolution have been considered unsuitable. In an attempt to remedy the situation The PRC Labour Disputes Mediation and Arbitration Law (the "Law") was adopted by the Standing Committee of the National People's Congress on 29 December 2007. The Law will come into force on 1 May 2008 and covers the following issues.

Pre-Requisite Arbitration And Voluntary Mediation

The Law places an emphasis on the use of voluntary mediation, in order to manage the increased number of labour disputes. It is worth noting that if an employer fails to perform its obligations provided for in a mediation agreement, the employee concerned may seek direct recourse to the competent People's Court for the issue of a payment order.
As per the existing regime, arbitration is a pre-requisite to litigation.

Conditionally Final And Binding Arbitral Awards

If any party disagrees with an arbitral award, it may commence litigation within 15 days of the arbitral decision, after which time the arbitral award will become binding.

The Law introduces an exception to this rule, which ensures that any arbitral awards arising from disputes over the (i) payment of salaries, compensation or damages; and/or (ii) performance of statutory obligations regarding working time, rest and holidays or social insurance are final at the time when they are made (subject to certain conditions being satisfied). The purpose of this is to prevent employers from commencing litigation as a means of delaying or avoiding the performance of their arbitral obligations in these limited circumstances.

Extended Scope Of Arbitrable Matters

The Law has extended the scope of arbitrable matters to cover nearly all labour-related disputes. These include disputes arising from (i) determining whether an employee / employer relationship exists, and (ii) the conclusion, modification or termination of an employment contract.

Extended Arbitration Application Period

According to the current regulations, the arbitration application period is 60 days from the date when the applicant knew, or should have known, that his rights had been infringed. The Law has extended this period to 1 year from the same date.

Clearer Jurisdiction Of Labour Arbitration Committee

The Law now clearly stipulates that the competent labour arbitration committee shall be the one located either where the labour contract is performed, or where the employer is located. This clarifies the current regime, which does not provide clear guidance on this matter.

Shorter Hearing And Award-Making Period

According to the Law, the competent arbitration committee shall complete hearings and make arbitral awards on relevant labour disputes within 60 days of the acceptance of an arbitration application. This is a reduction of 30 days from the current equivalent regulation.

Heavier Burden Of Proof On Employers

Taking into account the fact that most of the evidentiary documents required in litigation involving employers and employees are under the control of employers, the Law provides that if an employer refuses to provide such documents, the related fact(s) should be determined in favour of employees.

No Charge Of Arbitration Fees

Under the new regime, arbitration fees will no longer be charged. This will alleviate the economic burden that employees face when trying to protect their interests, thereby making it easier for arbitration to be commenced.

Overall, the amended Law represents a shift towards the protection of employees. Foreign enterprises in China would be wise to pay more attention to the statutory labour-related obligations in order to avoid becoming involved in unnecessary labour disputes with their employees

[top]Taxation in China

Source: China-Britain Business Council - Market Intelligence - Tax, Law & Banking - Taxation

There are many taxes levied in China. The taxes that are of most relevance to foreign businesses are those levied on Foreign Investment Enterprises ("FIEs") and Foreign Enterprises ("FEs"). These are:

• enterprise income tax
• business tax
• value-added tax
• consumption tax
• urban real estate tax
• stamp duty
• deed tax
• land value-added tax
• vehicle and vessel purchase tax
• vehicle and vessel use tax
• resources tax

Foreign businesses also have to have regard to individual income tax.

ENTERPRISE INCOME TAX (“EIT”)

Enterprise Income Tax applies to FIEs with income which they derive from production and business operations and other income, and to FEs with income derived from production and business operations and other income in China.


Taxable income

FIEs are subject to EIT on their worldwide income sourced in and outside the PRC. But a foreign tax credit is allowed for income tax paid in other countries with respect to foreign-sourced income derived by the overseas subsidiaries and/or branches of an FIE. The foreign tax credit is limited to the EIT payable on the same amount of income, so you can’t get tax credits in this way!

