The
Administrative Measures for Foreign Enterprises and Individuals to Establish Partnership Enterprises in China
(the “Measures”) became effective on March 1, 2010. Non-Chinese entities and individuals, alone or with Chinese individuals, legal persons and other organizations, are now allowed to set up foreign invested partnerships (“FIPs”).
Before the Measures went into effect, there are only two roads for foreign enterprises and individuals to approach to China, namely Joint Ventures (“JVs”) and Foreign-funded Enterprises (“FFEs”). Under the new Measures, foreign investors have a third choice to invest in China. Compared to JVs and FFEs, FIPs have more advantages in certain respects. They not only stimulate foreign investment , but also boost the economy. Other advantages include:
(1) Simplified Procedures for Establishment
According to Article 5 of the Measures, a FIP can be registered in a local Administration of Industry and Commerce (AIC). Prior to registration, however, a JV or FFE shall obtain the approval from the Ministry of Commerce (MOFCOM) before its establishment. This new procedure has saved time and expense for foreign investors.
(2) More Flexibility for Investments
Partnerships in China are under the governance of the
Partnership Enterprise Law
(“PEL”), which provides partnerships with more flexibility in capital contributions, time limits and execution. FIPs can take advantages of these conveniences:
a) Capital Contributions
The PEL allows partners of FIPs make capital contributions in the form of cash or other assets, including labor services. In contrast, investors of JVs and FFEs cannot make capital contributions of labor services.
b) Time Limits
The contributions of JVs and FFEs are strictly subject to time limits, for example, 3 years for foreign investors of FFEs. There is no such limit for FIPs unless it is stated in the partnership agreement.
c) Execution
Investors of FIPs have more choices on the form of executions of partnership affairs. They can agree on that the affairs of the partnership are to be executed by one or more general partners. JVs and FFEs, however, do not enjoy such flexibilities. Only the Board of Directors, for instance, can make decisions on behalf of a JV.
(3) Better Tax Treatments
The PEL provides that partnerships are exempt from income tax at the enterprise level. FIPs should be offered the same treatment since the Measures do not discuss the issue. In contrast, JVs and FFEs pay enterprise level tax and their investors pay progressive individual income tax. The treatment for FIPs immensely cuts the costs of running a business in China.
“Such advantages significantly facilitate foreign investors,” says Lily Han, attorney of Lehman, Lee & Xu, “but it should be noted that there are also some limits for FIPs. Foreign investors should estimate the risks of establishing a FIP before taking actions.”
Lehman, Lee & Xu is a prominent Chinese corporate law firm and trademark and patent agency with offices in Beijing, Shanghai, Shenzhen, Hong Kong, Macau, and Mongolia. The firm has also been recognized as one of the top full service as well as intellectual property firms in China by several international magazines. The law firm is managed by Mr. Edward Lehman, a leading expert on corporate law with 20 years of practice experience in Mainland China.
To learn more about us, please visit our website at www.lehmanlaw.com.
(Tax: Article 1)
SAT Further Strengthens the Collection of Land Appreciation Tax
On May 25 2010, the State Administration of Taxation (“SAT”) issued another circular to strengthen the collection of land appreciation taxes (“LAT”) －
Notice on Reinforcing the Collection and Administration of Land Appreciation Tax
(Guo Shui Fa [2010] No.53) (“Circular 53″). Circular 53 is the second circular issued by the SAT on the subject of LAT within 10 days, which shows the great attention the SAT paid to LAT. Circular 53 focused heavily on enforcement measures rather than mere technique clarifications in previous circulars. Circular 53 gives several main points to local authorities of taxation:
(1) Provisional Payment
Circular 53 heavily emphasizes the importance of provisional payment, which is regarded as a principal means to adjust the economy and balance the taxation. Circular 53 sets the minimum provisional rates for levying LAT. Except for affordable housing, the provisional levying rate should be no less than 2% in the eastern provinces, 1.5% in the central and northeastern provinces, and 1% in the western provinces. Such actions, along with other measures required by the SAT, may impact the cash flow of property developers.
(2) Final Settlement
Great importance is repeatedly attached to LAT final settlement in Circular 53. It is required that local authorities make plans on enforcement of LAT final settlement which are to be submitted by the end of June. Further, Circular 53 requires local authorities to select three to five projects as key audit targets, focusing on overpriced projects or projects whose prices have risen too quickly. The SAT hopes to set exemplary models through auditing these projects. Both the plans and audits are compulsory for local authorities and spot-checks will be conducted by the SAT.
(3) Restriction of Verification Collection
Circular 53 shows discouragement on verification collection of LAT, and local authorities were urged to collect LAT on an actual basis. Verification collection is restricted by law. In some cities, however, it is used as a principal method to facilitate the collection of LAT. But verification collection usually underestimates actual tax. Hence, Circular 53 sets a minimum rate for verification collection at 5% and requires verification collection to be applied at a strict and high standard.
“The SAT,” says Cindy Kang, attorney of Lehman, Lee & Xu, “shows its determination in strengthening the control of LAT.” She added; “As a local tax, LAT is generally influenced by the local government. The tone of SAT on the subject of LAT is without precedent, which indicates that the SAT hopes to optimize LAT’s function in coping with overheating property prices.”
Lehman, Lee & Xu is a prominent Chinese corporate law firm and trademark and patent agency with offices in Beijing, Shanghai, Shenzhen, Hong Kong, Macau, and Mongolia. The firm has also been recognized as one of the top full service as well as intellectual property firms in China by several international magazines. The law firm is managed by Mr. Edward Lehman, a leading expert on corporate law with 20 years of practice experience in Mainland China.
To learn more about us, please visit our website at www.lehmanlaw.com.