INFO KIT FOR ASPIRING ENTREPRENEURS

DOING BUSINESS IN CHINA

ACE BEIJING CHAPTER RESEARCH COMMITTEE

By Singaporeans, For Singaporeans

Foreword
China is an ever-changing market, despite being the second largest economy in the world, its constant growth and rapid expansion still continue to be closely watched. Being touted as the business hub of Asia, the impact and influence China brings to the world will remain a force that will stay in the near future. With that in mind, ACE officially launched its first overseas chapter in Beijing in June 2012. Its aim is to help Singaporean startups access overseas markets for the first time, by connecting them to a vibrant network of entrepreneurs and other partners in these markets. The Chapter will also facilitate a number of networking activities to build the local community and to link the connection to ACE in Singapore. This formulates a platform by Singaporeans, for Singaporeans. ACE Beijing Research Committee will produce a live report every six months, which aims to help the committee serve its purpose of helping Singaporean startups venture into the Chinese market. The "Info Kit for Aspiring Entrepreneurs" that you will read, is a compilation and summary of research on information which are essential to setting up a business in China. Suggestions and comments are most welcome! Enjoy the report, and here's wishing you all the best in your startup journey!

ACE Beijing Chapter Research Committee 30 June 2013

Contents
Introduction ................................................... 3
Overview of China ................................................. 3 Political Landscape ................................................ 6 Trade Relations ...................................................... 8

Concluding Notes ......................................... 41 Appendix 1 ................................................... 42

List of Useful Websites ........................................ 42

Doing Business in China ................................ 10

12th Five-Year Plan ............................................... 10 Practical Guidance Issue ...................................... 15 Legal Structures and Procedures ......................... 18 Tax Regime .......................................................... 23 Audit and Accountancy ........................................ 27 Invoice Management ........................................... 30 Storage of Invoice ................................................ 32 Human Resources/Staff Recruitment .................. 32 Intellectual Property Rights (IPR) ......................... 40

Introduction
China has one of the biggest markets in the world, with great potential in the near future and is hence a hot spot for many entrepreneurs. Beijing being the capital of China is at the core of the booming entrepreneurial scene in China. This report aims to provide aspiring entrepreneurs of Singapore a first-stop guide towards setting up a business in China, providing basic essential information for starting up in China. This publication is meant to be used as an informational tool only; please approach the appropriate channels for specific and detailed advice.

Figure 1- Nominal GDP of Major Economies, 2011 (US$ billion)2

Overview of China
Economic Landscape
As of 2012, China has the world's second-largest economy in terms of nominal Gross Domestic Product (GDP). According to the World Bank 1 , in 2011, Chinas GDP was US $7.298 trillion while Singapores GDP totals US$239.7 billion. According2 to the World Bank3, China's annual average GDP growth between 2001 and 2010 was 10.5%, and the Chinese economy is projected to grow at an average annual rate of at

Take a glimpse!
Chinas annual average GDP growth (2001- 2010): 10.5%; growth rate of at least 8% for 2011-2013 nd Worlds 2 largest trading power behind US Total international trade value of US$3.64 trillion (2011) China attracted US$116.011 billion FDI in 2011 (9.72% increase) Chinas total outward direct investment flow (2010): US$68 billion

least 8% between 2011 and 2013 . Between 2007 and 2011, China's economic growth rate was equivalent to all of the G7 countries' growth combined. China is a member of the World Trade Organisation (WTO) and is the world's second-largest trading power behind the US, with a total international trade value of US$3.64 trillion in 2011 5 . Its foreign exchange 6 reserves reached US$2.85 trillion by the end of 2010, an increase of 18.7% over the previous year, making its reserves by far the world's largest. China owns an estimated US$1.6 trillion of US Treasury bonds and is thus the largest 7 foreign holder of US public debt . China is the world's thirdlargest recipient of inward foreign direct investment (FDI), attracting US$116.011 billion in 2011, marking a 9.72% increase over 20108. China also increasingly invests abroad, with a total outward direct investment of US$68 billion in th 2010 and is ranked 5 amongst other major economies as seen in the figure9 below:

Economic Model
Modern China is currently under a socialist market economy, consisting of a mixture of state-owned enterprises with an open-market economy. In 1978, China under Deng Xiaoping embarked upon economic reform and opening up, moving towards a more market-oriented mixed economy while keeping a one-party rule. Within this model, privately owned enterprises have become a major component of the economic system alongside the central state-owned enterprises and collective or township village enterprises. A wide variety of small-scale private enterprises were encouraged while the government relaxed price controls and promoted foreign investment. Foreign trade was focused upon as a major vehicle of growth, leading to the creation of Special Economic Zones (SEZs), first in Shenzhen and then in other Chinese cities. Inefficient state-owned enterprises (SOEs) were restructured by introducing westernstyle management systems, with unprofitable ones being closed outright, resulting in massive job losses. By the later part of 2010, China was reversing some of its economic liberalization initiatives, with state-owned companies buying up independent businesses in steel, auto and energy industries. China's success has been primarily due to manufacturing as a low-cost producer. This had been attributed to a combination of cheap labour, good infrastructure, relatively high

Figure 2- Top 10 Economies of Outward FDI flows in 2010 (US$ billion) 5

productivity, favourable government policy and monetary policy. The state still dominates in strategic "pillar" industries (such as energy and heavy industries), but allowed private enterprises (composed of around 30 million private businesses) to expand enormously in others; in 2005, it accounted for anywhere between 33% to 70% of national GDP, while the Organisation for Economic Co-operation and Development (OECD) estimate for that year was over 50% of China's national output, up from 1% in 1978.

Political Landscape
Communism and the CCP
The People's Republic of China, along with Vietnam, North Korea, Laos, and Cuba, is one of the five remaining official Communist states in the world. The entire system of state power is controlled by the Chinese Communist Party (CCP). The highest authority rests with the Standing Committee of the Politburo of the CCP. The President, Xi Jinping and the Premier, Li Keqiang, together with the 5 other members are in effect Chinas cabinet. Beneath them are another 25 members followed by the 205-member Central Committee, made up of younger party members and provincial party leaders. At the grassroots level the party forms a parallel system to the administrations in the army, universities, government and industries. Real authority is exercised by the party representatives at each level in these organisations. They are in turn, responsible to the party officials in the hierarchy above them, thus ensuring strict central control. Day-to-day running of the country lies in the State Council, which is directly under the control of the CCP. The State Council is headed by the Premier, and beneath the Premier are 4 Vice-Premiers, 5 State Councillors, 25 Ministers and with various other agencies10. The State Council implements the decisions made by the Politburo. Approving the decisions of the CCP leadership is the National Peoples Congress (NPC), the principal legislature body that convenes in the Great Hall
6

Take a glimpse!
China has succeeded on manufacturing as a low-cost producer due to the cheap labour, good infrastructure, relatively high productivity, favorable government policy and monetary policy. Strategic industries: Energy & heavy industries Private enterprises (around 30 million private businesses) In 2005: 33-70% of national GDP; over 50% of Chinas national output

of the People. It comprises elected delegates who may or may not be party members, and includes intellectuals, technicians and industrial managers. The key in the political system is the armed forces, the Peoples Liberation Army (PLA) comprising land, sea and air forces with a total of 2.3 million mother 1.1 million serve in the Peoples Armed Police. China is divided into 7 military

regions, each with its own military leadership and in some cases, strong regional affiliations. Xi Jinping, is the chairman of the Central Military Commission and therefore heads the PLA. Along with his status as the General Secretary of the CCP, Xi holds the 3 most powerful positions in China.

Take a glimpse!
State Power: Under the Chinese Communist Party (CCP) Highest Authority: Standing Committee of the Politburo *Chinas cabinet: 7 members including President Xi Jinping and Premier Li Keqiang] State Council: Headed by the Premier, 4 Vice-Premiers, 5 State Councilors, 25 Ministers and with various other agencies Decisions made by Politburo and approved by NPC which consists of elected delegates, intellectuals, technicians and industrial managers Key in political system is armed forces, the PLA (land, sea, air) with 2.3 million members, Peoples Armed Police with 1.1 million members China is divided into 7 military regions President Xi holds the 3 most powerful positions including Chairman of the Central Military Commission and therefore heads the PLA, General Secretary of CCP
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Trade Relations
In recent decades, China has become an essential trading partner for many countries. In 2000, the U.S. Congress approved "Permanent Normal Trade Relations" (PNTR) with China, allowing Chinese exports in at the same low tariffs as goods from most other countries. China has a significant trade surplus with the United States, its most important export market. U.S.-China official trade relations has seen various disputes including that on Chinas currency valuation and trade complaints on specific industries such as Chinas rare earth exports. China went on to become a member of the 11 WTO in 2001 .

