Reforming on Registered Capital Registration System of Foreign Invested Enterprise
On October 28, 2015, the Ministry of Commerce of People’s Republic of China issued the Decision of the Ministry of Commerce on Revising Certain Regulations and Normative Documents (“Decision”), which took effect on the same day. The Decision aims to deepen the reform of foreign investment enterprises (“FIE”) in respect of registered capital registration system and the transformation of government functions, move forward the facilitation of the business registration system, effectively optimize the business environment, and further stimulate the vitality of market.
According to the Decision, the main changes are listed as follows:
1. Modifications regarding the Establishment and Annual Inspection of FIE
The Decision abolishes the requirements and restrictions on the minimum registered capital, the time limit of capital contribution, the percentage of first-time capital contribution, percentage of contribution by cash, and further simplifies the procedure of the establishment and the annual joint inspection, and the following kinds of enterprises shall be applicable:
a. Foreign Investment Joint Stock Companies;
b. Foreign Invested Venture Capital Enterprises; and
c. Foreign-Invested Commercial Enterprises.
2. Merger and Division of FIE
The Decision abolishes the following requirements:
a. Any merger and division of foreign-invested enterprises shall be not allowed until the foreign investors have paid up their capital contribution or provided cooperation conditions pursuant to the provisions of the company's contract and articles of association and actually commenced production and operation; and
b. Any merger or division of the FIE shall submit the capital verification reports to relevant approval authorities.
3. Reinvestment of the FIE
The Decision abolishes the following requirements:
a. Before making investments in China, the FIE shall pay up the registered capital;
b. When the FIE reinvests in China, its accumulated investment shall not exceed 50% of its net assets; and
c. Where the FIE reinvests in any encouraged or permitted sector to establish any new entity, the FIE will not be required to submit the capital verification reports, which demonstrates that the registered capital has been paid up in full amount.
4. Equity Contribution of the FIE
The Decision abolishes the following requirements:
a. The equity shall not be used for the capital contribution under the circumstances that the registered capital of the FIE has not been paid up and the FIE fails to participate or pass the joint annual inspection of the previous year;
b. The total amount of equity contribution by all shareholders of the FIE and other non-monetary contributions shall not exceed 70% of the registered capital of the invested enterprise; and
c. Where the FIE intends to make equity contribution, it shall submit relevant certificate to the approval authority in order to prove it has passed the joint annual inspection.
5. Minimum Registered Capital Reform regarding Several Industries
The Decision abolishes the requirements on the minimum registered capital of the FIEs in the following industries:
a. Lease sector;
b. International freight forwarding sector;
c. Refined oil market;
d. Contract work on outbound construction projects; and
e. Logistics sector.
Comments:
The Decision further loosens the strict requirement on FIEs especially regarding the registered capital registration system, which is consistent with the reform of registered capital registration system for domestic enterprises. In a word, the capital registration system for both FIEs and domestic enterprises are almost unified.
However, the Decision still couldn’t sort out relevant regulations thoroughly. For instance, regarding the investment FIE setup, although the Decision abrogated the requirements on minimum registered capital of USD 30 million, there are still provisions concerning such minimum registered capital exiting in Provisions on the Establishment of Investment Companies by Foreign Investors.
Opinions of the State Council on the Implementation of the Market Access Negative List System
On October 02, 2015, State Council of People’s Republic of China (the "China") released Opinions of the State Council on the Implementation of the Market Access Negative List (the “Negative List”) System (the "Opinions"). The Draft will come into effect as of December 1, 2015 and shall remain in force till December 31, 2017. The Draft, once taken into effect, will affirm the equal basis for all the market entities to invest in the different industries, sectors and businesses not included in the Negative List, which is comprehensively used by other countries to administrate domestic market, administrating state-owned enterprises, non-state-owned enterprises, domestic enterprises and foreign invested enterprises on an equal basis. The implementation of the market access negative list system is a significant change of approach and framework regarding administration of Chinese government from government-led administration to a looser resident self-governance.
1. Background
The world's second-largest economy, which grew 7 percent in the first half from a year earlier, is experiencing its slowest economic expansion during the last 25 years in 2015. Therefore, nowadays, China has made its decision to slacken restrictions on its manufacturing and service sectors as it tries to improve inefficient state-owned firms by adopting market-friendly policies to stave off slowing growth. The concept of the Negative List with respect to foreign investment was introduced to China in bilateral investment treaty negotiations with the United States. The market access negative list system (the “Negative List”) establishes that any administration of the authorities contrary to the national treatment and most favored nation treatment for the foreign investments, shall be clearly included in the Negative List, and the foreign investors will be entitled the same market access right.
2. Overview
a) Classification
Pursuant to Article 6, the Negative List, including both the prohibited access list and the restricted access list, is applicable to the investments, operations and other market access activities of various market entities via initial investment, expansion of investment as well as merger and acquisition, etc.
The Opinion has the clear access requirements for both the prohibited access list and the restricted access list. As for the fields included in the prohibited access list, the entities are prohibited to invest in and the authorities shall not examine or approve the market access or handle the relevant procedure. As for the fields included in the restricted access list, the entities may submit an application for the authorities to decide whether to approve the market access.
Further, as for the fields not included in the Negative List, all the entities may enter the market on an equal basis in accordance with the law.
b) Conditions for Application
Pursuant to Article 7, it clarifies the conditions for determining the prohibition and restriction for operations and other market access activities of various market entities. The authority may utilize the qualification of market entities, shareholding ratio, scope of businesses, status of operation, business mode, regional layout, land development and protection and other relevant administrative measures in accordance with the law, regulations and decisions of the State Council as the market access qualification in some specific fields.
We notice that the Opinion provides a standard to distinguish the prohibited and restricted fields. The national safety, the national layout of major productive powers, development of strategic resources, major public interests will be majorly taken into consideration for the prohibited and restricted field.
c) Major Types of Negative List and Their Application
Pursuant to Article 8, there are two main negative lists, including the market access negative list and the foreign investment negative list. The market access negative list applies to both the domestic and foreign investors and constitutes the uniform requirements of market access for various market entities. Meanwhile, the foreign investment negative list only applies to the investments by foreign investors in China and constitutes the special management measure for market access of foreign investment.
