ace info kit for aspiring entrepreneurs doing business in china

7/29/2019 ACE Info Kit for Aspiring Entrepreneurs Doing Business in China

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INFOKITFORASPIRINGENTREPRENEURSDOINGBUSINESSINCHINAACEBEIJINGCHAPTERRESEARCHCOMMITTEE

BySingaporeans,ForSingaporeans


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Foreword

China isanever-changingmarket, despitebeing thesecond

largesteconomyin theworld,its constantgrowthandrapid

expansionstill continue tobe closelywatched.Being touted

asthebusinesshubofAsia,theimpactandinfluenceChinabrings to theworldwill remaina force that will stay in the

nearfuture.

With that inmind, ACE officially launched its first overseas

chapterinBeijinginJune2012.ItsaimistohelpSingaporean

startups access overseas markets for the first time, by

connectingthemto avibrant networkof entrepreneursand

other partners in these markets. The Chapter will alsofacilitateanumberofnetworkingactivitiestobuildthelocal

communityandtolinkingtheconnectiontoACEinSingapore,

formulatingaplatformbySingaporeans,forSingaporeans.

ACE Beijing Research Committee will produce a live report

everysixmonths,whichaimstohelpthecommitteeserveits

purpose of helping Singaporean startups venture into the

Chinesemarket.The"InfoKitforAspiringEntrepreneurs"thatyouwillread,is a compilation and summary ofresearchon

information which are essential to setting upa business in

China.

Suggestions and comments are most welcome! Enjoy the

report, and here's wishing you all the best in your startup

journey!

ACEBeijingChapter

ResearchCommittee

31thDecember2012


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Contents

Contents........................................................2Introduction................................................3

OverviewofChina................................................3PoliticalLandscape..............................................6

TradeRelations.....................................................8

SociologicalLandscape......................................9

DoingBusinessinChina.......................1012thFive-YearPlan............................................10

PracticalGuidanceIssue.................................15

LegalStructuresandProcedures................18

TaxRegime...........................................................21

AuditandAccountancy....................................25InvoiceManagement........................................28

StorageofInvoice..............................................29

HumanResources/StaffRecruitment.......30

IntellectualPropertyRights(IPR)..............36

ConcludingNotes....................................37Appendix1................................................38

ListofUsefulWebsites.....................................38


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Introduction

Chinahasoneofthebiggestmarketsintheworld,withgreat

potentialinthenearfutureandishenceahotspotformany

entrepreneurs.BeijingbeingthecapitalofChinaisatthecore

oftheboomingentrepreneurialsceneinChina.

This report aims to provide aspiring entrepreneurs of

Singaporeafirst-stopguidetowardssettingupabusinessin

China,providingbasicessentialinformationforstartingupin

China. This publication is meant to be used as an

informational tool only; please approach the appropriate

channelsforspecificanddetailedadvice.

OverviewofChina

EconomicLandscape

Asof2012,Chinahastheworld'ssecond-largesteconomyin

termsofnominal GrossDomestic Product (GDP). According

to the World Bank1, in 2011, Chinas GDP was US

$7.298trillionwhileSingaporesGDPtotalsUS$239.7billion.

According2totheWorldBank

3,China'sannualaverageGDP

growthbetween2001and2010was10.5%,andtheChinese

economyisprojectedtogrowatanaverageannualrateofat

Takeaglimpse!

ChinasannualaverageGDPgrowth(2001-2010):10.5%;growthrateofatleast8%for2011-2013

Worlds2ndlargesttradingpowerbehindUSTotalinternationaltradevalueofUS$3.64trillion

(2011)

ChinaattractedUS$116.011billionFDIin2011(9.72%

increase)

Chinastotaloutwarddirectinvestmentflow(2010):US$68billion

Figure1-NominalGDPofMajorEconomies,2011(US$billion)2


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least8%between2011and20134.Between2007and2011,

China'seconomicgrowthratewasequivalenttoalloftheG7

countries'growthcombined.ChinaisamemberoftheWorld

TradeOrganisation (WTO)and is theworld's second-largest

tradingpowerbehindtheUS,withatotalinternationaltrade

value of US$3.64trillion in 20115.Its foreign exchange

reserves reached US$2.85trillion6 by the end of 2010, an

increaseof18.7%overthepreviousyear,makingitsreserves

by far the world's largest.China owns an estimated

US$1.6trillion ofUSTreasury bonds and is thus the largest

foreignholderofUSpublicdebt7.Chinaistheworld'sthird-

largest recipient of inward foreign direct investment (FDI),

attracting US$116.011 billion in 2011, marking a 9.72%

increase over 20108. China also increasingly invests abroad,

with a total outward direct investment of US$68billion in2010 and is ranked 5

th amongst othermajor economies as

seeninthefigure9below:

EconomicModel

ModernChinaiscurrentlyunderasocialistmarketeconomy,

consisting of a mixture of state-owned enterpriseswith an

open-marketeconomy.In1978,ChinaunderDengXiaopeng

embarked upon economic reform and opening up, moving

towards a more market-oriented mixed economy while

keepingaone-partyrule.

Withinthismodel,privatelyownedenterpriseshavebecome

a major component of the economic system alongside the

central state-owned enterprises and collective or township

village enterprises. A wide variety of small-scale private

enterpriseswere encouragedwhile thegovernment relaxed

price controls and promoted foreign investment. Foreign

tradewasfocuseduponasamajorvehicleofgrowth,leading

to the creation of Special Economic Zones (SEZs), first in

Shenzhen andthen inotherChinesecities. Inefficient state-

owned enterprises (SOEs) were restructured by introducing

western-stylemanagement systems, with unprofitable ones

beingclosedoutright, resultinginmassive joblosses.Bythe

laterpartof2010,Chinawasreversingsomeofitseconomic

liberalizationinitiatives,with state-owned companies buying

up independent businesses in steel, auto and energyindustries.

China'ssuccesshasbeenprimarilyduetomanufacturingasa

low-costproducer.Thishadbeenattributedtoacombination

of cheap labour, good infrastructure, relatively high

Figure2-Top10EconomiesofOutwardFDIflowsin2010(US$billion)


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productivity, favourable government policy and monetary

policy.Thestatestilldominatesinstrategic"pillar"industries

(such as energy and heavy industries), but allowed private

enterprises (composed of around 30million private

businesses) to expand enormously in others; in 2005, it

accounted for anywhere between 33% to 70% of national

GDP,whiletheOrganisation forEconomicCo-operationand

Development(OECD)estimateforthatyearwasover50%of

China'snationaloutput,upfrom1%in1978.

PoliticalLandscape

CommunismandtheCCP

The People's Republic of China, along with Vietnam, North

Korea, Laos, and Cuba, is one of the five remainingofficial

Communist states in the world. The entire system of state

power is controlledby theChinese CommunistParty (CCP).

Thehighest authority restswith theStanding Committeeof

thePolitburo ofthe CCP.TheincomingPresident, XiJinping

and the incoming Premier, Li Keqiang, togetherwith the 5

othermembersare ineffectChinas cabinet.Beneaththem

are another 25 members followed by the 210-member

CentralCommittee,madeupofyoungerpartymembersand

provincial party leaders. At the grassroots level the partyforms a parallel system to theadministrations in thearmy,

universities, government and industries. Real authority is

exercisedbythepartyrepresentativesateachlevelinthese

organisations. They are in turn, responsible to the party

officials in the hierarchy above them, thus ensuring strict

centralcontrol.

Day-to-day runningof thecountry lies in theState Council,which is directly under the control of the CCP. The State

Council isheadedby thePremier,and beneaththe Premier

are4Vice-Premiers,10StateCouncillors,aSecretary-General,

45 Ministers and with various other agencies. The State

Council implements the decisions made by the Politburo.

ApprovingthedecisionsoftheCCPleadershipistheNational

Takeaglimpse!

Chinahassucceededonmanufacturingasalow-costproducerduetothecheaplabour,goodinfrastructure,

relativelyhighproductivity,favorablegovernmentpolicy

andmonetarypolicy

Strategicindustries:Energy&heavyindustries

Privateenterprises(around30millionprivatebusinesses)In2005:33-70%ofnationalGDP;over50%ofChinas

nationaloutput


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Peoples Congress (NPC), theprincipal legislaturebody that

convenesintheGreatHallofthePeople.Itcompriseselected

delegates who may or may not be party members, and

includesintellectuals,techniciansandindustrialmanagers.

The key in the political system is the armed forces, the

PeoplesLiberationArmy(PLA),embers.Comprisingland,seaandair forceswith a total of2.3millionmother1.1million

serve in the Peoples ArmedPolice.China is divided into 7

militaryregions,eachwithitsownmilitaryleadershipandin

some cases, strong regional affiliations. Xi Jinping, is the

chairman of theCentralMilitary Commissionand therefore

headsthePLA.AlongwithhisstatusastheGeneralSecretary

oftheCCP,Xiholdsthe3mostpowerfulpositionsinChina.

Takeaglimpse!

