Opportunities abound in the world's largest consumer market. If you plan to open an office or send employees to China, read our newly updated guide first.

On this page:

• Overview
• Setting up a company
• Visas
• Taxes
• News

OVERVIEW

China's accession to the World Trade Organisation (WTO) in December 2001 has revolutionised the country's economy as foreign companies clamber to find a foothold in the market. The WTO agreement has heralded a new beginning for the People's Republic of China (PRC), a country that launched economic reforms in 1978 and which has since seen the economy explode at an annual growth rate of 9 percent per year, the fastest growth rate of any comparably sized country.

Economically, China sits behind the Unites States, but its economy is two to three times larger than major Western European nations, and is well on the road to becoming an 'open economy'.

Multinationals are now looking towards China with renewed fervour, with accession opportunities for increased foreign direct investment, import competition and continued growth. China's relatively low GDP per capita (USD 910 per annum, compared with USD 36,020 for the United States) means labour costs are cheap, and low costs for business space add to the advantages. But it's not all plain sailing. Those establishing businesses in China can expect bureaucratic problems and increased political pressure in a country trying to come to terms with its dramatic reforms.

SETTING UP A COMPANY

WTO accession should mean that those considering establishing a company in China can expect more legal transparency and equitable business laws. But the process can be extremely vague and fraught with difficulties, and it is essential that anyone considering the establishment of a company in China consult a specialist.

China's WTO inclusion has meant that regulatory changes allowing foreign nationals to enter the Chinese market will become much easier. Major changes include:

• Representative offices are expected to become less important as other sectors open to foreigners (these offices only allow for 'representation', not actual sales or signing of contracts)
• Regulations related to the establishment of foreign-invested enterprises will be relaxed
• WFOEs (wholly owned foreign enterprises) will be extended to more sectors
• Restrictions on holding companies are to be lifted for most sectors

Market liberalisation means that China will not be able to impose trade restrictions on foreign countries, and it is expected that trade barriers will fall away within six years upon accession into WTO. Sectors of the economy, previously closed to foreign investment, will open to foreign investors - provided the foreign investors satisfy the specific thresholds.  Areas where there is expected to be major growth include e-commerce and the internet, medical and pharmaceutical, infrastructure, insurance and banking, telecommunications, and the airline industry.

Until now, certain activities/industries open for foreign investors have been restricted to special economic zones. These areas, designated by the Central Government for foreign investors, are found mainly along the eastern coast.

With the WTO accession, these zones are to be phased out. A new List for Guidance on Foreign Investment in Industries came about in April 2002, and splits foreign investment into three categories:

• Types of project for which foreign investment is encouraged
• Types of project for which foreign investment is restricted
• Types of project for which foreign investment is prohibited

The point is to ensure that particular industries are directed towards areas that will best assist China's development and fit into the long term strategic business plan of the country. The prohibited sectors are those where China seeks to protect domestic industries for political, economic or security reasons.

But setting up a company in China is never easy. For examples, there can be a general lack of competency with many staff; the workforce is volatile; it is extremely difficult to manage conflict situations with Chinese partners and there are problems with intercultural communication and negotiation.
 
Luc Manneval, a customs' specialist, advises: "The golden rule is simple - do not do anything alone in China. In my opinion you have to stop at the border of the country and let the Chinese intermediaries deal with the operation until the final client has been delivered."

Types of companies

Foreign companies looking to set up in China can choose from six main types of company/form:

• Representative office
• Chinese subsidiary and foreign-invested enterprise
• Technology transfer and licensing
• Franchising
• Mergers and acquisitions
• E-commerce

Representative office

As the easiest road for foreign nationals looking to establish in China, representative offices are only able to act as "liaison offices". In effect this means they cannot sign sales contracts, bill customers directly, or supply parts and after-sales services for a fee although most representative offices perform these activities in the name of the parent company). Despite the limitations, this has been very successful for many foreign companies in the past given the stringent restrictions imposed.

