NCO CHINA NEWSLETTER - FEB. 2010
FEATURE ARTICLE
- Chinese New Year Brings Boom to Consumer Markets
- The significance of the Foreign-Invested Partnership Enterprises for Foreign Investors into
REGULATORY UPDATES
Corporate Registry
Accounting and Tax
Wind Power
IN THE SPOTLIGHT
FEATURE ARTICLE
Chinese New Year Brings Boom to Consumer Markets
Niki Wang, NCO China
As Chinese New Year begins, domestic consumption in
With the brunt of the financial crisis behind us, a happy and festive atmosphere prevails among Chinese consumers despite concerns of the rising property prices, inflation, and internet censorship.
A variety of promotional activities and festivals throughout the country has helped to expand domestic consumption during this time of celebration.
Consumer products such as home appliances, clothing, jewelry and automobiles have been selling well, and each year, more and more families are heading out to restaurants to enjoy their New Year's Eve dinner. This year, famous restaurants in
Foreign enterprises interested in entering the Chinese market to sell their products and services are well poised to benefit from this market opportunity of growing domestic consumption.
At the onset of 2010, the Chinese public has been concerned about whether government stimulus policies will continue, with hopes that they will be expanded further. At a recent press conference, Minister of Commerce Chen Deming stated that building up domestic markets through further expansion of rural markets, and support for export companies, are at the core of the government's agenda this year.
He further indicated that rural markets has not yet received any government stimulus as increases in rural consumption have been attributed mainly to macro and fiscal policies. The government hopes that a new economic plan will bring sustainable increases in rural consumption in near future.
According to another report from the Ministry of Commerce, foreign investment excluding investment in the financial sector, has grown consecutively in the five months since August. FDI skyrocketed by 103.1 percent from a year earlier to $12.14 billion, compared to the 32 percent year-on-year growth in November. Lu Yan, head of the Beijing Municipal Commission of Commerce stated that foreign investment actually realized in the capital city rose 0.6 percent in 2009 to $6.12 billion despite the global financial crisis. $5 billion has been set as the minimum target for the city’s actual realized foreign investment for 2010. With this target, the government continues to encourage the entry of foreign enterprises to
The significance of the Foreign-Invested Partnership Enterprises for Foreign Investors into
Debby Davidson, AFP Group
Until now, foreign investors had not been able to set up partnership enterprises in
The Measures will allow foreign investors to directly act as partners of partnerships in China by providing that a new foreign-invested partnership enterprise ("FIPE") may be established in China (a) by two or more foreign enterprises or individuals or (b) by a foreign enterprise or individual and a Chinese legal person (including a foreign invested enterprise), natural person or organization. Most importantly, under the Measures, approval from MOFCOM is not required for the establishment of a FIPE.
Compliance with Chinese Partnership Law and foreign investment policies
A FIPE must comply with the provisions under the People's Republic of China Partnership Enterprises Law, enacted in 2007 ("Partnership Law"), and, like other foreign-invested business entities in China, a FIPE must comply with other relevant laws and regulations, as well as foreign investment policies such as the Guidance Catalogue for Foreign Investment in Industries.
Simplified Procedures
Whilst the establishment of a FIPE will not require full approval from MOFCOM, the partners are required to unanimously appoint a representative or jointly authorize an agent, who shall co-ordinate with the local administration for industry and commerce (“AIC”) on the behalf of partners as to the registration procedures. We understand that the documents to be provided to AIC will include at least the following: registration application, partnership agreement, identity certificates of the partners and other documents requested by competent authorities
Upon completion of the registration procedures, an applicant is required to file with the local commerce department (i.e. local MOFCOM) a report containing the information which has been provided to AIC.
Capitalisation
The Measures permit the partners of a FIPE to contribute capital in freely convertible currency (foreign legal persons and individuals) or in lawfully obtained RMB (Chinese legal and natural persons and organizations). The Measures do not provide a minimum capitalization requirement and do not address in-kind contributions to capital. Questions have been raised as to how this would be interpreted in practice. Given the foreign exchange controls currently in place, could it really be the case that the FIPE could receive money from overseas to pay its operating expenses before generating any revenue?
Is this a cause for celebration?
For decades, MOFCOM has been the main approval authority for foreign invested enterprises for decades. Whilst the Measures specifically provide that an application for the establishment of a FIPE shall only be subject to registration with AIC, with a subsequent notification to MOFCOM, we question whether the procedures provided by the Measure are significantly lighter in practice. A FIPE is still subject to foreign investment industrial policies, including the Foreign Investment Industry Catalogue, and it is likely that AIC will require evidence of compliance with foreign investment industrial policies as part of the application process. Further, commentators have expressed concern on the consistency between AIC and MOC in applying industrial policies to FIPE and speculated that this could trigger, through the back door, the involvement of MOFCOM in approving FIPEs.