FEs are subject to EIT only with respect to income sourced from the PRC. The taxation of an FE also depends on whether it has a "permanent establishment" in China. FEs with permanent establishments in the PRC would be subject to EIT on all income sourced from the PRC, while FEs without permanent establishments in the PRC are subject to a withholding tax on such income as certain dividends, interest receipts, rentals received, royalties, capital gains and other passive income sourced from China.


Tax rates

FIEs and FEs are generally subject to EIT at a standard rate of 33% (which amounts to a national tax rate of 30% plus a local tax rate of 3%) on the taxable income. Up until March 2007, foreign-invested enterprises in certain special zones could benefit from lower rates (either 24 per cent or 15 per cent).

As from 1st January 2008, the rate of tax paid by foreign-invested enterprises and Chinese companies will be 25 per cent (although it is not yet clear how the income tax rate will be increased over the five-year transitional period from 15 per cent to 25 per cent). Note that there are still some exceptions and exclusions, as follows:

1) Provisions for small low-profit and hi-tech enterprises
The new law applies a preferential rate of 20 percent to eligible small low-profit enterprises and a preferential rate of 15 percent to hi-tech enterprises receiving priority support from the State.

2) Tax incentive policies
Current preferential policies relating to the regular tax reduction and exemption for production foreign-funded enterprises (i.e. two-year exemption and subsequent three-year 50 per cent reduction of standard tax rate) as well as the 50 per cent tax reduction for export-oriented foreign-funded enterprises will be abolished. However, tax preferential treatment will still be available to venture investment enterprises and to enterprises investing in projects involving environmental protection, agricultural development, water conservation, production safety, high-tech development and public welfare undertakings.

Certain tax breaks will also be granted to new hi-tech enterprises in special economic zones and ‘encouraged enterprises’ located in less-developed western areas of the country.

For those FIEs who will lose their current tax holidays under the new law, they will have to consider raising the high/new-tech content of their products and production technology, as well as purchasing capital goods for enhancing environmental protection, water and energy conservation, and production safety in order to try to qualify for the new tax incentives.

3) 'Grandfathering’ treatment
There will be a transitional period for FIE's currently enjoying preferential tax treatment:

- FIEs subject to a reduced income tax rate and established before the promulgation of the new Tax Law will be subject to a gradually increasing transitional income tax rate over five years after the new Tax Law becomes effective.

- Production FIEs entitled to enjoy the ‘two plus three year’ tax holiday (two years tax free and a further three years at 50 per cent) under the current income tax laws may continue to enjoy remaining incentives in accordance with the requirements and period specified by the current income tax laws.

- For those FIEs which have not yet begun their ‘tax holiday’, the period will commence from the effective date of the new law (i.e. January 1st 2008).


Withholding tax

The withholding tax rate applying to interest receipts, rentals received, royalties, capital gains and other passive income derived by FEs (with no PEs) in China is 10%. While most dividends are currently exempt from PRC tax, some dividends are subject to a withholding EIT at a rate of 20%.


Tax treaties

China has double tax treaties with a number of jurisdictions that seek to avoid taxation of the same income in more than one jurisdiction. In other words, any tax paid in one contracting state with respect to an income shall be allowed as a credit against the tax on that income payable in the other contracting state. Generally, double tax treaties cover any income tax (including both enterprise income tax and individual income tax), but not turnover taxes (eg business tax, value-added tax, etc) that may be payable.

Currently, China has entered into double tax treaties with 88 countries, including the UK.


OTHER TAXES

Business tax (“BT”)

Business Tax is levied on enterprises and individuals that provide labour services, transfer intangible assets or sell immovable property in China. BT is generally levied at the rate of 3% or 5% depending on the type of taxable activities performed by the enterprises or individuals in China:

(i) BT is levied at 5% on income earned from the transfer of intangible assets, sales of immovable property in China, or the provision of services related to the financial and insurance industries, agency, the hotel industry, food and beverage industries, tourism industry, warehousing industry, leasing industry, advertising industry and other non-vatable services industries;

(ii) BT is levied at the rate of 3% on income arising from the provision of services related to the transport industry, construction industry, post and telecommunications industries, culture and sports; and

(iii) BT is levied at the rate of 5% to 20% on income earned from the provision of services related to entertainment business.