In Article 8, the foreign investment negative list will be formulated with the subject of diplomatic talks concerning foreign investment taken into comprehensive consideration, with the relevant rules to be separately prescribed by the State.
We understand that Article 8 is a reserve of Chinese government for future negotiation with other countries, especially with USA. When the market access negative list applies to the foreign investors, the investments by the foreign investors also has to be ruled a special foreign investment negative list, which means that if some conflicts exist between such two lists, the foreign investment negative list shall apply. In a way, it is a drawback for the market access negative list system and it has not substantially realized the national treatment for all entities.
d) Formulation, Implementation and Adjustment Procedure
Pursuant to Article 10 and 11, the Negative List will be uniformly formulated and announced by the State Council and will follow the principles of carrying out pilot programs and gradual expansion, from December 1, 2015 to December 31, 2017. The negative list system will be launched on a pilot basis in some areas to accumulate experience and gradually improve and the unified nationwide market access negative list system will be formally enforced from 2018.
National Development and Reform Commission and Ministry of Commerce will be authorized by State Council to lead in the establishment of cross-sectorial deliberation and coordination mechanism, which will be responsible for the routine work in implementing the negative list system.
We notice that the Opinion has not provided a clear timeline for implementation of the Negative List and it only provides a general principle of carrying out pilot programs and gradual expansion. We understand that this probably is another element for Chinese government to negotiate with other countries.
e) Conclusion
The Opinion has great significance in releasing the decisive role of the market in allocating resources and further developing the role of government, and in establishing a commercial environment based on the rule of law and building a new open-style economic system. Meanwhile, the final implementation of the Opinion is still subject to some uncertainties regarding the foreign investment negative list and the non-existence of timeline of implementation.
Reply of the Supreme People’s Court on the Request of the Shanghai High People’s Court for Instructions on the Cases Involving the Judicial Review of Arbitration Awards Made by the CIETAC and its Former Sub-Commissions
On July 15, 2015, the Supreme People’s Court has issued the Reply on the Request of the Shanghai High People's Court for Instructions on the Cases Involving the Judicial Review of Arbitration Awards Made by the CIETAC and its Former Sub-Commissions (the "Reply"). The Reply, once taking into effect dated on July 17, 2015, will solve the disputes over the issues regarding the validity of relevant arbitration awards and the right to accept arbitration cases, the jurisdiction over arbitration cases and the enforcement of arbitration awards of several arbitration agencies.
Background
A dispute between the central Beijing commission of the China International Economic and Trade Arbitration Commission ("CIETAC") and its Shanghai sub-commissions and South China sub-commissions has arisen as the two sub-commissions refused to comply with the new arbitration rules issued by CIETAC that took into effect on May 1, 2012. As a result, on August 1, 2012, the central Beijing commission suspended the authority of arbitration to the Shanghai and South China sub-commissions. Correspondingly, the former South China sub-commission changed its name to the South China International Economic and Trade Arbitration Commission (“SCCIETAC”) and the former Shanghai sub-commission changed its name to the Shanghai International Economic and Trade Arbitration Commission (“SHIAC”).
As a result, after names were changed (“Rename Date”), SCCIETAC and SHIAC became independent from CIETAC. However, it also caused several disputes over the issues such as the validity of relevant arbitration awards and the right to accept arbitration cases, etc.
Reply of the Supreme People’s Court
In order to solve the disputes in practice, the Supreme People’s Court confirmed in the reply as follows:
(1) Before the Rename Date, where the parties agree to submit their disputes to "CIETAC South China Sub-Commission" or "CIETAC Shanghai Sub-Commission" for arbitration, SCCIETAC or SHIAC shall have jurisdiction over these arbitration cases. Where any party of the dispute requests the people's court to determine the arbitration agreement to be invalid or applies for the revocation or non-enforcement of the arbitration award on the ground that SCCIETAC or SHIAC has no right to arbitrate, the people's court shall reject such request.
(2) After the Rename Date, where the parties agree to submit their disputes to "CIETAC South China Sub-Commission" or "CIETAC Shanghai Sub-Commission" for arbitration, CIETAC shall have jurisdiction over these arbitration cases. However, if one party applies to SCCIETAC or SHIAC for the arbitration and the respondent raises no objection to the jurisdiction of the SCCIETAC or SHIAC, and after an arbitration award is made, any party of the dispute applies for the revocation or non-enforcement of the arbitration award on the ground that SCCIETAC or SHIAC has no right to arbitrate, the people's court shall reject such application.
(3) After the Reply takes into effect, where the parties sign an arbitration agreement and agree to submit their disputes to "CIETAC South China Sub-Commission" or "CIETAC Shanghai Sub-Commission" for arbitration, CIETAC shall have the jurisdiction over these arbitration cases.
(4) Where the applicant in an arbitration case requests the arbitration committee to decide the jurisdiction over the case, and after the arbitration committee determines that the arbitration agreement is valid and it has jurisdiction over the case, the respondent files a lawsuit with the people's court before the first hearing, applying for confirming the validity of the arbitration agreement, the people's court shall accept the lawsuit to make a judgment. Where the applicant or the arbitration committee claims that the people's court shall not accept the lawsuit filed by the respondent, the people's court shall reject such claim.
(5) Where, before this Reply takes into effect, an arbitration case that shall not be accepted by CIETAC, SCCIETAC or SHIAC according to Article 1 of the Reply has been accepted and the arbitration committee has made the award, such award is effective and binding.
(6) Where, before this Reply takes into effect, CIETAC has accepted the same arbitration case with SCCIETAC or SHIAC, the arbitration committee that first accepted the case shall have jurisdiction over the case.
Comment
The Reply has clarified the queries during the arbitration practice among different arbitration commissions. As a result, the contradiction of jurisdiction over cases among arbitration commissions is solved to some extent and the status of SCCIETAC and SHIAC has been confirmed in a formal way.