StatePower:UndertheChineseCommunistParty(CCP) HighestAuthority:StandingCommitteeofthePolitburo

[Chinascabinet:7membersincludingincoming

PresidentXiJinpingandincomingPremierLiKeqiang]

StateCouncil:HeadedbythePremier,4Vice-Premiers,10StateCouncilors,SecretaryGeneral,45Ministersand

withvariousotheragencies

DecisionsmadebyPolitburoandapprovedbyNPCwhichconsistsofelecteddelegates,intellectuals,technicians

andindustrialmanagers

Keyinpoliticalsystemisarmedforces,thePLA(land,sea,air)with2.3millionmembers,PeoplesArmedPolicewith1.1millionmembers

Chinadividedinto7militaryregions President-ElectXiholdsthe3mostpowerfulpositions

includingChairmanoftheCentralMilitaryCommission

andthereforeheadsthePLA,GeneralSecretaryofCCP


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8

TradeRelations

In recent decades, China has played an increasing role in

calling for free trade areas and security pacts amongst its

Asia-Pacificneighbours.ChinabecameamemberoftheWTO

in200110and in2004,China proposed anentirely newEast

AsiaSummit(EAS)frameworkasaforumforregionalsecurityissues,pointedlyexcludingtheUnitedStates.TheEAS,which

includesASEANPlusThree,India,AustraliaandNewZealand,

held its inaugural summit in 2005. China is also a founding

member of the Shanghai Cooperation Organisation (SCO),

alongwithRussiaandtheCentralAsianrepublics.

In 2000, the U.S. Congress approved "Permanent Normal

TradeRelations"(PNTR)withChina,allowingChineseexports

inatthesamelowtariffsasgoodsfrommostothercountries.

ChinahasasignificanttradesurpluswiththeUnitedStates,its

most important export market. U.S.-China official trade

relationshasseenvariousdisputesincludingthatonChinas

currencyvaluationandtradecomplaintsonspecificindustriessuchasChinasrareearthexports.

Takeaglimpse!

Chinahasstrongtraderelations MemberoftheWTO FoundingmemberoftheSCO USallowedChinasexportsatthesamelow

tariffsasgoodsfromothercountries

Significanttradesurplus USisChinasmostimportantexportmarket


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9

SociologicalLandscape

DemographicsToday, the People's Republic of China has more than 150

citieswithapopulationofmorethanonemillionresidents(in

theurban area), including the threemajor citiesof Beijing,

HongKong,andShanghai.11

Figure3-DemographicsofChina


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DoingBusinessinChina

12thFive-YearPlan

Overview12

Chinas12thFive-YearPlanmapskeydevelopmentalgoalsand

policydirections foryear 2011 to2015,covering economic,

social and cultural aspects. This plan is the Chinesegovernmentsdevelopmentaloutline to guidepolicymaking

and set targets for central and local governments and

ministries, state-owned enterprises (SOEs) and private

sectors.Theplanskeythemesarerebalancingtheeconomy

(higher quality growth), ameliorating social inequality

(inclusive growth) and protecting the environment. The

Chinese government has also set to reduce annual GDP

growthto7percentoverthenextfiveyears.

ImportantGoalsinthePlan13

The12thFiveYearPlanhasthefollowinggoals:

DevelopandurbanizeChinaswesternregions; Improvethesocialwelfareandlivelihoodofitscitizens; Increasedomesticconsumption; Developkeyemergingstrategicsectors;and Protecttheenvironmentandimproveenergyefficiency.

Toachievethesegoals,keytargetshavebeendrafted.Some

mainkeytargetscanbeclassifiedaskeyeconomicandnon-

economic targets (Figure6), with stronger emphasis on the

sevenSEIsidentifiedtoachievethesegoalsasshowninFigure

5below14:


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Figure4-DetailsofSevenEmergingIndustriesunder

Chinas12thFiveYearPlan


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AnnualGDPgrowth

7%

UrbanisaJon

47%to51.5%

SpendingonR&D

2.2%ofGDP

InflaJon(CPI)

atorbelow4%peryear

Percapitarealdisposableincome

excessof7%(urban&rural

areas)

PatentedinvenJons

1.7to3.3per10,000

populaJon

increase

ServicesectorcontribuJonto

GDP

43%to47%

EnergyuseperunitofGDP

Reduceby16%

CO2emissionsperunitofGDP

Reduceby17%

Forestcoverage

Increaseby21.66%

Urbanwelcare

housing

36Munits

Non-fossilfueluse

Increaseto

11.4%

Figure5-KeyEconomicandNon-EconomicTargetsofthe12thFiveYearPlan


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StrategicEmergingIndustries15

The 12th FiveYear Plan will not only provide financial

supportfortheseindustriesbutalsosupportintheformof

government industrial policyincentives.Thesecould include

investments in large demonstration projects to justify

feasibility, preferred access to credit and capital and even

direct government investment via investment arms of the

government responsible for allocating capital from the

banking,financialandretirementsystems.

NewEnergy,EnergyConversationandEnvironmental

ProtectionandNewEnergyVehicles16

Renewable energy sources such as nuclear, hydropower,

solar,wind,biofuel, andgeothermal, aswell as natural gas

will be encouraged throughout the plan. As Chinas energy

use continues to climb, so will its need to acquire foreign

energyresourcesandtodeveloprenewableenergybases,

includingwindpowerbasesandgreentowns.Inaddition,the

Chinesegovernmenthasannouncedthatitwillstructurenew

energypoliciesaroundhydroandnuclearpower.

Presently, Chinas 14nuclearpower reactors contribute less

than2%ofthetotalenergy17used,withatotalof9.1millionKW produced.

18By 2015 it is targeted to double, with 25

nuclearpowerplantsinoperation.Hydropowerscapacitywill

increase by 50 percent by 2015. Wind power and coal

industries consolidation remains imminent. Intellectual

property patent protection andResearch andDevelopment

(R&D)aretobefundedheavily,especiallyforelectricvehicle-

relatedtechnology.

Chinas huge dependence on itsmanufacturing and export

industriesforeconomicgrowthandcoal asthemainenergy

source has caused much pollution and environmental

destruction.Hence,thegeneralguidelinewouldbetoreduceunsustainable practices and replace them with sustainable

onesviachangestoitsenergyresourcesandenergyusage.In

fact, oil and coal consumption is still expected to be the

dominantsourceofenergyandexpectedtodeveloprapidly,

thoughthegovernmentwillheavilyfundalternativeenergies.

Thegovernmentwillsupportefficientprovidersandpressure

inefficient ones to shut down operations. The government

plans to continue with the consolidation of coal mining

companies:about11,000coalenterpriseswillbereducedto4,000,with8to10coalcompaniesexpectedtoaccountfor

nearlytwo-thirdsofallcoalproductionby2015.Inaddition,

the government has said that China's investment in the

environmentalprotectionindustryduringthe12thFiveYear

Planperiodwillexceed3 trillion RMB (US$470 billion),with

theindustrygrowingby15-20%annually,itisahugepotential

for international cooperation. Arnold and Porter Consulting

Group(APCO)Worldwidealsoreportsthatimprovingenergy

efficiency and decreasing CO2 emissions are backed by

preferential policies, focusing on waste recycling and clean

coaltechnologies.

During the 11th FiveYear Plan, China designated clean

energytechnology(solar,wind,bio,and nuclear energy) for


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government support, spendingapproximately2 trillionRMB

(US$309 billion) on energy efficiency and environmental

protection measures. Currently, Chinese companies have

emerged as global leaders in wind and solar power. More

specifically, Chinese solar manufacturing companies have

become the worlds largest producer of photovoltaic solar

cellsandmodulesandcontrolapproximately17percentof

theglobalmarketfortheproductionofsilicon.The12thFive-Year Plan steps up these developments to support more

resource usage technologies such as the smart grid. The

Chinesegovernmentseemsdeterminedtotakemeasuresto

bolsterdemandforitsSEIproducts.Overthenextfiveyears,

theChinese central and local governments are expected to

devote significant resources to all seven SEIs, creating both

potentialopportunitiesandchallengesforforeignfirms.

HealthcareandBiotechnology

Biotechnologyis oneofChinaskeySEIs.Ithasthepotential

for large productivity gains and at the same time, solves

healthproblemsassociatedwithChinasrapidlyagingsociety.

Through the fastest growing biotech industry in theworld,

China is increasing its crop and animal husbandry yields,

improving medicines, developing newmedical systems and

increasing alternative energy production, among otherapplications. The 12

th Five-Year Plan will support the

development of innovative biotech products, high-end

medicaldevicesandpatentedmedicines.Thegovernmentwill

reportedly put forth a spending package of more than 12

billionRMB(US$1.8billion)forR&Dofnewdrugsfrom2011-

2015.

Technology

Akeypriorityofthe12thFive-YearPlanisforChinatoadvance

from Made in China to Designed in China. The

government will increase funding for R&D and industrial

upgrading aswell as improve intellectual property rights to

promoteindigenousinnovationdrive.

Next-generation IThasbeenselectedasoneof ChinasSEIs.

