United States: Asia Tax Bulletin - Winter 2016/2017

Last Updated: January 18 2017
Article by Mayer Brown

China (PRC)

Revisions to inbound foreign investment laws

China's regulatory regime on inbound foreign investment entered a new era on 1 October 2016. According to a decision issued by the National People's Congress of China in September 2016, the foreign investment approval requirement has to a large extent been replaced by a filing system across the nation (please refer to our earlier Legal Update for details).

To implement this decision, a number of regulations have been released recently, including:

  • NDRC & MOFCOM Circular 2016 No.22 (中华人民共 和国国家发展和改革委员会中华人民共和国商务 部公告2016年第22号) ("Circular 22")
  • Interim Administrative Measures on Record-filing of Establishment and Change of Foreign Invested Enterprises (外商投资企业设立及变更备案管理暂 行办法) ("MOFCOM Measures")
  • SAIC Notice on Registration of Foreign Invested Enterprises under the Filing System (工商总局关于 做好外商投资企业实行备案管理后有关登记注册 工作的通知) ("SAIC Notice")

Under the new system, foreign investment no longer requires approval from the Ministry of Commerce (MOFCOM) or its local branches, as long as the business undertaken is not on a "negative list".

Foreign investment changes

On 7 December 2016, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly released the latest revised draft of the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录(修订 稿) (Draft Catalogue) soliciting public comments. The deadline to submit comments is 6 January 2017.


Since the Foreign Investment Industrial Guidance Catalogue (Catalogue) was first issued in 1995, it has been one of the most fundamental legal documents regulating foreign investment in China. On 1 October 2016, a nationwide reform on foreign investment was launched resulting in the removal of the requirement to obtain approval from MOFCOM or its local branches for projects which do not fall within a negative list. However, no separate negative list has been issued by the government so far; instead, reference was made to the current catalogue adopted in 2015 (2015 Catalogue). To correspond to this negative list approach, NDRC and MOFCOM changed the structure of the 2015 Catalogue to form the Draft Catalogue. In addition, changes were made to relax certain restrictions on a number of industry sectors.

Structural changes to the Catalogue

One of the main changes in the Draft Catalogue relates to its structure. Under the 2015 Catalogue and all previous versions of the Catalogue, industries were classified under the following categories: (a) encouraged, (b) restricted and (c) prohibited, with those industries which are not expressly listed in the Catalogue falling under the "permitted" category. To implement the recent reform on foreign investment, the Draft Catalogue groups industries under the following two main headings: (a) encouraged and (b) negative list. The negative list section is further divided into three categories:

  • Industries under the encouraged category but subject to restrictions on foreign equity holding;
  • Industries under the restricted category; and
  • Industries under the prohibited category.

As its name suggests, if a foreign investor would like to know whether its investment falls within the negative list (and therefore requires MOFCOM approval), it should refer to this negative list section. Compared with the 2015 Catalogue, where references to these items are scattered throughout, the amendment provides easier reference and clearer guidance to foreign investors.

Encouraged category

Restrictions on foreign equity holding have been removed for a number of industries (i.e. 100 per cent foreign ownership is allowed), such as:

  • Manufacturing and R&D of automobile electronic bus network technologies (汽车电子总线网络技术) and electronic controllers for electric power steering systems (电动助力转向系统电子控制器);
  • Manufacturing of new energy automobile power batteries (新能源汽车能量型动力电池制造) – this has been changed from an encouraged industry to a permitted one; and
  • Manufacturing of track transportation equipment (轨道交通运输设备) – this has been changed from an encouraged industry to a permitted one.

Due to structural changes to the Draft Catalogue, the encouraged industries with restrictions on foreign equity holding also appear under the new negative list section. The Draft Catalogue clarifies that while these industries are subject to the applicable foreign equity restrictions, they will continue to enjoy preferential policies available to any encouraged industry (such as tax reduction on imported equipment).

Restricted category

A number of industries, including those listed below, have been removed from the restricted category and have now become permitted industries:

  • Highway passenger transportation service (公路旅客运输);
  • Credit investigation and evaluation service (资信调查与评级);
  • Exploration and exploitation of precious metals (贵金属勘探、开采);
  • Processing of rice, flour and crude sugar (大米、面粉、原糖加工); processing of edible oil and fats (食用油脂加工) – restriction on foreign equity holding has also been removed;
  • Production of biological liquid fuels (生物液体燃料生产) – restriction on foreign equity holding has also been removed; and
  • Motorcycle manufacturing (摩托车制造) – restriction on foreign equity holding has also been removed.