The Measures for Administration of Individual Income Tax on Income Derived from Equity Transfer (for Trial Implementation)
On December 7, 2014, the State Administration of Taxation has issued the Measures for Administration of Individual Income Tax on Income Derived from Equity Transfer (for Trial Implementation) (the "Measures"). The Measures, once taking into effect on January 1, 2015, will abolish the Notice of the State Administration of Taxation on Strengthening Administration of the Collection of Individual Income Tax on Income Derived from Equity Transfer (Guo Shui Han [2009] No. 285), and the Announcement of the State Administration of Taxation on Issues Relating to Determining Verifying the Taxation Basis for Individual Income Tax on Income Derived from Equity Transfer (Announcement of the State Administration of Taxation [2010] No. 27) (the “Announcement”).
The Measures have specified considerable rules regarding individual income tax on income derived from equity transfer which are listed as follows, among others:
1. Overview
1.1 Proper Taxpayer
Pursuant to Article 2 and Article 5 of the Measures, individual shareholders who invest equities or shares into enterprises or organizations established within the territory of China, excluding sole proprietorships and partnerships, shall be regarded as the proper taxpayer. During transfer transactions, the equity transferor is regarded as the tax payer and the transferee is deemed as the withholding agent.
1.2 Competent Tax Authorities
Pursuant to Article 19 of the Measures, competent tax authorities for the individual income tax (“IIT”) on the income derived from equity transfer by individuals are local tax authorities where the invested enterprise is located.
1.3 Circumstances of Equity Transfer (Scope of Tax Collection)
Pursuant to Article 3 of the Measures, the equity transfer means the individual transfers his/her equity to other individuals or legal entities, specifically includes:
a. The sale of equity;
b. The repurchase of equity by enterprises;
c. When the issuer initiates the public offering of shares, shareholders of the invested enterprise also sell their shares to the investors by way of the public offering;
d. The equity is compulsorily transferred by judicial or administrative authorities;
e. Equity investment or any non-monetary transactions;
f. The equity is used for clearing off debts;
g. Other equity transfer conducts.
1.4 Calculation of Taxable Income of Equity Transfer
Pursuant to Article 4 of the Measures, the IIT shall be calculated and paid in the name of "asset transfer income" based on the taxable income during the equity transfer. The taxable income refers to the balance of "equity transfer income" minus "original value of equity and reasonable cost". "Reasonable cost" refers to relevant taxes paid to competent tax authorities for the equity transfer.
2. Identification of Original Value and Equity Transfer Income
2.1 Original Value
Pursuant to Article 15 of the Measures, the original value of the transferred equity shall be identified through the following methods:
Situation | Calculation Method of Original Equity Value |
| Actual payment plus reasonable taxes directly related to the equity transfer; |
| The non-monetary asset price at the time of investment recognized or verified by the tax authorities plus reasonable taxes directly related to the equity transfer; |
| Reasonable taxes directly related to the equity transfer and the original value of equity of the previous holders; |
| The added value plus related taxes shall determine the original value of the equity of the newly added share capital; |
| The competent tax authorities shall reasonably determine the original value of equity under the principle of "avoiding double collection of individual income tax". |
2.2 Equity Transfer Income
Pursuant to Article 7, Article 8 and Article 9 of the Measures, the "equity transfer income" refers to the economic income acquired in such forms as cash, physicals and securities for equity transfers, which also includes liquidated damages, compensation, as well as other payments, assets, and interests under other items. Moreover, the subsequent income acquired by a tax payer under a contract after meeting the agreed terms shall also be regarded as the equity transfer income.
3. Income Determined by Competent Tax Authorities
3.1 Pursuant to Article 11 of the Measures, competent tax authorities may determine the equity transfer income under any of the following circumstances:
a. The declared equity transfer income is obviously low and unjustified;
b. Relevant taxes have not been declared before the deadline and such taxes are still not declared after tax authorities have ordered to declare taxes within a limited period;
c. The transferor fails to or refuses to provide information of the equity transfer income;
d. Other circumstances under which the equity transfer income shall be determined.
3.2 Pursuant to Article 14 of the Measures, competent tax authorities shall adopt the following methods in turn to determine the equity transfer income:
a. Confirmation by Net Asset
b. The method of analogue
c. Other reasonable methods
3.3 Pursuant to Article 12 and Article 13 of the Measures, the circumstance that “the equity transfer income is obviously low” is defined in order to prevent the tax avoidance during the equity transfer, which is clarified as follows:.
a. Equity Transfer Income is Obviously Low Without Reasonable Causes (Article 12)
i. The declared equity transfer income is lower than the net asset share corresponding to the equity, amongst which, if the invested enterprise has land use rights, buildings, unsold real properties of real estate companies, intellectual property, right of prospecting, mining rights, equity and other assets, the declared equity transfer income is lower than the fair value of the net asset fair value share corresponding to the equity;
ii. The declared equity transfer income is lower than the initial investment cost or lower than the price and related taxes paid for the acquisition of the shares;
iii. The declared equity transfer income is lower than the equity transfer income of the same shareholders or other shareholders of the same company under the same or similar conditions;
iv. The declared equity transfer income is lower than the equity transfer income of enterprises in the similar industry under the same or similar conditions;
v. Unjustified transfer of equity or shares without consideration;
vi. Other circumstances determined by competent tax authorities.
b. Equity Transfer Income is Obviously Low With Reasonable Causes (Article 13)
i. Valid documents can be provided to prove that invested enterprises transfers the equity at a low price because the corporate production and operation are significantly affected due to national policy adjustments;
ii. Inheritance, or equity transfer to spouse, parents, children, grandparents, grandchildren, brothers and sisters who can provide valid legal proof of the identity and relationship, or equity transfer to financial supporters of the transferors who undertake direct duties of the financial support;
iii. Internal transfer of equity held by enterprises' employees, which cannot be transferred externally and have relevant documents that can fully prove the reasonability and the authenticity of the transfer price;
iv. Any other reasonable circumstances where the transferors and transferees can provide valid certificates to prove the reasonability.
4 Timeline of IIT Payment and Submission of Documents
4.1 Timeline of Tax Payment
Pursuant to Article 6 of the Measures, the withholding agent/transferee shall report the relevant information to competent tax authorities within five working days after the relevant equity transfer agreement is signed.
