Author: Acclime China

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Preferential policies of individual income tax on bonuses are extended to December 2023

On December 29, 2021, Premier Li Keqiang chaired an executive meeting of the State Council where it was decided to continue the implementation of some preferential policies on individual income tax. In order to reduce the burden of individual income tax and relieve the pressure on low- and middle-income earners, the meeting decided:

Firstly, the one-time bonus of the whole year will not be incorporated into the salary income of the current month, and the policy of separate monthly taxation will be extended to the end of 2023 (see example of the impact below).

Secondly, the tax exemption policy of annual income not exceeding RMB 120,000 and requiring tax supplement or annual final tax supplement not exceeding RMB 400 shall be extended to the end of 2023, whereby those meeting the criteria do not need to undertake an annual filing.

Thirdly, the separate tax policy for equity incentive of listed companies will be extended to the end of 2022. Continued with the current practice that the total equity incentive income applies to annual tax rate table to calculate the tax separately.

The above policies can reduce the tax burden on individuals by an estimated RMB 110 billion a year, among which the first one is the policy of “the tax calculation method of annual bonus will change” which has attracted great attention in recent years.

This involves the tax on bonus being calculated separately from other income, with the tax calculation formula for annual one-time bonus being: tax payable = annual one-time bonus income * applicable tax rate – quick deduction.

In order to determine the applicable tax rate and quick calculation deduction, the annual one-time bonus income is divided by 12, and then this figure is applied to below table to determine this.

The comprehensive income tax rate after monthly conversion is:

Level Total monthly taxable income (RMB) Tax rate (%) Quick deduction
1 <3,000 3 0
2 3,000 – 1,200 10 210
3 12,000 – 25,000 20 1410
4 25,000 – 35,000 25 2660
5 35,000 – 55,000 30 4410
6 55,000 – 80,000 35 7160
7 > 80,000 45 15160

The individual comprehensive income annual tax rates are:

Level The annual amount of taxable income using cumulative wages withholding method (RMB) Tax rate (%) Quick deduction
1 <36,000 3% 0
2 36,000 – 144,000 10% 2,520
3 144,000 – 300,000 20% 16,920
4 300,000 – 420,000 25% 31,920
5 420,000 – 660,000 30% 52,920
6 660,000 – 960,000 35% 85,920
7 > 960,000 45% 181,920

Based upon the above, the following provide an example of the impact:

Case 1: Mr. John worked in Beijing in 2021 with a monthly gross salary of RMB 9,000, a monthly deduction of RMB 2,028 for monthly social welfare, no other deduction items, and an annual bonus of RMB 30,000.

Scheme 1: Annual bonus is calculated separately under the tax preferential policy.

1) RMB 30000 / 12 = RMB 2500, and according to the tax rate table, it is applicable to the tax rate of 3%, and the quick deduction is 0, and therefore the tax payable is:

Bonus tax = RMB 30000 * 3% – 0 = RMB 900

2) The annual tax payable of wages and salaries = RMB 9,000 * 12 – 2028 * 12 – 5000 * 12 = RMB 23,664, the corresponding tax rate is 3%, and the quick deduction is 0.

Payroll tax payable = RMB 23,664 * 3% = RMB 709.92

Total annual individual income tax = bonus individual tax + annual comprehensive income tax payable = RMB 900 + 709.92 = RMB 1,609.92.

Scheme 2: Annual bonus is incorporated into comprehensive income and no special taxation.

Annual bonus + annual salary = RMB 9,000*12 + 30000=RMB138,000, taxable income = 138,000 – 2,028 * 12 – 60,000 = RMB 53,664, the corresponding tax rate is 10%, and the quick deduction is 2520.

Annual tax payable = RMB 53,664 * 10% – 2520 = RMB 2,846.4

Difference between the two tax payment methods = RMB 2,846.4 – 1,609.92 = RMB 1,236.48

After comparison, the impact of the special bonus tax policy is that Mr. John shall pay RMB 1,236.48 less IIT.

Case 2: Mr. Peter worked in Beijing in 2021, with a pre-tax monthly salary of RMB 30,000, a monthly deduction of RMB 6,353.21 for the social welfare, no other deduction items, and an annual bonus of RMB 30,000.

Scheme 1: Annual bonus is calculated separately.

1) 30000 / 12 = 2500 According to the tax rate table, it’s applicable to the tax rate of 3%, and the quick calculation deduction is 0

Bonus tax = RMB 30000 * 3% – 0 = RMB 900

2) The annual tax payable of wages and salaries = RMB 360,000 – 6,353.21 * 12 – 5,000 * 12 = RMB 223,761.48, the corresponding tax rate is 20%, and the quick deduction is 16,920

Payroll tax payable = 223761.48 * 20% – 16920 = RMB 27,832.3

Total annual individual income tax = bonus individual tax + annual comprehensive income tax payable = RMB 900 + 27832.3 = RMB 28,732.3

Scheme 2: Annual bonus is incorporated into comprehensive income.

Annual bonus + salary = RMB 390,000, taxable income = RMB 390000 – 6353.21 * 12 – 60000 = RMB 253,761.48, corresponding tax rate is 20%, quick deduction is 16920.

Annual tax payable = RMB 253,761.48 * 20% – 16920 = RMB 33,832.3

Difference between the two tax payment methods = RMB 33,832.3 – 28732.3 = RMB 5100

After comparison, the impact of the special bonus policy is that Mr. Peter shall pay RMB 5,100 less IIT.

Acclime’s suggestions

According to the Circular on Issues Concerning the Connection of Relevant Preferential Policies after the Revision of the Law on Individual Income Tax, employees can enjoy the special tax on bonus before the policy expires by the end of 2023. In order to reduce staff turnover and to encourage staff in their performance, companies can consider their remuneration structure inclusive of bonus provisions.

Offering employees one-time bonuses can also be used to attract outstanding talents and benefit the development of enterprises and employees. Companies should therefore look to review their remuneration structure from a compliance, tax optimisation and best practice perspective.