China will accelerate the creation of next-generation

information networks, mobile communication and the

Internet, which is crucial for the development of Chinas

logisticsindustry.Inaddition,thegovernmentplanstoinvestinR&Dofthe"Internetofthings"andcloudcomputing,and

develop digital and virtual technologies. China will invest

heavily in smart grid solutions in order to modernize and

ensureefficiency incurrent utilitycompanies. Infact,smart

grid technologyhashuge growth potential,with worldwide

utilitiesfirmsexpectedtoinvestUS$375billionby203019.

OpportunitiesforForeignBusiness20

IndustrialUpgradingOpportunitiesandChallenges

Thegovernments plan toincreaseSEIsshare ofGDPyields

opportunities for foreign companies as incentives will be


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created for private investment. In fact, the government

reportedlyexpectsmorethan14trillionRMB(US$2.2trillion)

in funds, fromboth governmentand private sectors, tobe

investedintheseindustries.TheaimisforSEIscontribution

toincreasefromtodaysapproximately5%ofGDP to8%by

2015and15%by2020.

However, according to APCO Worldwide, given Chinas

currentdrivetodevelopitsindigenousinnovationcapabilities,

these preferential policies may be biased toward domestic

firms,especiallysincethegovernmenthaspreviouslygivenits

pledge to develop a national procurement list that favours

domestic firms.Foreign business shouldmonitorChinas SEI

policyclosely andlookfor opportunities toparticipate inits

development. Foreign firms can also consider partnerships

withlocalcompaniestobetteraccessthesignificantfundingopportunitiesavailable.

SeekingViewsfromForeignBusinesses

Innovationanddevelopmentof these industrieswill require

advice,trainingandcooperationfromforeigncompanies.This

assistance could vary from informal consultations to more

formal programs under the rubric of corporate social

responsibility,improvingunderstandingandinstitutionalizing

governmentrelationships.

PracticalGuidanceIssue

BusinessCultureinChina21

Chinas distinctive business culture and etiquette makes it

standoutfrom theothermarkets in theworld. Hence, it is

imperative tohave basic knowledge of these to dowell in

China.

Culture

ConfucianismstillshapestodaysChinesesociety.Hencethe

concept of relationships, elements of responsibility and

obligationareemphasised, to achieve surface harmonyand

collectivegood.


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Guanxi

MostofusalreadyknowoneofthekeyconceptsinChinese

business culture is guanxi(), whichmeans connections.

Guanxi is a network of relationships that involve trust and

support. Money does not necessarily build guanxi. In fact,

guanxi can be established by showing and proving you are

trustworthy, reliable and dependable. It is important to

maintaincontact andemotional bondswithChineseas they

oftenfeelobligedtodobusinesswiththeirfriends.

Mianzi

Anotherimportantissue inChina ismianzi()which is a

symbol of one's pride. It revolves around an individual's

reputationandsocialstatusandcanbegiven,gained,savedorlost.Causingonetolosemianzithroughpublichumiliation

or inappropriate level of respect can ruin business

negotiations.Forexample,Chinese businessman donotlike

tosay "no" outright asit would causethe rejectedparty to

lose mianzi. Although the concept is hard for most to

understand, itisessentialasit isstill verymuchapparentin

manyaspectsofChina.

Keqi

Keqi()referstotheideaofbeinghumbleandmodest.It

is important to demonstrate humility and modesty all the

time as exaggerated behaviours can be deemed to be

arrogantand rudewhicharemuchdisliked accordingto the

Chineseculture.

Etiquette

BelowisalistofthecodeofbehaviourthattheChinesehave

accordingtotheirconventionalnorms:

StatusandHierarchyinChina

The hierarchical structures of the Chinese society and

business organisations are strictly based onpositions in the

organisation. Entrances into meeting rooms are based on

their ranks, as status is very important in China.Greet and

introduce yourself to themost seniormember. In addition,

addressyourChinesecounterpartswitha titleandtheirlast

name. If the person does not have a title, use Mr or

Madam. Senior members tend to lead negotiations and

directdiscussions.

WorkingRelationshipsinChina

Prior to closing business deals, the Chinese build strong

relations with the other party. Even if the other party is

friendly and hospitable, it does not guarantee a positiveoutcome.Inasituationwherebothpartiescanbenefitfrom

eachother,itisimperativetohavetrust.Thecollectivistway

of thinking still plays a strong role and influences Chinese

businesstoday.


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DininginChina22

Followtheseatingprotocol,basedonhierarchy,duringmeals

andwaittobeseated.Mealsareusuallyusedtobuildindirect

business relationship and not used for direct business

negotiations. One should not leave a dish empty as it is

perceivedasnotbeinggivenenoughfood,whichisaninsult

totheChinese.Conversely,leavingfooduntouchedmayalsoappearoffensive.

Toastsaremadefrequentlyduringthedinner.Thefirsttoast

usuallyoccursduringorafterthefirstcourseandnotbefore.

Itisrudetodrinkalonewithouttoastingothers.Simplyraise

yourglassandmakeeyecontact.Ifyouaretoasted,sipyour

drinkinreply.

Gifts

Be prepared toexchange amodest gift with your business

colleaguesatthefirstmeetingsoasnottosetyourbusiness

onawrongfoot.

Preparea groupgift from your company tobe given to the

leaderofthehostcompany.Agiftshouldbepresentedtoall

presentornoneatall.Presentagiftwithbothhands.Uponreceiving,thereareusuallynotopened.

TheChineseoftenrefuseagiftwhenfirstoffered.Youshould

offerasecondtime.

DueDiligence

When conducting business in China, no one should

underestimatethevalueandneedofthoroughduediligence.

By doing so, one can fully equip himself of all the key

informationnecessarytohisoperations.


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LegalStructuresandProcedures

Overview

Foreign investors may choose amongvarious Business Vehicles (BV) according

to the operations and needs of their

businesses. The business structures are

mainlyWholly Foreign-owned Enterprise

(WFOE),JointVentures(JV)andRepresentative

Office(RO).Theroutemapbrieflydescribesanoverview

ofthecoursetoundertakeandthelegal

structurefortheestablishmentofforeign

enterprises.

Investors should always approach lawyers and consult the

relevant governmental departments for a better

understandingofthelegalproceduresinvolved.(E.g.thePRCembassies or consultants stationed in their respective

countriesorregionsorthelocalgovernmentsDepartmentof

PromotionofInternationalTrade-thedepartmentincharge

ofthepromotionofforeigntradeandforeigninvestment).

Figure6-RouteMaptoRegulationsandProcedures


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DeterminationofLegalStructureor

BusinessVehicle

The application and approval procedure for all foreign

enterprisesarelargelysimilarbutmayvarydependingonthe

specific type of business vehicle chosen. Different business

vehiclesmaycatertodifferentinvestorswithvaryingneeds.

Assuch,it isimperative that a foreigninvestorunderstands

thecharacteristicsofthevariousbusinessvehiclesinorderto

catertotheneedsofhisbusiness.

TheapprovedBusinessVehiclesare:

1. WhollyForeign-OwnedEnterprise(WFOE)WFOEis alimited liabilitycompanywhollyownedby the

foreign investor(s) and is increasingly being used for

service providers such as a variety of consulting and

managementservices,softwaredevelopmentandtrading.

2. ointVentures(V)A JV is a business arrangement where the participants

create a new business entity or official contractual

relationshiptoshareinvestmentandoperationexpenses,

management responsibilities and profits and losses.Sometimes,JVsaretheonlywaytoregisterinChinaifa

certain business activity is still controlled by the

government. (E.g. Restaurants, Bars, Building and

Construction,CarProductionandCosmeticsetc.)

Thereare2typesofjointventures,namely EquityV,the

second most common manner after WFOE, in which

foreign companies enter the Chinese market and the

preferred mode of cooperation where the Chinese

government and Chinese businesses are concerned; and

CooperativeVenture(alsoknownasContractualJV),the

partiesinvolvedmayoperateasseparatelegalentitiesand

bearliabilitiesindependentlyratherthanasasingleentity.

3. RepresentativeOffice(RO)ROisestablishedbyforeignparentcompanies

23toengage

in business liaisons, quality control, product promotion,

market research, exchange of technology and other

permitted activities in China. About 20% of foreign

investorschooseROastheirChinabusinessentitybecause

itiscostefficientandrequiresnocapitalinvestment.

TheROisanon-legalentityoperatingandrepresentingits

parent company overseas. As such, it is not allowed to

engagedirectlyinbusinessandoperationalactivities,issue

official invoices, remit outward, sign sales or purchase

contracts, or receive income from services performed.

Howeveritmayactasaliaisonandpromotionofficeforits

parentcompany.

4. HongKongCompany

AHongKongCompanyisoftenusedasaSpecialPurpose

Vehicle(SPV)toinvestinChina.HongKongisoneofthe

quickest locations to incorporate a business in China.

Although a HK company is not a legal entity in China24,


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many foreign investors, especially investors from Europe

andNorthAmericachoosetoformaHongKongcompany

asaSPVtoinvestinChina.