Take a glimpse!
China has strong trade relations US allowed Chinas exports at the same low tariffs as goods from other countries Significant trade surplus US is Chinas most important export market Member of the WTO Founding member of the SCO CSFTA covers bilateral trade in goods, services and investments China-ASEAN FTA in place since 2010

China has also been calling for free trade areas and security pacts amongst its Asia-Pacific neighbours. In 2004, China proposed an entirely new East Asia Summit (EAS) framework as a forum for regional security issues, pointedly excluding the United States. The EAS, which includes ASEAN Plus Three, India, Australia and New Zealand, held its inaugural summit in 2005. China is also a founding member of the Shanghai Cooperation Organisation (SCO), along with Russia and the Central Asian republics.

China also inked a Free Trade Agreement with Singapore in 2008. The China-Singapore Free Trade Agreement (CSFTA) covers bilateral trade in goods, services, investments and the flow of personnel. China further strengthened its trade relations with its neighbours with the China-ASEAN Free Trade Area (FTA) that went into effect on 1st January 201012.
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Sociological Landscape Demographics

Today, the People's Republic of China has more than 150 cities with a population of more than one million residents (in the urban area), including the three major cities of Beijing, Hong Kong, and Shanghai.13

Figure 3 - Demographics of China 9

Doing Business in China

12th Five-Year Plan
Overview14
Chinas 12 Five-Year Plan maps key developmental goals and policy directions for year 2011 to 2015, covering economic, social and cultural aspects. This plan is the Chinese governments developmental outline to guide policy making and set targets for central and local governments and ministries, state-owned enterprises (SOEs) and private sectors. The plans key themes are rebalancing the economy (higher quality growth), ameliorating social inequality (inclusive growth) and protecting the environment. The Chinese government has also set to target an annual GDP growth of 7 per cent over the next five years.
th

Important Goals in the Plan15

The 12th Five-Year Plan has the following goals: Develop and urbanize Chinas western regions; Improve the social welfare and livelihood of its citizens; Increase domestic consumption; Develop key emerging strategic sectors; and Protect the environment and improve energy efficiency.

To achieve these goals, key targets have been drafted. Some main key targets can be classified as key economic and noneconomic targets (Figure 6), with stronger emphasis on the seven Strategic Emerging Industries (SEI) identified to achieve these goals as shown in Figure 5 below16:

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Figure 4 - Details of Seven Emerging Industries under Chinas 12th Five-Year Plan

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Annual GDP growth 7% Service sector contribution to GDP 43% to 47% Non-fossil fuel use Increase to 11.4% Patented inventions 1.7 to 3.3 per 10,000 population increase Per capita real disposable income excess of 7% (urban & rural areas) Inflation (CPI) at or below 4% per year Spending on R&D 2.2% of GDP Urbanisation

Energy use per unit of GDP Reduce by 16%

47% to 51.5%

CO2 emissions per unit of GDP Reduce by 17%

Urban welfare housing 36M units

Forest coverage Increase by 21.66%

Figure 5 - Key Economic and Non-Economic Targets of the 12th Five- Year Plan

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Strategic Emerging Industries17

The 12th Five-Year Plan will not only provide financial support for these industries but also support in the form of government industrial policy incentives. These could include investments in large demonstration projects to justify feasibility, preferred access to credit and capital and even direct government investment via investment arms of the government responsible for allocating capital from the banking, financial and retirement systems. New Energy, Energy Conversation and Environmental Protection and New Energy Vehicles18 Renewable energy sources such as nuclear, hydropower, solar, wind, biofuel, and geothermal, as well as natural gas will be encouraged throughout the plan. As Chinas energy use continues to climb, so will its needs to acquire foreign energy resources and to develop renewable energy bases, including wind power bases and green towns. In addition, the Chinese government has announced that it will structure new energy policies around hydro and nuclear power. Presently, Chinas 14 nuclear power reactors contribute less 19 than 2% of the total energy used, with a total of 9.1 million kW produced. 20 By 2015 it is targeted to double, with 25 nuclear power plants in operation. Hydropowers capacity will increase by 50 percent by 2015. Wind power and coal industries consolidation remains imminent. Intellectual property patent protection and Research and Development

(R&D) are to be funded heavily, especially for electric vehiclerelated technology. Chinas huge dependence on its ma nufacturing and export industries for economic growth and coal as the main energy source has caused much pollution and environmental destruction. Hence, the general guideline would be to reduce unsustainable practices and replace them with sustainable ones via changes to its energy resources and energy usage. In fact, oil and coal consumption is still expected to be the dominant source of energy and expected to develop rapidly, though the government will heavily fund alternative energies. The government will support efficient providers and pressure inefficient ones to shut down operations. The government plans to continue with the consolidation of coal mining companies: about 11,000 coal enterprises will be reduced to 4,000, with 8 to 10 coal companies expected to account for nearly two-thirds of all coal production by 2015. In addition, the government has said that China's investment in the th environmental protection industry during the 12 Five-Year Plan period will exceed 3 trillion RMB (US$470 billion), with the industry growing by 15-20% annually, it is a huge potential for international cooperation. Arnold and Porter Consulting Group (APCO) Worldwide also reports that improving energy efficiency and decreasing CO2 emissions are backed by preferential policies, focusing on waste recycling and clean coal technologies. During the 11th Five-Year Plan, China designated clean energy technology (solar, wind, bio, and nuclear energy) for
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government support, spending approximately 2 trillion RMB (US$309 billion) on energy efficiency and environmental protection measures. Currently, Chinese companies have emerged as global leaders in wind and solar power. More specifically, Chinese solar manufacturing companies have become the worlds largest producer of photovoltaic solar cells and modules and control approximately 17 per cent of th the global market for the production of silicon. The 12 FiveYear Plan steps up these developments to support more resource usage technologies such as the smart grid. The Chinese government seems determined to take measures to bolster demand for its SEI products. Over the next five years, the Chinese central and local governments are expected to devote significant resources to all seven SEIs, creating both potential opportunities and challenges for foreign firms. Healthcare and Biotechnology Biotechnology is one of Chinas key SEIs. It has the potential for large productivity gains and at the same time, solves health problems associated with Chinas rapidly aging society. Through the fastest growing biotech industry in the world, China is increasing its crop and animal husbandry yields, improving medicines, developing new medical systems and increasing alternative energy production, among other th applications. The 12 Five-Year Plan will support the development of innovative biotech products, high-end medical devices and patented medicines. The government will reportedly put forth a spending package of more than 12

billion RMB (US$1.8 billion) for R&D of new drugs from 20112015. Technology A key priority of the 12 Five-Year Plan is for China to advance from Made in China to Designed in China. The government will increase funding for R&D and industrial upgrading as well as improve intellectual property rights to promote indigenous innovation drive. Next-generation IT has been selected as one of Chinas SEIs. China will accelerate the creation of next-generation information networks, mobile communication and the Internet, which is crucial for the development of Chinas logistics industry. In addition, the government plans to invest in R&D of the "Internet of things" and cloud computing, and develop digital and virtual technologies. China will invest heavily in smart grid solutions in order to modernize and ensure efficiency in current utility companies. In fact, smart grid technology has huge growth potential, with worldwide utilities firms expected to invest US$375 billion by 2030 21.
th

Opportunities for Foreign Business22

Industrial Upgrading Opportunities and Challenges The governments plan to increase SEIs share of GDP yields opportunities for foreign companies as incentives will be
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created for private investment. In fact, the government reportedly expects more than 14 trillion RMB (US$2.2 trillion) in funds, from both government and private sectors, to be invested in these industries. The aim is for SEIs contribution to increase from todays approximately 5% of GDP to 8% by 2015 and 15% by 2020. However, according to APCO Worldwide, given Chinas current drive to develop its indigenous innovation capabilities, these preferential policies may be biased toward domestic firms, especially since the government has previously given its pledge to develop a national procurement list that favours domestic firms. Foreign business should monitor Chinas SEI policy closely and look for opportunities to participate in its development. Foreign firms can also consider partnerships with local companies to better access the significant funding opportunities available. Seeking Views from Foreign Businesses Innovation and development of these industries will require advice, training and cooperation from foreign companies. This assistance could vary from informal consultations to more formal programs under the rubric of corporate social responsibility, improving understanding and institutionalizing government relationships.