Chinese subsidiary and foreign-invested enterprises

A locally incorporated equity or co-operative joint venture with one or more Chinese partners, or a wholly foreign-owned enterprise (WFOE) is another major option for those looking to start up in China. Since 1 April 2002, 88 percent of all industries could set up as a WFOE.

WFOES are a type of foreign-invested enterprises (FIEs) that are exempt from some customs duties and VAT. FIE categories include:

• Equity joint ventures (EJVs)
• Co-operative (contractual) joint ventures (CJVs)
• Wholly foreign-owned enterprises (WFOEs)
• Foreign-invested joint stock companies.

The current law on WFOEs is that they must either provide advanced technology or be export-oriented, though in practice the requirement is a plus but not mandatory for approving the set-up of FIEs.

Technology transfer and licensing

Technology transfer offers market entry and short-term profits, but runs the risk of creating long-term competitors. To avoid this, some companies register older technology with the promise that more advanced technology will be introduced/developed at a later date. One point to note is that licensing contracts must be approved by and registered with the Ministry of Commerce.

Franchising

Foreign companies are starting to establish retails arrangements, including some that function like franchises. There are no specific laws yet governing this, other than pre-WTO legislation.

Mergers and acquisitions

A lack of laws and policies makes this practice difficult to implement to certain extent, however China has made progress to pave the road for merger and acquisition exercise.  In April 2003, China issued a provisional ruling to permit foreign investors to merger or acquire domestic companies, by way of assets acquisition or equity acquisition.

E-commerce

Still in the formative years – lack of structure and policy has made it difficult — but a number of foreign IT companies have been working with the Chinese in developing adequate systems.

VISAS

Individuals entering China who do not have a Chinese passport must first apply for a visa before their departure.
Visas can be for single, double or multiple entries into China. Depending on the type of visa, Chinese visas may be valid for 30, 60, 90, 180 days, one year or three years from the date of issue.

To avoid delays in obtaining visas and unnecessary costs relating to express service fees, individuals should apply for their visas no earlier than three months and no later than 30 days before the planned date of departure to avoid expiration of the visa or make sufficient time for the application process.

Visa applications must be made at the Chinese embassies or consulates in person or by mail. The processing time is generally three to five working days for in-person applications and seven to ten working days for by-mail applications. One-day express processing is also available with extra fees charged.

For visa application fees, please contact the local embassy or consulate. The visa application form (in English) can be downloaded from this link: http://www.china-embassy.org/eng/hzqz/zgqz/t84240.htm

There are strict procedures for foreigners who wish to obtain visas to live and work in China. The most common visa classes for foreign business visitors and workers are business/official visit visa and employment/work visa.

There are other classes of visas for airline pilot and crews, mariners, diplomats, students, and journalists.
Business and work visas must be obtained prior to entry into China, and numerous documents are required for visa application. It is criminal offence for foreigners to work in China without appropriate visa and work documents.

Also keep in mind that currently China does not recognise dual nationality, and immigration requirements for Hong Kong and for mainland China are different.

In addition to application forms, an official invitation issued by competent Chinese government authority is also required for work visa applications. 

Foreigners working in academic and scientific institutes or government authorities need to obtain a Foreign Specialist's License, which is issued by Chinese Foreign Specialist Bureau.

Note: Foreigners applying for a work visa must also submit a notarized health report that is accepted by the responsible Chinese health centre. If this health report is issued outside of China, it must be notarized by your local Public Notary and authenticated by the Chinese Embassy and then sent to China for approval.  

Business visit visa

If the visit to China is for business purpose, then a business visit visa (category F) is necessary. The following documents are required for application for F Visa: 

• Original passport that is valid for at least six months and with at least one blank page available.
• The visa application form plus one passport-sized photo (black and white or color are acceptable).
• An official invitation issued by the competent Chinese authority (e.g. Administration of Industrial and Commerce). The invitation must state the name of the person invited and the proposed length of stay.
• The individual can apply for a single or a double-entry visa. For multiple-entry visa, the invitation should be issued by a government organization or a state-owned company approved by Chinese Ministry of Foreign Affairs.