5. PartnershipEnterpriseThis is a new type of business presence in China (since

March 1, 2010) and it may take some time for local

authorities todeterminehowthesestructures fitinwithothertypesofbusinessentities.Itrefersto:

TwoormoreForeignenterprisesorindividualsestablishaPartnershipEnterprise(PE)inChina;and

Foreign enterprise(s) or individual(s) with ChineseindividualorcompanyestablishaPartnershipEnterprise

(PE)inChina.

LawsandRegulationsforForeignInvestmentsinChina

GeneralLawsandRegulations

Generallawsandregulationsregulateallforeigninvestment

enterprisesanddomestic companies.They includeCompany

Law, Contract Law, Insurance Law, Arbitration Law, Labour

Law, Intellectual Property Law (including Trademark and

Copyright Law),The ProvisionalRegulationsonValue-Added

Tax, The Provisional Regulations on Consumption Tax, The

Provisional Regulations on Business Tax, and, other related

lawsandregulations.Assuch,itisalwaysrecommendedthat

a certifiedlawyer ispresentto adviseonvarious regulatory

issues.

MainForeignInvestmentLawsandRegulations

Other than the general laws and regulations, foreign

investments are also subject to a series of laws and

regulationsspecifictoforeigninvestments.Afewmainlaws

include:

Law of Chinese-Foreign Equity Joint Ventures and itsimplementationregulations

Law of Chinese-ForeignContractual Joint Ventures anditsimplementationregulations Law of Wholly-Owned Foreign Enterprise and its

implementationregulations

LawofForeign-investedenterprises,theincometaxanditsimplementationregulations

Law on the Protection of Taiwan CompatriotsInvestment


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InternationalTreaties

Foreign investments are subject to some international

treaties, such as the Bilateral Investment Treaties and

BilateralAgreementontheAvoidanceofDoubleTaxation.

ExaminationandApprovalProcedure

Foreign investors are also required to produce certain

documents for the approval process. Such documentations

may vary depending in the form of business entity i.e.

whethertheyareJointVentures(JVs),WhollyForeignOwned

EnterprisesorRepresentativeOffices.

TaxRegime

TaxisthemostimportantsourceoffiscalrevenueofChina.

Tax policies are also used to create certain economic and

socialdevelopmentimpact.Thegovernmentagencyincharge

oftaxpolicyistheMinistryofFinance;fortaxcollection,the

StateAdministrationofTaxation.

Tax rates in China, more often than not, are subject to

frequent changes and many tax rules and regulations are

subjecttolocalinterpretation.Alwayscheckforthelatest

informationbycontactinglocaltaxingjurisdictionsoroneof

theaccountingorganizations in the location where youare

operatingorgoingtooperate.Takenotetoseekadviceonly

fromreputablefirms,internationalorlocal.

Under the current taxation system in China, there are 19

typesoftaxes,namelythevalueaddedtax,consumptiontax,

business tax, enterprise income tax, individual income tax,

resource tax, urban and township land use tax, house

property tax, citymaintenance andconstruction tax, taxon

theuseofarableland,landappreciationtax,vehiclepurchase

tax,vehicleandvesseltax,stamptax,deedtax,tobaccoleaf

tax,customsduty,tonnagedues,andfixedassetsinvestmentorientationregulatorytax.

Astaxpayersonlyneedtopaytherelevanttaxesaccordingto

theactivitiestheyareengagedin,mostenterprisesonlyneed


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22

topayfrom6-8categories.Thenumberofpayabletaxesmay

reachupto10categoriesforlargerenterprises.

CapitalGains

An individuals capital gains are taxable in China at 20%.

Capital gains tax for a Chinese company is added to the

regular tax.A 10%deductionat sourceismadefromcapital

gainsfromaforeigncompanyinChina.

Thetablebelowservesasareferenceandshowstheincome

tax rates in China for an individual in 2012. Income for

business is taxable at 5-35% and passive income such as

interestandroyaltiesistaxableatastandardrateof20%.

MonthlyTaxable

Income(RMB)

Tax

Percentage(%)

QuickDeduction

(RMB)

11,500 3 0

1,5014,500 10 105

4,5019,000 20 555

9,00135,000 25 1,005

35,00155,000 30 2,755

55,00180,000 35 5,505

80,001andabove 45 13,505

Table1-IndividualIncomeTaxRatesinChinaforYear2012

ReportingDatesandPayment

ThetaxyearinChinaendsonDecember31.Itiscompulsory

to file a report and pay advances monthly or quarterly

(monthly for individuals). Submitting an annual report and

arrangingpaymentsshouldbedonebeforeMay31.Thereare

finesonarrears.ForeigncompaniesinChinaareobligatedto

submit an interim report every three months (advancepayments should be paidwithin15 days of the end of the

quarter).

Inmostcaseswhen theannual incomeis less than 120,000

RMB, an individualwhose entire income inChina is from a

salaryorwhoseincomeis subjectedtoa deductionoftaxat

sourcewillbeexemptedfromsubmittinganannualreport.An

employer is obligated to submit a monthly report on his

employees'wagesandtopaythetaxdeductedwithin7days

oftheendofthepreviousmonth.


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23

DeductionofTaxatSource

Anemployerisobligatedtodeducttaxatsourceonamonthly

basis from a salaried employee and to make additional

contributions to social security. Social security in China

consists of 3 parts: basic pension, personal accounts and

additional payment. The rates for social security vary in

differentcities.Ratesinthemajorcitiesarearound30% foremployers,and11%foremployees.

Thefollowingtableshowsa detailed summary of taxesand

mandatorycontributionsthatamediumsizedcompanymust

pay or withhold in a given year, as well as measures of

administrativeburdenin payingtaxes.In 2012,a numberof

major cities and provinces (including Shanghai, Beijing and

GuangdongProvince)haverolledoutapilotVAT(Pilot)Tax

schemeforbusinessesintransportationandmodernserviceindustries

.25262728

The following data was collected by the

WorldBankaspartofthereport,DoingBusinessin2012.

Taxormandatorycontribution Payments

(number)

Noteson

payments

Time

(h)

Statutorytax

rate

Taxbase Totaltax

rate(%

profit)

Employerpaid-socialsecurity/housing

fundcontributions

1 Onlinefiling 192 44.0% Grosssalaries 49.6%

Corporateincometax 1 Onlinefiling 74 20.0% Taxableprofits 5.4

Urbanmaintenancetax - Paidjointly 7.0% VAT 3.5

Educationsurcharge Paidjointly 3.0% VAT 1.5

Stampduty 1 Onlinefiling 0.03% Transactions 1

Realestatetax 1 1.2% 80%buildingvalue 1

Leviesforconstructionand

maintenanceofriverprojects

0 Paidjointly 1.0% VATandbusiness

tax

0.5

Businesstax 1 5.0% Capitalgain 0.5

Landusetax 1 Onlinefiling CNY6per

squaremeter

Landarea 0.4

ValueAddedTax(VAT) 1 Onlinefiling 132 17.0% Valueadded Notincluded

Totals 7 398 63.5

Table3-SummaryofTaxes&MandatoryContributionsofaMediumSizedCompany(StatisticsfromCalendarYear2010)

Di id d Withh ldi T


24/41

24

Takeaglimpse!

TaxisthemostimportantsourceoffiscalrevenueofChina

UnderthepurviewoftheMinistryofFinance;taxcollectionisundertheStateAdministrationof

Taxation

25typesoftaxesin8categories:Turnover,Income,Resource,Taxesforspecialpurposes,Propertytaxes,

Agriculturaltaxes,Customstaxes

TaxyearinChinaends31December Submissionofannualreportandarrangingpayments

mustbedoneby31May

Companiestosubmitinterimreportsevery3months(advancepaymenttobemadewithin15daysofendofquarter)

Annualwagereportexemptionincasesofemployeeswithannualincomeoflessthan120,000RMB

Employerstosubmitmonthlyreportsonemployeeswagesandtopaytaxdeductedwithin7daysofend

ofpreviousmonth

AdditionalcontributionstoSocialsecurity:BasicPension,PersonalAccountsandAdditionalPayment

Ratesinmajorcities:30%foremployersand11%foremployees

DividendWithholdingTax

ProfitscanbetakenoutofChinaintheformofdividends,but

anydeclareddividendsforforeignenterprisesaresubjected

to10%withholding tax. Therefore,most of thetimeprofits

arebetterspentreinvestingintheenterprise,whichisexactly

whatthegovernmenthopestoachieve.

Fees are an important aspect to account for in starting a

businessregardlessoftheindustry.Feesandlicenseswould

havetobeincurredforproceduressuchaspowerhook-ups,

installations, fire safety permits. Fees and regulations may

change, thus it is useful to understand the updated local

practices.

Benchmarkingcansometimesprovidebetterinsighttowhat

feesmaybeimposedandhowbigtheymaybe.Ifstartingupafactoryforexample,contacta fewfirmswhohavejust set

upshopintheareaforanideaofwhattobetaxed.

3 C h fl t t t


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25

AuditandAccountancy

Audit and accountancy can vary across different types of

companies. Companies can be registered and categorized

variously such as private companies, representative office,

Hong Kong registered office and listed companies in which

accountingregulationswoulddiffer.