Compared with the 2015 Catalogue, there are around 11 fewer industries under the restricted category in the Draft Catalogue. However, some of these industries have been removed from the Draft Catalogue because they are restricted to both foreign investment and Chinese investment and have already been covered by the Draft Pilot Market Access Negative List (市场准入 负面清单草案(试点版))circulated in March 2016, which applies to any investment in China (whether foreign or not). These sectors include, for example, the construction and operation of large-scale theme parks ( 大型主题公园建设、经营).

Prohibited category

Similarly, a number of prohibited industries have been removed from the Draft Catalogue because they are prohibited to both foreign and Chinese investment, such as the construction of golf courses and villas (高尔夫球 场、别墅的建设), gambling and lottery (博彩业).

Other Highlights

The Draft Catalogue clarifies that foreign investors are not allowed to set up a foreign-invested partnership in any restricted industry where restrictions on foreign equity ratio exist.

The Draft Catalogue reiterates that the current regulatory regime on acquisition of associated Chinese companies in the form of round-trip investment remains effective and must be complied with. This seems to suggest that MOFCOM approval under Rules on Foreign Investors Acquiring Domestic Companies 关于外国投 资者并购境内企业的规定 is required for such round-trip acquisition regardless of industry sectors.


The key highlight in this round of amendments is that a new negative list section has been added to the Draft Catalogue. Although this is more a reorganisation of the existing categories, it does provide easier reference to foreign investors. The changes also reflect a move towards a regulatory regime where two negative lists will apply, one specific for foreign investment and the other which generally applies to both foreign and Chinese investment. However, the negative list section in the Draft Catalogue is still rather lengthy with very broad language on restrictions. Therefore, while the regulatory regime on foreign investment has been largely relaxed since 1 October 2016, there is still a long way to go in implementing national treatment for foreign investors.

Pilot programme introduced to centralise work permit system

The PRC has introduced a "Pilot Implementation Plan on the Work Permit System for Foreigners in China." The pilot programme seeks to unify the current two work permit streams (alien employment permit and foreign expert permit) into a single work permit stream.

The pilot programme will run in nine locations in China from 1 November 2016 to 31 March 2017, with nationwide rollout effective 1 April 2017.

While implementing rules have not yet been released, the pilot programme is expected to introduce the following new features:

  • Online filing system, with a reduction in government processing times and required application documents;
  • Identification card to serve as the work permit approval; and
  • Points-based system to classify workers as (A) Foreign Top Talent, (B) Foreign Professional Talent or (C) Temporary, Seasonal, Non-Technical or Service Workers.

Nationwide platform for sharing entry/ exit information

China announced plans to explore development of a unified entry/exit platform to strengthen the coordination of governmental departments across the country. A report submitted by the Standing Committee of the National People's Congress, China's top legislative body, highlights the improvements in efficiency created by development of a unified platform.

Currently, Chinese nationals must seek approvals from multiple departments to submit documents if they seek to travel abroad, which creates asymmetric information-sharing among entry/exit authorities. The report also stipulates that entry/exit services for foreigners will be improved.

Stock option incentive scheme

On 28 September 2016, the State Administration of Taxation (SAT) issued an announcement concerning the collection and administration of income tax on stock option incentive schemes and capital contributions in the form of technology (SAT Gong Gao [2016] No. 62), implementing Cai Shui [2016] No. 101 on the same subject. The announcement retrospectively applies from 1 September 2016. The main content of the announcement is summarised below.

Individual income tax

  • For the qualified stock option incentive schemes of an unlisted company, the average number of employees is determined by the average number of the company's employees in the last six months as reported in the withholding tax returns for wages and salaries prior to the granting of such schemes.
  • If the unlisted companies undergo changes and, as a result, no longer satisfy the conditions for the tax deferral treatment of incentive schemes, the individual income tax of employees should be withheld and remitted within 15 days after such changes.
  • The fair market price of the shares of a listed company is determined by reference to the closing price on the trading day. The fair market price of the shares of an unlisted company is determined by using the net asset method, the analogy method or another reasonable method.
  • All qualified stock option incentive schemes and the tax deferral treatment of the contribution in the form of technology must be filed with the competent tax authority. The relevant forms are available on the website of the SAT.

Enterprise income tax

  • The enterprise that applies the deferred tax treatment should be an enterprise that is taxed on actual profits (not on deemed profits) and makes the investment by contributing the proprietary right of the self-developed technology.
  • An enterprise applying the tax-deferral treatment is required to file the contribution in the form of technology with the tax authority, and the tax authority is authorised to make adjustments to the value of the contribution if it is unreasonable.

VAT on disposal of immovable Property

The State Administration of Taxation (SAT) issued an announcement on 24 November 2016 (SAT Gong Gao [2016] No. 73) clarifying the VAT treatment of the disposal of immovable property. The announcement applies from 24 November 2016.

