Policy on foreign investment

On 8 August 2017, the State Council issued a notice (Guo Fa [2017] No. 39) announcing measures to encourage foreign investment. The measures are intended to improve the foreign investment policy in five aspects.

The contents of the notice are summarised below:

  • Reduction of limitations on import of foreign capital: The national treatment and negative list management system in respect of foreign investment, which was trialled in Free Trade Pilot Zones, will be fully implemented nationwide with increased market access to foreign investors. The notice encourages foreign investments in special and new energy automobiles, vessel design, call centres, banking, insurance and securities, etc.

    • Fiscal and tax incentives: Qualifying profits (dividends) derived by foreign investors from resident enterprises and reinvested in China are temporarily exempt from withholding tax. The income tax incentives currently aimed at technologically advanced service enterprises located in designated service outsourcing cities will be made available nationwide. The Ministry of Finance (MoF) and the State Administration of Taxation (SAT) will study the introduction of preferential tax policies regarding the remittance of foreign income to China by resident enterprises (including regional headquarters of multinational companies). Meanwhile, local governments may, within the framework of the laws, issue policies, including fiscal support, to encourage multinational companies to set up regional headquarters in China. In addition, the relocation of existing foreign investment in high-end manufacturing industries to the western and northeast part of China is encouraged. As such, local provincial governments may issue bonds to fund the construction of infrastructure and other key projects for trading with foreign countries.
    • Improvement of investment environment in the National Development Zones: More power will be granted to National Development Zones in terms of management of investments. The use of land for construction of foreign investment projects will be prioritised and guaranteed. Auxiliary services will also be upgraded.
    • Relaxation of entry and exit of talented and skilled persons: The policy on attraction of foreign talents will be optimised and work permit issuance is expected to be standardised across the country in 2018. Qualifying foreign talent may be entitled to a multiple entry visa for 5-10 years, and it may also be possible to apply for a permanent resident permit.
    • Improvement of general business environment: The State Council also urges the relevant government departments and provincial governments to unify the laws and regulations on domestic and foreign investment and to remove the regulations which impair foreign investment. It also promises improvements in respect of dispute resolution, remittance of profits by foreign investors, simplifying registration with different authorities, participations in Chinese enterprises and protection of intellectual property. Detailed rules and regulations are expected to be issued by the relevant government agencies and departments to implement the policies of the State Council.

VAT on asset management services

On 30 June 2017, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly issued a notice (Cai Shui [2017] No. 56) (the Notice) clarifying VAT payable on asset management services. Under the previous business tax regime, asset management services were exempt from business tax. Following the transition from business tax to VAT on 1 May 2016, these services became subject to VAT. The Notice seeks to clarify how these services will be taxed. It will apply from 1 January 2018 so as to allow asset management agents time to prepare for the implementation.

According to the Notice, the taxable asset management services are subject to 3% VAT on the basis of the simplified method. The simplified method means that no input VAT can be deducted. Asset management agents include banks, trust companies, securities companies, private investment funds, insurance asset management companies, special insurance asset management institutions and pension funds.

The taxable products covered by the Notice include, inter alia, asset management products, trust products, special or collective asset management plans, open security investment funds, composite insurance asset management products and old-age pension products. Taxable asset management services not covered by the Notice will be subject to VAT based on the current standard VAT rules.

Tax incentives for high and new technology enterprises

On 19 June 2017, the State Administration of Taxation (SAT) issued an announcement (SAT Gong Gao [2017] No. 24) clarifying the administrative rules for high and new technology enterprises (HNTE). The announcement applies to the final settlement and payment of the annual enterprise income tax of 2017 and subsequent years. Some of the salient points include:

  • A qualifying HNTE may enjoy the tax incentive starting from the year in which the certificate of HNTE is issued and the filing procedure with the competent tax authorities is completed.
  • A HNTE is required to make a prepayment of enterprise income tax at a rate of 15% in the year that the certificate of HNTE expires.
  • If the enterprise fails to renew the certificate by the end of that year, it must pay enterprise income tax at the full tax rate by making a supplement to the prepayment.
  • The following documentation must be maintained by a HNTE:

