From cys05@iastate.edu Wed Apr 27 22:43:40 1994 Received: from cnd.org (cnd.cnd.org) by cnd-b.cnd.org (4.1/9.7jsm) id AA14180; Wed, 27 Apr 94 22:43:40 EST Received: by cnd.org (4.1/4.7) id AA28324; Wed, 27 Apr 94 20:37:48 PDT Return-Path: Received: from marge.ecss.iastate.edu by cnd.org (4.1/4.7) id AA28319; Wed, 27 Apr 94 20:37:43 PDT Received: by marge.ecss.iastate.edu with sendmail-5.65 id ; Wed, 27 Apr 1994 22:37:09 -0500 Message-Id: <9404280337.AA16564@marge.ecss.iastate.edu> To: cnd-ib@cnd.org X-Delivery-Note: This mail was relayed by CND.ORG Subject: Contribution Date: Wed, 27 Apr 1994 22:37:08 CDT From: Joseph Fung Status: RO INTERNATIONAL BUSINESS PRACTICES courtesy of Univ. of Missouri-St. Louis PEOPLE'S REPUBLIC OF CHINA (PRC) BUSINESS ORGANIZATIONS There are primarily three types of enterprises with foreign investment (foreign-invested enterprises) in China: wholly foreign-owned ventures, contractual joint ventures and equity joint ventures. As of the end of 1991, there were about 42,000 approved foreign-invested enterprises in China. Representative offices are also popular vehicles for establishing ties between foreign firms and the Chinese market. Other types of business establishments include consignment sales and service centers established to market foreign company products and to service those products, and foreign bank branches. Representative Offices: For foreign companies, the most common way to establish a permanent presence in China is to register as a representative office. Registration legitimizes business operations in China and allows a foreign company to establish a permanent presence in the Chinese market. Although representative office personnel cannot directly sign contracts or receive fees or income in China, they can perform market research, consulting, or liaison type work. A foreign company must first find a sponsor organization that will approve its application to establish an office. An application is then submitted to the State Administration for Industry and Commerce (SAIC) for review and registration. Equity Joint Ventures: Under Chinese law, equity joint ventures are limited liability companies. Normally, the foreign partner of an equity joint venture must contribute at least 25 percent of the capital although there are no limitations on the number of partners in a venture. Profits are distributed according to each partner's capital contribution. Upon successful completion of the pre-approval screening, the Ministry of Foreign Economic Relations and Trade (MOFERT) or a corresponding authority will normally make a decision on approval within 90 days. Depending on the scope of the venture, the contract period may be decided by negotiation among the parties or in accordance with sector specific regulations. The foreign investor may not recover its investment until liquidation or sale of the venture. Contractual Joint Venture: Under the law governing contractual joint ventures, often called cooperative joint ventures, the parties determine the form of operation through the negotiation of a contract. Generally, the parties agree to operate jointly like partners or to form a new limited liability company. There are no set government requirements on the duration of the venture, on the amount of capital the foreign investor must contribute, or on how profits are to be distributed. If ownership of the fixed assets of the venture reverts to the Chinese partner at the end of the contract term, the foreign investor may recover its share of the investment during the term of cooperation. Assuming successful completion of the required pre-approval procedures, MOFERT or a corresponding local authority will make a decision on approval within 45 days. Wholly Foreign-owned Ventures: Approval of a wholly foreign-owned venture depends on whether the enterprise is deemed to benefit the development of China's national economy. The Chinese government prefers enterprises which employ advanced technology and equipment to manufacture products that are important to the national economy and are not produced in China. Ventures which export a large portion of their products also are more likely to be approved. MOFERT is responsible for approval of wholly foreign-owned ventures, although other national and local authorities typically participate in the pre-approval screening steps required before the application documents are forwarded to MOFERT for approval. Because the foreign investor is the sole operator of a wholly foreign-owned venture, it is responsible for guiding its application through the Chinese bureaucracy. EXPORTING In October 1992, the United States and China signed an agreement on market access for exports to China. The agreement reduces tariffs for selected products; requires China to systematically publish its import and export related laws and guidelines; reduces China's reliance on import quotas and other restrictions; eliminates China's use of import substitution policies; and requires that more sales and marketing information be made available to foreign exporters. China's stated policy is to bring its trade system into line with international