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China, People's Republic of - More on Offshore Jurisdiction

China, People's Republic of

Capital: Beijing
Population: 1,306 million (est. 7/2005)
Languages: Mandarin (official), Yue
Area: 9,326,410 sq. km (land area)
Currency: Renminbi (RMB),"Yuan"
Fiscal year: Calendar year
Status: 01/10/1949 (People's Republic established )

CHINA, PEOPLE'S REPUBLIC OF, is firmly committed to economic reform and opening to the outside world. The Chinese leadership has identified reform of state industries and large-scale privatization of unprofitable state-owned enterprises and development of a pension system for workers has been made its ways for improvements. The leadership has also downsized the government bureaucracy. The 66.35 million member Chinese Communist Party, authoritarian in structure and ideology, continues to dominate government. In periods of greater openness, the influence of people and organizations outside the formal party structure has tended to increase, especially in the economic influences. With the entering the World Trade Organization ("WTO") in December 2001, as part of trade liberalization agreement, China agreed to lower tariffs and abolish market impediments.

Legal System
The criminal law and the criminal procedures laws were amended to introduce significant reforms. Criminal procedures reforms also encouraged establishment of a more transparent, adversarial trial process. Provinces, autonomous regions and municipalities' governments have made efforts to organize and revise local laws and regulations under the uniform guidance of the Standing Committee of the National People's Congress ("NPC") and State Council. Particularly in special economic zones where preferential treatments is given to foreign investors, foreign related laws and regulations are currently in the process of being re-organized and revised.

Renminbi ("RMB") is the formal currency used in China, where US dollars may be quoted in Shanghai and HK dollars may be used in daily transactions in Guangzhou & Shenzhen areas. Because the Renminbi is not yet fully convertible, restrictions (as to be approved by the State Administration of Foreign Exchange ("SAFE") apply to the exchange for so-called capital account items. Foreign Exchange for Current Account items and profits to be distributed to foreign investors are both fully convertible. However, the banks authorized to handle such matters are charged with reviewing the documents to be submitted.

The tax administration of Foreign Investment Enterprises (FIEs), including foreign representative offices, is handled by two separate tax bureaus. Generally, Enterprise Income Tax ("EIT") and Value Added Tax ("VAT") are collected by the local branches of the State Administration of Taxation whereas Business Tax and other local taxes are collected by the local tax bureau.

VAT of 17% is imposed on the sale or importation of goods. Input VAT is payable on the purchase of raw materials and other product inputs from domestic suppliers and output VAT is collected on sales to domestic customers. Import-stage VAT is payable on the purchase of imported materials. For overseas sales, part of the input VAT is refunded.

The standard enterprise income tax rate applicable to FIEs is 30%. However, this rate may be reduced either to encourage certain kinds of business activity or to encourage activities generally in a Special Economic Zone or other incentive areas. Alternatively or additionally, tax holidays may apply to certain types of activity

Role of a Hong Kong Company for the investment in China
Hong Kong companies are still the main investors into China. Hong Kong is still used by many international companies as a base or headquarter for their China operation. The reason for this are easier set up procedures, liability and tax incentives, which includes the following:-
  • Hong Kong holding company may be fully liable for the China investment and in general, the ultimate parent company or foreign investors may be proteted from all liability
  • Dividends received by the Hong Kong holding company may be tax free in Hong Kong and can be used for further investment
  • Royalties, license fees, rent etc. received by the Hong Kong holding company are tax free in Hong Kong (subject to the new rules as enacted in Hong Kong)
  • If the China manufacturing factory is invoicing and sold products through the Hong Kong holding company, only 50% of the profits are assessed as sourced in Hong Kong and therefore taxable in Hong Kong (advance ruling may be required and is subject to assessment by the Hong Kong Tax Authority)

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