Setting up a foreign private equity fund in China

China’s recent capital market reform

In April 2020, the Chinese government removed the limits on foreign ownership of fund management, securities, futures, life insurance, and currency brokerage firms. They implemented the decision one year earlier than it was initially scheduled. Previously, foreign financial firms could only obtain a minority stake in a Chinese joint venture. The joint venture prevents foreign firms from being overly involved in the Chinese financial system while allowing its partner firm to learn advanced financial know-hows. The State Administration of Foreign Exchange also removed Qualified Foreign Institutional Investors (QFII) and CNY Qualified Foreign Institutional Investors’ (RQFII) investment quota. Since then, Chinese capital market’s further opening has attracted many agile foreign investors.

China’s swift move did not surprise the investment and asset management world. BlackRock and Neuberger Berman were the first two firms to apply for mutual fund management qualification in April 2020. On June 11, 2021, the Shanghai based BlackRock Fund Management Co Ltd got permission to operate as a fund management company, paving the way for BlackRock to launch its first domestic mutual fund in China.

On the securities business side, Goldman Sachs and Morgan Stanley were the first to acquire 51% equity in their Chinese joint ventures up from 49%. In July 2021, one year after the financial reform, Morgan Stanley increased its stake in the joint venture to 90% and changed the firm’s name to Morgan Stanley Securities (China) Co Ltd, dropping off its Chinese partner’s name from the joint venture.

Despite the recent US-China trade tensions and the impact of the Covid-19 pandemic, China was resolute in keeping its promise in opening its financial sector. China is in dire need to develop a mature capital market amid the goals of Chinese Yuan’s internationalisation, rebalancing the misallocated domestic asset classes, and expanding the gradually depleting national pension fund pool.

Even though China’s economy size is big, Morgan Stanley Capital International, an index provider company, only increased the ratio of China’s A shares from 5% to 20% in its MSCI Emerging Markets Index in 2019. While the Chinese economy is still underrepresented in the index, it reflects the fact that the Chinese capital market is relatively immature. In terms of asset classes, most of China’s investors put majority of their portfolio into the housing market. At the same time, China’s fast growing ageing population is facing an exhausting pension fund system that is likely to run out by 2035. These problems, the policy makers found, can be alleviated by further opening the financial sector to international investors.

Specific reforms in the private equity sector in China

In the private equity fund world, China had announced more favourable policies before the broader financial opening that took place in 2020. These policies did not come from an integrated agency but were result of a series of economic dialogues with the United States and the United Kingdom. During the 7th and 8th US-China Strategic Economic Dialogue in 2015 and 2016, and the UK-China Economic Financial Dialogue in 2015, China announced the following policies:

  1. Allowing the Wholly Foreign Owned Enterprise (WFOE) and Joint Venture private equity funds to participate in private equity fund management, including secondary security market (US, 2015)
  2. Allowing foreign firms to set 51% owned securities firms in Shanghai Free Trade Zone (UK, 2015)
  3. The Asset Management Association of China to register foreign owned private equity funds (US, 2016)

The above-mentioned Asset Management Association of China (AMAC) is an NGO co-founded by Chinese asset management firms under the Security Investment Law in 2012. AMAC is set to carry out these policies. Its responsibility includes “making and implementing self-disciplinary rules; monitor, and inspect members’ professional conducts”, “creating industry standards”, and “registering private equity managers”. It is the officially sanctioned authority handling China’s asset management firms’ day to day regulatory affairs.

The basic qualifications to set up a private equity fund are simple: first, one must register a company in China; second, the foreign shareholders are institutions legally operating in a foreign territory and that foreign territory has signed a MoU with the China Securities Regulatory Commission; third, one and one’s foreign shareholders did not receive any severe penalty in the recent three years.

There are, however, two minor limitations aside from the broader opening: China would monitor the fund’s investment flow as well as profits & losses; trading decision should be made independently from the China based firm, no foreign based (including the use of foreign trading system) trading decision in securities and futures transactions is allowed.

In addition, since 2016, foreign fund management companies can participate in private equity investments in China with domestically sourced CNY fundings.

Structure of the foreign PE firms and funds

An investor or firm can set up a WFOE Private Fund Management (WFOE PFM) in a Free Trade Zone to join in the Chinese private equity landscape and fund management. For example, Bridgewater Associates LP, the world’s largest hedge fund manager based in the United States, founded Bridgewater (China) Investment Management Co Ltd in March 2016 in Shanghai Free Trade Zone and registered with the AMAC in June 2018.

Bridgewater (China) has 310 million CNY registered capital and around 210 million CNY paid-in capital. With approximately 2,000 to 5,000 million CNY assets under management, Bridgewater was permitted to invest in securities and fund of funds. In 2018, Bridgewater opened its first private equity and securities funds in China with the names “Bridgewater All Weather Enhanced China Private Securities Investment Fund I (&II)”. In 2019, Bridgewater got the qualification to conduct investment advisory business in China.

The other way to get involved in private equity is through the newly created Qualified Foreign Limited Partnership (QFLP) pilot scheme structure. According to AMAC’s registration database, there are about 30 QFLP structured private equity firms at the end of 2020. The domestic based limited partner firms are usually subsidiary of a parent investment management firm, making the investment vehicle more flexible both in terms of its investment strategy and profit-sharing scheme.

The QFLP structure offers certain tax advantages at the partnership level and enjoys more flexibility in forex settlement. If the limited partner is an individual investor, their income would be taxed as individual income, if it was a legal entity, then corporate income tax would apply. The QFLP’s structure allows foreign LPs to control the China based firm with a General Partner management entity to invest with a CNY based fund in China, investing in public securities and private placements. The GP management entity could either be China based investors, foreign investors, or a mixture of both, though this condition varies in different QFLP pilot areas.

First introduced in Shanghai in 2010, the QFLP pilot scheme had expanded to cities such as Qingdao, Shenzhen, Zhuhai, Guangdong Province, Guizhou Province, and other provincial or municipal regions.

Because there is no centralised coordination in setting up a national QFLP standard, the specific rules regarding setting up a QFLP entity in different administrative regions are fragmented.

For example, Shanghai has a negative list providing the specific items where a QFLP fund cannot invest, but some other places do not have such clear indication. In another case, the Zhuhai authority’s requirement for the amount of asset under management is a minimum of 12 million USD, which is smaller than other administrative regions’ requirements.