GeneralAccountingPrinciplesand

Regulation

A few sets of general accountingprinciples and regulations

applytoallregisteredcompaniesinMainlandChinaandHong

Kong. Thegeneral accountingprinciples and regulations for

publiclylistedcompaniesaremuchmoreextensive,andthese

companiestendtohaveinternationalauditingfirmsmanaging

theiraccountsinChina.Allcompanieshavetosubmitannual

financialstatementstotheStateAdministrationforIndustry

andCommerce(SAIC)forinspection.Thesereportsalsohave

tobeauditedbyChineseaccountantswhoareregisteredwith

theChineseInstituteofPublicCertifiedAccountants (CICPA)

in accordance to Companies Law. In February 2006, the

Ministry Of Finance (MOF) announced the newest 38

accounting standards, which were enforced from 1 January2007. In general, the financial accounting statements

required,notincludingtaxstatementsrequired,are:

1. Balancesheet2. Incomestatement

3. Cashflowstatement4. Statementofprofitappropriation5. Notestothefinancialstatements6. Supplementarystatements7. Management's commentary on the entity's financial

performance

PrivateCompanies

Private companies can preparetheir financial statements in

accordancetotheAccountingSystemforBusinessEnterprises

or Accounting Standards for Business Enterprises. There is

alsoanAccountingSystemforSmall-sizedBusinessEnterprise

which is for small companies that have no publicly traded

sharesandfulfilthebelowstatedrestrictions.

Industry No.Of

Staff

Sales

(RMB,

million)

Assets

(RMB,

million)

Construction


26/41

26

RepresentativeOffice

ForcompaniesthatareregisteringtheirbusinessinChinaasa

representativeofficeof their foreign office, thecompany is

not allowed to engage in any revenue-generating business.

Hence,thefinancialstatementsareto bepreparedon atax

basis andaudited for taxpurposes. Theaccounting records

aremuch simpler, containing cash andbankbooks, expenseandassetaccounts.30

HongKongRegisteredCompanies

Since 1st January 2005, Hong Kong has adapted a Financial

ReportingStandards(FRS)frameworkthathasbeenmodelled

on InternationalFinancial Reporting Standards (IFRS), issued

by theInternational AccountingStandardsBoard(IASB). For

companiesregisteredinHongKongandhavetheirbusinesseslegally registered under a Chinese agency, these are the

following documents needed for accounting back in Hong

Kong31:

1. Thebooksofaccountsrecordingreceiptsandpayments,orincomeandexpenditure

2. The underlying documentation necessary to verify theentriesinthebooksof account;suchas vouchers,bankstatements,invoices,receiptsandotherrelevantpapers

3. Arecordoftheassetsandliabilitiesofthebusiness

4. Adailyrecordofallmoneyreceivedandexpendedbythebusinesstogetherwithsupportingdetailsofthereceipts

orpayments

AprivatelimitedcompanyincorporatedinHongKongunder

theCompaniesOrdinanceisrequiredtofileanAnnualReturn

signed by a director, company secretary, manager or

authorized representative with the Companies Registry. An

AnnualReturncontains theparticularsof thecompanysuch

as the address of the registered office, shareholders,

directors, secretary, etc. The Annual Return must be filed

once every calendar year (except in the year of its

incorporation) within 42 days of the anniversary of the

companys incorporation date. Even if the information

containedinthelastreturnhasnotchangedsince,anannual

returnstillneedstobefiled,certifyingthattherehasbeennochangesincethedateofthelastreturn.

Late filing will result in a higher registration fee and the

companyanditsofficersareliabletoprosecutionandfines.

Unlike companies registered inMainland China, there is no

restriction on the accounting software used by Hong Kong

companies.

ListedCompanies

There area great variety of accounting companies offering

complete accountingservices forlistedcompanies inChina.

Generally foreign listed companies need to prepare 3 sets of another date as its balance day This is subject to the approval


27/41

27

Generally,foreignlistedcompaniesneedtoprepare3setsof

accounts, one in accordance to the China Accounting

Standards (CAS), one for the International Accounting

Standardsandoneforthestandardsinthehomecountry.

Inaddition tosubmitting theannual financialstatements to

theSAIC,companieslistedinChinamustalsosubmitthemto

the China Securities Regulatory Commission (CSRC). The

AccountingStandardsforBusinessEnterpriseswasissuedon

15th February 2006 by Chinas MOF. This is the accounting

standardrequiredforlistedcompanies.

In2006,thechangestotheCAShadresultedinanestimated

90-95% convergence to the IFDS, reducing translation costs

greatly. For example, in the Accounting Standards for

Business Enterprises mentioned above that is required oflisted companies, thedifference lies in that IFRS allows the

reversal of impairment loss of long-term assets such as

equipmentplants,intangibleassetsandinvestments.TheCAS

forBusinessEnterprisesdoesnot.32

AdditionalNotes

AccountingPeriod

The accounting period in China is from 1 January to 31

December.However,ifaChinesecompanyisasubsidiaryofa

foreigngroupofcompanieswhosebalancedaydoesnotfall

on 31December, theChinese subsidiary can choose to use

anotherdateasitsbalanceday.Thisissubjecttotheapproval

oftherelevantregulatoryauthorities.

AccountingBooksandRecords

Under the Enterprise Income Tax Law for Mainland China,

foreign companies are required to keep accounting records

for at least 15 years. For Hong Kong, all records must beretainedfor7yearsfromthetransactiondate.

CurrencyRequirements

Enterprisesarerequiredtomaintaintheiraccountingrecords

inRMB. If a companyuses foreigncurrencies foroperating

incomeandexpenses,oneofthesecurrenciescanbeusedas

the bookkeeping base currency. However, the financial

statementsmustbeconvertedtoRMB.

Language

AccountingrecordshavetobemaintainedinChinese.Foreign

companiesmayuseChineseonlyoracombinationofChinese

andaforeignlanguage.

I i M t An invoice collection book specifying the type and quantity of


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28

InvoiceManagement

DefinitionofInvoice

An invoice is the proof of payment for the sale of goods,

provision of labourservice,or otherbusiness activities. Itis

alsoaproofthatapaymentandreceipthavetakenplace,anofficial document for financialmanagement andaccounting

andanimportanttoolinauditingfortaxationpurpose.

Invoices are generally in triplicate copies, namely the stub,

invoice copy and accounts copy. Value-added tax (VAT)

invoiceshaveanadditionalcopy,whichisthedeductioncopy.

PurchaseandCollectionofInvoice

A tax registration certificatewill be issued to individualsor

enterprises that have completed tax registration, which is

compulsorybylaw.Topurchaseinvoices,thefollowinghave

to be submitted to the competent tax office for invoice

purchase:

1. Identificationdocumentoftheapplicant;2. Taxregistrationcertificateorotherproof;and3. Officialsealorspecialsealforinvoices.

Aninvoicecollectionbookspecifyingthetypeandquantityof

invoicestobepurchasedaswellasthemethodofpurchase

willbeissuedaftergainingapprovalfromthetaxoffice.The

applicantcanthenpurchasetheinvoicesfromthecompetent

taxoffice.

IssuanceofInvoice

Thefollowingaresomeguidelinesontheissuanceofinvoices

bybusinesses:33

1. Anindividualorenterprisethatreceivespaymentfromthesale of goods, provision of service or other business

activitiesshouldissueinvoicestothepayer.Underspecial

circumstances,thepayerwillissueinvoicestothepayee.

2. When enterprises and individuals engaged in production

or other business operations purchase a good, receivea

serviceorconductabusinessactivity,theyshouldaskthe

payeeforaninvoiceandmustnotchangethedescription

oramountshownontheinvoice.

3. Invoicesshouldbeissuedinserialorderwithinaspecifiedperiodoftime.Invoicesinmultiplecopiesshouldbeissued

at one time to accurately record the details of a

transaction andstampedwith theissuer'sofficial seal or

specialinvoiceseal.

4. No individual or enterprise should borrow, transfer or Storage of Invoice


29/41

29

4. No individual or enterprise should borrow, transfer orissueinvoicesonothers'behalf.Unlessapprovalisgranted

by the tax authority, the invoice books should not be

detached for use. The scope of use for special invoices

shouldnotbeextendedcasually.

5. Invoices that fail to meet the relevant requirementscannot be used as financial proof. Enterprises andindividualsmayrefusetoacceptsuchinvoices.

6. Since1July2003,taxpayersinBeijing,Tianjin,Shanxi,Jilin,Heilongjiang, Jiangsu, Ningbo, Anhui, Fujian, Xiamen,

Qingdao, Henan, Hubei, Hunan, Guangdong, Shenzhen,

Guangxi,Hainan,Sichuan,Chongqing,Yunnan,Gansuand

NingxiaarerequiredtoissueVATinvoicesbyanti-forgery

VATinvoicesystem.HandwrittenVATinvoiceshavebeen

disallowed for input VAT claimpurpose (except theVAT

invoicesissuedbytaxauthoritiesonbehalfofsmallscale

VATpayers).