4.2 Submission of Documents
Pursuant to Article 21 of the Measures, the following documents shall be submitted competent tax authorities for the tax payment (withholding) declaration:
a. The equity transfer contract (agreement);
b. The identification certificates of transferors and transferees of the equity transfer;
c. Asset value appraisal reports on net assets or land/real properties issued by qualified agencies if required according to relevant provisions;
d. Documents proving that the tax calculation basis is obviously low for certain reasonable causes;
e. Other documents required by competent tax authorities.
Comments
In general, compared to the Announcement, the Measures provide a more comprehensive guideline for the Chinese tax authority to supervise the payment of IIT during the equity transfer cases in respect of the following critical elements:
1) Clarify the scope of equity share, equity share income and tax payment;
2) Identify the equity transfer income and incorporate the subsequent income acquired by a tax payer under a contract after meeting the agreed terms as the equity transfer income;
3) Specify the circumstance “the equity transfer income is obviously low” and the exception;
4) Establish methods for competent tax authorities to determine the equity transfer income;
Detailed and clear rules regulated in the Measures, especially the elements mentioned above, will definitely facilitate the supervision of IIT payment by the Chinese tax authority in order to prevent the tax avoidance of individuals during the equity transfer transactions.
However, the Measures still have certain unclear sectors which need to be improved regarding the IIT derived from the equity transfer as follows:
1) During non-monetary transactions such as the investment with equity as one of circumstances of equity transfer, in general, there is no cash income incurred. As a result, it will be difficult to determine the income since the anticipated revenue will normally be different from the actual income. In practice, under certain circumstances, there still exist difficulties to determine the income.
2) With regard to the value adjustment mechanism (“VAM”), although the Measures regulates the subsequent income acquired by a tax payer under a contract after meeting the agreed terms as the equity transfer income in Article 9, which is one type of VAM, other types of VAM is still not taken into account. Therefore, the IIT involving other types of VAM needs to be further clarified.
3) With regard to “reasonability” in the item 4 of Article 13, it is still unclear what situations the “reasonability” shall prevail.
Therefore, no matter the transferor, the transferee or the invested enterprises shall keep a close eye on the Measures and the following improvements or adjustments.
Key Issues Regarding the Administrative Measures on the General Anti-Avoidance Rule (for Trial Implementation)
On December 2, 2014, the State Administration of Taxation (“SAT”) issued the Administrative Measures on the General Anti-Avoidance Rule (for Trial Implementation) (the “Measures”), which will be effective on February 1, 2015.
Although principles on the application of general anti-avoidance rules (“GAAR”) were included in Corporate Income Tax Law of People’s Republic of China (“CIT Law”), Detailed Implementation Rules of CIT Law and the Implementation Measures on Special Tax Adjustments (for Trial Implementation), specific administrative measures regarding GAAR application such as the operation procedures and enforcement standards were absent for a long time until the release of the Measures.
In general, the Measures further regulate and clarify various issues regarding GAAR application such as the applicable scope, features of tax avoidance arrangements, adjustment methods, working procedures, dispute resolutions when applying GAAR, etc.
The main contents in detail are clarified as follows:
1. Applicable Scope (Article 2 and Article 3)
The Measures shall be applicable when Chinese tax authorities implement special tax adjustments towards the corporate tax avoidance arrangements conducted by companies in order to obtaining Tax Benefits (defined below) without reasonable commercial purposes.
Tax Benefits refer to the reduction, exemption or delay of corporate income tax payments.
According to Article 120 of CIT Law Detailed Implementation Rules, “without reasonable commercial purposes” refer to the key purposes of obtaining the aforementioned Tax Benefits.
On the other hand, the Measures shall not apply to the following circumstances:
a. Arrangement irrelevant to cross-border transactions or payments.
b. Illegal tax behaviors such as avoidance of paying taxes, avoidance of paying unpaid taxes, tax fraud, refusal of paying tax, and issuance of forged invoices.
2. Exception of Application of the Measures (Article 6)
The corporate tax avoidance arrangements which are within the range of other special tax adjustments including transfer pricing, cost sharing, controlled foreign corporations, thin capitalization shall first apply to relevant laws regulating special tax adjustments, such as Section 6 of CIT Law.
On the other hand, the corporate tax arrangements which are within the range of execution of taxation agreements such as beneficial owner and interest restriction shall first apply to relevant rules of execution of taxation agreements.
Note: The Measures should only be applicable if a tax arrangement cannot be regulated by any of aforementioned special tax adjustments. In other words, the Measures shall be the last resort to counter tax avoidance when all other anti-avoidance tools are exhausted.
3. Features of Tax Avoidance Arrangements (Article 4)
In order to facilitate the assessment of Chinese tax authorities and the self-assessment of involved companies, the Measures specify the following major features of “tax avoidance arrangements”:
a. The sole purpose or primary purpose is to obtain Tax Benefits;
b. Obtaining Tax Benefits by certain means, the form of which is compliant with the tax laws but inconsistent with the economic substance.
4. Tax Adjustment Methods (Article 5)
Chinese tax authorities shall implement special tax adjustments on the basis of “ similar arrangements with reasonable commercial purposes and economic substance” and in accordance with the principle that "the substance is superior to the form". Special adjustment methods shall include:
a. Re-characterizing the entire or part of transactions of the tax arrangements;
b. In terms of tax, denying the existence of a transaction party for tax purposes, or deeming the transaction party and other transaction parties as the same entity;
c. Re-characterizing the related income, deductions, tax incentives and overseas tax discount or exemption, or reallocating them among transaction parties;
d. Any other reasonable methods.
5. Information Provided for Investigation of Tax Avoidance Arrangements (Article 11)
Companies being investigated for the tax avoidance arrangements shall provide the following documents within 60 days after receiving inspection notice from Chinese tax authority if they consider that their arrangements shall not be regarded as tax avoidance arrangements:
a. Background documents for the arrangements;
b. Documents for the commercial purposes of the arrangements;
c. Information on the internal decision-making and management of the arrangements, such as board resolutions, memorandums and emails;
d. Detailed transaction information relating to the arrangements, such as contracts, supplemental agreements, and payment receipts or payment collection;
e. Communication information with other transaction parties;
f. Other documents which may prove that their arrangements shall not be regarded as tax avoidance arrangements;
g. Other documents considered necessary by Chinese tax authorities.
