Legal Overview

Establishment of Enterprises

Limited-Liability Company

In General

A limited-liability company (LLC) is defined as a company where the shareholders’ liabilities are limited to the capital they contributed to the company.

The number of shareholders shall not be more than 50.

Shareholders’ Meeting

Composition

The shareholders’ meeting is composed of all shareholders.

Board of Directors

Composition

The board of directors of an LLC comprises of a minimum of three and a maximum of 13 members, unless it is otherwise provided for in Article 50 of the Company Law, under which one executive director replaces the board of directors.

The board of directors of an LLC may comprise of the representatives of the employees of the company concerned. The employees’ representatives who are to serve as directors must be democratically elected by the employees of the company by the general meeting of the representatives of the employees, an employees’ meeting, or in any other way. Non-re- presentative directors must be appointed at the shareholders’ meeting.

The board of directors has one board chairman and may have one or more deputy chairmen. The appointment of the chairman and deputy chairman must be prescribed in the articles of association.

Function

The board of directors should report and be accountable to the shareholders.

Supervisory Board

Composition

An LLC must have a board of supervisors, consisting of at least three supervisors. However, a small LLC or an LLC with a relatively small number of shareholders may be permitted to have one or two supervisors instead of a board of supervisors.

The board of supervisors must include representatives of the shareholders and employees’ representatives in an appropriate ratio, which must be stipulated in the articles of association. The employees’ representatives who are to serve as members of the board of supervisors must be democratically elected by the employees of the company through the meeting of the employees’ representatives, an employees’ meeting, or by any other means. The board of supervisors must have one chairman, who will be elected by at least half the total number of supervisors. To ensure independence and impartiality, neither the directors nor the senior managers may concurrently be appointed as supervisors.

Function

The function of the board of supervisors is to supervise the financial status of the company and the conduct of the directors, the general manager, and other senior managers of the company.

Legal Representative

A legal representative is one of the principal players in an LLC, who re-presents and acts on behalf of the LLC. Most importantly, he is always deemed to have the full authority of the LLC and his actions bind the LLC. The legal representative has his own personal seal. Normally, the company seal will also be kept by him (or someone authorized by him). Most (if not all) of the corporate and legal documents will require affixing the company’s seal as well as the legal representative’s physical signature and/or seal. Most financial instruments will require the legal representative to affix his seal.

Furthermore, the legal representative executes the application documents for the incorporation of the LLC or alteration of its registration with the authorities. For this purpose, a specimen of his signature will have to be submitted to the company registration authorities. In this sense, the legal representative plays a very important role in the LLC’s operations.

The company’s legal representative may even incur personal liability for the illegal operation of the LLC. He is the only representative of the LLC recognized by the authorities and his signature is required for all official documents submitted to the authorities. The legal representative may act as an executive director, general manager, or the chairman of the board of directors. Normally, the powers of a legal representative are specifically defined in the articles of association of the LLC.

Joint Stock Limited Company

A joint stock limited company may be established either by way of promotion or by way of stock floatation.

A joint stock limited company shall have no less than two and no more than 200 promoters, of whom a majority shall be domiciled within the territory of China.

A joint stock limited company shall establish the board of directors, members of which shall range from 5 to 19. The board of directors may include employee representatives. Employee representatives who serve as board directors shall be democratically elected through the employee representatives’ assembly, the employees’ assembly or otherwise.

A joint stock limited company shall have the board of supervisors comprised of no less than three members. The board of supervisors shall include shareholders’ representatives and an appropriate proportion of employee representatives. The proportion of employee representatives shall be specified in the articles of association but in any event shall ac- count for no less than one third of the supervisors appointed. Employee representatives who serve as members of the board of supervisors shall be democratically elected through the employee representatives’ assembly, the employees’ assembly or otherwise.

Legal Representative

Same as LLC.

A Single shareholder limited liability company

Single shareholder limited liability company refers to a limited liability company with one natural or legal person as a shareholder.

The requirements for a single shareholder limited liability company are the same as that for LLC.

Any natural person may only establish a single shareholder limited liability company. Such single shareholder limited liability company shall not establish a new single shareholder limited liability company.

A single shareholder limited liability company shall have no board of shareholders.

Legal Representative

Same as LLC.

Partnership Enterprise

The partnership enterprise herein means a general partnership enterprise, or a limited partnership enterprise established by natural persons, legal persons and other organizations within China pursuant to this Law.

A general partnership enterprise consists of general partners, who are jointly and severally liable for the debts of the partnership enterprise.

A limited partnership enterprise consists of both general partners and limited partners, whereby the former is jointly and severally liable for the debts of the partnership enterprise and the latter are liable for the debts of the partnership enterprise only to the extent of their respective capital contribution.

Wholly state-owned enterprises, state-owned enterprises, listed companies, or public service units or social communities shall not become general partners.