standards. Thus, the degree of central control over Chinese business entities may differ widely between industries and regions. National foreign trade companies that are responsible for goods tightly controlled by the central plan are still preeminent in their areas. In other sectors, however, local foreign trade companies, industry and trade companies, manufacturers and other entities have increased ability to deal directly with foreigners. Additionally, many Chinese business organizations have established offices in Hong Kong, Macau and other locations outside of China, allowing them to import goods outside the central planning controls. Foreign companies seeking to negotiate contracts in China may contract MOFERT or its local branch to ascertain which Chinese organizations are authorized to directly negotiate and conclude specific types of foreign trade transactions, or may ask a prospective partner for written evidence of its ability to directly engage in foreign trade. The Chinese government encourages barter, compensation trade and processing arrangements because Chinese buyers sometime lack control over foreign currency needed to import goods. The Chinese government issues testing, labeling and certification standards which may increase documentation required for entry of goods into China and may require time consuming inspection. Agents and Distributors: There are few regulations specifically applying to the conduct of agents and distributors in China. Contracts between foreign companies and Chinese entities acting on their behalf are governed by general contract laws and regulations. A number of experienced foreign trading companies and consultants, most likely located in Hong Kong or a major coastal Chinese city, represent a wide variety of foreign manufacturers in China. Also, certain foreign-invested enterprises are vehicles for distribution within China. Chinese trading corporations, under the present trade regime, are still primarily export oriented, but handle purchasing transactions for Chinese end users with no direct links to foreign manufacturers. Agreements between foreign companies and Chinese entities to establish consignment sales and service centers are increasingly common. Trade shows and trade missions are also useful ways to begin marketing a foreign product in China. Direct hiring of Chinese individuals as sellers and agents is constrained, in part, by existing labor laws and policies, and the linkage between social and welfare benefits and employment with a Chinese entity. Import Restrictions: Under the October, 1992 agreement, China agreed to eliminate licensing requirements, quotas, controls and other restrictions for many key U.S. export sectors over a five-year period commencing on December 31, 1992. China has promised to publish a list of all organizations that are responsible for authorizing or approving imports whether through license review or approval, and will publish procedures and criteria for the approval of import licenses. In addition, approval of import licenses will not be contingent upon the transfer of technology to China or the existence of competing Chinese suppliers. Moreover, China has promised not to subject any products to any import substitution measures in the future. Import Duties: China adheres to the Harmonized System (HS) for tariff classification purposes. There is a general tariff rate and a minimum tariff rate granted to nations which have concluded tariff agreements with China, such as the United States. Pursuant to the October, 1992 agreement, China promised to significantly reduce tariffs on a number of important U.S. produced goods. Foreign companies or foreign-invested enterprises importing materials to produce goods to be exported may often obtain an exemption from custom duties. Foreign representative offices can sometimes obtain favorable tariff treatment on certain materials imported for office use. COMMERCIAL POLICIES Free-Trade Zones: The central government has approved five free-trade zones. These are located in the municipalities of Shanghai and Tianjin, the city of Dalian in Liaoning Province, the city of Haikou in the Hainan Island Special Economic Zone (SEZ), and within the Shenzhen SEZ. The zones offer duty-free entry for imported materials used in production within the free-trade zones. Bonded warehouse areas have also been approved for cities such as Guangzhou in Guangdong Province and Dalian. Exchange Controls: China has a two tiered currency system in use: foreign exchange certificates (FEC) and renminbi (RMB). The RMB is not convertible into foreign currency, and is used for internal commerce, but not for the purchase of imported goods. The FEC is convertible into foreign currency at government controlled rates and was designed to be used for the purchase of imported goods. Thus, control of FEC is a key issue for any Chinese entity wishing to conduct foreign trade. The State General Administration of Exchange Control (SGAEC) is responsible for currency exchange issues while the Bank of China is the only bank authorized to conduct foreign exchange business. Foreign-invested enterprises must