Companies that cannot submit such documents on time due to special circumstances may apply to the Chinese tax authorities for an extension of submission timeline in written form. However, even if the application is approved, the extended period for submission shall not exceed 30 days.
Note: The purpose of timeline requirements mentioned above is, on one hand, to ensure Chinese tax authorities to handle GAAR related cases efficiently and, on the other hand, to improve tax related risk control measures and internal tax related rules compliance of relevant companies.
6. Working Procedures (Article 8, Article 15 and Article 16)
Besides the substantial regulations mentioned above, the Measures also specify relevant working procedures which cover all phases of GAAR administration, including admission, investigation and the closure of a case, as well as procedural rules which set out roles and responsibilities of Chinese tax authorities in different levels in each phase to ensure transparent and fair implementation of GAAR.
Where the in-charge local tax authority become suspicious of tax avoidance arrangements of one company, it shall report the case upwards through different levels to the provincial tax authority for approval, and then apply to the SAT in order to initiate the investigation process.
During the investigation process, in-charge tax authorities may verify the information provided by relevant companies through on-site investigation, issuing letters to request assistance of companies for the investigation, or utilizing public information, etc.
In-charge local tax authorities shall examine relevant documents obtained during the investigation process within 9 months after the approval of case filing, comprehensively judge whether relevant companies conduct tax avoidance arrangements, form opinions and reasons for "plans not to adjust" or "preliminary adjustment plans", and apply to the SAT for case closure after reporting such opinions and reasons level by level to the provincial tax authorities for approval.
7. Dispute Resolutions (Article 19 and Article 21)
On one hand, while the companies being investigated disagree with the GAAR assessments made by the in-charge tax authorities, they can apply for legal remedies in accordance with relevant laws and regulations.
On the other hand, if investigated companies consider that the general anti-tax avoidance adjustments made by tax authorities result in the international double taxation or the taxation is incompliant with provisions of tax treaties, investigated companies may initiate the mutual negotiation procedures according to tax treaties and relevant provisions thereof.
Comments
Generally, the Measures provide Chinese tax authorities a detailed guideline for the implementation of GAAR, build up a more transparent and consistent GAAR framework and create more specific practical methods in order to make the tax adjustments and crack down the international tax avoidance arrangements and evasion.
On the other hand, companies, especially multinational corporations, shall pay sufficient attention to the substantial rules and practical procedures in the Measures in order to conduct the proper tax arrangement for the international transactions.
However, as to tax adjustment methods in the Measures, the limitation of “economic substance” still remains ambiguous, which may confuse companies to some extent when they conduct tax arrangements. Therefore, more detailed rules for implementation are expected to facilitate the execution of the Measures in future.
New Adjustments on the Catalogue of Investment Projects Approved by the Chinese Government
On October 31, 2014, the State Council issued the Circular on promulgating the Catalogue of Investment Projects Approved by the Government (2014 Version) (the "New Catalogue"), which took effect on the same day. The New Catalogue has superseded the Catalogue promulgated on December 2, 2013 (the "Old Catalogue").
Compared to the Old Catalogue, several changes to the systems of approvals and filing of investment projects have been made in order to simplify the approval and facilitate the investment implementation. According to the statistical data issued by the National Development and Reform Commission (“NDRC”), the investment approval by Chinese authorities in 38 fields has been eliminated or delegated from state level to provincial or local level in total. Combined with the Old Catalogue, the total amount of fields subject to the approval of state level has been reduced by 76% since 2013.
The details of the main changes are highlighted as follows:
1. Elimination of Administrative Approval on Certain Fields
According to the New Catalogue, the government approval of investment in 15 fields is eliminated from the catalogue, including steel, non-ferrous metals, fertilizers, cement, shipping, urban water supply and other urban construction projects. Instead, only filing for record is required for the investment in those fields.
2. Delegation of Administrative Approval Power to Lower Level on Certain Fields
Approval authorities for the investment in several fields have been delegated from the state level to the provincial or local level, including fields of heat power stations, pumped-storage power stations, new general airport projects, the expansion projects of combined military and civilian airports, the exploration of iron mining, new ethylene projects, etc.
Besides the main changes mentioned above, the New Catalogue also adjusted the approval and filing requirements on cross-border investments, as described in the following tables:
a. Foreign Investment
| Competent Government | Approval/Filing | Old Catalogue | New Catalogue |
| State Council | Filing | Total investment amount of USD 2 billion or more (including capital increase). | |
| The Investment Departments of State Council (generally NDRC) | Approval | Encouraged category: total investment amount of USD 300 million or more (controlled by a Chinese party). Restrictive category: total investment amount of USD 50 million or more (excluding real estate). | Encouraged category: total investment amount of USD 1 billion or more (controlled by a Chinese party). Restrictive category: total investment amount of USD 100 million or more (excluding real estate). |
| Provincial Government | Approval | Restrictive category: total investment amount of less than 50 million or real estate projects. | Restrictive category: total investment amount of less than 100 million or real estate projects. |
| Local Government | Approval | Encouraged category: total investment amount of less than USD 300 million (controlled by a Chinese party including relative controlling). | Encouraged category: total investment amount of less than USD 1 billion (controlled by a Chinese party including relative controlling |
b. Outbound Investment
| Outbound Investment Projects | Old Catalogue | New Catalogue |
| Projects with the investment amount of USD 1 billion or more than USD 1 billion from Chinese investors. | Approved by The Investment Departments of State Council (generally NDRC) | The provision is eliminated. |
| Investments of domestic enterprises to establish enterprises outbound (excluding financial companies). | Approved by the Ministry of Commerce (“MOFCOM”) once involving sensitive countries and regions or sensitive industries; under other circumstances, enterprises under administration of the central government shall file record with MOFCOM, local enterprises shall file record with provincial-level governments. | The provision is eliminated. |
Comments
The New Catalogue indicates that the Chinese government continues to deepen the reform of the investment system and the administrative examination and approval system in order to streamline administration and delegating powers to lower the requirements effectively transform the government's investment administration functions, and eventually facilitate the execution of investments in and out of China by independent investors. As a result, the Chinese market is likely to further integrate into the global economy.