Foreigners suffering from mental disorder, leprosy, AIDS, venereal diseases, contagious tuberculosis or other diseases are not allowed to enter into China.

Employment/work visa

To apply for a work visa, applicants must ensure that the following requirements/documents are met/provided:

• Original of Employment License from China labor Ministry
• Original official invitation letter from the authorized organizations in China
• Health examination report. See note above regarding notarization and legalization of health documents.
• Visa application form provided by the Chinese embassy.
• 2 copies of 2-inch passport-sized photo.
• Original passport valid for at least 6 months.

Please note that the validity of a single- or a double-entry visa is three months from the date of issuance.

TAXES

China implemented its first national tax law on 1 January 1994, but the law is still hazy and is subject to a wide degree of interpretation and enforcement, with each district office of the State Tax Bureau and the Local Tax Bureau having a substantial amount of flexibility in interpretation and administration of the law.

Uniformity in treatment of the law is still more of a dream than a reality and even though the rate of growth of understanding of what the rule of law concept as it applies to the laws of taxation means, negotiations between the taxpayer and the tax bureau still are essential if one has expectations of favourable interpretations of the law.

China's WTO membership looks likely to see the phasing out of its two-tier tax system for domestic and foreign enterprises. Local companies have expressed discontent over rebates and tax benefits for foreign companies. But there remain a number of primary tax incentives to encourage foreign investment in China. These include:

A. CONCESSIONARY RATES OF TAXATION FOR FOREIGN ENTITIES IN DESIGNATED LOCATIONS

The central government assesses 30 percent of net profits as the Enterprise Income Tax (corporation income tax). This amount is reduced to 15 percent for all business activities for foreign entities operating within the Special Economic Zones and to 15 percent for specific types of business activities within other designated zones throughout the country.

B. HONG KONG AND CHINA ARRANGEMENTS REGARDING DOUBLE TAXATION:

A memorandum was signed with the Hong Kong Inland Revenue Department early in 1998, exempting income received by Hong Kong based businesses from activities conducted in China if the activities do not last for more than six months.

In addition, China will exempt salary income of Hong Kong residents if they work in China for no more than 183 days in a year, provided that the salary is not paid or borne by any PRC entity. 

C. ITEMS EXEMPT FROM THE INDIVIDUAL INCOME TAX:

Subject to certain limitations and requirements on supporting documents, the following income and allowances provided to expatriates living and working in China are currently exempted from Individual Income Tax:

• Company paid or reimbursed rental.
• 'Reasonable' allowances for business trips.
• Meal and food subsidies.
• Moving and relocation expense reimbursements.
• Laundry expense reimbursements.
• Language training expense reimbursements.
• Reimbursement of tuition for children's education taken in China.
• Cost of two return trips per year to home country for the employee.
• Company paid or reimbursement of social club membership fees.
• Company paid or reimbursement of car rental expenses for business purposes.
• Employer contribution to home country insurance and social securities that are statutorily required.

Tax treaties

China has tax treaties in effect with many countries, including the United States. The main benefit applies to expatriates living and working in China on a temporary basis.

Based on the Organisation for Economic Co-operation and Development (OECD) and United Nations (UN) model tax treaties, China's tax treaties generally allocate cross-border income to the country in which income is to be taxed: being either the country in which the income originates, or the country in which the relevant taxpayer is resident.

Countries that have a tax treaty with China: Albania, Armenia, Austria, Australia, Bahrain, Bangladesh, Barbados, Belarus, Belgium, Brazil, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Cuba, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Jamaica, Japan, Republic of Korea, Kazakhstan, Kuwait, Kyrgyzstan, Kyrgyz Republic , Laos, Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mauritius, Mexico, Moldova, Mongolia, Netherlands, New Zealand, Norway, Oman, Pakistan, Papua New Guinea, Philippines, Poland, Portugal, Romania, Russia, Srilanka, Singapore, Slovakia, Slovenia, South Africa, Spain, Sudan, Sweden, Switzerland, Thailand, Turkey, Tunis, Ukraine, United Arab Emirates, United Kingdom, United States, Uzbekistan, Venezuela, and Vietnam.