Practical Guidance Issue

Business Culture in China23
Chinas distinctive business culture and etiquette makes it stand out from the other markets in the world. Hence, it is imperative to have basic knowledge of these to do well in China. Culture Confucianism still shapes todays Chinese society. Hence the concept of relationships, elements of responsibility and obligation are emphasised, to achieve surface harmony and collective good.

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Guanxi Most of us already know one of the key concepts in Chinese business culture is guanxi (), which means connections. Guanxi is a network of relationships that involve trust and support. Money does not necessarily build guanxi. In fact, guanxi can be established by showing and proving you are trustworthy, reliable and dependable. It is important to maintain contact and emotional bonds with Chinese as they often feel obliged to do business with their friends. Mianzi Another important issue in China is mianzi () which is a symbol of one's pride. It revolves around an individual's reputation and social status and can be given, gained, saved or lost. Causing one to lose mianzi through public humiliation or inappropriate level of respect can ruin business negotiations. For example, Chinese businessman do not like to say "no" outright as it would cause the rejected party to lose mianzi. Although the concept is hard for most to understand, it is essential as it is still very much apparent in many aspects of China. Keqi Keqi () refers to the idea of being humble and modest. It is important to demonstrate humility and modesty all the time as exaggerated behaviours can be deemed to be arrogant and

rude which are much disliked according to the Chinese culture. Etiquette Below is a list of the code of behaviour that the Chinese have according to their conventional norms: Status and Hierarchy in China The hierarchical structures of the Chinese society and business organisations are strictly based on positions in the organisation. Entrances into meeting rooms are based on their ranks, as status is very important in China. Greet and introduce yourself to the most senior member. In addition, address your Chinese counterparts with a title and their last name. If the person does not have a title, use Mr or Madam. Senior members tend to lead negotiations and direct discussions. Working Relationships in China Prior to closing business deals, the Chinese build strong relations with the other party. Even if the other party is friendly and hospitable, it does not guarantee a positive outcome. In a situation where both parties can benefit from each other, it is imperative to have trust. The collectivist way of thinking still plays a strong role and influences Chinese business today.

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Dining in China24 Follow the seating protocol, based on hierarchy, during meals and wait to be seated. Meals are usually used to build indirect business relationship and not used for direct business negotiations. One should not leave a dish empty as it is perceived as not being given enough food, which is an insult to the Chinese. Conversely, leaving food untouched may also appear offensive. Toasts are made frequently during the dinner. The first toast usually occurs during or after the first course and not before. It is rude to drink alone without toasting others. Simply raise your glass and make eye contact. If you are toasted, sip your drink in reply. Gifts Be prepared to exchange a modest gift with your business colleagues at the first meeting so as not to set your business on a wrong foot. Prepare a group gift from your company to be given to the leader of the host company. A gift should be presented to all present or none at all. Present a gift with both hands. Upon receiving, there are usually not opened. The Chinese often refuse a gift when first offered. You should offer a second time.

There is a growing phenomenon of giving gift cards with value deposited. Receiver will be able to make use of these cards to make purchases. The advantage of this is that the gift could be directed to a single person, for eg. the leader. Furthermore, it saves the hassle of having to distribute the gift to everyone who is present at the meeting. One thing to note, although hampers are widely given as corporate gifts in Singapore, it is not a common practice in China.

Due Diligence
When conducting business in China, no one should underestimate the value and need of thorough due diligence. By doing so, one can fully equip himself of all the key information necessary to his operations.

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Legal Structures and Procedures

Overview
Foreign investors may choose among various Business Vehicles (BV) according to the operations and needs of their businesses. The business structures are mainly Wholly Foreign-owned Enterprise (WFOE), Joint Ventures (JV) and Representative Office (RO). The route map briefly describes an overview of the course to undertake and the legal structure for the establishment of foreign enterprises. Investors should always approach lawyers and consult the relevant governmental departments for a better understanding of the legal procedures involved. (E.g. the Chinese embassies or consultants stationed in their respective countries or regions or the local governments Department of Promotion of International Trade - the department in charge of the promotion of foreign trade and foreign investment).

vehicles may cater to different investors with varying needs. As such, it is imperative that a foreign investor understands the characteristics of the various business vehicles in order to cater to the needs of his business. The approved Business Vehicles are: 1. Wholly Foreign-Owned Enterprise (WFOE) WFOE is a limited liability company wholly owned by the foreign investor(s) and is increasingly being used for service providers such as a variety of consulting and management services, software development and trading. WFOE is currently the most common (65%) type of business vehicle for foreign investors. The required registered capital is at least 100,000 RMB, depending on the type of business and location.25 2. Joint Ventures (JV) A JV is a business arrangement where the participants create a new business entity or official contractual relationship to share investment and operation expenses, management responsibilities and profits and losses. Sometimes, JVs are the only way to register in China if a certain business activity is still controlled by the government. (E.g. Restaurants, Bars, Building and Construction, Car Production and Cosmetics etc.) There are 2 types of joint ventures, namely Equity JV, the second most common manner after WFOE, in which foreign companies enter the Chinese market and the
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Determination of Legal Structure or Business Vehicle

The application and approval procedure for all foreign enterprises are largely similar but may vary depending on the specific type of business vehicle chosen. Different business

preferred mode of cooperation where the Chinese government and Chinese businesses are concerned; and Cooperative Venture (also known as Contractual JV), the parties involved may operate as separate legal entities and bear liabilities independently rather than as a single entity. 3. Representative Office (RO) 26 RO is established by foreign parent companies to engage in business liaisons, quality control, product promotion, market research, exchange of technology and other permitted activities in China. About 20% of foreign investors choose RO as their China business entity because it is cost efficient and requires no capital investment. The RO is a non-legal entity operating and representing its parent company overseas. As such, it is not allowed to engage directly in business and operational activities, issue official invoices, remit outward, sign sales or purchase contracts, or receive income from services performed. However it may act as a liaison and promotion office for its parent company. 4. Hong Kong Company A Hong Kong Company is often used as a Special Purpose Vehicle (SPV) to invest in China. Hong Kong is one of the quickest locations to incorporate a business in China. Although a HK company is not a legal entity in China 27, many foreign investors, especially investors from Europe and North America choose to form a Hong Kong company as a SPV to invest in China.

5. Partnership Enterprise Partnership Enterprise (FIPE) is an unlimited business entity with no minimum registered capital. FIPE is becoming more popular among young entrepreneurs as it requires no capital, and yet able to hire people, collect payments, issue invoices, and apply for work or residence permits in China freely. There are currently 3 types of FIPE: General Partnership Enterprise, Limited Partnership Enterprise, and Special General Partnership Enterprise. The minimum number of partners is 2, and there are no restrictions on the nationality of each partner.28 The following are examples of possible partnership structures:

Two or more Foreign enterprises or individuals establish a Partnership Enterprise (PE) in China; and Foreign enterprise(s) or individual(s) with Chinese individual or company establish a Partnership Enterprise (PE) in China.

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WFOE Minimum Registered Capital Business Scope RMB 100,000

JOINT VENTURE RMB 100,000

REPRESENTATIVE OFFICE No need for capital investment Liaisons, Quality Control

HONG KONG COMPANY HKD 1

PARTNERSHIP ENTERPRISE No minimum

Official Invoice Key Points & Advantages

Consultancy Service WFOE, Manufacture WFOE, Trading WFOE, FICE (Foreign-Invested Commercial Enterprise) WFOE Official invoice in China 1. Freedom to operate without considering the involvements of the Chinese Partner. 2. The registered capital can be solely contributed by the foreign investors.