However, there are still certain issues to be further clarified. Regarding the cross-border investments, relevant rules in the New Catalogue are not clearly consistent with the corresponding rules in other current regulations, such as the Administrative Measures for Approval and Filing of Foreign Investment Projects issued by NDRC on April 8 2014 and the Administrative Measures for Examination and Approval of Outbound Investment Projects issued by MOFCOM on September 2014. Therefore, different rules in different regulations issued by different authorities are expected to be adjusted or modified in order to provide a unified regulatory framework for the implementation of the cross-border investments.
New Rules Simplify the Filing and Approval of Outbound Investment Projects
On September 6, 2014, the Ministry of Commerce ("MOFCOM") issued the Outbound Investment Management Rules (the "Rules"), which took effect on October 6, 2014. The Rules have replaced old MOFCOM regulations regarding Chinese outbound investment projects. On April 8 2014, the National Development and Reform Commission ("NDRC") issued a regulation regarding measures for the administrative approval and filing of outbound investment projects (the "Measures"). The Rules together with the Measures provide clear and simplified guidelines for the outbound investment.
The main changes of the Rules are described as follows:
1. Establishment of Filing-Oriented Mechanism
According to old MOFCOM rules on outbound investment projects, the Chinese government applied the "approval-based mechanism" which requested Chinese investors to obtain MOFCOM’s approval for investments over specific amounts, or investments in sensitive countries and regions and fields, etc. The government level (state or provincial) depends on the scale of transactions.
However, the Rules have established the "filing-oriented mechanism" as the main supervision method for normal non-financial sector outbound investment projects, which are only subject to the filing with MOFCOM (where the investment involves centrally-administered state-owned enterprises) or its provincial branches (regardless of the scale of the transaction). As the only exception, non-financial sector outbound investments in "sensitive countries and regions" and "sensitive fields" shall be approved by MOFCOM.
For the purpose of the Rules, the term "sensitive countries and regions" includes countries which have no diplomatic relations with China and the countries or regions which are under sanctions by the United Nations. The term "sensitive fields" includes industries relating to exportation of products and technology which are restricted to export by Chinese government, as well as industries influence interests of more than one country or region.
2. Simplified Application Process
The new Rules significantly simplify the approval and filing procedures, and also reduce the timeline for the review of outbound investment projects.
a. Outbound Investment Filing Process
Under the Rules, the Chinese investor/applicant is required to complete an outbound investment filing form (the "Form") with the company stamp and submit it together with a copy of its business license to the MOFCOM for filing. Except the project subject to the approval by MOFCOM aforementioned, as long as the Form is complete and accurate and all information is true, the project shall be filed by MOFCOM within 3 working days after receiving the application. Meanwhile, the MOFCOM shall issue an outbound investment certificate (the "Certificate") to the applicant.
b. Outbound Investment Approval Process
The Rules have also simplified the MOFCOM approval process for outbound investment projects.
i. For the application documents, the outbound M&A prophase report requested under the old rules has been excluded from required application documents under the new Rules.
ii. For the timeline of approval by the MOFCOM, the new Rules have reduced by 5 days comparing to the old rules. Specifically, the whole process of the approval by MOFCOM (state level) will take within 20 working days in total and the whole process of the approval by MOFCOM (provincial level) will take within 30 working days in total after the approval applications are accepted by the corresponding authorities. The timeline for each scenario has included the time for consulting with the Chinese Embassies and Consulates.
Comments:
The filing-oriented mechanism established under the Rules dramatically has facilitated outbound investment projects for Chinese investors. Meanwhile, the MOFCOM will execute the simplified administrative process of outbound investment projects, regardless of projects for filing or approval. These positive changes will undoubtedly be positive for resolving the conflict between domestic approval process and outbound investment schedule, and to some extent, reduce the uncertainty for outbound investment.
Nevertheless, there are still unclear issues which we wait for further guidance of MOFCOM in order to implement the new Rules completely:
a. It is unclear under the Rules that when the Chinese investors shall apply for the filing or approval of outbound investment projects to the MOFCOM.
b. There are two authorizes governing the outbound investment – MOFCOM and NDRC under the Rules and Measures. As a result, it is unclear whether the application process with MOFCOM requires the implementation of filing or approval of outbound investment by NDRC.
c. The existing regulations on foreign exchange control by State Administration of Foreign Exchange ("SAFE") are too conservative to implement foreign exchange issues relating to the outbound investment projects.
d. The internal communication and coordination among NDRC, MOFCOM and SAFE shall be further improved to establish a complete system for the implementation of outbound investment projects, which is not mentioned in the Rules
The term "sensitive countries and regions" and "sensitive fields" under the Rules are different from those under the Measures. Under the Measures, the term "sensitive countries and regions" includes countries which have no diplomatic relations with China and the countries or regions which are under international sanctions, war or civil strife. The term "sensitive fields" includes basic telecom operation, trans-boundary water-resource development and utilization, large-scale land development, trunk transmission lines, power grids, news media and other industries.
Significant Changes to Several Requirements on Registration of Foreign Invested Enterprises in China
On June 17, 2014, the Ministry of Commerce of China issued a notice regarding the improvement of review & approval and statistical rules of foreign investment in China (the “Notice”) and the Notice shall take effect as of its promulgation date. The Notice revised several important issues regarding the review and approval of registration of foreign-invested enterprises (the “FIE”) in China.