maintain a separate FEC account with the Bank of China and repatriation of foreign exchange profits is regulated by the Bank and the SGAEC. Foreign-invested enterprises must generally balance their FEC receipts and expenditures. Swap centers administered by the SGAEC allow foreign-invested companies to exchange RMB earnings for FEC. SGAEC still sets the swap range and amount in most cases. Regulatory Policies: The central government imposes production quotas and sets prices on key commodities. Under the current five-year economic plan and annual plans, the State Planning Commission and its local branches control many of the important purchasing and investment decisions made by Chinese enterprises. In recent years, however, the amount of non-plan commercial activity has grown dramatically. In many industries, market-oriented business practices are increasingly prevalent. FOREIGN INVESTMENT Total U.S. investment in China is approximately US$ 5 billion. Oil, coal, and hotel and property development projects accounted for large amounts of investment initially. More recently, investment funds have shifted to manufacturing ventures. Ventures using advanced technology or focusing on exports are generally more encouraged than consumer product and service sector projects. Potential investments go through a multi-tiered screening process often involving a number of government clearances at both the national and local levels. Implementation of national investment laws at the local level can vary widely. Generally, the five SEZs (Shenzhen, Zhuhai and Shekou in Guagdong Province, the Hainan SEZ, and the Xiamen SEZ in Fujian Province) provide good investment incentives and have established streamlined approval procedures. Many of the major cities on China's coast have economic and technical development zones offering incentives similar to those existing in the SEZs. INTELLECTUAL PROPERTY RIGHTS In January of 1992, China and the United States reached an agreement on intellectual property rights under which China pledged to make significant changes in its copyright and patent laws. China also promised to enact legislation governing the control of trade secrets. Copyrights: Pursuant to the January, 1992 agreement, China agreed to accede to the Geneva Phonograms Convention and the Berne Convention for the Protection of Literary and Artistic Works. On October 15, 1992, China's accessions to the Berne Convention and the Universal Copyright Convention took effect. Also, China will treat computer software as a literary work under its copyright law and will protect computer software for a period of 50 years. Copyright protection will be offered to foreign copyright holders in other Berne Convention member states should their works be first published outside of China. Protection will also be extended to works in existence before China's new obligations become effective. Patents: To qualify for patent protection in China, the property involved must not have been publicly disclosed worldwide or used in China prior to the time of filing. China now provides patent protection for pharmaceuticals and other chemical products in addition to providing process protection for those categories of goods. The length of patent protection is 20 years. In addition, compulsory licenses are not generally allowed unless the proposed user has made reasonable efforts to obtain authorization from the rights holder on reasonable commercial terms. Contracts for the licensing or assignment of patent rights held by a foreign entity to a Chinese entity are subject to the examination and approval of MOFERT or its local branches. Trademarks: In China, the SAIC is responsible for trademark registration matters. Foreign companies filing applications to register their trademarks must use a Chinese trademark agent affiliated with organizations such as the China Council for the Promotion of International Trade (CCPIT). China follows the first to file rule of protection. The initial length of protection is 10 years. A trademark registrant which licenses its trademark must file a copy of the licensing contract with the SAIC. TAXATION The United States and China have an agreement for the avoidance of double taxation which applies to the taxation of Americans and U.S. companies doing business in China. Apart from the relevant Chinese tax laws, foreign companies and individuals may be alert to various types of administrative regulations and decrees, at both the local and national levels, that may change the amount of tax foreign companies pay on their income produced in China. Corporate Taxes: A new income tax law for foreign-invested companies took effect in July, 1991. Under the new law, wholly foreign-owned ventures, equity joint ventures and contractual joint ventures pay a combined national and provincial tax of 33 percent of pre-tax income. Depending on the location, purpose, length and profit reinvestment plans of a foreign-invested venture, there are opportunities to lessen, defer or exempt income from taxation. Foreign partners of foreign-invested companies should be on notice that taxes in the form of periodic benefits payments to