Consulting, Service and HiTech JV

All business activities are offshore, General trading

Specific industry according to Foreign Investment Industrial Guidance Catalogue

Official invoice in China 1. JVs are useful to gain preferential treatment and manufacturing capability of the Chinese side. More useful for working around red tapes.

Unable to issue invoice 1. To act as a coordinator for parent enterprise's in China. 2. Not allowed to engage in profit making activities.

Customized A4 receipt 1. Easy to set up. However, it is not recognized in mainland China.

Official Invoice 1. No requirements on minimum registered capital. 2. Less procedures as compared to WFOE. 3. Minimum of 2 partners, with no nationality restrictions on each partner.

Figure 6 Summary of Different Business Vehicles in China

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Figure 7 - Route Map to Regulations and Procedures

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Laws and Regulations for Foreign Investments in China

General Laws and Regulations General laws and regulations regulate all foreign investment enterprises and domestic companies. They include Company Law, Contract Law, Insurance Law, Arbitration Law, Labour Law, Intellectual Property Law (including Trademark and Copyright Law), Provisional Regulations on Value Added Tax, Provisional Regulations on Consumption Tax, Provisional Regulations on Business Tax, and, other related laws and regulations. As such, it is always recommended that a certified lawyer is present to provide advices on various regulatory issues. Main Foreign Investment Laws and Regulations Other than the general laws and regulations, foreign investments are also subject to a series of laws and regulations specific to foreign investments. A few main laws include:

Law of Foreign-invested enterprises, the income tax and its implementation regulations Law on the Protection of Taiwan Compatriots Investment

International Treaties Foreign investments are subject to some international treaties, such as the Bilateral Investment Treaties and Bilateral Agreement on the Avoidance of Double Taxation.

Examination and Approval Procedure Foreign investors are also required to produce certain documents for the approval process. Such documentations may vary depending in the form of business entity i.e. whether they are Joint Ventures (JVs), Wholly Foreign Owned Enterprises or Representative Offices. Summary Registering a business in China is a challenging work filled with paperwork and bureaucratic restrictions. It would be advisable to obtain the help of a qualified agency. The qualified agency will have the right connections. In addition, corporate regulations in China are changing at a rapid pace and it will be difficult for any enterprise or entrepreneur to come into China being fully prepared and knowing everything.

Law of Chinese-Foreign Equity Joint Ventures and its implementation regulations Law of Chinese-Foreign Contractual Joint Ventures and its implementation regulations Law of Wholly-Owned Foreign Enterprise and its implementation regulations

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Tax Regime
Tax is the most important source of fiscal revenue of China. Tax policies are also used to create certain economic and social development impact. The government agency in charge of tax policy is the Ministry of Finance; for tax collection, the State Administration of Taxation. Tax rates in China, more often than not, are subject to frequent changes and many tax rules and regulations are subject to local interpretation. Always check for the latest information by contacting local taxing jurisdictions or one of the accounting organizations in the location where you are operating or going to operate. Take note to seek advice only from reputable firms, international or local. Business taxation is governed by the Enterprise Income Tax (EIT) Law first introduced in 2008. In addition to EIT, China imposes many other taxes such as the resource tax, land appreciation tax (LAT), social security contributions, stamp duties, etc. The more important taxes that companies need to take note are the value added tax (VAT), business tax (BT), consumption tax and the custom duties. As taxpayers only need to pay the relevant taxes according to the activities they are engaged in, most enterprises only need to pay from 6-8 categories. The number of payable taxes may reach up to 10 categories for larger enterprises.

Capital Gains
An individuals capital gains are taxable in China at 20%. Capital gains tax for a Chinese company is added to the regular tax. A 10% deduction at source is made from capital gains from a foreign company in China. The table below serves as a reference and shows the income tax rates in China for an individual in 2013. Income from other business is taxable at 5-35% and passive income such as interest and royalties is taxable at a standard rate of 20%. Monthly Taxable Income (RMB) 1 1,500 1,501 4,500 4,501 9,000 9,001 35,000 35,001 55,000 55,001 80,000 80,001 and above Tax Percentage (%) 3 10 20 25 30 35 45 Quick Deduction (RMB) 0 105 555 1,005 2,755 5,505 13,505

Figure 8 - Individual Income Tax Rates in China for Year 2013

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Reporting Dates and Payment The tax year in China is the calendar year, ending on December 31. It is compulsory to file a report and pay advances monthly or quarterly (monthly for individuals). Submitting an annual report and arranging payments should be done before May 31. There are fines on arrears. Foreign companies in China are obligated to submit an interim report every three months (advance payments should be paid within 15 days of the end of the quarter). Individuals whose annual income exceeds 120,000 RMB is required to file their taxes 3 months after the end of the tax year. An employer is obligated to submit a monthly report on his employees wages and to pay the tax deducted within 7 days of the end of the previous month. Deduction of Tax at Source An employer is obligated to deduct tax at source on a monthly basis from a salaried employee and to make additional contributions to social security. Social security in China consists of 3 parts: basic pension, personal accounts and additional payment. Contribution to the social security varies in different cities, and can be as high as 40% of the employees basic monthly salary. Unless exempted, foreigners working legally in China (both hired locally or sent from abroad) are also required to participate in the social security scheme.

Take a glimpse!
Tax is the most important source of fiscal revenue of China. Under the purview of the Ministry of Finance, tax collection is under the State Administration of Taxation. 25 types of taxes in 8 categories: Turnover, Income, Resource, Taxes for special purposes, Property taxes, Agricultural taxes, Customs taxes. Tax year in China ends on 31 December. Submission of annual report and arranging payments must be done by 31 May. Companies to submit interim reports every 3 months (advance payment to be made within 15 days of end of quarter). Employers to submit monthly reports on employees wages and to pay tax deducted within 7 days of end of previous month. Additional contributions to social security: Basic Pension, Personal Accounts and Additional Payment. Social security contributions can be up to 40% of the employees basic monthly salary, and varies in different cities.

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Tax or mandatory contribution

Payments (number) 1 1 1 1 0 1 1 1 7

Notes on payments Online filing Online filing Paid jointly Paid jointly Online filing Paid jointly

Time (h)

Statutory tax rate 44.0% 20.0% 7.0% 3.0% 0.03% 1.2% 1.0% 5.0%

Tax base

Total tax rate (% profit) 49.6% 5.4 3.5 1.5 1 1 0.5 0.5 0.4 Not included 63.5

Employer paid- social security / housing fund contributions Corporate income tax Urban maintenance tax Education surcharge Stamp duty Real estate tax Levies for construction and maintenance of river projects Business tax Land use tax Value Added Tax (VAT) Totals

192 74

Gross salaries Taxable profits VAT VAT Transactions 80% building value VAT and business tax Capital gains Land area Value added

Online filing Online filing 132 398

CNY 6 per square meter 17.0%

Figure 9 - Summary of Taxes & Mandatory Contributions of a Medium Sized Company (Statistics from Calendar Year 2010)

The table above shows a detailed summary of taxes and contributions that a medium sized company must pay or withhold in a given year, as well as measures of administrative burden in paying taxes. The data was collected by the World Bank as part of the report, Doing Business in 2012.

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Dividend Withholding Tax Profits can be taken out of China in the form of dividends, but any declared dividends for foreign enterprises are subjected to 10% withholding tax. Therefore, most of the time profits are better spent reinvesting in the enterprise, which is exactly what the government hopes to achieve. Fees are an important aspect to account for in starting a business regardless of the industry. Fees and licenses would have to be incurred for procedures such as power hook-ups, installations, fire safety permits. Fees and regulations may change, thus it is useful to understand the updated local practices. Benchmarking can sometimes provide better insight to what fees may be imposed and how big they may be. If starting up a factory for example, contact a few firms who have just set up shop in the area for an idea of what to be taxed.

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Audit and Accountancy

Audit and accountancy can vary across different types of companies. Companies can be registered and categorized differently such as private companies, representative office, Hong Kong registered office and listed companies in which accounting regulations would differ.