According to the announcement, a taxpayer is subject to VAT on the balance between sale proceeds and acquisition price when an immovable property is disposed of. If the taxpayer is unable to provide the original invoice of immovable property proving the acquisition price, other documents, such as the payment certificate of deed tax, which states the taxable amount of deed tax on the transaction, may be used.

Supplemental VAT rules published

The Ministry of Finance and the State Administration of Taxation jointly issued a notice on 21 December 2016 (Cai Shui [2016] No. 140) supplementing VAT rules for financial services, exploitation of real estate, educational services, etc. With the exception of article 17, the notice retrospectively applies from 1 May 2016. The main content of the notice is summarised below.

  • Income derived from an investment in its holding period, in respect of which the recovery of the invested principal amount is not guaranteed, is not subject to VAT due to the non-interest nature.
  • Holding of financial products purchased from a fund, trust or other asset management company is not considered a transfer of financial products in the sense of Cai Shui [2016] No. 36.
  • Interest payables on loans granted by approved securities companies, insurance companies, financial leasing companies, securities fund management companies, securities investment funds and other institutions are subject to VAT within 90 days of the due date of interest, and are subject to VAT. Those accrued after 90 days of the interest due date are temporarily exempt from VAT until the accrued interest is paid.
  • The "considerations for acquiring land paid to the government" referred to in Cai Shui [2016] No. 36 include the fees related to the acquisition of land, relocation costs, land development costs and income from the transfer of land.
  • Subject to certain conditions, a real estate development company may deduct the consideration for acquiring land paid to the government for the purposes of VAT.
  • Takeaway services provided by taxpayers engaged in food and beverages are treated as "food and beverage service" and taxed accordingly.
  • Providing conference venues and associated services by hotels, resorts and other business accommodations is treated as conference and exhibition service and taxed accordingly.
  • In tourist places, income from operating cables, ferry cars, battery cars, cruises and other appliances is subject to VAT in accordance with the "Cultural and Sports Services" article.
  • Non-enterprise organisations that are general taxpayers may elect to apply the simple calculation method and pay 3% VAT on supplies of R&D and technical services, information technology services, forensic consulting services, sales of technology, copyright and other intangible assets.
  • General taxpayers may elect to apply the simple taxation method and pay 3% VAT on the supply of educational assistance services.
  • Armed transportation services are treated as "security services" and taxed accordingly.
  • Property management services that mainly comprise maintenance and repair services are treated as "construction services" and taxed accordingly.
  • The leasing of construction equipment to others, provided the equipment is operated by an employee of the taxpayer, is treated as "construction services" and taxed accordingly.

Tax incentives for advanced technology service enterprises

On 10 November 2016, the Ministry of Finance, the State Administration of Taxation, the Ministry of Commerce and the National Development and Reform Commission jointly issued a notice introducing tax incentives for advanced technology service enterprises that are located in pilot service innovation development zones (Cai Shui [2016] No. 122). The designated zones include Tianjin, Shanghai, Hainan, Shenzhen, Hanzhou, Wuhan, Guangzhou, Chengdu, Suzhou, Weihai, Harbin New Area, Jiangbei New Area, Liangjiang New Area, Guian New Area and Xixian New Area, and the tax incentives apply from 1 January 2016 to 31 December 2017.

Under the tax incentives, an advanced technology service enterprise located in the zone is subject to enterprise income tax at 15% and the actual employee education expenditure is deductible for up to 8% of the total salary and wages in determining taxable income (the excess of the expenditure can be carried forward in the following tax years) provided that certain requirements are satisfied.

An advanced technology service enterprise is required to observe the relevant provisions of Cai Shui [2014] No. 59 when applying for the tax incentive. The services being eligible for the incentive include computer and information services, R&D technical services, culture technical services, and medical services of traditional Chinese medicine etc. A list of such services is attached to the notice.

Advance pricing agreements

On 11 October 2016, the State Administration of Taxation (SAT) issued an announcement updating the rules on advance pricing agreements (APAs) (SAT Gong Gao [2016] No. 64). The announcement, pursuant to the enterprise income tax law and the tax administration law, seeks to improve APA management and implement the tax treaties concluded by China. The announcement will apply from 1 December 2016, and chapter 6 of the Implementation Rules on Special Tax Adjustments (Guo Shui Fa [2009] No. 2) will be abolished on the same date. The main contents of the announcement are summarised below.