Value-added tax

VAT is imposed on enterprises and individuals that sell goods, provide processing or repair and replacement services or import goods into China. The standard VAT rate for goods sold or imported by the taxpayers (except for certain goods which are subject to VAT at 13%) and processing or repair and replacement services provided by the taxpayers is 17%.

In calculating the net VAT liabilities, note that the amount of VAT on purchases for the current period ("Input VAT") can be offset against the amount of VAT on sales ("Output VAT") for the relevant period. The formula for calculating the net VAT is as follows:

Net VAT payable = output VAT - input VAT

In addition, input VAT paid on importation/local purchase of materials for the production of exported goods can be fully or partially refunded in accordance with the prevailing export VAT refund policy. The refund rate may vary from 5% to 17% depending on the type of goods exported from China.


Consumption tax (“CT”)

Consumption Tax is imposed on enterprises and individuals that produce, entrust third parties with processing or import consumer goods specified in the relevant rules and regulations on consumption tax in China. Some of the examples of those consumer goods include tobacco, alcoholic beverages, cosmetics, petrol, cars, etc. CT is calculated at a fixed rate according to the price or at a fixed amount according to the quantity.


Urban real estate tax ("URET")

Urban Real Estate Tax is payable by the individual or corporate owners of the properties situated in China. URET is calculated on the original value of the property or, if the property is leased out, the rental income of the property.

If URET is calculated on the original value of the property, a statutory deduction of 10% to 30% of the original value will be allowed. URET will then be levied at the rate of 1.2% of the net value. The specific rate of deduction shall be determined by the local government and may vary from city to city.

If the property is for rent, URET can be calculated on the rental income at 18%.

The above rates apply only to FEs and FIEs which are established in China.


Stamp duty

Stamp Duty is levied on enterprises and individuals that conclude or receive any of the following documents:

(i) documents issued for a purchase and sale transaction, process contracting, property leasing, commodity transportation, storage and custody of goods, loans, property insurance, technology contracts, engineering project reconnaissance and design contracts, construction and installation project contracts and other documents of a contractual nature;

(ii) documents involved in the transfer of property by purchase, sale, inheritance, gift, exchange or division;

(iii) documentation of rights or licenses; and

(iv) other documents declared to be taxable by the tax authorities.

Stamp duty is calculated at a fixed rate according to the contract amounts (ranging from 0.005% to 0.1% depending on the nature of the taxable documents) or at a fixed amount per document. Specific exemption may be available to certain types of contracts or documents.


Tax withholding obligations

Any entity or individual that pays income on which IIT is payable must act as a withholding agent. If a withholding agent fails to withhold or collect tax as required, tax authorities will pursue with the taxpayer the tax that should have been withheld or collected, as well as the corresponding interest, penalties and/or surcharges. At the same time, a penalty will also be imposed on the withholding agent in this regard.


INDIVIDUAL INCOME TAX ("IIT")

Individual Income Tax is imposed on all individuals (including local PRC and foreign nationals) residing in or earning income from the PRC. This comes under a law called the Individual Income Tax Law of the People's Republic of China (the "IIT Law") and the Detailed Rules for the Implementation of the Individual Income Tax Law of the People's Republic of China (the "Detailed Implementing Rules").


Taxation of individuals working in China

An individual who is domiciled in China is subject to IIT on all of his worldwide income regardless of type (ie wages and salaries, capital gains, dividends, interest, rent, etc). The Detailed Implementing Rules define the term "wages and salaries" to include cash awards, bonuses, allowances, subsidies and other compensations received by an individual for the tenure of employment.