Private Companies Private companies can prepare their financial statements in accordance to the Accounting System for Business Enterprises or Accounting Standards for Business Enterprises. There is also an Accounting System for Small-sized Business Enterprise which is for small companies that have no publicly traded shares and fulfil the restrictions stated below. No. Of Staff <600 <400 <500 <300 <100 <100 Sales (RMB, million) <30 <30 <30 <30 <10 <30 Assets (RMB, million) <40 <40 -

General Accounting Principles and Regulation

A few sets of general accounting principles and regulations apply to all registered companies in Mainland China and Hong Kong. All companies have to submit annual financial statements to the State Administration for Industry and Commerce (SAIC) for inspection. These reports also have to be audited by Chinese accountants who are registered with the Chinese Institute of Public Certified Accountants (CICPA) in accordance to Companies Law. In February 2006, the Ministry of Finance (MOF) announced the newest 38 accounting standards. In general, the financial statements required, excluding tax statements required, are: 1. 2. 3. 4. 5. 6. Balance sheet Income statement (Profit and Loss statement) Cash flow statement Statement of profit appropriation Notes to the financial statements Supplementary statements

Industry Construction Hotel and Restaurant Logistics Manufacturing Retail Wholesale

Figure 10 - Restrictions under the Accounting System for Small-sized Business Enterprise29

Representative Office For companies that are registering their business in China as a representative office of their foreign office, the company is not allowed to engage in any revenue-generating business. Hence, the financial statements are to be prepared on a tax basis and audited for tax purposes. The accounting records

27

are much simpler, containing cash and bankbooks, expense 30 and asset accounts. Hong Kong Registered Companies Since 1 January 2005, Hong Kong has adapted a Financial Reporting Standards (FRS) framework that has been modelled on International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB). For companies registered in Hong Kong and have their businesses legally registered under a Chinese agency, the following documents are needed for accounting back in Hong Kong 31: 1. 2. The books of accounts recording receipts and payments, or income and expenditure The underlying documentation necessary to verify the entries in the books of account; such as vouchers, bank statements, invoices, receipts and other relevant papers A record of the assets and liabilities of the business A daily record of all money received and expended by the business together with supporting details of the receipts or payments
st

secretary, etc. The Annual Return must be filed once every calendar year (except in the year of its incorporation) within 42 days of the anniversary of the companys incorporation date. Even if the information contained in the last return has not changed since, an annual return still needs to be filed, certifying that there has been no change since the date of the last return. Late filing will result in a higher registration fee and the company and its officers are liable to prosecution and fines. Unlike companies registered in Mainland China, there is no restriction on the accounting software used by Hong Kong companies. Listed Companies There are a great variety of accounting companies offering complete accounting services for listed companies in China. Generally, foreign listed companies need to prepare 3 sets of accounts, one in accordance to the China Accounting Standards (CAS), one for the International Accounting Standards and one for the standards in the home country. In addition to submitting the annual financial statements to the SAIC, companies listed in China must also submit them to the China Securities Regulatory Commission (CSRC). The Accounting Standards for Business Enterprises was issued on

3. 4.

A private limited company incorporated in Hong Kong under the Companies Ordinance is required to file an Annual Return signed by a director, company secretary, manager or authorized representative with the Companies Registry. An Annual Return contains the particulars of the company such as the address of the registered office, shareholders, directors,

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15th February 2006 by Chinas MOF. This is the accounting standard required for listed companies. In 2006, the changes to the CAS had resulted in an estimated 90-95% convergence to the IFRS, reducing translation costs greatly. For example, in the Accounting Standards for Business Enterprises, the difference lies in that IFRS allows the reversal of impairment loss of long-term assets such as property, equipment and plants (PPE), intangible assets and investments. The CAS for Business Enterprises does not.32

Companies incorporated in a jurisdiction whose laws do not require accounts to be audited Hong Kong branch of a foreign company, subject to certain conditions

Filing of Annual Tax Return with Inland Revenue Department (IRD)

With respect to Hong Kong registered companies, it is required as per Hong Kong company law, that every company formed in Hong Kong, must file a Tax Return (also known as Profits Tax Return) along with its audited accounts on an annual basis with the IRD of Hong Kong. The following companies are not required to submit audited accounts along with their returns:

IRD issues Tax Return filing notifications to companies on 1 April every year. For the newly incorporated companies, the notification is generally sent on the 18th month of the incorporation date. Companies must file their Tax Return within one month from the date of notification. Companies can request for an extension, if needed. Companies may incur a payment of penalty or even prosecution if they fail to submit their tax returns by the due date. When filing the Tax Return, the following supporting documents must also be attached33:

A certified copy of the companys balance sheet, auditors report and Profit & Loss Account relating to the basis period; A tax computation indicating how the amount of assessable profits (or adjusted loss) has been arrived at; and The prescribed Supplementary Form which contains most particulars such as tax data and financial data etc.

Small corporations: Defined as those corporations whose total gross income does not exceed HKD 500,000 for the basis period Dormant companies: Defined as having no relevant accounting transactions during a financial year

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Additional Notes
Accounting Period The accounting period in China is from 1 January to 31 December. However, if a Chinese company is a subsidiary of a foreign group of companies whose balance day does not fall on 31 December, the Chinese subsidiary can choose to use another date as its balance day. This is subject to the approval of the relevant regulatory authorities. Accounting Books and Records Under the Enterprise Income Tax Law for Mainland China, foreign companies are required to keep accounting records for at least 15 years. For Hong Kong, all records must be retained for 7 years from the transaction date. Currency Requirements Enterprises are required to maintain their accounting records in RMB. If a company uses foreign currencies for operating income and expenses, one of these currencies can be used as the bookkeeping base currency. However, the financial statements must be converted to RMB. Language Accounting records must be maintained in Chinese solely, or may be accompanied with a foreign language.

Invoice Management
Definition of Invoice
An invoice is the proof of payment for the sale of goods, provision of labour service, or other business activities. It is also a proof that a payment and receipt have taken place, an official document for financial management and accounting and an important tool in auditing for taxation purpose. Invoices are generally in triplicate copies, namely the stub, invoice copy and accounts copy. Value added tax (VAT) invoices have an additional copy, which is the deduction copy.

Purchase and Collection of Invoice

A tax registration certificate will be issued to individuals or enterprises that have completed tax registration, which is compulsory by law. To purchase invoices, the following have to be submitted to the competent tax office: 1. Identification document of the applicant; 2. Tax registration certificate or other proof; and 3. Impression of official seal or special seal for invoices. An invoice collection book specifying the type and quantity of invoices to be purchased as well as the method of purchase
30

will be issued after gaining approval from the tax office. The applicant can then purchase the invoices from the competent tax office.

Temporary Purchase of Invoices

Should an individual or enterprise be conducting business activities in areas outside their registered city and need invoices temporarily, they can apply to the local tax office. However, a guarantor or a deposit of maximum 10,000 RMB is required for the application.

3. Invoices should be issued in serial order within a specified period of time. Invoices in multiple copies should be issued at one time to accurately record the details of a transaction and stamped with the issuer's official seal or special invoice seal. 4. No individual or enterprise should borrow, transfer or issue invoices on others' behalf. Unless approval is granted by the tax authority, the invoice should not be detached from the invoice book in a disorderly manner. The scope of use for special invoices should not be extended casually. 5. Invoices that fail to meet the relevant requirements cannot be used as financial proof. Enterprises and individuals may refuse to accept such invoices. 6. Since 1 July 2003, taxpayers in Beijing, Tianjin, Shanxi, Jilin, Heilongjiang, Jiangsu, Ningbo, Anhui, Fujian, Xiamen, Qingdao, Henan, Hubei, Hunan, Guangdong, Shenzhen, Guangxi, Hainan, Sichuan, Chongqing, Yunnan, Gansu and Ningxia are required to issue VAT invoices by anti-forgery VAT invoice system. Hand written VAT invoices have been disallowed for input VAT claim purpose (except the VAT invoices issued by tax authorities on behalf of small scale VAT payers). 7. In addition, since 1 August 2003, handwritten VAT invoices have been disallowed for input VAT claim purpose in Hebei, Inner Mongolia, Shanghai, Guizhou, Shanxi, Qinghai and Xizang (except the VAT invoices issued by tax
31

Issuance of Invoice
The following are some guidelines on the issuance of invoices 34 by businesses: 1. An individual or enterprise that receives payment from the sale of goods, provision of service or other business activities should issue invoices to the payer. Under special circumstances, the payer will issue invoices to the payee. 2. When enterprises and individuals engaged in production or other business operations purchase a good, receive a service or conduct a business activity, they should ask the payee for an invoice and must not change the description or amount shown on the invoice.

authorities on behalf of small scale VAT payers). Any handwritten VAT invoices issued on or after 1 August 2003 cannot be used as input VAT claim evidence across the whole country (except the VAT invoices issued by tax authorities on behalf of small scale VAT payers).