The main changes are described as follows:
a. The Notice abolished the requirements and restrictions on percentage of first-time capital contribution, percentage of contribution by cash and the time limit of capital contribution of the FIE. All these issues shall be agreed by investors (including shareholders and promoters) of FIE and regulated in the equity/contractual joint venture contracts or the Articles of Association of the FIE.
b. The Notice abolished the requirement on the minimum registered capital of the FIE, unless otherwise provided by laws, administrative regulations and State Council's decisions for particular industries.
c. The Notice stipulated that the FIE which is involved in particular industries (such as bank, insurance, securities, etc) listed by State Council shall still comply with the current paid-in capital contribution requirements unless relevant laws, administrative regulations and the State Council's decisions relating to those particular industries are amended later.
On the other hand, subscribed capital contribution (other than paid-in capital contribution) shall be applied to the FIE which is involved in normal industries and whether the registered capital is paid will not be examined or verified by the Chinese authorities except for particular industries.
d. The ratio between registered capital and total investment amount of the FIE shall still comply with the requirement regulated in Provisional Regulations on the Ratio between the Registered Capital and Total Investment Amount of Sino-Foreign Joint Equity Enterprises and other relevant provisions.
e. Regarding the foreign investment registration which was approved before March 1, 2014, investors shall perform their capital contribution obligations according to the original contracts and Articles of Association. Any modification to the original arrangement requested by investors shall be reviewed and approved by Chinese commercial departments.
f. Under the subscribed capital contribution requirement, if the capital contribution is actually paid in by investors (including shareholders and promoters) of the FIE, according to the relevant laws and regulations, the FIE shall issue the capital contribution certificates to investors respectively and then submit the copy of the capital contribution certificates (including the company chop) as well as materials relating to the capital contribution to the local Chinese commercial departments for filing within 30 days after the corresponding capital contribution is finished.
Comments
The Notice shall be considered as the corresponding adjustment/amendment to the foreign investment laws and regulations of China in order to keep in line with the new Company Law of China which came into force on March 1, 2014.
According to the amendment in the Notice, the registered capital of the FIE in normal industries will not be necessarily paid by investors within fixed periods after it is established (eg: 3 months and 2 years after the establishment), which will dramatically reduce the cash flow pressure of foreigner investors and increase the flexibility of foreign investment.
The Notice will, through the reform of corporate capital registration and statistical rules, further loosen the control over market entry for foreign investment, lower the access threshold, optimize business environment in China and eventually improve the regulatory efficiency.
New Environmental Protection Law will lead China into a Cleaner Future
On April 24, 2014, the Standing Committee of China's National People's Congress (“NPC”) approved to adopt the amendment to the Environmental Protection Law (the new “EPL”), the first amendment since the original EPL was enacted 25 years ago. It will take into effect on January 1, 2015.
With 70 articles compared with 47 in the original EPL, the new EPL begins with the establishment of the environmental protection as the country's basic policy, in order to provide a stronger legal foundation to fight against the environment pollution and improve the environment condition dramatically in China.
The new EPL has established the principles that national economic and social development should be coordinated with environmental protection, and environment and health monitoring, survey and risk assessment mechanism shall be successively improved.
Among others, the new EPL achieves the “reform” of environment protection through the revolutionary changes and improvement in the following main respects:
1. Supervision and Management
1.1. Monitoring and Early Warning System (Article 17 – 18)
The state will establish the monitoring system including the relevant network and stations for the monitoring information sharing and management.
Meanwhile, the state and provincial governments will also authorize their departments or professional institutions to survey and assess the environment condition, and establish the early warning system for resource and environmental carrying capacity.
1.2. Environmental Impact Assessment (Article 19)
Besides the existing environmental impact assessment (the “EIA”) towards projects which may cause impacts on the environment, the new EPL introduces the EIA towards framework/plans for the development and use. Any plans without EIA shall not be implemented and any projects without EIA shall not be constructed.
1.3. On-site Inspection (Article 24 – 25)
The environmental protection departments and environmental monitoring agencies of different levels are empowered to conduct on-site inspections to polluting enterprises. If enterprises discharging pollutants violate the laws and regulations, which have polluted the environment or may cause the pollution, the environmental protection departments will be authorized to distain or seizure heavily polluting facilities and equipments.
2. Prevention of Pollution
2.1. Clean Energy (Article 40)
The State promotes and encourages the clean production and resource recycling. Clean energy shall be the priority to be made use of by enterprises.
Moreover, the technology and equipments to reduce the pollutants and prevent the pollution shall be highly recommended to use.
2.2. Quota on Discharging Major Pollutants (Article 44)
The new EPL establishes the rule of quota on major pollutants. The specific quota on total amount of pollutants discharged is set out by State Council and executed by different levels of governments.
For enterprises discharging pollutants, on one hand, they shall comply with national and local pollutant discharging standards, and on the other hand, they shall also control the total amount of discharged pollutant within the quota allocated to them separately.
If the total amount of discharged pollutants from all enterprises in one area is over the permitted quota or those enterprises don’t achieve the goal of national environmental quality, the environmental protection departments in that area shall suspend the approval of EIA for the application of construction projects with major pollutants discharging facilities.
2.3. Pollutant Discharging License (Article 45)
The new EPL stipulates the system of pollutant discharging license. Without the pollutant discharging license, any enterprises are not allowed to discharge pollutants. Even if one company obtains the pollutant discharging license, the pollutant discharging shall be subject to the requirement of pollutant discharging license.
3. Information Disclosure and Public Participation
Individuals, legal entities and other groups are entitled to obtain the environment information and participate in the supervision of environmental protection based on the new EPL.
3.1. Information Disclosure (Article 53 – 56)
The new EPL specifies the following information which the public may access to:
a. Environment related information published by environmental protection departments of governments of different levels and other environmental monitoring agencies;
b. Information of environmental quality and monitoring to major polluting sources as well as other serious environmental information published by State Council;
c. Environmental condition reports periodically published by environmental protection departments of provincial governments;
d. Information of environmental quality, environmental monitoring, environmental emergencies, information of environmental related administrative permission, administrative penalty, collection of discharging pollutants, as well as information of violation of environmental protection laws and regulations by enterprises or other business groups, disclosed by environmental protection departments of country and municipal levels and other environmental monitoring agencies;
e. Names of major pollutants, discharging methods, concentration and total amount of discharged pollutants, construction and operation of pollution protection facilities published by major pollutant discharging enterprises;
f. EIA report (except contents relating to national secrets or trade secrets) published by approval departments of EIA.