Enterprise Income Tax

The rate of enterprise income tax is 25%.

Non-resident enterprises that have not set up institutions or establishments in China or have set up institutions or establishments, but the income obtained by the said enterprises has no actual connection with the set-up institutions or establishments, shall pay enterprise income tax in relation to their income originating from China. The tax rate is 20%.

For a partnership enterprise, every partner shall be a taxpayer. Where a partner of a partnership enterprise is a natural person, individual income tax shall be paid; where a partner is a legal person or any other organization, enterprise income tax shall be paid.

Contact

Guangzhou

HJM ASIA LAW & CO LLC

B-1002, R&F Full Square Plaza
No. 16, Ma Chang Road, ZhuJiang New City Tianhe District, Guangzhou
Guangdong 510623
Tel +86 20 81 21 66 05
Fax +86 20 81 21 65 05
https://www.hjmasialaw.com/
Caroline Berube
china@hjmasialaw.com

Shanghai

HJM ASIA LAW & CO LLC

Level 15, Office 1543, One Corporate Avenue
222 Hu Bin Road, Lu Wan District Shanghai 200021
Tel +8621 6122 1260
Fax +8621 6122 2418
https://www.hjmasialaw.com/
Caroline Berube
china@hjmasialaw.com

Tax overview

Company registration

Form of business entities

Foreign investors can operate in mainland China through different legal vehicles. The most common entities used by foreign investors in practice are:

• Wholly-foreign owned enterprise (WFOE);
• Representative office (RO);
• Equity joint venture (EJV);
• Branch;
• Partnership;
• Non-profit organization.

General procedure

Every new business must start registration with State Administration of Industrial and Commerce (hereinafter referred as SAIC) whatever its legal form. The SAIC will automatically link with relevant tax authority based on its registered address. A sole registration number for each business can then be applied for procedure with different authorities.

However, it is necessary to go to tax authority for applying taxpayer category, setting applicable tax rate, purchasing golden tax disk for invoice issue. Should this sentence read. Depending upon the business plan of the company, it can then be decided if there is a need to apply for import and export rights and register with Customs if necessary.

Capital

According to effective China Company Law, there is no specific rule on capital injection when a company is established. Total amount of investment, investment manner and timing of the contribution are at the disposal of investors, but this shall be disclosed in Articles of Association for future reference.

Bank account

Each company shall open basic bank account under approval of the People’s Bank of China by submitting business license, identity card or passport of legal representative, tax registration approval and other application forms. Different bank have different rules on whether legal representative must be present at bank site for opening bank account.

However, original ID or passport are necessary for most of local banks.

Each company is permitted to open one basic bank account only. Settlement account and capital account are allowed upon necessity.

Taxation

Corporate income tax

The Chinese corporate income tax (CIT) law provides for the unified tax treatment for all enterprises and organizations deriving income within China, from the foreign-invested enterprises (FIEs) established in China to the non-tax resident enterprises.

Tax resident enterprises

The CIT law introduces the concept of Tax Resident Enterprise (TRE). TRE’s are subject to CIT on their worldwide income. Place of registration, operation, and management are the criterion used to determine TRE. If either of them is in China, the enterprise will be considered as a TRE or a non-TRE. Non-TREs are taxed on their China-source income only.

Tax rate

The standard tax rate is 25%. The preferential tax rates are applied to encouraged businesses and small and medium-sized enterprises (SMEs) with low profit.

Withholding tax

The dividends, interests, and royalties paid to a resident enterprise are not subject to withholding tax, but are being included in the taxable income of the recipient resident enterprise and taxed accordingly, except where exempted. If a foreign enterprise not established in China derives income in the nature of interest, rent, and/or royalties, it will be subject to value-added tax at their corresponding standard rates and withholding income tax at a standard rate of 10% under CIT law (unless a double tax treaty/arrangement applies).

Filing requirements

The calendar year is used as the tax year. A quarterly income tax return is required to be filed within 15 days from end of each quarter. An annual income tax return is required to be lodged before 31st May each year.

VAT (Value-added Tax)

On 1st January 2012, China commenced the Pilot Collection of Value Added Tax in Lieu of Business Tax (VAT reform). The VAT reform was launched nationwide on 1st May 2016. According to the China Provisional Regulations for Value Added Tax (Provisional Regulations), VAT applies to individuals and enterprises engaged in the sale of goods or processing, repair and assembly services, sale of services, intangible assets, immovable, and the importation of goods into mainland China. VAT payable = Output VAT – Input VAT during the period

Output VAT = Turnover * Tax rate

Tax Rates

There are two types of taxpayers under VAT system, a small-scale taxpayer and a general taxpayer.

Small scale taxpayers are chargeable to VAT at the simplified levy rate of 3% on their turnover. Input VAT arising from purchase is not allowed to be set off against output VAT.