An individual who is not domiciled in China is subject to IIT on "PRC-sourced income" mainly depending on how long the individual stays in the PRC. For the purpose of determining the individual's tax liability, only the days on which the individual was actually present in China are counted. The day on which the individual leaves, enters, enters and leaves, or makes multiple entries shall be counted as a whole day for this purpose.

Notwithstanding this, certain types of PRC-sourced income (such as dividends, interest or rent) are subject to IIT irrespective of whether the individual spends any time in China during a calendar year.


Taxable income

An individual who is not domiciled in China, i.e., foreign nationals residing in China for not more than five "full" consecutive years (a foreign individual who is based in the PRC but spends more than (i) 30 days on a single trip or (ii) 90 days in the aggregate outside the PRC during any calendar year will not be considered to have spent one "full" year in PRC for tax purposes) is generally subject to IIT on "PRC-sourced income". The term "PRC-sourced income" is defined to include "income from personal services provided inside the PRC because of the tenure of office, employment, the performance of a contract, etc".

In addition, the following items, among others, derived by foreign nationals working in China are "temporarily exempted from IIT":

(i) reasonable allowances for housing, meals and laundry services received in a noncash form or on a reimbursement basis;

(ii) reasonable one-off relocation costs on a reimbursement basis;

(iii) reasonable allowances for business trips both inside and outside the PRC;

(iv) allowances for the expatriate's language training, and children's education in China, provided the costs are supported by valid invoices and approved as reasonable by PRC tax authorities; and (v) home leave pay for the expatriate, whereby the expenses are restricted to the expatriate's travel expenses and shall not exceed two trips to return to his/her home (including the residence of his/her spouse or parents) during a single calendar year.


Tax rates

IIT is charged at a progressive rate from 5% to 45%. Foreign nationals with PRC-sourced income can now deduct Yn4,800 (the standard deduction being Yn1,600 and the extra deduction amounting to Yn3,200) each month against his/her monthly income effective from 1st January 2006.


Tax withholding obligations

Any entity or individual that pays income on which IIT is payable must act as a withholding agent. If a withholding agent fails to withhold or collect tax as required, tax authorities will pursue with the taxpayer the tax that should have been withheld or collected, as well as the corresponding interest, penalties and/or surcharges. At the same time, a penalty will also be imposed on the withholding agent in this regard.

Since 1st January 2000, the withholding requirement has also applied to wages and salary payments made by the parent or affiliated company outside of China to expatriate employees of the entity in China. Accordingly, the entity in China is obligated to withhold taxes on wages and salary payments made to the PRC and expatriate employees by either (i) the parent or affiliated company outside of China; or (ii) the entity in China.

Written by DLA Piper Beijing Office International Tax Team. Contact: Tel: +86 10 6561 1788, Email: jingzhou.tao@dlapiper.com

[top]China-Britain Business Council

China-Britain Business Council
China-Britain Business Council

Head office and registered address:
1 Warwick Row, London SW1E 5ER

T: +44 (0)20 7802 2000
F: +44 (0)20 7802 2029

Whether you are just starting to develop your business in China, or you are already established in the market, the China-Britain Business Council (CBBC) can help you achieve success in this important market.

CBBC is the UK's leading agency helping British companies do business in China. CBBC deliver a range of practical, cost-effective services to British companies wishing to export goods and services to, invest in, or establish manufacturing under license arrangements with China.

Whilst use of CBBC's services is open to all British registered companies on a pay-as you-go basis, it is also a membership organisation with some 900 British company and individual members. Companies join us both for high-level contact and the wide range of practical help that we offer. Over one third of CBBC members are SMEs. For companies serious about developing business in China, CBBC membership provides a cost-effective route to on-going support, networking and exclusive services and discounts.

CBBC is a business led partnership between government and industry with a proven track record of developing British trade in China dating back to the 1950s. CBBC is widely recognised and respected at the highest level of both Chinese and British governments. CBBC organise many useful high-level business events with trade related government ministers from both countries.