Human Resources/Staff Recruitment

Contracts and Unions
Legal Environment The Ministry of Labour and Social Security is the government body responsible for the administration of employment law in China. The Ministry is responsible for formulating national labour and social security policies. The labour and social security bureaus, which are under the Ministry, are responsible for administering the national and local regulations. Labour practices vary between regions given the fairly wide discretion in handling local labour matters . On 1 January 2008, the Labour Contract Law was enforced in China, formulated with the purpose of governing the establishment of employment relationships, and the conclusion, performance, amendment and termination of labour contracts between the employer and the employee. This Law encourages employers to enter into long term or non-fixed term employment contracts with employees, and sets more strict regulations for the termination of employment, stipulating conditions of termination and increasing any relevant costs. It also increases the penalties for violation of the Labour Contract Law and other related regulations.
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Storage of Invoice
The following are some advice on the storage of invoice: 1. For regular users of these invoices, an invoice register should be set up to record the usages and for reporting to the competent tax office. Changes or cancellation of invoices and invoice books should be done concurrently with changes and cancellation of tax registration.

2.

Invoice stubs and invoice registers should be well taken care of and retained for five years after which time they should be destroyed upon checking by the tax office.

An amendment was made by the Standing Committee Chinas National Peoples Congress on 28 December 2012. The newly amended Labour Contract Law (Amended Labor Contract Law) will come into effect on 1 July 2013. In the past, many Chinese companies did not hire employees by themselves but used a large number of employees who were hired by a labour agency and then seconded to work for the companies. This kind of special employment has caused a number of problems in recent years. For example, many seconded employees did not get pay commensurate with their work. Also health and safety rights of seconded employees were not always well protected. The aim of the Amended Labour Contract Law is to change such situation in China. To implement the above new policies, the Amended Labour Contract Law gives the enterprises some time to make adjustment on their employment arrangements. The new law allows the enterprises to continue to perform the existing labour contracts, which have already been executed before its issuance (i.e. before 28 December 2012) until the expiration of the contracts. However, the principle of equal pay for equal work as stated in point three of the amended Labour Contract Law shall be adopted immediately after the effectiveness of the Amended Labour Contract Law.

the new provisions on the use of seconded employees, it can be ordered by the labour administrative authority to make rectification. If it fails to do so, a penalty from RMB 5,000 to RMB 10,000 can be imposed on the enterprise for each seconded employee. Additional labour-related laws and regulations accompanied the Law, including the Salary Regulation, the Labour Dispute Arbitration Law, the Social Security Law, etc. The implementation of such rules for the Labour Contract Law affects the way in which foreign companies do business in China, and will have far-reaching implications. The new rule brings a further tightening of labour regulations and in general, is more labour-friendly. After full implementation of the new Contract Law, the general impacts on foreign companies include, increased labour costs due to stricter compensation requirements when firing employees and increased risks related to employment. Employees rights will also be better protected, and as a result, companies might find it more difficult to prevail in labour disputes. It also means that employers will have to be more cautious when recruiting new employees because of new requirements on severance and probation.

Recruitment Foreign invested enterprises may wish to check if their current employment arrangements need to be adjusted. Please note that after 1 July 2013, if any enterprise breaches Methods differ for Foreign Investment Enterprises (FIEs) and Representative Offices (ROs) of foreign companies in China. FIEs, for instance, Joint Ventures (JVs) and Wholly Foreign33

Owned Enterprises (WFOEs), are afforded autonomy with regard to their employment decisions. For example, they may choose whom they employ, and what criteria to apply throughout the recruitment process. Nevertheless, such companies must file their recruitment plans to their local Labour and Social Security Department, who in turn ensure that within all labour contracts, the legitimate rights and interests of the workers are well protected. An example of autonomy in recruitment for JVs and WFOEs is that these enterprises may recruit Chinese employees directly or through local employment service centres. JVs normally do so through recommendations from their Chinese partner or the local authorities. The JV will often employ staff from the original manufacturing plant of the Chinese partner. WFOEs normally have a free hand in recruiting staff locally. However, due to a lack of local networks, they will often need to rely on professional firms, mass media, or other methods to recruit staffs in the managerial level. Recruiting local staff is different for ROs, which are required to hire staff through an authorised labour agency. There are several available authorised labour agencies in China, such as the Foreign Enterprise Service Corporation, China International Intellect Corporation (CIIC), for example. Today there are over 70 authorized Foreign Service Corporations who provide local staff to ROs in 25 provinces and municipalities.

There are no specific stipulations in Chinese Law regarding the language of the contract, but it is advisable to create a bilingual document - one of the languages being Chinese; particularly as all contracts must be verified by the labour authority and requires the contract to be in Chinese. In order to employ Chinese nationals in a Foreign RO in China, the employer must obtain a registration certificate. In order to be granted this certificate, a number of formalities must be completed such as opening a bank account for foreign exchange, applying for direct telecommunication lines and securing a multiple entry visa for locals.

Take a glimpse!
FIEs given freedom for employment decisions just need to file to the local Labour and Social Security Department. ROs must hire through an authorised labour agency; the employer must have a registration certificate to hire locals which requires completion of certain formalities.

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The amended Labor Contract Law highlights the principle that direct hiring by conclusion of employment contract with employees shall be the primary means of employment in China. It elaborates more requirements on the use of seconded employees. The details of such requirements are as follows: 1. Starting from 1 July 2013, a company providing employee-seconding services shall have a minimum registered capital of RMB 2 million, fixed office premises and facilities as well as relevant management rules on seconding employee. Further, it shall obtain an administrative permission from the labor administration authority. All existing labor agencies are required to make re-registration within one year after the effectiveness of the Amended Labor Contract Law. A company who fails to get an administrative permission in the reregistration procedure will not be allowed to engage in employee seconding services. 2. After 1 July 2013, an employer can only use seconded employees for work positions, which are temporary, auxiliary or substituting in nature. As defined by the Amended Labor Contract Law, a temporary work position refers to a position, which lasts no longer than six months. An auxiliary work position refers to a position that provides supporting services to the core business positions of a company and a substituting work position refers to a position, which is temporarily

vacant due to an employee taking leave or studying, etc. Further, the State labor administration authority will set a limitation on the percentage of using seconded employees in an enterprise. 3. The employer shall adopt the same remuneration allocation policy to seconded employees who do the same work as that of employees directly hired by the employer. Legally speaking, such remuneration shall include not only the basic salary but also bonus, subsidies and allowances, etc. 4. The limitation on the percentage of seconded employees does not apply to representative offices established by foreign companies in China. Representative offices of foreign companies are not independent legal entities in China and therefore, are not allowed to hire Chinese employees directly, but must hire them through a labor agency.35 Termination of Employment Unlike practices in many other countries, employment at will is not permitted in China. Employment termi nation is complicated in China and employers should exercise caution in this regard. Employers have to follow certain procedures and conditions to terminate the employment with the staff, e.g. upon contract expiration, or where the employee is proved to be unqualified during probationary period, violates the enterprises rules and regulations and disclosed criminal

35

convictions. In addition, staff may be made redundant as a result of production or technical changes. However, an employer is not permitted to dismiss staffs who undergo stipulated medical treatment, who lose their ability to work due to an occupational disease or a work-related injury, and who are on pregnancy or maternity leave or in the midst of a lactation period. To terminate an employment relationship with staff, enterprises may need to give a statutory termination notice. Employers may dismiss employees without notice only when the employee is dismissed during the statutory probation period; has seriously violated workplace rules; cause great losses to the employer due to serious dereliction of duty, embezzlement or another criminal offence; or is being investigated for a criminal offence. Conditions permitting employee dismissal with prior 30 days notice include inability of an employee to take up his original or new work upon returning from non-work related medical treatment for illness or injury, is unqualified for his job and remains unqualified even after receiving training or an adjustment to another work post. Enterprises may need to provide required severance payment following termination of an employment relationship. The severance payment is calculated based on the actual service year and the salary level of the staff.