3.2. Whistleblowing System (Article 57)
Individuals, legal entities or other groups are entitled to report the environment pollution and ecological damage activities to environmental protection departments and other environmental monitoring agencies.
Personal information of whistleblowers shall be confidential and benefits of whistleblowers shall be protected.
3.3. Public Interest Litigation (Article 58)
The new EPL expands the participants who may bring the environmental cases into litigation in China.
This new rule will apply to social groups who meet the following requirements:
a. Duly registered with the Civil Affairs Agencies of Municipal People's Governments (with jurisdiction of districts) or above levels;
b. Keeping conducting environmental protection activities for public interests for more than successive 5 years without any illegal record.
However, such groups shall not make profit through the environment pollution litigation.
4. Punishment (Article 59)
The new EPL establishes the a new penalty system, which authorizes environmental protection departments to issue corrective orders and penalties based on the original penalty amount to polluting enterprises on a daily basis, from the day after the corrective order is issued, as long as enterprises fail to bring their operations in line with environmental regulations.
This new penalty system replaces the previous one-time penalty on polluting enterprises, which will definitely increase the cost of enterprises who are conducting the environment pollution activities. As there is no maximum limit for the penalty, environmental protection departments will start to pose an existential threat to non-compliant enterprises.
Comments
The new EPL establishes many strong amendments to improve environmental protection rules and reinforce the power of relevant authorities and public to fight against the pollution in China. It will certainly have a big potential to influence the dynamics of environmental protection in China in a long term.
Despite the positive changes in the new EPL, it still has space to be perfect and will face many challenges as follows:
a. Most of the amendments in the new EPL are related to the pollution prevention and environmental protection, however, as one of the important parts of environmental protection, ecological protection is not concerned enough in the new EPL, which causes the imbalance between these two key issues in the new EPL. Therefore, ecological protection shall be also strengthened in future.
b. Even though the environmental protection departments of governments of different levels are authorized more powers to execute the monitoring and inspection activities, such departments are still tightly controlled by corresponding governments in terms of personnel and finance, which may potentially create difficult conditions for implementation of activities and influence their independence, especially in small places of country level. It is still uncertain to what extent local environmental protection departments will be able to make use of the powerful weapons available to levy real punishments. Moreover, the new EPL doesn’t specify how to define and calculate penalties to the polluting enterprises. Whether a maximum amount of penalty will be considered is still unclear.
c. Even though the participants in the environmental litigation are expanded and social groups are involved in such litigation based on the new EPL, however, possibilities for environmental litigation still remain limited. Since only social groups registered above municipal level will be able to initiate relevant lawsuits, many other active parties engaging in environmental protection activities will be excluded for the litigation, such as many NGOs registered below municipal level and individuals. Therefore, more eligible participants shall be considered in future in order to encourage the legal defense for the purpose of environmental protection.
Pilot Programme for Mutual Connection of Transactions in Shanghai and Hong Kong Stock Markets Approved
The China Securities Regulatory Commission (“CSRC”) and the Securities and Futures Commission (“SFC”) have approved, in principle, the development of a pilot programme for establishing mutual stock market access between Mainland China and Hong Kong in order to promote the common development of the capital market. It will take around six months to formally start the Shanghai-Hong Kong Stock Connection (the “Connection”) from the date of announcement on April 10, 2014 to complete the preparation for formal launch.
The pilot programme will operate between Shanghai Stock Exchange (“SSE”), the Stock Exchange of Hong Kong Limited (“SEHK”), China Securities Depository and Settlement Corporation Limited (“China Settlement”), Hong Kong Securities Settlement Company Limited (“HKSSC”).
The main contents of this announcement are described as follows:
1. SSE and SEHK will enable investors to trade eligible shares listed on the other’s stock market through local securities firms or brokers.
2. The Connection will be established based on the existing stock exchange rules and regulations and operational models in each market. There are five principal elements of the Connection as follows:
a. Applicable Transaction, Settlement and Listing Rules
Transaction, settlement arrangements and listed companies will be subject to the regulations and rules of the market where transaction and settlement take place or companies are listed.
b. Settlement
China Settlement and HKSSC will establish a direct link for the cross--boundary settlement. Each of them will participate in the other’s settlement to provide settlement services.
c. Eligible Shares
Shares eligible to be traded under Northbound Link (trading shares in SSE through SEHK) will include all the constituents of the SSE 180 Index and SSE 380 Index, and shares of all SSE-listed companies which have issued both A shares and H shares. Shares eligible to be traded under Southbound Link (trading shares in SEHK through SSE) include all the constituents of the Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index, and shares of all companies listed on both SSE and SEHK. The scope of the Connection may be further adjusted after the launch of the pilot programme.
d. Quotas
In the beginning the pilot programme, a maximum cross-boundary investment quota and a daily quota for the transaction are fixed and will be monitored on a “real time” basis. The Northbound Link will be limited to an aggregate quota of RMB 300 billion and a daily quota of RMB 13 billion, and the Southbound Link will be limited to an aggregate quota of RMB 250 billion and a daily quota of RMB10.5 billion. Quotas may be adjusted in future.
e. Eligible Investors
In the beginning of the pilot programme, the SFC requires Mainland investors participating in the Southbound Link to be limited to institutional and individual investors who hold an aggregate balance of not less than RMB 500,000 in their securities and cash accounts.
3. Both the CSRC and the SFC will actively enhance cross-boundary regulatory and enforcement cooperation and will also establish a dedicated liaison mechanism for the Connection to deal with issues during the pilot programme period.
4. Benefits
The Connection is an important step in the opening of China capital market and it will enhance capital market connectivity between Mainland China and Hong Kong, bringing various benefits, including:
a. Enhancing the overall strength of China’s capital markets through a new and significant collaborative mechanism.
b. Further consolidating the position of Shanghai and Hong Kong as financial centers, and enhancing the attractiveness of both markets to international investors.
c. Promoting the internationalization of RMB and development of Hong Kong as an offshore RMB business center.