As a side note, QFLP should not be confused with Qualified Domestic Limited Partnership (QDLP). Simply put, QDLP is an investment vehicle that puts domestic Chinese investor’s CNY fund to overseas direct investment through China based foreign intermediates. For example, BlackRock Fund Management Co Ltd operates two QDII funds in China that can accept QDLP’s money. The first one is the BlackRock World Technology Fund, the other is the BlackRock Global Asset Allocation Fund.

The QDLP scheme, combined with QDII qualified institutions, provides Chinese investors an alternative in allocating their CNY assets globally. As of now, there are 28 qualified institutions in China to take QDLP’s investment in their funds. QFLP is the other way around, allowing foreign investors to participate in the Chinese market with a CNY based fund.

Opportunities and challenges

As discussed in the previous sections, China is making it easier for foreign financiers to operate in China. There are ample opportunities as well as challenges for this rapidly expanding industry in China. There are also pending reforms that foreign investors should pay attention to with prudence.

The Shanghai Free Trade Zone so far has the biggest financial freedom in China and has been enjoying most of the policy benefits ahead of other regions. As we can see that almost all of the QFII institutions are registered in Shanghai. These institutions are already the best in their home country. For example, the Man Group is the oldest asset management firm in the United Kingdom with more than 230 years of history. Japan’s Nomura Group has $604 billion USD asset under management globally.

Shanghai also has 4,600 registered private equity funds managing 4,280 billion CNY assets. Shenzhen has 4,400 private equity funds registered but only manages half worth of Shanghai’s assets. As mentioned before, the QFLP policies in China is very fragmented and varies region by region, thus making Shanghai even more attractive because of its transparency and clear policy guidance. Shanghai possesses absolute advantages against other regions in attracting foreign financiers.

The pace of China’s financial reform and foreign financier’s adaptation is a symbiosis relationship. In April 2020, the financial authority in Shanghai announced to support the opening of preferred stock, convertible bond, subordinate debt to QFLPs. The central government permitted QFLPs’ participation in fund of funds in order to support the Greater Bay Area’s development.

During the process, foreign managers also facilitated the use of both onshore and offshore CNY, indirectly promoting CNY’s internationalisation. By investing in the secondary market as institutional investors, they can also test the water of China’s famous policy and momentum driven stock market, which might bring substantial headache to foreign financiers who expect lower volatility.

Conclusion

As China’s economic growth matures, its need of sophisticated financial instruments and platform rises. China’s opening up of its financial sector not only brings needed resources and expertise, but also stirs competition among its domestic peers. Private equity, or alternative asset management in general, is a relatively new concept both in the West and in China.

Entering the Chinese private equity landscape is a desirable goal for ambitious foreign managers. The Chinese QFLP pilot scheme and the existing WFOE PFM structure provides convenience for them to do so. An easy entrance to China’s PE is one thing, however, taking root in China is another thing. Foreign fund managers should constantly learn and adapt to China’s unique financial circumstances and pay attention to the latest policy development.

If you want to know more about the (ever changing) regulatory framework for registered foreign entities in China, please do not hesitate to contact us. We will assist you with the navigation through the registration process and ensure a compliant set up in China. Feel free to reach out and set up a meeting.

Acclime expands in China with LehmanBrown merger

27 September 2021, Hong Kong – Acclime, the premier corporate services provider in Asia, announces today that it has completed a merger with LehmanBrown International Accountants in China. This is in line with Acclime’s strategy of actively growing its pipeline of compliance and corporate services businesses to be a major player in the region and a leader in the PRC market. This move brings Acclime’s headcount in China to over 200, and close to 700 across the whole group.

LehmanBrown International Accountants has been a pioneer in assisting foreign organisations enter the China market for the last 20 years and has built up an enviable reputation. The company is now in a prime position to transition to a large-scale professional services firm so that it continues to attract the best talent, provides clients with access to a pan-Asian network and secures the business moving forward.

“Acclime chose to partner with LehmanBrown because of the similarities in our cultural and professional styles – we have a similar DNA” remarked Martin Crawford, Co-founder and CEO of Acclime. “Both companies place significant value on genuine, collaborative partnerships with clients seeking to establish and expand into new markets. We believe LehmanBrown‘s clients will benefit from access to Acclime’s network of client services across Asia, including Greater China, Australia, Singapore, Vietnam, Indonesia, Thailand, Cambodia, Malaysia and Philippines.”

LehmanBrown’s clients will continue to receive the same dedicated service from the same expert team, with access to deeper resources and regional experts who can help navigate complex Asian markets. Managing Partner of LehmanBrown, Russell Brown OBE, on making the announcement said “this is exciting news for everyone and a great time to pause and acknowledge how far we have come since founding the business 20 years ago. We are sincerely thankful to all our clients and staff for being on this journey with us now and into the future.”

Brown outlined why this merger is significant for LehmanBrown’s clients: “Each market has its own complexities when it comes to business compliance, and navigating a new market needs local expertise and cross border knowledge and experience. As a result of this strategic integration, our clients can benefit from a wider spectrum of professional services and gain access to regional experts to help them navigate complex emerging Asian markets.” Brown continued: “I look forward to introducing our clients to the greater scope of services across the region that integration with Acclime now brings us.”

LehmanBrown will continue to trade under its own brand and will remain in its existing offices for now. Over time there will be an integration of offices, service lines and branding. STS Capital Partners in Singapore acted as exclusive M&A advisor to LehmanBrown in this transaction.

 

Download press release (PDF)

Key compliance requirements for companies in China

China has complicated administrative procedures and a set of corporate compliances different from that of many foreign nations. Companies must complete all compliance requirements to ensure the company is in line with national and local regulations and avoid penalties. This article provides you with a complete list of corporate compliance requirements for companies in China.

Ongoing business compliance requirements for companies in China

Annual Shareholders Meeting

The shareholders’ meeting must be held at least once every year. However, there is no statutory requirement when the meeting should be held.

The notice period for holding meetings is 15 to 20 days or as stated in the articles of association.

