Choice of business entity
Foreign companies, enterprises, or individuals may establish equity joint ventures, contractual joint ventures, wholly foreign-owned enterprises, or representative offices in China. Certain foreign financial institutions, including banks and insurance companies, may, subject to approval, set up branches in China. Foreign investors are allowed to establish foreign invested partnerships in China. For certain foreign invested industries and projects, approval is needed from the relevant Chinese government authorities.
Development of the Foreign Account Tax Compliance Act (FATCA) in China
In late June 2014, the Chinese government reached an agreement in substance with the United States (US) on the terms of a Model 1 Intergovernmental Agreement (IGA). However, as of 1 December 2016, the China-US IGA has not been signed, and the financial institutions in China have not started implementing FATCA.
Foreign exchange transactions are administered by the State Administration of Foreign Exchange (SAFE) and its branches. The regulatory administration on foreign exchange transactions of an enterprise depends on whether the transaction is a current account item or a capital account item. Current account items refer to ordinary transactions within the context of international receipts and payments, including, but not limited to, balance of payments from trade, labour services, and unilateral transfers. Capital account items refer to items of increase or decrease in debt and equity due to inflow or outflow of capital within the context of international receipts and payments, including, but not limited to, direct investment, all forms of loans, and investment in securities. Generally, a payment that falls under the category of a current account may be remitted overseas if supported with proper contracts, invoices, and tax payment/exemption certificates. In the past, most of the transactions under the category of capital account items had to be approved by the SAFE. Since the end of 2012, the SAFE has relaxed the administration of certain capital account items so that approval is no longer needed for a few types of transactions.
Patents, trademarks, and copyrights are governed by separate laws and administered by separate governmental bodies. The government encourages the development and transfer of intellectual properties. The transfer of qualified technology and qualified technical services are exempted from VAT.
Mergers and acquisitions (M&A) activities
Both Chinese domestic and foreign investors increasingly are using M&A transactions to establish or expand their Chinese operations.
The Minister of Finance (MoF) and the SAT jointly released several circulars that address the CIT treatment for six forms of restructuring transactions, namely, change in legal form, debt restructuring, equity acquisition, assets acquisition, merger, and spin-off. The general principle is that enterprises undergoing corporate restructuring should recognise the gain/loss from the transfer of relevant assets/equity at fair value when the transaction takes place. However, if certain prescribed conditions are satisfied, the parties involved could opt for special tax treatments, which are essentially tax deferral tax treatment. In other words, recognition of gain/loss of the transferor from transfer of assets/equity can be deferred with respect to the equity-payment portion; and the transferee may take over the transferor’s tax basis of the acquired assets/equity. Such special tax treatments are only available to a very few specific types of cross-border transactions.