The 90-days and 183-days tests

Under PRC law, an employee who is not domiciled in the PRC can work in the PRC for up to 90 days without becoming subject to PRC income taxation, provided that the employer is not a PRC enterprise and the employee's salary is not borne by a PRC entity or other PRC establishment of the employer.

In the case of an employee who is a tax resident of a country which has entered into an income tax treaty with the PRC, the 90-day tax exemption period may be extended to 183 days either in a calendar year or in a 12-month period depending on the specific provisions under the applicable treaty.

An exception to this general rule is that, if an employee holds a senior management position or is a director of a PRC enterprise (including joint ventures and wholly owned foreign entities); the employee will be subject to PRC income tax on all income received from the enterprise, regardless of the amount of time the person spends in the PRC.

If the cost of the employee is not borne by the PRC entity and the employee resides in China for less than 90 or 183 days, then the employee is not subject to PRC tax.
More than 90 (or 183) days but less than one year

An employee who spends more than 90 days or 183 days, as the case may be, but less than one year, in the PRC is subject to PRC income tax on a monthly basis with respect to taxable employment income arising in the PRC for the time he or she spends in China. 

A foreign individual working in China would be regarded as have stayed in China for one year if he or she did not exit China for more than 30 days in a single trip or for more than 90 days in multiple trips in a calendar year.

Time spent outside the PRC on personal leave or for training during the course of work in the PRC is not considered to be absent from the PRC for tax purposes. The income tax rate ranges from 5 percent to 45 percent. Employment income is considered to arise in the PRC if it is earned through the performance of services in the PRC.

One full calendar year or more

If an employee spends "one year" in the PRC, his or her taxable employment income will include both (1) income arising in the PRC and (2) income arising outside the PRC but is borne by a PRC entity.
More than 5 years

A foreign employee who resides in China for more than five continuous years and has spent "one year" for each of the five years would be subject to China tax for worldwide income regardless of the physical presence of the individual and the source of income.

Individual income tax

Individuals who have domicile in China and individuals who reside in China for at least "one year" are generally subject to Individual Income Tax on income derived from sources both within and outside China that is attributable to the work done in China.

Other individuals are subject to tax on income derived from sources within China only.

Individual Income Tax applies to employment income (at progressive rates from 5 percent to 45 percent); income of individual businessmen (at progressive rates from 5 percent to 35 percent); income from contracting for or leasing of the operation of enterprises or institutions (at progressive rates from 5 percent to 35 percent); and income from rendering personal services (at a flat rate of 20 percent).

It shall be noted, however, that additional tax is payable on abnormally high personal service income (i.e. above RMB20,000 per service item). Therefore, compensation received for personal services is effectively subject to tax at progressive rates ranging from 20 percent to 40 percent.

Royalties, interest and dividends, income from the leasing and assignment of property, contingency income and other income determined as taxable by the State Council are also generally subject to Individual Income Tax at a fixed rate of 20 per cent.

Items that are exempt from the Individual Income Tax include interest on savings deposits in banks, interest on government bonds, state allowances and subsidies, social welfare, pension and other benefits, insurance indemnifications, income of foreign diplomatic personnel where tax-exempt under other Chinese laws, and other income approved as tax-exempt by the State Council.

Individual Income Tax is calculated on a monthly basis. A standard deduction of CNY 4,800 is allowed to non-residents with respect to employment income. Other standard deductions apply to individual businessmen and income from personal services, author's remuneration, royalties and income from the leasing or assignment of property. Individuals may deduct income tax paid outside China from the amount of Individual Income Tax payable on income from sources outside China. Donations to public welfare funds may also be deducted from taxable income.

Enterprise income tax

Income Tax on Foreign Investment Enterprises and Foreign Enterprises

A Foreign Investment Enterprise (FIE) is a PRC legal entity or unincorporated joint venture in which one or more foreign investors own an interest of 25 percent or more.  An FIE may be an equity joint venture, a co-operative joint venture or a wholly foreign-owned enterprise (WFOE).