7. Inaddition,since1August2003,handwrittenVATinvoiceshave been disallowed for input VAT claim purpose in

Hebei,InnerMongolia,Shanghai,Guizhou,Shanxi,Qinghai

and Xizang (except the VAT invoices issued by tax

authorities on behalf of small scale VAT payers). AnyhandwrittenVATinvoicesissuedonorafter1August2003

cannot be used as input VAT claim evidence across the

whole country (except the VAT invoices issued by tax

authoritiesonbehalfofsmallscaleVATpayers).

StorageofInvoice

Thefollowingaresomeadviceonthestorageofinvoice:

1. For regular users of these invoices, an invoice registershouldbesetuptorecordtheusagesandforreporting

tothecompetenttaxoffice.

2. Changes or cancellation of invoices and invoice booksshould be done concurrently with changes and

cancellationoftaxregistration.

Invoicestubsandinvoiceregistersshouldbewelltakencare

ofandretainedforfiveyearsafterwhichtimetheyshouldbe

destroyeduponcheckingbythetaxoffice.

FilingofAnnualTaxReturnwith

InlandRevenueDepartment(IRD)

With respect to Hong Kong registered companies, it is

requiredasperHongKongcompanylaw,thateverycompany

formedinHongKong,mustfilea TaxReturn(alsoknownas

Profits Tax Return) along with its audited accounts on an

annual basis with the IRD of Hong Kong. The following

companiesarenotrequiredtosubmitauditedaccountsalong

withtheirreturns:

Small corporations: Defined as those corporations whose The prescribed Supplementary Form which contains most


30/41

30

Smallcorporations:Definedas thosecorporationswhosetotalgrossincomedoesnotexceedHKD500,000forthe

basisperiod

Dormant companies: Defined as having no relevantaccountingtransactionsduringafinancialyear

Companies incorporated in a jurisdiction whose laws donotrequireaccountstobeaudited

HongKongbranchofaforeigncompany,subjecttocertainconditions

IRDissuesTaxReturnfilingnotificationstocompaniesonthe

1stofAprileveryyear.Forthenewlyincorporatedcompanies,

the notification isgenerallysent onthe 18thmonth ofthe

incorporation date. Companies must file their Tax Return

withinonemonth from thedate ofnotification.Companies

can request for an extension, if needed. You may incur a

paymentofpenaltyorevenprosecutionifyoufailtosubmit

yourtaxreturnbytheduedate.

When filing the Tax Return, the following supporting

documentsmustalsobeattached34:

Acertifiedcopyofthecompanysbalancesheet,auditorsreport and Profit & Loss Account relating to the basis

period;

A tax computation indicating how the amount ofassessableofprofits(oradjustedlosses)hasbeenarrived

at;and

TheprescribedSupplementaryFormwhichcontainsmostparticularssuchastaxdataandfinancialdataetc.

HumanResources/Staff

RecruitmentContractsandUnions

LegalEnvironment

TheMinistryofLabourandSocialSecurityisthegovernment

bodyresponsiblefortheadministrationofemploymentlawin

China. The Ministry is responsible for formulating national

labour and social security policies. The labour and socialsecurity bureaus, which are under the Ministry, are

responsible for administering the national and local

regulations.Labourpracticesvarybetweenregionsgiventhe

fairlywidediscretioninhandlinglocallabourmatters .

Effective from 1 January 2008, a new Labour Contract Law

wasenforcedinChina.ThisLabourContractLawisformulated

with the purpose of governing the establishment ofemploymentrelationships,andtheconclusion,performance,

amendmentandterminationoflabourcontractsbetweenthe

employerandtheemployee.ThisLawencouragesemployers

to enter into long term or non-fixed term employment

contractswithemployees,andsetsmorestrictregulationsfor

the termination of employment, stipulating conditions of choose whom they employ, and what criteria to apply


31/41

31

p y p g

termination and increasing any relevant costs. It also

increases thepenalties for violation of the Labour Contract

Lawandotherrelatedregulations.

Additional labour-related lawsand regulations accompanied

theLaw,includingtheSalaryRegulation,theLabourDispute

Arbitration Law, the Social Security Law, etc. The

implementation of such rules for the Labour Contract Law

affects the way inwhich foreign companies do business in

China,andwill have far-reaching implications.The new rule

brings a further tightening of labour regulations and in

general,ismorelabour-friendly.Afterfullimplementationof

the new Contract Law, the general impacts on foreign

companies include, increased labour costs due to stricter

compensation requirements when firing employees andincreased risks relatedto employment. Employee rightswill

also be better protected, andas a result, companiesmight

find it more difficult to prevail in labour disputes. It also

means that employerswill have to bemore cautiouswhen

recruiting new employees because ofnewrequirements on

severanceandprobation.

Recruitment

MethodsdifferforForeignInvestmentEnterprises(FIEs)and

RepresentativeOffices (ROs)of foreigncompanies inChina.

FIEs, for instance, Joint Ventures (JVs) andWholly Foreign-

Owned Enterprises (WFOEs), are afforded autonomy with

regardtotheiremploymentdecisions.Forexample,theymay

y p y pp y

throughout the recruitment process. Nevertheless, such

companies must file their recruitment plans to their local

Labour andSocialSecurity Department, who in turn ensure

that within all labour contracts, the legitimate rights and

interestsoftheworkersarewellprotected.

AnexampleofautonomyinrecruitmentforJVsandWFOEsis

thattheseenterprisesmayrecruitChineseemployeesdirectly

orthroughlocalemploymentservicecentres.JVsnormallydo

so through recommendationsfrom their Chinesepartner or

thelocalauthorities.TheJVwilloftenemploystafffromthe

originalmanufacturingplantof theChinese partner.WFOEs

normallyhaveafreehandinrecruitingstafflocally.However,

duetoalackoflocalnetworks,theywilloftenneedtorelyon

professional firms,massmedia,or othermethodsto recruitstaffsinthemanageriallevel.

RecruitinglocalstaffisdifferentforROs,whicharerequired

tohirestaffthroughanauthorisedlabouragency.Thereare

severalavailableauthorisedlabouragenciesinChina,suchas

the Foreign Enterprise Service Corporation, China

InternationalIntellectCorporation(CIIC),forexample.Today

there are over 70 authorized Foreign Service Corporations

who provide local staff to ROs in 25 provinces and

municipalities.

The labour agency is the legal employer of the staff and

seconds them to the RO to provide agreed services. In

practice,ROsneedtoestablishacontractualrelationshipwith TerminationofEmployment


32/41

32

Takeaglimpse!

FIEsgivenfreedomforemploymentdecisionsjustneedtofiletothelocalLabourandSocialSecurityDepartment

ROsmusthirethroughanauthorisedlabouragency;theemployermusthavearegistrationcertificatetohirelocals

whichrequirescompletionofcertainformalities

the labour agencyandpaythe required service fee. As the

staffworkingforROsaretheemployeesoftheagency,many

ROsinChinachoosetoenterintoaseparateagreementwith

the staff stipulating the terms and conditions of the

engagement.

TherearenospecificstipulationsinChineseLawregardingthelanguage of the contract, but it is advisable to create a

bilingual document - one of the languages being Chinese;

particularly as all contracts must be verified by the labour

authorityandrequiresthecontracttobeinChinese.

InordertoemployChinesenationalsinaForeignROinChina,

theemployermustobtaina registration certificate.Inorder

tobegrantedthiscertificate,anumberofformalitiesmustbecompleted such as opening a bank account for foreign

exchange, applying for direct telecommunication lines and

securingamultipleentryvisaforlocals.

Unlike practices in many other countries, employment at

will is not permitted in China. Employment termination is

complicatedinChinaandemployersshouldexercisecaution

in this regard. Employershave to followcertain procedures

andconditions toterminatetheemploymentwiththe staff,

e.g. upon contract expiration, or where the employee is

provedto beunqualified,violatesthe enterprises rules and

regulations, discloses criminal convictions. In addition, staff

maybemaderedundantasaresultofproductionortechnical

changes.

However,anemployerisnotpermittedtodismissstaffswho

undergostipulatedmedicaltreatment,wholosetheirability

to work due to an occupational disease or a work-related

injury,andwhoareonpregnancyormaternityleaveorinthe

midstofalactationperiod.

To terminate an employment relationship with staff,

enterprisesmayneedtogiveastatutoryterminationnotice.

Employersmaydismissemployeeswithoutnoticeonlywhen

the employee is dismissed during the statutory probation

period; has seriously violated workplace rules; cause great

losses to the employer due to serious dereliction of duty,embezzlement or another criminal offence; or is being

investigated for a criminal offence. Conditions permitting

employeedismissalwithprior30daysnoticeincludeinability

of an employee to take up his original or new work upon

returningfromnon-workrelatedmedicaltreatmentforillness

or injury, is unqualified forhis joband remains unqualifiedEmployer-Employee Relations


33/41

33

Takeaglimpse!

Dismissalofstaffduetomedicalissuesisnotpermitted

Astatutoryterminationperiodneedstobegivenbeforeterminationunlessstatutoryprobation

periodappliesorunderseriouscircumstances

Severancepaymentfollowingterminationbasedonactualserviceyearandsalarylevelofstaff

ROsgothroughagenciessubjectedtotheiragreedconditionsbetweenbothparties

Takeaglimpse!