    • the certificate of the HNTE status;
    • the documents supporting the HNTE status;
    • the documents related to intellectual property rights;
    • the documentation stating that the key technology used in the main products of the enterprise is within the scope of the "State Supported High and New Technologies" and the relationship between the key technology and the revenue generated by such key technology;
    • the documentation on personnel and the scientific and technology employee;
    • the documentation on the proportions of R&D expenses to the revenue of the current and two previous years, the administration, accounts and specification of R&D expenses; and
    • other relevant documents required by the tax authorities at the provincial level.

International tax developments


On 24 April 2017, the amending protocol, signed on 8 December 2016, to the China (People's Rep.) - Pakistan Income Tax Treaty (1989), as amended by the 2000 and 2007 protocols, entered into force. The protocol generally applies from 24 April 2017.


On 17 June 2017, the 2016 tax treaty with Romania entered into force. The treaty generally applies from

1 January 2018. From this date, the new treaty generally replaces the 1991 tax treaty.


On 7 May 2017, the agreement to clarify the application of the article on interest under PRC's tax treaty with Portugal, signed on 7 April 2017, entered into force.

The agreement on the application generally applies from 1 June 2017.


Consultation report on measures to counter BEPS

On 31 July 2017, the government released a consultation report on measures to counter base erosion and profit shifting (BEPS) by enterprises. According to the report, the proposed implementation strategy of countering BEPS, which focuses on the four minimum standards set by the OECD (i.e. countering harmful tax practices, preventing treaty abuse, imposing a country-by-country reporting requirement and improving the cross-border dispute resolution mechanism) while maintaining Hong Kong's simple and low-tax regime, has gained the general support from the respondents. The government will introduce an amendment bill into the Legislative Council by the end of 2017.

Amalgamation ruling

On 22 August 2017, the Inland Revenue Department (IRD) published an advance ruling (Advance Ruling Case No. 62) in respect of the application of sections 14, 33A, 35, 39B, 51, 61 and 61A of the Inland Revenue Ordinance (IRO) which sets out the tax treatment of amalgamating companies.

Details of the ruling, which will apply as from the year of assessment 2017/18, are summarised below:

  • Company A, Company B and Company C (the HK Companies) are companies incorporated in Hong Kong. Their respective parent companies and common ultimate holding company are incorporated outside Hong Kong. The HK Companies are principally engaged in property investment and collectively own a commercial building for long-term investment and letting purposes. In order to standardise the property holding structure, enhance management and operational efficiency, the Group planned to amalgamate Company B and Company C horizontally into Company A (the amalgamation) by 30 June 2017. Following the amalgamation, the rental of the building was to be solely managed by Company A.
  • The amalgamation is governed by the amalgamation provisions included in the Companies Ordinance. The legal effects of the amalgamation on and after the effective date of the amalgamation are as follows:

    • Company B and Company C cease to exist as entities separate from Company A;
    • Company A acquires all property, rights and privileges, and all liabilities and obligations of Company B and Company C; and
    • any agreement entered into by Company B and Company C may be enforced by or against Company A.
  • The following ruling was issued:

    • no profits or losses will arise, or be deemed to arise, in any of the HK Companies as a result of the amalgamation;
    • any provision or accruals of Company B and Company C will be carried over to and vested with Company A without any changes in the related tax base and treatments;
    • annual allowances of commercial building and structures will be available to Company A, subject to balancing charges on disposal not exceeding the aggregate of the allowances made to the HK Companies; and
    • the unclaimed reducing value of the relevant machinery or plant of Company B and Company C will be used for computing the annual allowances made to Company A, subject to balancing charges on disposal not exceeding the aggregate of the allowances made to the HK Companies.

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This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.