Of these, equity joint ventures and wholly foreign owned enterprises always take the form of a PRC limited liability companies, whereas a co-operative joint venture may be either a PRC limited liability company or an unincorporated business vehicle akin to a partnership.

A Foreign Enterprise (FE) is a foreign enterprise - in other words, a company or other business organization formed under the laws of a country other than China.  For example, a Hong Kong company with a representative office in China is an FE, as is a US company, which has no PRC presence but derives PRC-sourced income from licenses granted to Chinese licensees.

Under the Enterprise Income Tax Law, all FIEs and FEs with a permanent establishment ('PE') in China are generally subject to a national tax imposed at the rate of 30 percent on China-sourced net income. 

In addition, a local income tax of 3 percent of taxable income is levied by the local government, resulting in a total tax rate of 33 percent.  In order to simplify tax administration, both taxes are assessed and collected concurrently, nevertheless, the local tax authorities are empowered to waive the 3 percent local income tax for eligible FIEs under their jurisdiction when certain criteria are met.  FEs that do not have a PE in the PRC but have PRC-sourced income will generally subject to withholding income tax at the reduced rate of 10 percent.

There are a number of tax concessions for FIEs provided for under the Enterprise Income Tax Law and its Implementing Rules.  Some of the more important of these are described as follows:

The national tax rate is reduced to 15 percent for FIEs established in the Special Economic Zones (SEZs) of Guangdong, Fujian and Hainan Provinces.  The reduced 15 percent rate also applies to FIEs engaged in production and established in Economic and Technological Development Zones (ETDZs) approved by the State Council. 

Turnover taxes

VALUE ADDED TAX (VAT)

The PRC Value Added Tax (VAT) took effect on 1 January 1994.  VAT applies to the sale and importation of goods in China, and also applies to processing and repair or replacement services carried out in China.

Sellers of taxable goods and services, with a general VAT payer status, are required to collect VAT from purchasers at rates of 17 percent for most goods, 13 percent for certain staples, books and publications, and 17 percent for processing and repair or replacement service.  PRC Customs is required to collect VAT at the applicable rate at the time of importation of goods.  As opposed to general VAT payer status, sellers/service providers with minimal size would be treated as small scale VAT payer and be imposed to VAT at a flat rate of 6 percent.  Effective July 1998, 4 percent flat tax rate is applied to small-scale commercial enterprises.

For export sales, VAT was originally intended to be levied at a zero rate.  This would have meant that the input VAT paid on materials and supplies and services subject to VAT used in the production of the exported goods should be fully creditable against output VAT on domestic sales.
 
However, there have been numerous changes to the treatment of input VAT related to export sales since the introduction of the VAT law in 1994.  For those FIEs established after 31 December 1993, the VAT refund rate for most of products exported has been reduced from 17% to 13%, i.e. the 17% input VAT incurred for the exports cannot be fully creditable.  Exporters will have to absorb and charge the non-creditable input VAT of 4% to the cost of sales.  The formulas for calculating the non-creditable input VAT and VAT payable/(refundable) are as follows:

Non-creditable input VAT
=  (FOB price of export goods - Value of bonded raw materials) x
(VAT rate - VAT refund rate)

VAT payable / (refundable)
= Output VAT - (Input VAT - Non-creditable input VAT)

Goods imported into the PRC are generally subject to VAT.  The VAT rate of goods imported is the same no matter where the goods are from.  The VAT payable on goods imported by a taxpayer is calculated by applying the appropriate tax rate to the composite taxable value of the imported goods.  VAT payable on imports is calculated as follows:

Tax Payable = VAT Rate x Composite Taxable Value
Composite Taxable Value = Dutiable Value of Goods + Applicable Customs Duty + Applicable Consumption Tax

PRC Customs is required to collect VAT at the point of entry on behalf of the taxation authorities.  Importers or their agents must pay tax within 15 days of issuance of a duty-and-tax-payment certificate by Customs.