As such, it is the view of AFP that it is too early to tell whether the Measures would significantly ease the documentary burden with foreign investment into
REGULATORY UPDATES
Corporate Registry
Joint Circular from the State Administration for Industry and Commerce (SAIC) and Ministry of Public Security (MPS)
Gong Shang Wai Qi Zi [2010] No.4
Strengthening the Administration on Registration of Representative Offices of Foreign Enterprises
The circular states:
When a resident representative office of a foreign enterprise wishes to establish or make amendments to the name of the office, a Certificate of Incorporation from the foreign enterprise to confirm its existence for more than two years shall be submitted together with a Letter of Credit Worthiness from the foreign enterprise’s financial institution.
The documents must be notarized by a notary office in the country or district, and the Embassy of the People’s Republic of
When a resident representative office of companies and other enterprises run by overseas Chinese or by compatriots from Hong Kong and
When, a resident representative office of a foreign enterprise applies for the renewal of their Registration Certificate, a Certificate of Good Standing shall be submitted to the relevant authorities in where the representative office is located.
All registration authorities of SAIC shall comply with the relevant regulations of the Measures for Administration of Registration of Resident Representative Offices of Foreign Enterprises.
A one-year Registration Certificate shall be awarded to resident representative offices applying for establishment and renewal. If, the term of validity of the registration certificate exceeds one year, a new registration certificate shall, during application for amendment and renewal, be awarded by the relevant authorities.
All Registration Authorities of SAIC shall restrict the number of the representatives to strengthen the administration of registration of resident representative offices of foreign enterprises. The number of representatives (including the Chief Representative), in conformity with the business activity, shall not exceed four. If, the number of representatives exceeds the aforesaid requirement the representatives can apply to reduce this number, but not increase it.
国家工商行政管理总局、公安部近日公布关于进一步加强外国企业常驻代表机构登记管理的通知
通知规定：
代表机构在设立、变更名称时，应当提交隶属企业存续两年以上的合法开业证明、同该企业有业务往来的金融机构出具的资本信用证明，并经隶属企业所在国家或地区公证机关和中华人民共和国驻该国家或地区使领馆公证和认证。港澳台地区企业代表机构设立或者变更名称时，应当提交的文件按照现行相关规定办理。代表机构申请登记证延期时，应当提交隶属企业所在国家或者地区有关部门出具的企业存续证明。
各地工商登记部门要严格执行《关于外国企业常驻代表机构的登记管理办法》的有关规定，对申请设立和延期的代表机构统一颁发有效期限为一年的登记证；对已颁发的有效期限超过一年的登记证，应当在代表机构办理变更或者延期登记时换发。
各地工商登记部门要严格控制代表机构代表人数，加强对代表的登记管理。代表机构的代表人数应当与其开展的业务活动相适应，代表机构代表（含首席代表）人数一般不得超过4人。对目前代表人数已超过4人的代表机构，原则上只允许注销代表，不允许新增代表。
Notice 698: Challenges from PRC tax authorities on Offshore Holding Structures of
Debby Davidson, AFP Group
Introduction
Notice 698 sets out the basis on which the PRC State Administration of Taxes may tax a foreign company that “indirectly” transfers equity interests in a subsidiary in
Historically, investors have held their onshore investments through intermediate holding companies located in
Application of the Notice
Notice 698 imposes reporting requirements on the foreign investor (i.e. the actual controlling entity of Offshore HoldCo) who indirectly transfers the shares in the China resident company through a transfer of shares in Offshore HoldCo under either of the following situations:-
- The effective tax rate in the jurisdiction of Offshore HoldCo is less than 12.5%; or
- The jurisdiction in which Offshore HoldCo resides does not impose tax on foreign source income.
The following documentation/information is required to be submitted to the local tax authorities where the transferred
- Contract or agreement for the share transfer;
- The relationship between the foreign investor and the offshore intermediary holding company being transferred with respect to financing, business operations, purchases and sales etc.;
- Details of the business operations, personnel, finance and accounting, assets etc. of the offshore intermediary holding company transferred by the foreign investor;
- The relationship between the offshore intermediary holding company being transferred and the China resident enterprise with respect to financing, business operations, purchase and sales, etc.;
- Explanation to support the bona fide commercial purposes of establishing the offshore intermediary holding company by the foreign investor; and
- Other relevant information required by the Chinese tax authorities.