Companiesneedtoprovidefundsequivalentto2%oftotalsalarycostsfortradeunionactivities

Labourdisputesshouldgothroughnegotiations,compulsoryarbitration,beforeinitiatinglegal

proceedings

even after receiving training or an adjustment to another

workpost.

Enterprisesmayneedtoproviderequiredseverancepayment

following termination of an employment relationship. The

severancepaymentiscalculatedbasedontheactualservice

yearandthesalarylevelofthestaff.

InChina,ROsarealsoabletoterminatetheirstaff.Astheydo

nothaveanemploymentrelationshipwiththesecondedstaff,

ROs may terminate the serviceof these staff through their

engagedagency.TheserviceagreementbetweenROsandthe

labouragencyservesastheguidanceofthetermination.

Employer EmployeeRelations

TheChinesegovernment is nowenforcing theTrade Union

Law. According to the Trade Union Law, companies are

required tosupport employees to setup a trade union and

providefundsequivalentto2%ofthecompanystotalsalary

costsfortheactivitiesofthetradeunion.Foractivitiesrelated

toemployees, forexample, re-organisations and layoffs, thecompanyshallnotifythetradeunionandheeditscomments

beforetakingaction.

On labour disputes, Chinas Regulations Concerning the

HandlingofLabourDisputesinEnterprisesandtheProvisional

Regulations onHandlingofPersonnelDisputes establish the

procedures forhandling labour disputes. Under thedispute

regulations,partiesareencouragedtosettlelabourdisputesby negotiation ormediation. If neitherof these works, the

partiesmustresorttocompulsoryarbitrationbeforetheymay

initiatelegalproceedings.

WorkingConditions deducted or delayed without justification. Delayed payroll


34/41

34

g

WagesandSalaries

In China, enterprises have the right to set their own

remunerationpackage,includingcompensationandbenefits.

Pursuant toChinasLabourContractLaw,thewagesof staff

shall not be lower thantheminimumwage in the locationwhere the company is registered. Minimum wage

requirementsaredeterminedataprovinciallevel.The1993

RegulationsonMinimumWages inEnterprises (amended in

October1994)requireallprovinces,autonomousregions,and

directly administered municipalities to set minimum wage

standardsandreportthemtotheMinistry.Employersthatfail

to meet these standards may be ordered to compensate

employees for the difference, pay other compensation, or

both.

Inadditiontocompensation,enterprisesmayalsoimplement

effective incentive programmes, e.g. sales incentives,

performancebonuses,stockoptions,andthelike,inorderto

attract talent. This is usually of greater importance for

positionsinmanagementandsales.

In termsofpayroll, salary shall bedisbursed to thestaffat

least once a month in local currency. The date of

disbursementcanbedecidedthroughanagreementbetween

the company and staff. The wagepaid tostaff shall not be

disbursementmayleadtoafinancialpenalty.Inaddition,the

companyisresponsibleforwithholdingPRCindividualincome

taxesthatispayablefromstaffgrosscompensation.

FringeBenefits

In China, employers and employees are required toparticipate ina socialbenefits system.As a result, they are

obliged to make contributions to the statutory social

insurance programmes based on the schemes for different

locations.Foramajorityoftheworkforce,whosesalarylevel

fallswithin thelocal socialinsurancecontribution base, the

social insurance contribution could be between 35-40% of

theirsalarycost.

Thesocial insuranceprogrammescover the following social

insurance and funds: pension, medical insurance,

unemployment insurance, work-related injury insurance,

maternity insurance and housing fund. It was recently

announced that foreigners face a compulsory inclusion into

thesocialinsurancesystem.35

To participate in social insurance programmes, enterprises

need to registerwith therelevant labourbureau, set upanaccount with a social insurancemanagement authority and

pay the required insurance premiums on a monthly basis.

Apartfromemployerpremiums,companiesshallwithholdthe

premiumsofemployeesfromtheirmonthlysalaryandmake

thepaymenttotherelevantauthority.ForROs,becausethey

l l i i i h ld b id i h

retainlocaltalent.


35/41

35

are not legal entities, premiums should be paid via the

authorized labour agency. In addition to statutory social

insurance, enterprises in China also provide supplementary

benefitsschemestotheiremployeesasawaytoattractand

WorkingHours

The working hours per week were reduced from 48 to 44

hoursinMarch1994,andfurtherreducedto40hoursinMay1995 by the State Council. In general, overtime is not

encouraged,thoughpermissibleunderspecialcircumstances.

Overtimepay ishigher than that fornormalworking hours,

ranging from150%up to300%ofnormalwages,depending

onwhether the overtime is during weekdays, rest days or

statutoryholidays.

Challenges

CompaniesinChinaneedtobeawareofpotentialchallenges

in industrial and community-relations in doing business in

China following the implementation of the new Labour

ContractLaw.Thisincludesstrongerlabourunionsandmore

litigious employees, who now are less likely to hesitate to

protestincasesofdownsizing.SincecompaniesinChinaare

increasinglyexpectedtodemonstratesocialresponsibilityand

corporate citizenship, it is important to implement changes

wellandpromotegoodcommunicationwithinthecompany.

A good start is to receive expert labour law input when

formingforexampleJVandothercontracts.

Takeaglimpse! EmployersandEmployeesarerequiredto

participateinsocialbenefitssystem,make

contributionstostatutorysocialinsurance

programmes(locationbased)contribution

between35-40%ofsalarycost.

Socialinsuranceprogrammescoverpension,medicalinsurance,unemploymentinsurance,work-relatedinjuryinsurance,maternityinsurance

andhousingfund.

Registerwithrelevantlabourbureau,setupanaccountwithsocialinsurancemanagement

authoritiesandpayrequiredinsurancepremiums

onmonthlybasis.

Employersholdpremiumsofemployeesfrommonthlysalarytomakepaymenttorelevant

authority.

EnterprisesinChinaalsoprovidesupplementarybenefitsschemestoemployees.

Human resource constraints or the difficulty to recruit

lifi d t ff f tl f t th b h ll

TrademarkApplication


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36

qualifiedstafffrequentlyfeatureasthenumberonechallenge

thatcompaniesface.Interestingtrendsandinsightsthatare

surfacingincludetheintensecompetitionforthesametalent.

There is a wide recognition that talent quality coming out

from local universities is better than ever, but competition

from employers is also fierce. Competition to recruit top

talentis comingnot only fromother foreign companiesbutalso from private Chinese companies and state-owned

enterprises.Furthermore,domesticcompaniesarereplicating

some of the western formulas that make an employer

attractive, like moving their offices to prime real estate so

that they make the setting more attractive to top talents.

Observations have been made that there has been an

evolutioninthetypeoftalentthatislacking.Itiscommonly

saidthatin2001therewasalackofprofessionals,in2005a

lackofmanagersand2011alackofexecutives.

IntellectualPropertyRights(IPR)Overview

This section isa summary of the relevant laws that aim to

protect an individuals intellectual property rights, namely,

the registration process for trademarks, patents, aswell as

possiblelegalavenuestoseekredressonIPRdisputes.36

1. The two principal pieces of legislation forming thetrademarksystemaretheTrademarkLaw,andtheUnfair

CompetitionLaw.

2. China employs a "first-to-file" system, meaning that ingeneral,thefirstpartytofileatrademarkapplicationin

China will be deemed the owner of that trademark,

assumingtheapplicationproceedsontoregistration.

3. ForeignpartiesmusttakeupthetrademarkregistrationprocesswithanapprovedChineseagent,whichcantake

about1to3years.

PatentApplication

1. The application for a patent right to any invention orutility model must possess novelty, inventiveness and

practicalapplicability.

IntellectualPropertyRightsDisputes

1. Chinas intellectual property legislation stipulates thatinfringements of IPRs are dealt with by administrative

proceduresandlegalproceedings.

2. China currently adopts a dual-track system for IPRprotectionunderwhichtheinterestedpartiesmayseek

to resolve IPR-related disputes through administrative

procedures or legal proceedings


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37

proceduresorlegalproceedings.

3. WhenanIPRinfringementdisputearises,theinterestedpartiesmay resort to mediation. If mediation is not a

preferredoption,ormediationhasfailed,oroneofthe

interested parties refuses to abide by the outcome of

mediation,legalproceedingsmaybeinstitutedwiththePeoplesCourt.

4. It should be noted that under ChinasPatentLawandTrademarkLaw,foreignenterprisesarerequired

toappoint designatedagentstohandlematters related

to patents and trademarks. This also applies to the

handling of disputes involving infringements, which

means that the designated agent should make the

request for settlement of the dispute onbehalf oftheinterestedparty.

ConcludingNotes

Inthisinfokit,wehopetogiveentrepreneursanoverviewof

thesituation inChina,assist andequip them with essential

information required inenteringtheChinesemarket forthe

first time. Undoubtedly, there is still vast knowledge to be

realisedabouttheChinesemarketthatisincompressibleinto

onekit.

Our future updates of this report aim to continue giving

Singapore entrepreneurs the latest information regarding

startingupinChina.Dostaytunedforournextupdate!