Chapter 6 of Notice Guo Shui Fa [2009] No. 2 provides for the implementation rules of an APA. However, Notice SAT Gong Gao [2016] No. 64 made the following amendments to the Notice Guo Shui Fa [2009] No. 2:

  • The authority to accept an APA application is extended to the competent tax authorities. An enterprise for which the total annual amount of related transactions exceeds CNY 40 million in the preceding three years, prior to the tax year when the Notice of Tax Items concerning the acceptance of negotiation intentions by the competent tax authority is delivered, may reach an APA with its competent tax authority concerning the pricing policies and calculation methods for its related transactions in future years;
  • The whole application procedure for an APA is rescheduled and consists of six steps: (i) preliminary meeting, (ii) negotiation intention, (iii) analysis and evaluation, (iv) formal application, (v) negotiation and signing, and (vi) monitoring and implementation;
  • Under Notice SAT Gong Gao [2016] No. 64, the application year of an APA starts from the day the Notice of Tax Items concerning the acceptance of negotiation intentions by the competent tax authority is delivered to the enterprise. A concluded APA generally lasts from three to five years. Previously, the application year of an APA started from the following year the enterprise submitted its formal application;
  • The negotiation intention and formal application of an enterprise may be turned down by the competent authorities, and priority of handling a formal application for an APA may be given by the competent tax authorities under some circumstances; and
  • An article of exchange of information on a unilateral APA is introduced. Based on the minimum standards under the OECD BEPS Project, China is committed to include the unilateral APA concluded after 1 April 2016 into the framework of the mandatory spontaneous exchange of information with relevant countries and regions.

An enterprise may apply for a unilateral APA with the competent tax authority. A unilateral APA proposal must contain the following information:

  • The tax year for which the APA should apply;
  • Related parties and transactions involved in the APA;
  • Organisation and management structures of the enterprise and the group;
  • Business operations, financial statements, audit report and contemporaneous documentation of the enterprise in the preceding three to five years;
  • Function and risk analysis of related parties;
  • The proposed transfer pricing principle and calculation methods to be used, and the functional and comparability analyses, the assumptions on which the transfer pricing principle and calculation method used are based;
  • Value chain or supply chain analysis, and the consideration about location savings such as cost saving, market premium;
  • Market statement, including industry development trend and the competitive environment;
  • The forecast and estimate of the annual business scale, profits and plans for the APA period;
  • The possibility of the APA applied retrospectively;
  • Domestic and foreign laws and regulations affecting the APA; and
  • Other information required by the competent tax authorities.

An enterprise may apply for a bilateral or multilateral APA to the SAT and its competent tax authority simultaneously. Besides the information mentioned above, a bilateral or multilateral APA proposal must contain the following:

  • The information concerning the application for an APA to the competent tax authority of treaty partners;
  • Business operation and related transactions of related parties in the preceding three to five years; and
  • The possibility of double taxation.

The State Administration of Taxation (SAT) released the China Advance Pricing Agreement (APA) Report of 2015 on 23 December 2016. This is the seventh time that the SAT has published the APA annual report. The report provides statistics of APAs concluded from 2005 to 2015.

According to the report, 12 APAs (six unilateral and six bilateral) were concluded in 2015. The total number of APAs entered into in 2015 is considerably higher than in the preceding year, in which nine (three unilateral and six bilateral) were concluded. All six bilateral APAs entered into in 2015 were concluded with Asian countries.

Accounting rules related to VAT Revised

The Ministry of Finance issued accounting rules on value added tax (VAT) on 3 December 2016 (Cai Kuai [2016] No. 22) (the Rules). The Rules address the different aspects of recording VAT in accounting records and aligning accounting rules with VAT regulations in the aftermath of the VAT reform that transforms business tax on services into VAT. The Rules apply as from 3 December 2016.

The Rules provide the ledgers for the purpose of recording VAT, including:

  • VAT payable;
  • VAT to be paid;
  • VAT advance payment;
  • Input VAT;
  • Input VAT upon approval (of tax or customs authority);
  • VAT on accrued sales;
  • Non-deductible VAT;
  • VAT based on the simplified calculation method;
  • VAT on transfer of financial products; and
  • VAT by way of withholding.

Furthermore, the Rules specify how to make entries of sale of goods and services, acquisition of tangibles, taxation on the basis of the difference between sale proceeds and acquisition price (such as immovable properties), and VAT refund for export. With the publication of the Rules, Cai Kuai [2012] No.13 and Cai Kuai [2013] No. 24 on the treatment of VAT in accounting records ceased to apply.

Export VAT refunds

The Ministry of Finance and the State Administration of Taxation jointly issued a notice on 4 November 2016 (Cai Shui [2016] No. 113) increasing the VAT refund rates for the export of certain products. From 1 November 2016, the VAT refund rates for cameras, video recorders, internal-combustion engines, petroleum, aviation kerosene, diesel oil, etc. have been increased to 17%. A list of the products and their applicable VAT refund rates is attached to the notice.

International tax developments


On 8 December 2016, China and Pakistan signed an amending protocol to their tax treaty, as amended by the 2000 and 2007 protocols.

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