INVESTING IN CHINA
As one of the most potential country in the world and possessing a conducive business environment and affluent consumers, China is attracting more and more foreign investments by offering effective benefits and incentives. This is best reflected in the various laws and regulations those give special incentives and benefits to foreign investors. The positive climate toward foreign investments has continued during the recent years.
Foreign business operating in China can take on a number of different forms. The particular form chosen will depend on its specifics needs and planned business activities.
1.1 Representative Office
The most basic form that a foreign investor may adopt is that of a representative office. Typically, these offices engage in activities such as the procurement and inspection of goods bid for and execute contracts, market research, and other supplementary activities. It is not considered to be a legal entity and thus is not permitted to engage in many necessary activities such as opening of bank accounts, hiring foreign workers or acquiring certain assets. Furthermore, it is prohibited from engaging in sales or generating commercial income or act as a principal for business transactions. As such, its expenses must be funded from abroad. Consequently a representative office is usually suitable for a foreign corporation engaging in souring products in China, but is not suitable for marketing or selling of products or services.
1.2 Branch Office
The form of business presence a foreign concern adopts in China is the establishment of a branch office. It allows for more effective control and business flexibility and is usually adopted by foreign enterprises once they became familiar with the local conditions. A branch office may engage in profit-making activities just like domestic companies and is considered to be a permanent entity. Both the branch office and the parent office are considered the same legal entity, with the exception for tax and import/export purposes. Therefore like a domestic company it will be taxed at source on income earned in China and is subject to the jurisdiction of the Chinese laws. After-tax profits the branch generates may be remitted out to the head office without additional taxes.
A shortcoming of the branch office arrangement is that because both are considered to be the same entity, the parent company is liable for the debts that the branch incurs. Thus, in order to enjoy the tax benefits of a branch office while minimizing the exposure, foreign companies will frequently establish a wholly-owned offshore subsidiary, and then establish the Chinese branch under the subsidiary.
1.3 Corporate Forms
Instead of operating as a part of an existing foreign company, foreign investor may also form a local subsidiary by incorporating a new company under Chinese laws or purchasing an existing local company. This is especially advantageous where the income generated by the local company is high enough to overcome the higher costs of domestic incorporation. And entering the local market directly will reassure consumers and suppliers alike as this reflects a long-term interest in the Chinese market. The subsidiary form also allows the parent company to exercise a greater degree of control while limiting the potential liability of the parent.
There are three types of company authorized by Chinese Law, Chinese-foreign Equity Joint Venture, Chinese-foreign Contractual Joint Venture and Enterprise with Foreign Capital, which now are called Foreign Investment Enterprises.
To establish a Foreign Investment Enterprise, a series of procedures should be carried out, such as application to the Ministry of Foreign Economic Relations and Trade of the PRC, registration with the Local Business Administration Bureau and opening an account with a bank in China, etc. Furthermore, there are particular regulations on each type of entity, for instance, as a Chinese-foreign Equity Joint Venture, it must be a liability company, and in the registered capital the proportion of the investment contributed by the foreign participant(s) shall in general not be less than 25 percent. As a Chinese-foreign Contractual Joint Venture, it can take the form of either limited or unlimited corporation in accordance with the cooperative contract.
2. taxation
In accordance with Chinese law, a normal enterprise shall be levied income tax at the rate of 33% per year. For the sake of absorbing foreign investment, quite a few priorities in taxation granted by government, such as follows:
(1) Manufacturing enterprises with foreign investment scheduled to operate for a period of 10 years or more may be exempt from income tax in the first and second profit-making years and allowed a 50% reduction from the third year to the fifth year.
(2) After the expiration of exemption or reduction period in accordance with the above two rules, the enterprises with foreign investment that are engaged in farming, forestry and animal husbandry or located in remote, economically undeveloped areas, upon approval by the tax authorities of State Council of an application filed by the enterprises, are allowed a 15% to 30% reduction of the income tax.
(3) Enterprises with foreign investment in special economic zones, foreign enterprises which establish organizations that are engaged in production and business in special zones and the manufacturing enterprises with foreign investment operating in economic and technological development areas may be charged at a reduced tax rate of 15%.
(4) Foreign investor who reinvest the profits distributed to them by their enterprises in order to establish or expand export enterprises or technologically advanced enterprises for a period of operation of not less than five years, after application to and approved by the tax authorities, shall be refunded 40% of the amount of income tax already paid on the invested portion.
Besides above priorities on income tax, Foreign Investment enterprise shall be exempt from customs duty and consolidated industrial and commercial tax for the following imported materials:
participant’s share of investment.
are part of the venture’s total investment .
(3) Machinery, equipment, parts and other materials imported by the venture with the additional capital under the approval of examination and approval authority on which China cannot guarantee production and supply.
(4) Raw materials, auxiliary materials, components, parts and packing materials imported by the venture for production of export goods.
3. Intellectual Property Rights
In the past, China has been commonly accused of violating the intellectual property rights of others. The government has worked hard to change this image by joining to Paris Convention, Berne Convention and Madrid Convention as well as by the enactment of tougher laws as it has come to realize its importance to the future development of the country. A distinguishing feature of the intellectual property laws of China is that criminal sanctions may also be imposed. Therefore, the filing of a criminal complaint often quickly brings the offending patty to the settlement table.
3.1 Patents
Protection under the patent law is only available to holders of patent registrations in China. Therefore, foreign patent provides no protection under Chinese law, unless a corresponding patent has been registered in China. However, some benefits are conferred upon foreign patent holders under Paris Convention and various bilateral agreements. For instance, a foreign patent for invention or utility model holder from the country of a signatory of Paris Convention filing in China is entitled to claim a priority date provided that the patent application is submitted within twelve months or within 6 months for a design after the patent filing for the same invention was made in the foreign jurisdiction.
The examination process could take several years to complete. Once granted, an invention patent is valid for twenty years from the date of application and an annual administrative fee must be paid or the patent may be canceled. For utility patents and design patents the period of validity is ten years.
3.2 Copyrights
In China, Copyright Law was made in 1991.06.01. Translation rights to foreign works have been protected on a reciprocal basis. Furthermore, bilateral agreements have been signed with various nations, guaranteeing mutuality of protection. Currently, works by nationals of foreign countries may be able to claim protection based on first publication principles.
Under Chinese Law, the creator of the work at completion of the work holds copyright. No additional registrations are necessary. The law, however, provides a system of registration primarily for evidentiary and notice purposes.
3.3 Trademarks
China recognizes right in trademarks. The right can be acquired without registration. But the unregistered trademark holder cannot confront others who use the same trademark on the same merchandise or service. So it is necessary for foreign entities to register their trademarks. As trademarks are granted on the basis of priority of registration rather than priority of use, it is vitally important that foreign trademarks be registered at the earliest opportunity. Applicants from signatory of Madrid Convention, through bilateral treaties with China, do get the advantage of a prior registration date if they registered in their home jurisdiction six months prior to registering in China. Once the application is preliminarily approved, the trademark is published in the official trademark gazette. If no oppositions are filed within three months of publication, the trademark is then registered. The initial registration lasts for ten years, with renewals allowed for every ten years thereafter.
Once registered, if the trademark owner fails to use or properly use the trademark for three years, the trademark authority may upon its own motion or upon the request of an interested patty cancel the trademark.