Matters to be decided in the shareholders’ meeting may include:

  • Amendments to the articles of association
  • Deciding the remuneration of directors and supervisors
  • Passing resolutions on company mergers, divisions, dissolution or liquidation
  • Passing resolutions on the increase or reduction of the registered capital
  • Reviewing and approving the reports of the board of directors
  • Reviewing and approving the reports of the supervisor or board of supervisors
  • Reviewing and approving the company’s annual financial budget and financial plans

Business licenses

Business licenses are needed for companies to operate in China. You will need to apply for a business license at the Administration of Industry and Commerce (AIC).

The information contained in the business license include:

  • 18-digit business registration number
  • Business scope
  • Company name
  • Date of establishment
  • License expiry date
  • Legal representative
  • Registered address
  • Registration bureau
  • Registered capital
  • Registration number
  • Type of entity

Accounting and tax compliance requirements for companies in China

Date of the financial year-end

The financial year-end of companies in China is the same as the calendar year, which starts on 1 January and ends on 31 December.

Safekeeping of proper accounts and records

Companies in China are required to keep accounting records in accordance with the accounting standards issued by the Ministry of Finance. All of the books, records and financial statements must be in Chinese and kept for 15 years. Companies must keep three types of accounting records:

  • General ledger and sub-ledgers
  • Journals
  • Supplementary memorandum records

Appointment of an auditor

The board of directors is responsible for appointing an auditor, and the financial statements must be audited by a Chinese-registered certified public accounting (CPA) firm.

Income tax return

Companies must file and pay income taxes monthly or quarterly within 15 days of the following month or quarter. They also need to file and settle their annual income tax return within five months after the end of the tax year.

Employment law in China

There are certain employment laws that foreign investors should consider when doing business in China.

These laws include:

Social security contribution in China

China’s social security system covers five types of benefits and a housing fund.

Benefit Employer contribution rate  Employee contribution rate
Pension 14% – 16% 8%
Medical expenses 10% 2%
Unemployment (up to 12 – 24 months of benefit in the case of redundancy) 0.5% – 0.8% 0.2% – 0.5%
Maternity  0.8% – 1% 0
Work-related injuries 0.5% – 2% 0
Housing funds (residents only) 5% – 12% 5% – 12%

Entitled leaves for employees in China

The number of leaves an employee is entitled to depend on the number of employment years.

Years of employment Entitled leaves
Less than one year No leave
1 – 10 years 5 days
11 – 20 years 10 days
Over 20 years 15 days

Sick leaves in China are given to employees who suffer from an illness or a non-work-related injury. Sick leaves in China are required to be paid for local and foreign employees. An employee is compensated at 60% to 100% of their normal salary during their sick leave. The percentage of compensation depends on the seniority of the employee, the city and its regulations.

Working period % of salary
Less than six months of sick leave
Less than two years 60%
Between 2 and 4 years 70%
Between 4 and 6 years 80%
Between 6 and 8 years 90%
More than eight years 100%
More than six months of sick leave
Less than one year 40%
Between 1 and 3 years 50%
Between 3 and 6 years 60%

The maximum sick leave is three months for employees with less than a 10-year employment history, while the maximum sick leave for employees with 20 years of work history is an unlimited paid leave.

Examples of common compliance risks

There are many examples of common compliance risks which should be carefully considered when active in China. Here are some of the most prominent examples.

Employment Taxes

Many companies traditionally sought to save on the cost of individual income taxes and social insurance contributions by paying part of salaries (and bonuses!) as reimbursements against valid legal invoices (fapiao). However, an employee complaint to the Labor Department or local tax officer may be sufficient to trigger an inspection, which could result in back-payments as well as late fees and fines. If the amounts of evaded taxes are large enough, these practices could even lead to criminal liability (though this is not common).

 

Corporate Taxes

Recently, some companies were pursued by a local district tax office in Shanghai for failure to pay withholding taxes on intercompany expenses booked in the previous year. Tax offices are improving their systems, and many are becoming more assertive at initiating inspections and monitoring compliance. Campaigns focusing on certain kinds of activities (in 2014: affiliated party transactions) are causing havoc to companies that do not strictly play by the rules.

Tax Evasion and Bribery (Commercial and Official)

Some companies manage to receive income off the books and then use some of these funds to pay illegal commissions (kickbacks) to promote sales, win projects or obtain licenses. Not only does this practice expose the company and its managers to liability for accounting fraud and tax evasion, but it can also result in administrative, civil and criminal liabilities for commercial or official bribery under PRC laws. Even in industries where such practices are common, especially foreign businesses may be the first to get caught – with life-altering consequences for the business and the involved managers.

Business Scope Restrictions

China continues to restrict foreign investment in certain sectors or subjects businesses to special licenses that are difficult to obtain. Examples in the service industry are recruitment (joint ventures only, unless the investor is CEPA qualified), labour dispatch (license difficult to obtain), legal services (closed to foreign investment), accounting and auditing (joint ventures only), as well as certain forms of education (subject to restrictions or licensing). Many foreign investors avoid such restrictions by establishing a general consultancy WFOE. But this exposes the business and could lead to fines and even revocation of the business license. As part of a long-term strategy, foreign investors should also consider alternatives such as making the extra effort to obtain the required licenses, relocating to a pilot area that allows this business (e.g. the Shanghai Free Trade Zone), using a VIE (Variable Interest Entity) structure or entering into a joint venture with a local partner. 

Future of compliance in China: Social Credit System

The future of compliance in China has already been announced through the introduction of the Social Credit System (SCS). The SCS is a system designed to measure individuals’ compliance, companies, and government entities. For business entities, the Chinese Government envisions the SCS to promote self-control through fear of unfavourable conditions. 

The SCS can be seen as a big data initiative, connecting the dots between data already in possession of the Chinese government. Such data includes whether all due taxes have been paid, whether organizations have all relevant licenses to operate, or whether the company has been fined for employment infringements. Based on these combined metrics, the government might impose unfavourable conditions, leading to a market disadvantage compared to competitors. 

Conclusion

All companies have sets of compliance requirements they must follow. Failure to meet these requirements may negatively impact the company, which may also lead to potential legal and administrative risks in the future.

Acclime will help you navigate through all kinds of difficulties you may face. To ensure you have satisfied all corporate compliance requirements for China companies, we recommend engaging with Acclime’s services. Feel free to contact us with questions!