In China, ROs are also able to terminate their staff. As they do not have an employment relationship with the seconded staff, ROs may terminate the service of these staff through their engaged agency. The service agreement between ROs and the labour agency serves as the guidance of the termination.

Take a glimpse!
Dismissal of staff due to medical issues is not permitted. A statutory termination period needs to be given before termination unless statutory probation period applies or under serious circumstances Severance payment following termination without cause is based on actual service year and salary level of staff. ROs go through agencies subjected to their agreed conditions between both parties.

Employer-Employee Relations The Chinese government is now enforcing the Trade Union Law. According to the Trade Union Law, companies are required to support employees to set up a trade union and provide funds equivalent to 2% of the companys total salary costs for the activities of the trade union. For activities related
36

to employees, for example, re-organisations and layoffs, the company shall notify the trade union and heed its comments before taking action. On labour disputes, Chinas Regulations Concerning the Handling of Labour Disputes in Enterprises and the Provisional Regulations on Handling of Personnel Disputes establish the procedures for handling labour disputes. Under the dispute regulations, parties are encouraged to settle labour disputes by negotiation or mediation. If neither of these works, the parties must resort to compulsory arbitration before they may initiate legal proceedings. Part of Labour Disputes Arbitration will be final under the Labour Disputes Intermediation and Arbitration Law of the Peoples Republic of China.

to meet these standards may be ordered to compensate employees for the difference, pay other compensation, or both. In addition to compensation, enterprises may also implement effective incentive programmes, e.g. sales incentives, performance bonuses, stock options, and the like, in order to attract talent. This is usually of greater importance for positions in management and sales. In terms of payroll, salary shall be disbursed to the staff at least once a month in local currency. The date of disbursement can be decided through an agreement between the company and staff. The wage paid to staff shall not be deducted or delayed without justification. Delayed payroll disbursement may lead to a financial penalty. In addition, the company is responsible for withholding individual income taxes that is payable from staff gross compensation. Fringe Benefits In China, employers and employees are required to participate in a social benefits system. As a result, they are obliged to make contributions to the statutory social insurance programmes based on the schemes for different locations. For a majority of the workforce, whose salary level falls within the local social insurance contribution base, the social insurance contribution could be between 35-40% of their salary cost.

Working Conditions
Wages and Salaries In China, enterprises have the right to set their own remuneration package, including compensation and benefits. Pursuant to Chinas Labour Contract Law, the wages of staff shall not be lower than the minimum wage in the location where the company is registered. Minimum wage requirements are determined at a provincial level. The 1993 Regulations on Minimum Wages in Enterprises (amended in October 1994) require all provinces, autonomous regions, and directly administered municipalities to set minimum wage standards and report them to the Ministry. Employers that fail

37

The social insurance programmes cover the following social insurance and funds: pension, medical insurance, unemployment insurance, work-related injury insurance, maternity insurance and housing fund. It was recently announced that foreigners face a compulsory inclusion into 36 the social insurance system. To participate in social insurance programmes, enterprises need to register with the relevant labour bureau, set up an account with a social insurance management authority and pay the required insurance premiums on a monthly basis. Apart from employer premiums, companies shall withhold the premiums of employees from their monthly salary and make the payment to the relevant authority. For ROs, because they are not legal entities, premiums should be paid via the authorized labour agency. In addition to statutory social insurance, enterprises in China also provide supplementary benefits schemes to their employees as a way to attract and 37 retain local talent.

Take a glimpse!
Employers and employees are required to participate in social benefits system, make contributions to statutory social insurance programmes (location based) contribution between 35-40% of salary cost. Social insurance programmes cover pension, medical insurance, unemployment insurance, work-related injury insurance, maternity insurance and housing fund. Register with relevant labour bureau, set up an account with social insurance management authorities and pay required insurance premiums on monthly basis. Employers hold premiums of employees from monthly salary to make payment to relevant authority. Enterprises in China also provide supplementary benefits schemes to employees.

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Working Hours The working hours per week were reduced from 48 to 44 hours in March 1994, and further reduced to 40 hours in May 1995 by the State Council. In general, overtime is not encouraged, though permissible under special circumstances. Overtime pay is higher than that for normal working hours, ranging from 150% up to 300% of normal wages, depending on whether the overtime is during weekdays, rest days or statutory holidays. Challenges Companies in China need to be aware of potential challenges in industrial and community-relations in doing business in China following the implementation of the new Labour Contract Law. This includes stronger labour unions and more litigious employees, who now are less likely to hesitate to protest in cases of downsizing. Since companies in China are increasingly expected to demonstrate social responsibility and corporate citizenship, it is important to implement changes well and promote good communication within the company. A good start is to receive expert labour law input when forming for example JV and other contracts. Human resource constraints or the difficulty to recruit qualified staff frequently feature as the number one challenge that companies face. Interesting trends and insights that are surfacing include the intense competition for the same talent. There is a wide recognition that talent quality coming out

from local universities is better than ever, but competition from employers is also fierce. Competition to recruit top talent is coming not only from other foreign companies but also from private Chinese companies and state-owned enterprises. Furthermore, domestic companies are replicating some of the western formulas that make an employer attractive, like moving their offices to prime real estate so that they make the setting more attractive to top talents. Observations have been made that there has been an evolution in the type of talent that is lacking. It is commonly said that in 2001 there was a lack of professionals, in 2005 a lack of managers and 2011 a lack of executives.

Take a glimpse!
Companies need to provide funds equivalent to 2% of total salary costs for trade union activities. Labour disputes should go through negotiations, compulsory arbitration, before initiating legal proceedings.

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Intellectual Property Rights (IPR)

Overview
This section is a summary of the relevant laws that aim to protect an individuals intellectual property rights, namely, the registration process for trademarks, patents, as well as 38 possible legal avenues to seek redress on IPR disputes. Trademark Application 1. The two principal pieces of legislation forming the trademark system are the Trademark Law, and the Unfair Competition Law. China employs a "first-to-file" system, meaning that in general, the first party to file a trademark application in China will be deemed the owner of that trademark, assuming the application proceeds on to registration. Foreign parties must take up the trademark registration process with an approved Chinese agent, which can take about 1 to 3 years. Recent amendments to the Implementing Regulations of the Trademark Law allows local branches or subsidiaries of foreign companies to register trademarks directly without the use of a Chinese agent.39

Patent Application 1. The application for a patent right to any invention or utility model must possess novelty, inventiveness and practical applicability.

Intellectual Property Rights Disputes 1. Chinas intellectual property legislation stipulates that infringements of IPRs are dealt with by administrative procedures and legal proceedings. China currently adopts a dual-track system for IPR protection under which the interested parties may seek to resolve IPR-related disputes through administrative procedures or legal proceedings. When an IPR infringement dispute arises, the interested parties may resort to mediation. If mediation is not a preferred option, or mediation has failed, or one of the interested parties refuses to abide by the outcome of mediation, legal proceedings may be instituted with the Peoples Court. It should be noted that under Chinas Patent Law and Trademark Law, foreign enterprises are required to appoint designated agents to handle matters related to patents and trademarks. This also applies to the handling of disputes involving infringements, which
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2.

2.

3.

3.

4.

means that the designated agent should make the request for settlement of the dispute on behalf of the interested party.

Concluding Notes
In this info kit, we hope to give entrepreneurs an overview of the situation in China, assist and equip them with essential information required in entering the Chinese market for the first time. Undoubtedly, there is still vast knowledge to be realised about the Chinese market that is incompressible into one kit. Our future updates of this report aim to continue giving Singapore entrepreneurs the latest information regarding starting up in China. Do stay tuned for our next update!

