Doing Business in China

Structures of Business Entities

1 Representative Offices
The sole purpose of Representative offices is to carry out liaison and support work of its parent company overseas. Representative offices are restricted by rules in conducting production or sales activities in mainland China. Since Representative offices are not structured for profit making and therefore, special tax rules are exclusively applied to them.

2 Joint Venture
Under the existing policy, it is permitted to carry out both production and sales operation in mainland China, however, products are only allowed sold through its own sales network

(a) Co-operation Joint Venture
A co-operative joint venture does not have to be a legal entity and is allowed to share net profit on pre-agreed basis, which may not be in proportion to partiesˇ shareholdering. Under the arrangement, the foreign party may recover its capital contribution during the term of agreement, however, it has to give up the right of ownership of all tangible fixed assets when the agreement term is expired. This kind of arrangement is governed by The Law of the PRC on ¨Chinese-Foreign Contractual Co-operative Enterprises〃.

(b) Equity Joint Venture
Equity joint venture is similar to co-operative joint venture in many respects, and many of the same regulations apply. The ventureˇs liability is limit and registered capital is contributed by a Chinese company and a foreign party in proportional to their share of profits and losses. Starting from 2001, this kind of arrangement is governed by the Law of the PRC on ¨Joint Ventures Using Chinese and Foreign Investment".

3 Co-operative Arrangement
The major type of co-operative arrangements are processing and assembly, compensation trade and co-operative production. In contrary to wholly foreign owned enterprises mentioned in the following paragraph, foreign companies under co-operative arrangements aim at export business, and it may not establish sales distribution networks in China to sell their products manufactured through these arrangements.

4 BWholly Foreign-Owned Enterprise (¨WFOE〃)
WFOE is considered as separate entity from its foreign investor and a domestic limited liability entity in China. However, in accordance with state policies and the Foreign Investment Catalogue, WFOEs are not allowed to engage in certain industries.

Following the promulgation of ¨ Administrative Law of Foreign Investment in Commerce 〃 on 16 April, 2004, foreigners are now able to set up a sub-class of WFOE, Foreign-Invested Commercial Enterprises, to engage in the industries of retails, wholesales, sales agency and franchise with certain restrictions.

Taxation
Taxable income is calculated at gross income less deductible expenses and outgoings, including losses. The calculation is consistent with international tax practices. The standard national and local income tax rate for foreign companies, which engaged in business operations or production activities, is 30% and 3% respectively. In addition, VAT of 17% currently is also applied in mainland China.

Tax treatments applied to foreign companies are not entirely the same to domestic enterprises. The tax treatments of Foreign companies are governed by the Income Tax Law of the PRC on ¨Enterprises with Foreign Investment and Foreign Enterprises〃.

Foreign Exchange Control
At present, the renminbi is still not a freely convertible currency and it has pegged to US dollar at a rate of approximately 1:8.1. The People's Bank of China (PBOC) is responsible to maintain the rate of renminbi in stable, and may intervene in the market, if necessary.

China, however, has committed to move toward free convertibility by lifting controls over current account items. In December 2001, it committed not to place any restrictions on current account items unless the International Monetary Fund (IMF) is in agreement.

Intellectual Property Rights
To protect intellectual property rights, China has been working to develop a legal framework for the past two decades. Laws and regulations were introduced to cover patents, trademarks and copyrights, and tackle abuses of rights over computer software, trade secrets and trade names.

A body of legislation has been built up since the enabling Trademark Law was promulgated in 1982. After that came the Patent Law of 1984 and the Copyright Law of 1990, which were followed by a number of more specialised measures, including the Regulations for the Protection of Computer Software (1991) and the Law for the Repression of Unfair Competition (1993). In compliance with WTO requirements, China is expected to come up with a more comprehensive legal framework and an improved law enforcement system.

Immigration
All foreigners, whether their intention are for business, employment or simply leisure travelling in mainland China, are required to obtain an appropriate visa before taking flight. The Chinese visa authorities overseas include Chinese embassies, consulates, visa offices, and the consular department of the office of the Commissioner of the Ministry of Foreign Affairs of China. If a foreigner intends to enter into, exit from or transit through the Chinese territory, he shall apply to the above-mentioned Chinese visa authorities for a Chinese visa.

If foreigners are required to stay in mainland China for a longer period for the purpose of employment, they are obliged to register with police department in the place of residency, in order to obtain a resident permit.

Custom
China uses both tariff and non-tariff measures to regulate imports. Tariffs imposed include import duty (applied on the import CIF value and a few specific and compound duties on the volume imported), value added tax (VAT) and consumption tax; non-tariff measures include import licenses, quota control, restricted import list, etc. In general, tariff rates on raw materials and industrial supplies are relatively low, less than 20% (in most cases), higher on consumer goods mostly 20-50% and can reach 100% in a few selected luxury items. The specific duties are calculated by multiplying the number of units of the imported goods by tax payable per unit; while the compound duties are a mixture of ad valorem tariff and specific duty.

According to the Chinese government, the average tariff on imports of industrial products will be lowered to 15% by year 2000 and 10% by year 2005. At present, the average tariff rate is less than 17%.

Staff Recruitment
Under the Labour Law, corporations can decide for themselves the timing and means of hiring staff, as well as the requirements, qualification and numbers of staff. Corporations must sign employment contracts with each employee. The contract forms the basis of employment relation between the corporation and the employee. All mandatory terms and conditions which included in an employment contract are stipulated in the Labour Law and other relevant regulations.

Corporations are responsible for various kinds of social security, which included retirement fund, medical insurance, unemployment insurance, work-related injury insurance and child-bearing insurance. The amounts vary from place to place and usually determined by individual provincial government.