General taxpayers are chargeable to the applicable tax rate according to different taxable items. The tax rates are gradually reduced during the VAT reform and the updated tax rates for general taxpayers as from 1st April 2019 are:

Individual income tax

The new Individual Income Tax (IIT) Law took effect on 1st January 2019.

Income from employment, service fee income, royalties, author’s fee, income from transfer of properties, dividends, bonus and interest income, income from individual household businesses, income from leasing of properties, and incidental income are subject to IIT.

Tax resident

The 183 day criterion introduced by the new IIT Law determines the tax residency for non-China domiciled individuals. The China tax resident shall be subject to IIT liabilities on worldwide income, whilst the non-China tax resident shall be subject to IIT liabilities on China sourced income only.

The below paragraphs focus on the taxation of comprehensive income (employment income, service fee, author’s fee, and royalties) in the hands of tax residents. It shall be subject to determining the tax liabilities on an annual basis, although the tax pre filing shall be performed on a monthly basis.

Deductions for tax residents:

• Standard Basic Deduction: CNY 60,000 per annum (CNY 5,000 per month).
• Specific Deductions: personal portion of the mandatory China social insurance and housing fund applied to China tax resident.
• Specific Additional Deductions: deductions with upper limits for residents, including expenses for children’s education, further learning, medical treatment for major illness, home loan interest or house rentals, and support for elderly.

Tax rate for comprehensive income for tax resident:

The seven grades of progressive tax rate of 3% – 45% are applied to the IIT calculations. The rate of 45% is applied to the marginal annual taxable income (after deductions) above CNY 96,000.

Filing requirement

The withholding IIT returns shall be filed by the payer (i.e., Employer for employment income) on a monthly basis by the 15th of the following month.

After year end, an annual IIT self-filing return shall be filed by the tax resident between 1st March and 30th June of the following year, if the over or underpaid IIT during the year shall be reported for the salary, service, author’s remuneration, and/or royalty income.

Foreign tax credit

The China tax resident shall report the non-China sourced income between 1st March and 30th June of the following year. Any foreign tax paid is subject to foreign tax credit with the upper limit of the IIT liabilities calculated in accordance with China’s IIT rules. Any un-credited foreign tax shall be carried forward for up to 5 years.

Property taxes

Real estate tax is paid on each quarter by house owner within cities, county towns, administrative towns, industrial and mining district within China:

• Taxes for self-occupied houses are calculated after deduction of its residual value (10-30% of original cost) applying a tax rate of 1.2%, actual percentage for calculating residual value is decided by government.
• Taxes for rented house are calculated on the basis of rental fee with a tax rate of 12%.

Other taxes

Other principal taxes levied on foreign investors include:

• Urban Construction Tax and Education Surcharge;
• Customs duty;
• Land Appreciation Tax;
• Resources Tax;
• Stamp Duty;
• Urban Land Use Tax;
• Vehicle and Vessel Tax;
• Deed Tax;
• Environmental Protection Tax;
• Tonnage Tax.

Treaties for the avoidance of double taxation

China has a vast treaty network and has currently entered into double taxation agreements with 107 countries as well as Hong Kong and the Macao Special Administrative Regions, in which 100 treaties have been in force.

For treaties with most countries, interest paid to the beneficiary as creditor is subject to no more than 10% income tax. Royalty paid to the beneficiary is charged for 10% income tax on the basis of royalty value.

Dividends (national withholding taxes, international tax exemption options)

Dividend withholding tax is applied for profit distribution by China resident company to a non-resident company. In general China dividend withholding tax rate is 10%.

Subject to double tax treaties with different countries, withholding tax rate for dividend distribution may be reduced to 5% if a non-resident company holds more than 25% or more of the shares in a China resident company.

Tax treatment of losses carried forward

Tax losses can be carried forward for a period of no more than five years to offset against future taxable income. The period of carry forward for tax loss is extended to 10 years for some specific industries. Tax losses cannot be carried back.

Employer obligations (salary taxes, social security)

Withholding and payment of individual income tax and social security is the obligations of an employer. It is calculated and paid on monthly basis to tax and social security authority. Both salary taxes and social security will be collectively paid to the tax authority since 2019.

Social security insurance in China consists of two parts. One portion is deducted from an employee’s salary and the other is paid by the company based on percentage of last years’ average salary for the employee. It includes pension, medical, unemployment, work injury, maternity insurance and housing fund. The percentage to calculate the insurance and fund varies in different cities of China and is aligned to the different cost of living and salary.

Eileen Liang

Contact

Shangai

Transventure Business Consulting Co., Ltd

Room 1406,
JiuLong Building,
N° 188 East Nandan Road XuHui District
Shanghai 200030
Tel. +0086 21 56 96 13 65
www.kuaiji.biz
Eileen Liang – Bangjin Li
liangjx@kuiji.biz
libj@kuaiji.biz