Reporting Party
While Notice 698 imposes the reporting obligation on the foreign seller, some commentators have argued that reporting obligations have also been imposed on the Chinese subsidiary through the back door. This is because an earlier notice (Notice of the State Administration of Taxation regarding the issuances of interim procedures for the administration of source withholding for non-resident enterprise income tax, Guoshuifa [2009] No 3) impose reporting obligations on a Chinese subsidiary in the case of a direct transfer of equity between a foreign seller and foreign buyer. The argument is that once SAT deems an indirect transfer to be a direct transfer, Notice 3 would apply to impose obligations on the Chinese subsidiary to assist the tax authorities to collect taxes.
Penalties for failure to comply
Potential penalties of RMB 10,000 may be imposed on late reporting of the above information.
Based on information furnished to SAT, it will determine whether impose a tax liability on the foreign investor in respect of the income derived from the indirect transfer of
Difficulties for administration by SAT
Commentators have questioned the ability of SAT to enforce this notice, particularly as the SAT will not be able to readily detect an offshore transfer if the foreign seller does not comply with its reporting obligation.
Further, the drafting of this notice itself makes its implementation difficulty: for example, the reporting obligation is triggered where Offshore HoldCo is established or is resident in a jurisdiction with effective tax rate below 12.5%. Hong Kong and Singapore have corporate tax rate above 12.5% (though due to tax exemption, tax incentives and exemptions for small companies, the effective tax rate may be below 12.5% for some companies) and no capital gains – are transfers of holding companies from these jurisdiction caught under the notice?
Secondly, how wide is the concept of ‘transfer of equity’? Would the reporting obligations be triggered if, instead of an outright transfer of equity, a trust arrangement is entered into offshore whereby beneficial ownership is transferred or the transfer relates to hybrid capital (for example, subordinated debt instruments with rights akin to shares) as opposed to equity? Is a security arrangement in respect of shares treated as a transfer of equity?
Given the potentially expansive exposure which could arise due to Notice 698 for foreign investors who do not comply with the reporting obligations, we would be pleased to assist you in reviewing and assessing your tax exposure under this Notice.
Document of the National Development and Reform Commission
NDRC No.2991 [2009]
Circular of the National Development and Reform Commission (NDRC)
Canceling the Required Localization Rate of Equipment Procurement in Wind Power Projects
All provinces, autonomous regions, municipalities, cities specifically designated in the state plan, sub-provincial capital cities, the NDRC of Xinjiang production and construction corps and Bureau of Commodity Price:
In order to promote the sound and orderly development of the wind power industry in
The article concerning the Required Localization Rate of Equipment Procurement in Wind Power Projects that states “the requirement that at least 70 percent of the wind turbine equipment needs to be produced in China in order for the project be approved,”（NDRC No.1204 [2005]）is hereby canceled from this date.
In accordance with the Law of the People's Republic of China on Tenders and Bids (Circular), the wind power equipment shall comply with the state-set standard and technical requirement and be purchased by project units in a more just, fair and transparent way.
NDRC of all provinces and cities shall adjust relevant regulations appropriately for the sound and sustainable development of the wind power industry to create a better environment.
国家发展和改革委员会文件
发改能源【2009】2991号
国家发展改革委关于取消风电工程项目采购设备国产化率要求的通知
各省、自治区、直辖市及计划单列市、副省级省会城市、新疆生产建设兵团发展改革委、物价局：
为促进我国风电产业规范有序发展，根据我国风电产业发展和建立统一开放竞争有序风电市场的需要，现通知如下：
一 自即日起取消《关于风电建设管理有关要求的通知》（发改能源【2005】1204号）中“风电设备国产化率要达到70%以上，不满足设备国产化率要求的风电场不允许建设”的要求。
二 风电项目设备由项目单位根据国家有关标准和技术要求，按照《招标投标法》的有关规定，公开公平公正招标购买。
请各省区、市发展改革委按照本通知的要求，及时对有关规定进行调整，为风电产业的健康可持续发展创造良好环境。
Mylab Signs Strategic Partnership Agreement
On January 20th, 2010, Mylab Healthcare Technology (
Mylab Corporation, a market leader with nearly 80% of the market share in
Finnish Ambassador to China Lars Backström attended the forum and noted that in 1990 only 3 Finnish companies with industrial production were located in
Mylab is an example of a successful foreign company doing business in