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Appendix 1
List of Useful Websites
ACE Singapore http://www.ace.sg ACE Beijing http://www.acebeijing.org/ International Enterprise Singapore http://www.iesingapore.gov.sg Singapore Chamber of Commerce and Industry in China http://www.singcham.com.cn Singapore Embassy in Beijing http://www.mfa.gov.sg/content/mfa/overseasmission/beijing.html Market Research on China APCO Worldwide Inc. (Research Reports) www.apcoworldwide.com The American Chamber of Commerce in China http://www.amchamchina.org Beijing Consulting Group (New company setup / staff recruitment / sourcing) www.BJConsultingGroup.com China Briefing http://www.china-briefing.com/en/

Hong Kong Trade Development Council (HKTDC) http://www.hktdc.com/en-buyer/ iResearch (China Internet Market) http://www.iresearch.cn The JLJ Group (China Entry Market Handbook) http://www.jljgroup.com/page/en/21/China-Market-Entry%20Handbook.html National Bureau of Statistics of China http://www.stats.gov.cn/english/ Nielsen Research (China Consumer Research Reports) http://cn.en.acnielsen.com/trends/index.shtml Media in China China Daily (widest circulation of all Chinese English-language print newspapers) http://www.chinadaily.com.cn/index.html Xinhua Net (Chinas official news agency) http://www.xinhuanet.com/english/ Legal Matters China-Law-Firms http://www.chinalawfirms.cn/ (Legal Information) National Peoples Congress Laws and Regulations (In English) http://www.npc.gov.cn/englishnpc/Law/Integrated_index.html Economic Matters The World Bank http://www.worldbank.org/

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World Trade Organisation http://www.wto.org/

16

The World Bank, Data: GDP (current US$), (http://data.worldbank.org/indicator/NY.GDP.MKTP.CD). 2 Ibid. 3 Ibid. 4 International Monetary Fund (IMF), World Economic Outlook: Growth Resuming, Dangers Remain, Apr 2012, (http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf). 5 Research Institute of Economy, Trade and Industry, IAA, Riding on the Vigor of An Economic Superpower: Japan should seek an FTA with China, 13th March 2012, (http://www.rieti.go.jp/en/columns/a01_0340.html); Jiangsu Guotai International Group, 2011 Chinas Import and Export over US$3.6 trillion, (http://www.gtig.com/en/news-view-1731.aspx). 6 Bloomberg Daily, Chinas Foreign Exchange Reserves Surge, Exceeding $2 Trillion, 15th July 2009, (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=alZgI4B1lt3s). 7 CBS News, Econ Watch, China now owns $1.16 trillion of U.S. debt, 28th February 2011, (http://www.cbsnews.com/8301-503983_162-20037535-503983.html). 8 FDI China, News Release of National Assimilation of FDI From January to December 2011, 19th January 2012, (http://www.fdi.gov.cn/pub/FDI_EN/Statistics/FDIStatistics/ExpressofForeignInvestment/t201201 19_140569.html). 9 Economic and Commercial Counsellors Office of the Embassy of the Peoples Republic of China in the Republic of Zambia, 2010 Statistical Bulletin of Chinas Outward Foreign Direct Investment, 4th November 2011, (http://hzs.mofcom.gov.cn/accessory/201109/1316069658609.pdf). 10 Huanxin Zhao, China Daily, New State Council unveiled 17th March 2013 (http://www.chinadaily.com.cn/china/2013npc/2013-03/17/content_16313953.htm) 11 WTO | China, Member Information, (http://www.wto.org/english/thewto_e/countries_e/china_e.html). 12 Peoples Daily Online, China, Singapore have broad vista for economic, trade cooperation, 23rd July 2010 (http://english.people.com.cn/90001/90780/91421/7078614.html) 13 Wall Street Journal Asia, China Turns Predominantly Urban, 18th January 2012, (http://online.wsj.com/article/SB10001424052970203735304577166652002366514.html); National Bureau of Statistics of China, China's Total Population and Structural Changes in 2011, 20th January 2012, (http://www.stats.gov.cn/was40/gjtjj_en_detail.jsp?searchword=cities&channelid=9528&record =79). 14 New Zealand Trade & Enterprise (NZTE), Report On the 12th Five-Year Plan: An in-depth overview and analysis of Chinas policy blueprint for years 2011 2015 (Wellington: New Zealand and Enterprise, 2011), page 4, (http://www.nzte.govt.nz/features-commentary/InBrief/Pages/Report-Chinas-Five-Year-Plan.aspx). 15 Ibid.

KPMG China, Chinas 12th Five-Year Plan: Overview, March 2011 (http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Publicationseries/5-yearsplan/Documents/China-12th-Five-Year-Plan-Overview-201104.pdf), page 2 17 APCO, page 6-9. 18 NZTE, page 69-70. 19 14 nuclear reactors are in service. China Daily, Building of nuclear plants to resume, 8th March 2012, (http://english.peopledaily.com.cn/90778/7751956.html). 20 Xinhua, China to Safely and Effectively Develop Nuclear Power, 5th March 2012, (http://english.cri.cn/6909/2012/03/05/1461s684995.html). 21 Casey,J. & Koleski, K., Backgrounder: Chinas 12th Five-Year Plan. (U.S.-China Economic & Security Review Commission) page 9. 22 APCO, page 9. 23 Mary Murray Bosrock and Craig MacIntosh, Put your Best Foot Forward (United States of America: International Education Systems, 1997); Alberta School of Business, Business Etiquette in the Peoples Republic of China, May 2012, (http://www.business.ualberta.ca/International/InternationalPrograms/InternationalStudyTour/ ~/media/business/International/InternationalPrograms/Documents/StudyTour/etiquette2012.p df) 24 Jeffery Hays, Eating and Drinking Customs in China, February 2011, (http://factsanddetails.com/china.php?itemid=112&catid=4&subcatid=19). 25 Establishment Of Partnership Enterprise By Foreign Enterprises Or Individuals In China, June 2013, http://www.pathtochina.com/reg_pe.htm 26 The Parent Company must be established for more than 2 years. (State Administration of Industry and Commerce's file: Gong Shang Wai Qi [2010] No.4). 27 Due to the one country, two systems policy. For more information, visit (http://en.wikipedia.org/wiki/One_country,_two_systems). 28 Establishment Of Partnership Enterprise By Foreign Enterprises Or Individuals In China, June 2013, http://www.pathtochina.com/reg_pe.htm 29 Grant Thornton, Doing Business in Mainland China (Shanghai, China, 2011), page 15, (http://www.grantthornton.ie/db/Attachments/Doing-business-in-China-2011.pdf). 30 Ibid, page 10. 31 Janus, General Compliance and Annual Filing Requirements for Hong Kong Companies, (http://www.guidemehongkong.com/incorporation/company/hong-kong-company-annual-filingcompliance-requirements). 32 KPMG, Literature about the Difference and Convergence of CAS, September 2011, (http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/New-PRCGAAP-201109.pdf). 33 The Government of the Hong Kong Special Administrative Region of the Peoples Republic of China, Inland Revenue Department, Profits Tax Return Persons Other Than Corporations; Final Assessment and Provisional Payment Form Sample, (http://www.ird.gov.hk/eng/pdf/ebir52.pdf). 34 China Law Firms, Guide to Doing Business in China-Invoice Management, 8th June 2009, (http://www.chinalawfirms.cn/practice-areas/finance/finance/176-guide-to-doing-business-inchina-invoice-management-.html).

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35 Association of Corporate Counsel (ACC), (2013, 14th January). Newly amended PRC Labor Contract Law imposing stricter control over the use of seconded employees. Retrieved from: http://www.lexology.com/library/detail.aspx?g=eec02e59-c329-4c77-aafb-4b4c19324c95 36 China Briefing, Beijing Details Foreigners Mandatory Social Insurance Participation, 11th January 2012, (http://www.china-briefing.com/news/2012/01/11/beijing-details-mandatoryforeigner-participation-in-social-insurance.html). 37 China Briefing, Beijing Details Foreigners Mandatory Social Insurance Participation, 11th January 2012, (http://www.china-briefing.com/news/2012/01/11/beijing-details-mandatoryforeigner-participation-in-social-insurance.html 38 Tamara A. Miller, Why Registering Trademarks in China is a No-Brainer, Leydig, Voit and Mayer, Ltd., December 2007, (http://www.leydig.com/publications/articles_publications-22).

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