Chinese workers or to the Chinese partner itself may measurably increase the tax burden of the foreign-invested enterprise. Foreign companies that do not have joint venture investments, but have established an office or place of business in China to engage in production or business operations, also pay a tax of 33 percent of the amount of profit before income tax. Consignment sales and service centers established by a Chinese entity to market a foreign company's products, or to maintain or sell spare parts for the foreigner's products, are subject to the 33 percent tax. In addition, foreign companies which perform construction work or provide labor services in China are deemed to have a taxable establishment in China and are subject to income tax. A foreign enterprise which has no establishment or place of business in China, but derives profits, interest, rental, royalties and other income from sources in China, pays a withholding income tax of 20 percent of the revenue amount. However, profit repatriated by a foreign investor from a foreign-invested enterprise is exempted from further income taxation. Royalties received for selected types of technical know-how are taxed at a reduced rate of 10 percent of the revenue amount or may be exempted from income taxation. Foreign company representative offices which engage solely in liaison activities within China on behalf of their head offices normally have no Chinese source income and therefore do not pay income tax, although a tax return must be filed. Offices of foreign service companies such as consultants, accountants, banks and trading companies that derive income from their services may be taxed on their income. Consolidated Industrial and Commercial Tax: The Consolidated Industrial and Commercial Tax (CICT) applies to the production of industrial and agricultural goods, commercial retailing, and service, transportation and communications activities conducted in China. The tax is levied on the gross amount of proceeds received from the sale of goods and services at each stage of production when the taxable goods and services are transferred from one entity to another. The typical CICT rate is five to 10 percent, although the rates range from 1.5 to 69 percent. Taxpayers importing goods pay CICT on the amount of their purchases. Personal Income Taxes: Americans temporarily residing in China for up to 183 days in a calendar year are exempt from Chinese personal income tax on services performed in China, but paid outside of China. Only actual days spent in China are counted and days of temporary absence are excluded. Individuals residing in China and subject to income tax pay progressive rates ranging from five to 45 percent of their wages and salaries earned in China. Compensation for personal services, royalties, interest, dividends and other forms of income are taxed at a flat rate of 20 percent. Per diem or periodic allowances paid to employees of foreign companies in China are normally considered taxable income, but company expenditures such as lodging, business entertainment costs and transportation costs are not personal income for the employee. REGULATORY AGENCIES The following list includes some of the more important agencies and policies foreigners should be aware of when doing business in China: * Five-year economic plans establish general goals and priorities for capital investment, production, and supply. Annual plans set performance targets for state-owned industrial and commercial enterprises and govern allocation of state funds. * The State Planning Commission is responsible for economic plan implementation at the national level. * The People's Bank of China exercises power over China's other financial institutions. * The Ministry of Foreign Economic Relations and Trade (MOFERT) and the State Council's Economic and Trade Office are the two government agencies responsible for China's foreign trade system. Import licenses can be obtained from the MOFERT. * The State Administration of Import and Export Commodity Inspection issues a list of commodities for which inspection is required. * The General Customs Office Administration regulates customs clearance of all import and export cargoes by land, sea, air, and mail. USEFUL CONTACTS U.S. Embassy in the People's Republic of China Beijing Xiu Shui Bei Jie 3 100600, Beijing, People's Republic of China Telephone: (861) 532-3831 Telex: AMEMB CN 22701 To mail from the United States: U.S. Embassy - Beijing, PRC PSC 461, Box 50 FPO AP San Francisco 96521-0002 Embassy of the People's Republic of China in the United States 2300 Connecticut Avenue, NW Washington, DC 20008 Telephone: (202) 328-2500 American Chamber of Commerce for China Beijing Hotel East Change Avenue, No 33 Beijing, PRC Telephone: (861) 5007766 U.S.-China Business Council 1818 N Street, NW Suite 500 Washington, DC 20036-5559 Telephone: (202) 429-0340 -------------------------------------------------------------------------- This file extracted from Dept. of Commerce National Trade Databank (NTDB) CD-ROM, SuDoc C 1.88:993/11 by RCM of the Libraries of the University of Missouri-St. Louis, 11/29/1993 / IBPD0002