Sellers, with a general VAT payer status, must charge purchasers VAT on the total purchase price of goods including all commissions, late payment interest, packaging and other fees, but excluding the applicable VAT itself, consumption tax and any transport department fees.  Where a seller obviously understates a sales amount, the tax authorities may estimate a deemed sales amount.  Taxpayers concurrently dealing in goods and services with different tax rates are required to separately calculate the relevant sales amount or pay tax at the highest applicable rate.

Sellers must remit VAT to the tax authorities according to the following formula:

VAT payable for current taxable period = VAT paid on sales during the period - VAT paid on purchases of domestic and imported goods during the period.

VAT liability arises on the receipt by a seller of full payment or of a payment voucher for taxable goods or services, or on declaration to Customs by an importer of imported goods. Local tax authorities will arrange taxable periods for individual taxpayers in cycles of one day, three days, five days, 10 days, 15 days or one month depending on the amounts of tax payable.

Businesses with a fixed establishment shall report and pay tax with the local competent tax authorities where the establishment is located.  If the head office and branch are not situated in the same county (or city), they shall report and pay tax separately with their respective local competent tax authorities.  The head office may, upon the approval of the State Administration of Taxation or its authorized tax authorities, report and pay tax on a consolidated basis with the local competent tax authorities where the head office is located.

BUSINESS TAX

The business tax is payable by non-VAT payers.  The business tax is payable at varying rates by enterprises which provide services, sell immovable property or assign intangible assets.
Business tax applies at the following rates:

• 3 percent of the price of services in the areas of transport, construction, posts and telecommunications, culture and sports.
• 5 percent of the price for most other services, finance and insurance, the assignment of intangible assets and the sale of immovable property.
• 5 percent to 20 percent, as set by local authorities, of the price for entertainment.

Business tax is calculated at the applicable rate on the full price received by the seller or service provider, including all charges.  The formula for computing the tax payable is as follows:

Tax Payable = Turnover X Applicable Tax Rates

Specific methods of calculating the taxable amount apply to transportation enterprises, tourism enterprises, and construction contractors that subcontract, enterprises trading foreign exchange, securities or futures enterprises, and financial institutions that lend.

Where sellers or service providers concurrently engage in activities subject to different rates of business tax, they are required to calculate separately the different tax items, or pay at the highest applicable rate. Tax liability arises on receipt of full payment or a payment voucher for the taxable service or immovable or intangible assets.

Local tax authorities will set payment periods for individual taxpayers of five days, ten days, 15 days, one month, or per transaction, depending on the amount of tax payable

NEWS

Permanent residency procedures for foreigners living in China

Further to Ministry of Public Security's announcement in 2001 that China would introduce the international permanent residence ("green card") system, "Management procedures for permanent resident for foreigner living in China" was issued and implemented on 15 August 2004.

According to regulations issued, foreigners falling under one of the following four categories can obtain a green card in China:

• Foreigners who hold senior management positions in businesses which promote China's economic, scientific and technological development or social progress.
• Foreigners who have made relatively large direct investment in China.
• Foreigners who have made outstanding contributions or are of special importance to China.
• Foreigners who come to China to be with family, such as husband and wife, minors dependent on their parents, and senior citizens dependent on their relatives.

There is no time limit on the length of stay in China for green card holders.  A valid passport and green card are sufficient documentation for foreigners to enter and leave the country.  It can also be used as the legal identity document during the foreigners' stay in China; it is valid for five years for minors and ten years for adults.

To maintain a green card, foreigners must stay in China for at least three months in any calendar year.

November 2004 (updated April 2006)

This article was last updated in April 2006 by Gus Kang, Partner (gukang@deloitte.com.cn), Donna Liu, Senior Manager (donliu@deloitte.com.cn), Finny Cao, Manager(faco@deloitte.com.cn)  and Mary Ma, Senior Consultant (marylima@deloitte.com.cn) at Deloitte's offices in Beijing, China.

The authors can be contacted on the following telephone numbers: Gus Kang:  +86 10 8520 7600, Donna Liu: +86 10 8520 7527, Finny Cao: +86 10 8520 7535, Mary Ma: +86 10 8520 7661.