Appendix 1

HongKongTradeDevelopmentCouncil(HKTDC)


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38

Appendix1

ListofUsefulWebsitesACESingapore

http://www.ace.sg

ACEBeijing

http://www.acebeijing.org/

InternationalEnterpriseSingapore

http://www.iesingapore.gov.sg

SingaporeChamberofCommerceandIndustryinChina

http://www.singcham.com.cn

SingaporeEmbassyinBeijing

http://www.mfa.gov.sg/content/mfa/overseasmission/beijing.html

MarketResearchonChina

APCOWorldwideInc.(ResearchReports)

www.apcoworldwide.com

TheAmericanChamberofCommerceinChina

http://www.amchamchina.org

BeijingConsultingGroup(Newcompanysetup/staffrecruitment/

sourcing)

www.BJConsultingGroup.com

ChinaBriefing

http://www.china-briefing.com/en/

g g p ( )

http://www.hktdc.com/en-buyer/

iResearch(ChinaInternetMarket)

http://www.iresearch.cn

TheJLJGroup(ChinaEntryMarketHandbook)

http://www.jljgroup.com/page/en/21/China-Market-Entry-

%20Handbook.html

NationalBureauofStatisticsofChina

http://www.stats.gov.cn/english/

NielsenResearch(ChinaConsumerResearchReports)

http://cn.en.acnielsen.com/trends/index.shtml

MediainChina

ChinaDaily(widestcirculationofallChineseEnglish-languageprint

newspapers)

http://www.chinadaily.com.cn/index.html

XinhuaNet(Chinasofficialnewsagency)

http://www.xinhuanet.com/english/

LegalMatters

China-Law-Firms

http://www.chinalawfirms.cn/(LegalInformation)

NationalPeoplesCongressLawsandRegulations(InEnglish)

http://www.npc.gov.cn/englishnpc/Law/Integrated_index.html

EconomicMatters

TheWorldBank

http://www.worldbank.org/

WorldTradeOrganisation

http://www.wto.org/ 1714nuclearreactorsareinservice.ChinaDaily,Buildingofnuclearplantstoresume,8th


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39

p // g/ 1TheWorldBank,Data:GDP(currentUS$),

(http://data.worldbank.org/indicator/NY.GDP.MKTP.CD).2Ibid.3Ibid.4InternationalMonetaryFund(IMF),WorldEconomicOutlook:GrowthResuming,Dangers

Remain,Apr2012,(http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf).5ResearchInstituteofEconomy,TradeandIndustry,IAA,RidingontheVigorofAnEconomic

Superpower:JapanshouldseekanFTAwithChina,13thMarch2012,

(http://www.rieti.go.jp/en/columns/a01_0340.html);JiangsuGuotaiInternationalGroup,2011

ChinasImportandExportoverUS$3.6trillion,(http://www.gtig.com/en/news-view-

1731.aspx).6BloombergDaily,ChinasForeignExchangeReservesSurge,Exceeding$2Trillion,15

thJuly

2009,(http://www.bloomberg.com/apps/news?pid=newsarchive&sid=alZgI4B1lt3s).7CBSNews,EconWatch,Chinanowowns$1.16trillionofU.S.debt,28

thFebruary2011,

(http://www.cbsnews.com/8301-503983_162-20037535-503983.html).8FDIChina,NewsReleaseofNationalAssimilationofFDIFromJanuarytoDecember2011,19th

January2012,

(http://www.fdi.gov.cn/pub/FDI_EN/Statistics/FDIStatistics/ExpressofForeignInvestment/t20120

119_140569.html).9EconomicandCommercialCounsellorsOfficeoftheEmbassyofthePeoplesRepublicofChina

intheRepublicofZambia,2010StatisticalBulletinofChinasOutwardForeignDirect

Investment,4thNovember2011,

(http://hzs.mofcom.gov.cn/accessory/201109/1316069658609.pdf).10WTO|China,MemberInformation,

(http://www.wto.org/english/thewto_e/countries_e/china_e.html).11WallStreetJournalAsia,ChinaTurnsPredominantlyUrban,18thJanuary2012,

(http://online.wsj.com/article/SB10001424052970203735304577166652002366514.html);

NationalBureauofStatisticsofChina,China'sTotalPopulationandStructuralChangesin2011,

20thJanuary2012,

(http://www.stats.gov.cn/was40/gjtjj_en_detail.jsp?searchword=cities&channelid=9528&record

=79).12NewZealandTrade&Enterprise(NZTE),ReportOnthe12thFive-YearPlan:Anin-depth

overviewandanalysisofChinaspolicyblueprintforyears20112015(Wellington:NewZealandandEnterprise,2011),page4,(http://www.nzte.govt.nz/features-commentary/In-

Brief/Pages/Report-Chinas-Five-Year-Plan.aspx).13Ibid.14KPMGChina,Chinas12thFive-YearPlan:Overview,March2011

(http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Publicationseries/5-

years-plan/Documents/China-12th-Five-Year-Plan-Overview-201104.pdf),page215

APCO,page6-9.16NZTE,page69-70.

March2012,(http://english.peopledaily.com.cn/90778/7751956.html).18Xinhua,ChinatoSafelyandEffectivelyDevelopNuclearPower,5thMarch2012,

(http://english.cri.cn/6909/2012/03/05/1461s684995.html).19Casey,J.&Koleski,K.,Backgrounder:Chinas12thFive-YearPlan.(U.S.-ChinaEconomic&

SecurityReviewCommission)page9.20APCO,page9.21MaryMurrayBosrockandCraigMacIntosh,PutyourBestFootForward(UnitedStatesof

America:InternationalEducationSystems,1997);AlbertaSchoolofBusiness,BusinessEtiquette

inthePeoplesRepublicofChina,May2012,

(http://www.business.ualberta.ca/International/InternationalPrograms/InternationalStudyTour/~/media/business/International/InternationalPrograms/Documents/StudyTour/etiquette2012.p

df)22JefferyHays,EatingandDrinkingCustomsinChina,February2011,

(http://factsanddetails.com/china.php?itemid=112&catid=4&subcatid=19).23TheParentCompanymustbeestablishedformorethan2years.(StateAdministrationof

IndustryandCommerce'sfile:GongShangWaiQi[2010]No.4).24Duetotheonecountry,twosystemspolicy.Formoreinformation,visit

(http://en.wikipedia.org/wiki/One_country,_two_systems).25StateAdministrationofTaxationofThePeoplesRepublicofChina,ThePilotSchemeof

SwitchingfromBusinessTaxtoVATinBeijingCommenced,October2012,

(http://www.chinatax.gov.cn/n6669073/n6669118/12103048.html)26SchemeonSwitchingfromBusinessTaxtoValueAddedTaxandtheRelevantPoliciesand

RegulationsonPilotWorkinShanghai,November2011,

(http://www.csj.sh.gov.cn/pub/ywb/MediaViewpoint/201212/t20121226_401509.html)27GuangdongPublishedtheDetailedRulesfortheSwitchingfromBusinessTaxtoVATtoCarry

ForwardShanghaiModeandAddTwoNewBracketsofLowTaxRate,December2012,

(http://www.szds.gov.cn/portal/site/site/portal/szds/englishcontent.portal?contentId=2602A8E

EA89F9862968E6F0B6EE8EAB0&categoryId=3690)28

BriefAnalysisontheImpactsoftheVATTransitionPilotExpansion,October2012,

(http://www.kingandwood.com/Bulletin/ChinaBulletinContent.aspx?id=0bd7c9e3-fd46-46f0-

81cd-9ab27bdad905)29GrantThornton,DoingBusinessinMainlandChina(Shanghai,China,2011),page15,

(http://www.grantthornton.ie/db/Attachments/Doing-business-in-China-2011.pdf).30Ibid,page10.31Janus,GeneralComplianceandAnnualFilingRequirementsforHongKongCompanies,

(http://www.guidemehongkong.com/incorporation/company/hong-kong-company-annual-

filing-compliance-requirements).32KPMG,LiteratureabouttheDifferenceandConvergenceofCAS,September2011,

(http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/New-PRC-

GAAP-201109.pdf).33ChinaLawFirms,GuidetoDoingBusinessinChina-InvoiceManagement,8thJune2009,

(http://www.chinalawfirms.cn/practice-areas/finance/finance/176-guide-to-doing-business-in-

china-invoice-management-.html).34

TheGovernmentoftheHongKongSpecialAdministrativeRegionofthePeoplesRepublicof

China,InlandRevenueDepartment,ProfitsTaxReturnPersonsOtherThanCorporations;Final

AssessmentandProvisionalPaymentFormSample,

h


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40

(http://www.ird.gov.hk/eng/pdf/ebir52.pdf).35ChinaBriefing,BeijingDetailsForeignersMandatorySocialInsuranceParticipation,11th

January2012,(http://www.china-briefing.com/news/2012/01/11/beijing-details-mandatory-

foreigner-participation-in-social-insurance.html).36TamaraA.Miller,WhyRegisteringTrademarksinChinaisaNo-Brainer,Leydig,Voitand

Mayer,Ltd.,December2007,(http://www.leydig.com/publications/articles_publications-22).

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