CBBC Offices

In the UK, CBBC delivers its services via its Head Office in London, regional offices in Glasgow , Manchester , Leeds and East of England and a network of partners throughout the UK. CBBC have 9 offices in China established in strategic locations across the market in Beijing, Shanghai, Shenzhen, Qingdao, Wuhan, Chengdu, Nanjing, Hangzhou and Shenyang. This means you can draw upon CBBC's contacts and expertise in all the major business regions of China. CBBC's largest office in China is located in the British Centre in Beijing where CBBC share facilities with the British Chamber of Commerce in China and the Information Centre of the British Embassy.

[top]US-China Business Council

The US-China Business Council
Welcome to the US-China Business Council
Washington
1818 N Street, NW, Suite 200
Washington, DC 20036
Tel: 202-429-0340
Fax: 202-775-2476

Beijing
CITIC Building, Suite 10-01
19 Jianguomenwai Dajie
Beijing 100004, China
Tel: 86-10-6592-0727
Fax: 86-10-6512-5854

Shanghai
1701 Beijing West Road, Room 1301
Shanghai 200040, China
Tel: 86-21-6288-3840
Fax: 86-21-6288-3841

An Introduction to the US-China Business Council

The United States-China Business Council, Inc. (USCBC) is a private, non-profit, non-partisan, member-supported organization. It is the principal organization of US corporations engaged in business relations with the People's Republic of China. Founded in 1973 as the National Council for US-China Trade, USCBC originally served the early efforts of US business in China in the absence of formal diplomatic relations between the two nations. With the massive growth of US-China economic engagement since the end of the 1970s, USCBC has continued to assist firms entering the field for the first time, but increasingly the bulk of its work has served the interests and needs of US firms with well-established commercial relationships in China. Headquartered in Washington, DC, USCBC also serves its corporate members from field offices in Beijing and Shanghai.

USCBC provides extensive, tailored Business Advisory Services on a wide range of business interests and concerns to individual member companies. Its meetings and programs, in the United States, China, and Hong Kong, provide both broad-gauge and highly business-relevant information, and offer companies the chance to share ideas and experiences as well.

USCBC continues to play a central role in analysis and advocacy of key policy issues of significance not only to US businesses but also to the future of US-China relations. The Council's activities in support of government policies conducive to expanded US-China commercial and economic ties include educational meetings with Members of Congress and Congressional staff, and frequent testimony on behalf of the US business community in Congressional or other venues. USCBC also works to enhance media and public understanding of complex issues in US-China relations, appearing frequently on major broadcasts and providing accurate statistical and analytical information to media representatives.

The Council's numerous publications include the leading US periodical on China trade, the China Business Review, the members' weekly electronic newsletter, China Market Intelligence, two websites, Welcome to the US-China Business Council and The China Business Review: The Magazine of the US-China Business Council, and numerous focused studies on topics of current business interest.

USCBC serves as a valued and economical complement to the intensive in-house efforts that US companies devote to business development in China. Council membership in 2006 currently stands at about 250 firms, and continues to strengthen in response both to China's economic growth and to the many challenges and complexities US firms face in the Chinese environment. Among the Council's members are many of the largest and best known US corporations, but smaller companies and service firms make up a substantial portion of the overall membership as well.

The Council is governed by a Board of Directors composed of distinguished corporate leaders. USCBC's current chair is W. James McNerney, Jr., chairman, president and CEO of the Boeing Company. Since November 1, 2004, USCBC's president has been John Frisbie.

USCBC has long served as a respected host for senior visitors from China and from the US government. In recent years, the Council has been honored to receive His Excellency President Hu Jintao; Premier Wen Jiabao; former President Jiang Zemin; former Premier Zhu Rongji; and other distinguished Chinese guests from central and provincial government entities. Recent American public figures to meet with USCBC members have included Commerce Secretary Carlos M. Gutierrez; former US Trade Representative Robert B. Zoellick; US Ambassador to China Clark "Sandy" Randt; key figures from the US Congress; and numerous specialists on US-China affairs from various agencies of the Executive Branch of government.

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