Chinese fapiao (legal invoices) and trends in digitisation

In January 2021, over 25 regions entered China’s pilot program for digital special VAT fapiao’s, or e-fapiao. What started as a trial in Ningbo during the second half of 2020 was rapidly expanded towards other areas of China. Although currently still in its rollout phase, this development will significantly impact companies throughout China. This article will shortly review the e-fapiao and its benefits.

What is a fapiao?

A fapiao is a Chinese document used for registering the generation of revenue and VAT, i.e., a receipt mentioning the services sold, to whom it is sold, and the VAT rate. All Chinese business entities are obliged to issue these documents to their customers in China for payments received.

This document is printed on special paper that is provided by the State Tax Administration provides. Companies (incl. a foreign-invested company) can purchase the paper from their local tax bureau. Restrictions apply on the amount of fapiao that can be purchased as a means of supervision by the tax office.

The fapiao are always numbered and company specific. Typically, a printed fapiao has two or three layers. One layer is for internal bookkeeping, and other layers are given to the customer. Every month a company should declare the amount of fapiao issued at the tax bureau. The fapiao is one required document for cost-recognition of expenses within China, as it represents VAT paid by the customer and proves the official circulation of the transaction. A foreign-invested company must require its suppliers to provide a fapiao, and also print fapiao for its customers in China.

There are two types of fapiao in China:

  • General VAT fapiao: a type of fapiao in which the issued VAT cannot be deducted. This type of fapiao has already been digitalized and is often seen in restaurants, taxi’s or in e-commerce transactions.
  • Special VAT fapiao: these are fapiao issued when providing (taxable) services or goods. Special VAT fapiao can be used for VAT deductions.

How is the e-fapiao different?

The special VAT digital fapiao, or e-fapiao, is currently still implemented on a voluntary basis and can be used as an alternative to the printed version. As its name suggests, it is no longer a printed paper fapiao to deliver to customers. Indeed, after issued E-fapiao, customers can receive it by email or QR code then print it on A4 paper by themselves. Although the procedure is entirely digital, all data still needs to be added manually to the document. It is expected that the system will be rolled out nationally in the future and replace the current paper documents.

For a company in a pilot zone to start issuing e-fapiao, it needs to complete an application first. The company will receive a special token from the bureau after which it can log in to the online platform to issue the e-fapiao. Restrictions such as on the maximum value of one fapiao remain in place. Naturally, the company needs to be a general taxpayer to qualify. Before a company can issue e-fapiao, it needs to apply first at their local tax bureau. Restrictions such as on the maximum value of one fapiao remain in place.

One can check the validity of e-fapiao online on the local tax website. The website for Beijing can be found here.

What are the benefits of e-fapiao?

The national introduction of e-fapiao will result in a decrease in the workload that is required to ensure financial compliance. For example, checking the validity of fapiao will become easier, as one can check this online on the local tax website. However, a file management system for e-fapiao needs to be established. In terms of current bookkeeping and accounting regulations, little will change.

Anyone operating a company in China knows how much paperwork and administration is needed to stay compliant. A digital system will save a lot of paper documentation and thus is better for the environment.

Still, a streamlined process is needed to ensure that all parts can be digitalised, especially for audit purposes. Currently, general VAT e-fapiao must still be printed and included physically in the monthly accounting books.

Do you want to know if your company is eligible for the e-fapiao, or are you interested to learn more details regarding the application and usage of fapiao or e-fapiao? Acclime China is a regional expert provider of accounting, tax, consulting and corporate services and helps clients to seamlessly advance their businesses and interests in China. For more information about fapiao or other related matters, please contact Maxime at M.vantklooster@Acclime.com for a (digital!) meeting.

Celebrating our team’s achievements in 2020

China is one of the most difficult markets in the world to navigate as an international company, and so to have a knowledgable accounting & tax advisor can be the difference between success and failure. Therefore Acclime encourages their experts to always keep developing their knowledge and skill sets, to maximise their abilities to avoid or resolve any governmental and administrative compliance issues for our clients.

Our people determine the success of our business. We are grateful to have a team that is consistently developing themselves on so many different levels. Their hard work is essential to provide our clients with the high level of services which they expect from us.

We would like to take this opportunity to congratulate the following Finance and HR colleagues on their achievements in 2020.

Achievements of our finance experts

  • Congratulations to Ms. Gina Chen for qualifying as Certified Tax Agent
  • Congratulations to Ms. Catherine Shang for qualifying as Certified Public Accountant
  • Congratulations to Ms. April Wang for obtaining the Intermediate Accountant Certificate
  • Congratulations to Ms. Cecilia Yang for obtaining the Intermediate Accountant Certificate
  • Congratulations to Ms. Bess Zhang for obtaining the Junior Accountant Certificate

Achievements of our HR experts

  • Congratulations to Ms. Stella Zhou for obtaining the Certificate of Competences in Public Accounting for Global Accountants / Tax Agents / Finance Officers
  • Congratulations to Ms. Cloris Yang for obtaining the Intermediate Human Resource Manager Certificate, and the Certificate of Competences in Public Accounting for Global Accountants / Tax Agents / Finance Officers

Thank you all, for your ceaseless efforts to develop yourself.

 

Tax risks for expatriates when applying for tax-free rental benefits

Expatriates that live and work in China continue to enjoy certain privileges when it comes to individual income tax (IIT) on their income:

  • Compensation for rent
  • Relocation expenses
  • Language training
  • School fees
  • Home leave travel 

The Chinese government has created these benefits to establish a favourable work environment for foreigners, which has contributed significantly to the Chinese economy’s growth in recent decades. These benefits may lose effect at the end of 2021, but for now they remain an important part of an expatriate’s package in China.

Most foreign employees and their employers generally know which benefits are tax-deductible but are not always aware of the significant tax risks if some of these benefits are challenged. Failing to comply with the specific State Administration of Tax (SAT) regulations can lead to severe penalties and even legal prosecution.

Reasonableness of rent deductions 

In practice, misunderstandings often arise on how to apply the tax deductions correctly. The policies regarding the rental tax-deductions cause the most confusion; for example, we often read that the maximum deductible tax amount is 50% of the total salary, as long as the employee can provide a rental fapiao to their employer.

In fact, Chinese law does not actually set any limitation on the proportion of income that can be spent on tax-deductible rental; it only emphasises the need for reasonableness. Under the Notice of the State Administration of Taxation on Issues concerning the Implementation of an Individual Income Tax Levy or Exemption on Allowances of Foreign Individuals (Cai Shui Fa [1997] No. 054), expatriates may declare rental expenses not subject to IIT on the following conditions:

  • The compensation shall not be paid in cash (whether to the landlord or to the employee as reimbursement)
  • The rental amount must be reasonable and be supported by valid fapiao

Penalties

Nowadays, an employer is left to make its own judgment on whether or not certain income should be subject to IIT, and to complete tax filings on time, and afterward the tax bureau can conduct random spot checks to confirm that all has been done correctly. If the tax bureau determines that the IIT filing for tax-free items does not comply with the law, then this is regarded as tax evasion and can have serious consequences.

The tax bureau will recover the unpaid tax from the employee and will usually charge a late fee of 0.05% per day. Moreover, the employee can be fined at between 50% and 500% of the unpaid tax; and as the withholding agent, the employer can be penalised at between 50% and 300% of the tax that it should have withheld. Moreover, if the employee has already left China or if the employer is deemed to have actively assisted the employee to avoid taxes, then the tax bureau may decided to charge the avoided tax, late fee and penalties directly to the employer.

Minimising risks

As the law states that tax-free rental income should be “reasonable”, the tax office has a lot of discretion to determine whether the employee and the company have acted so. As guidance, Shanghai tax bureaus will usually focus on the following when completing spot checks:

  • The lease agreement must be signed by the landlord that has the building property certificate, and the employee must actually live there. In the case of a sublease, a sublease agreement must be signed as endorsement
  • The rental should be paid directly to the landlord and the landlord must issue the fapiao (legal invoice) to the employee or the employer based on the lease agreement. If the landlord is an individual, they will need to go to the tax bureau where the property is located to issue the fapiao. All items in the fapiao should comply with current regulations.
  • The rental should be based on the lease agreement. The local tax bureau will also verify that the amount of rent is in line with local market prices.
  • Within the same period, a property can only be used by one person to claim the tax-free benefit. If there are multiple tenants simultaneously, then they may need to sign lease contracts with the landlord separately. The local tax bureau will then consider whether the total monthly rent is reasonable.
  • If necessary, the tax bureau will require other supporting documents and may ask to interview the landlord

Companies and individuals should always make sure that they comply with the requirements of their local tax bureau, and should always keep the above materials on file so that they can immediately respond to a tax bureau’s inspection. Moreover, where international companies outsource their IIT tax filing work to an external agent or corporate service provider, they should double-check that the service provider is familiar with the requirements for deductions and is able to stay up-to-date with all policy changes.

Opening a corporate bank account in China

Opening a corporate bank account in China has always been fairly straightforward. However, regulatory compliance at Chinese banks is becoming increasingly strict which is causing problems to foreign investors.

 

Chinese vs. Foreign Banks

Unlike in Hong Kong, the process of opening a bank account in the Chinese Mainland has always been relatively straightforward because of a lack of KYC and due diligence procedures. The big Chinese banks such as the Bank of China and the ICBC have welcomed foreign-invested companies to open their bank accounts at their branches, with very limited KYC procedures in place to review the actual business of these companies. The whole account opening process for a new foreign-invested enterprise (WFOE) usually takes 3-4 weeks.

This contrasts to opening a bank account at foreign-invested banks such as HSBC and Standard Chartered, which offer a full range of banking services but adhere to international standards when it comes to the intake of business. The Chinese branches of foreign banks have more elaborate compliance systems and relatively high KYC requirements and as a result, the process can take longer.

 

Procedural Challenges

Therefore the main challenge, especially in the case of Chinese banks, is procedural; and unfortunately this is becoming more difficult. Banks have always preferred the company’s legal representative to come to the bank in person to sign documents, but considering the hassle and potential delay when involving a non-Chinese legal representative residing abroad, most banks have traditionally been more flexible: the legal rep.’s original passport or a notarized / legalized copy has always been sufficient to convince a local branch to accept an application to open a new bank account.

In recent months, however, we have seen a change in this attitude. There are still bank branches that take a more flexible approach – accepting the original passport or in some cases, confirming the legal representative’s approval through a WeChat call or recording. These exceptions are often made based on the good relationship between a specific bank branch’s officers and the corporate service provider in charge of the bank opening process.

Under the guidance of internal policies from China’s central bank, however, the number of branches that dare to remain flexible is diminishing. In most cases, the legal representative is now required to come to visit the local branch in person.

 

Who to Appoint as Legal Representative?

Stricter banking rules present foreign investors with a dilemma. Since the legal representative position comes with much power (e.g. the legal rep. is legally permitted to represent the company towards third parties including the government), many international companies wisely prefer to appoint someone from headquarters in this position. But then:

  1. Travel to China is severely restricted due to Covid-19 regulations. Foreign executives can come to China but will need to complete a 2- or 3-week quarantine period which unfortunately cannot always be enjoyed in comfort. This means that in the end, appointing a foreign legal representative to a new subsidiary could delay the opening of the bank account and therefore the moment that the business can start operations.
  2. Where the Chinese business has a (senior) general manager, his or her appointment could be a good alternative. If not, then appointing a local staff member as the legal representative would be a practical solution but could put operational control in jeopardy. By giving such employee the “keys to the castle”, a company will take risks that normally would be deemed unacceptable.
  3. The concept of a “legal representative for hire” – e.g. appointing a third-party service provider in this position, is rare in China. First, a company cannot be appointed in this position; it must be a natural person. Second, the legal representative potentially bears administrative and even criminal liabilities in relation to the company’s operations, which for an outsider is generally not acceptable (especially for one that lives and works in China).

 

Conclusions

China is always changing, and the current trend is towards stricter compliance. This noticeably translates into stricter processes, including in relation to the opening of corporate bank accounts. Unfortunately, this also presents some foreign investors with new difficulties on how to arrange matters safely but efficiently. Foreign investors are recommended to plan ahead and seek appropriate advice from a service provider with the right level of experience.

 

Acclime China supports international investors on company set-up and provides administration services to Chinese subsidiaries of foreign companies, including accounting/tax filing, custodial services, payroll, and banking/treasury support. Acclime China cooperates closely with R&P China Lawyers, a leading Chinese law firm that supports international business in China. For more information on how Acclime China can help to manage, control and develop your business in China, please contact Maarten Roos at m.roos@acclime.com.

 

A guide to registering a company in Hong Kong

According to the Doing Business 2019 Report published by the World Bank Group, Hong Kong ranks fourth among 190 economies in the world in terms of ease of doing business. Hong Kong’s unique geographical location as well as the minimum level of restrictions and bureaucracy are undoubtedly important factors for entrepreneurs expanding their businesses internationally.

Thanks to the extremely favourable tax policies, well-established legal system, and proximity to the huge market in the Mainland, Hong Kong has always been a popular registration destination for offshore companies around the world. This article will inform you about all relevant aspects that you need to know for the registration of a company in Hong Kong. Furthermore it will show you important details on how to maintain its status and stay compliant with the law.

Classifications of HK companies

There are multiple types of enterprises in Hong Kong, which are classified based on the legal liability of its owners. Each type of enterprise has different responsibilities and obligations; therefore, it is always advisable to choose the most suitable Hong Kong company type once you have decided to incorporate your company.

Based on the legal liability, there are two main categories of companies. First of all, there are the limited liability companies. As is the case with limited liability companies in most countries, the owners of a limited liability company in Hong Kong are not personally responsible for the debts of the company. Secondly, there are the unlimited liability companies. In these companies the owners are liable in case the company goes bankrupt. It is rare that investors and people coming to Hong Kong for business opt for an unlimited company, due to the protection concern of personal assets from business risks and liability, however we still wanted to include this option in this article to provide you with a good overview.

The limited companies are further classified to company limited by shares and company limited by guarantee. Furthermore, the company limited by shares can either be private limited company or public limited company, which are companies listed on the stock exchange. Most of the SMEs will choose private limited company registration, while public limited companies are often registered by medium to large scale businesses that decide to offer company’s shares to the public. As for company limited by guarantee, this form of company registration is commonly used for non-profit organisations.

Advantages of registering a Hong Kong company

The hassle-free setup

Compared to the abruptly changing rules and regulations, regional differences in rule enforcement, and the multi-bureau handled application process in Mainland China, setting up a Hong Kong company is an easy and straightforward process. Based on our past experience, opening a WFOE in mainland China often takes about 3-6 months, while the entire Hong Kong company incorporation process can be completed in about 2 weeks.

Below are the basic steps that need to be taken in order to set up a new company in Hong Kong:

  1. Preparation phase to determine the company name, legal structure, business scope
  2. Submission of registration documents submission and incorporation through the Hong Kong Companies Registry

The documents that need to be submitted are as follows:

  • Identification copies of the shareholders’ and directors’
  • Signed incorporation documents by the shareholders and directors
  • Proof of the Company address
  1. Opening a company bank account

The documentation and application process are straightforward. The company address acts as the address for receiving the company mails from the government and banks. If your company does not have any local business operations or employees in Hong Kong, then it is possible to get a registered office address through a secretarial firm for a small yearly fee. Moreover, there are very few restrictions regarding the business scope of companies in Hong Kong. Whereas in Mainland China there are the negative lists, which mandate the industries that foreigners may operate in. Furthermore, no capital verification is required for the registration of Hong Kong companies. Finally, throughout the entire registration process, the shareholder and director do not have to be present in Hong Kong. Something which saves a lot of travelling and money spent on plane tickets and hotel stays.

Favourable and simple tax system:

For enterprises in Hong Kong there are 3 main types of tax that apply. These are the profit tax, salaries tax, and property tax.

  • The profit tax is equivalent to the enterprise income tax in mainland China. The tax rate is 8.25% up to the first HKD 2 million of profit, and 16.5% for anything higher. In addition, Hong Kong adopts a territorial source principle of taxation. This means profits sourced elsewhere outside Hong Kong are not subject to Hong Kong profit tax.
  • Property owners are required to pay property tax on rental income of their properties in Hong Kong. The rates percentage charge is 15%.
  • Salaries tax is an income tax levied on an individual’s income, and the rates range from 2% to 17%. The taxpayers are individuals who derive income from their employment in Hong Kong.

In the meantime, Hong Kong companies have different tax reporting cycles compared Mainland to China. The first tax return will be issued by Inland Revenue Department only on the 18th month after the establishment of the company, and then once annually. Whereas in Mainland China taxes need to be filed on a quarterly or in some cases even monthly basis.

Hong Kong company maintenance and compliance

There are two annual maintenance practices of a Hong Kong company: Annual Inspection and Audits & Tax declaration:

Annual inspection

The Hong Kong business registration certificate, which is issued after the incorporation of a company, is only valid for one year. Therefore it needs to be replaced on the yearly basis through an annual inspection. The annual inspection document is required by the Hong Kong Companies Registry, and must state the relevant status of the company in the previous year, including the information of the shareholders, proportion of shares, operating status, etc. Fines are imposed if annual inspection document is not submitted in time.

More importantly, if a Hong Kong company does not file their annual inspection documents for several consecutive years, the company will be cancelled automatically. In this case, it will have negative consequences for any future HK-related activities of the directors and shareholders.

Audits & tax declaration

The annual financial statements of a Hong Kong limited company must be audited by a Hong Kong certified public accountant, and submitted with a profits tax return to the Hong Kong Inland Revenue Department for assessment. As for the tax declaration, if a Hong Kong company does not have any property, bank accounts, business operations, or employees in Hong Kong, then zero taxes can be declared.

After your Hong Kong company incorporation, you can still change the key personnel and objectives of your company, including but not limited to shareholder & director change, business scope change, company name change, etc. All of these changes must be conducted through applying for them at the relevant Hong Kong bureaus, and the process is relatively quick and easy. For instance, it only takes 5 working days to accomplish shareholder & director change.

Simplify your WFOE set-up

A wholly foreign-owned enterprise (WFOE), is the most common entity utilised by foreigners to do business in Mainland China. If you intend to enter the Chinese market with a physical entity, using a Hong Kong company as the parent company can save much time and effort. To register a WFOE in China all of the documents from outside of Mainland China need to be legalised and translated. This process often includes 3 steps. First of all, the incorporation documents must be notarised by a notary in respective country of the parent company. After the notarisation, the documents also need to be certified by the Chinese Embassy in respective country of the parent company. Finally, after all of this has been done the documents need to be shipped to Mainland China, where a Chinese translation must be made by an official translator.

This process is costly, long and can sometimes take months. However, a registration of a Hong Kong parent company only takes around 2 weeks. At the same time, the documents of the Hong Kong company are often in both languages (English and Chinese), which means the translation is no longer requested.

Apart from quicker set-up time, there are no foreign exchange controls in Hong Kong, and the free movement of funds and profits is not restricted. Therefore, with a Hong Kong company as shareholder, the profit distribution and money repatriation to the parent company will be much easier.

Closing remark

Over the years Acclime China has supported many clients with both the registration of a Hong Kong company, and the set-up of a WFOE in mainland China afterwards. Next to our registration and formation services in both Hong Kong and mainland China, Acclime provides our clients with hassle-free maintenance & compliance services under one roof, including Taxation, Accounting and auditing, and Company secretarial services, etc. As for cooperate related matters, often the rules & regulations itself are very clear, however, their actual enforcement and implementation can differ per case. If you would like to explore your Hong Kong company solution in greater depth, don’t hesitate to contact us.

China and HR compliance: Reviewing your employment situation

Not seldom, foreign-invested businesses are unaware of critical employment compliance requirements in China. It is a misconception that employees can be requested to work at any hour, whenever the business requires so, or that employees can be fired at will.

The opposite is the case. Chinese labour laws favour the employee quite significantly, while enforcement procedures can be easily and economically started by employees. Foreign-invested companies who treat their employees in China as if they were employed in their home country, may find themselves in precarious situations. Luckily, many problems can be avoided if the company has valid employment contracts, has adopted a staff handbook, and otherwise complies with the local laws and regulations . In this article, we will discuss the most critical points with regards to PRC Labour Law and Labour Contract Law compliance.

Employment contracts

Firstly, every employee must have signed a written employment contracts. The employment contracts shall not be in conflict with Chinese laws, so using standard contracts that are also used in the home jurisdiction is not advisable. These contracts will more likely than not contain plenty of clauses that will be non-compliant in China.

When drafting employment contracts, term and probation period are key considerations, and mandatory rules apply, and should not be violated. It speaks for itself that the employee must receive more than the minimum wage. The minimum wages differ from city to city and change very often, so it is crucial to stay on top of the recent developments. Therefore, pay special attention to the social insurance contribution levels, which are often – incompliantly – based on lower base levels than factually should apply.

Furthermore, it is worthwhile to protect the company’s IP and trade secrets in the employment contracts. Any successful company will have several trade secrets they do not want to see leaked. Therefore, a non-disclosure clause is an essential part of a good contract with key employees.

Besides, a non-compete clause can be useful. This will make sure (former) employees abstain from joining the competition. Please note, however, that the law on non-competes is quite extensive. The most important thing to consider is that the PRC law generally allows non-competes for a period up to two years, but that employers are required to pay the employee a monthly non-compete compensation during the non-compete term. This compensation shall be agreed between employer and employee, while failure to agree so in advance or before commencement, can lead to a court ruling that this compensation shall be set at 30% of the average remuneration during 12 months before termination.

Foreign employees

A company may be employing several foreigners, who are then subject to special regulations in the PRC and obtaining the necessary paperwork to obtain a work permit can be time-consuming. Besides having to comply with basic requirements like being in good health, and having no criminal record, foreigners may also be subject to specific local laws. For example, cities like Shanghai and Beijing require foreigners to have two years of relevant experience and at least a bachelor’s degree before allowing them to work there.

Pay extra attention to the fact that contracts with foreigners must comply with and be subject to PRC laws. This means that solely having contracts with foreign parent companies will not be deemed adequate for this purpose.

In most cities in China, foreign employees must contribute to social insurance funds. However, some cities have not yet implemented adequate government systems for this purpose, which could save considerable employer cost (f.i. Shanghai., for the time being).

Termination of contracts

Finally, a company must act carefully when terminating employment relationships with its employees. China does not allow for at-will employment for full-time employees, which means that an employee cannot be fired without due cause. Like many civil law jurisdictions, there must be legal grounds.

One of the leading legal grounds for lawful termination is a violation of company rules. For this purpose, companies should have duly implemented (following strict mandatory procedures) an internal document that sets out the company rules and regulations, usually referred to as a staff handbook or employee handbook. This should be a detailed document that describes as precise as possible how employees should behave. Without this document, it becomes challenging to fire or even sanction employees. Note that this document should best be written in Chinese, to avoid enforceability issues in local labor tribunals or courts.

If an employment relationship is unlawfully terminated, the employee can demand reinstatement or economic compensation that is double the severance in case of lawful termination (yes, in cases of lawful termination with notice, there is still severance pay). If legal grounds cannot be found, it is advisable to negotiate with the employee and try to reach a suitable solution for both parties to avoid legal proceedings.

Most of the time an adequate severance package will suffice, though if consensus cannot be reached, the employee may file a claim in labour arbitration. Employees whose contracts are not extended after an initial agreement term, are entitled to severance.

Severance is generally calculated on the basis of one month’s salary (“Severance Salary”) for each full year the employee has worked for the company. The Severance Salary means the average monthly remuneration of the employee during the last 12 months. The Severance Salary shall not exceed three times the local average monthly salary in the relevant city (around CNY 28,740 in Shanghai, at the time of issuance of this article in June 2021).

The above are general interpretations of the general laws and regulations, but their application on a local level can vary and should be consulted with employment law specialist.

Conclusion

It is common wisdom that prevention is better than the cure: compliance with employment provisions is thus crucial for running a successful business in China. Being compliant in the employment arena, will significantly decrease the cost of severance, labour disputes, and other employment issues. Especially in China, where labour laws change frequently and vary locally, this does require extra diligence when dealing with employees. For this reason, your employment situation shall best be reviewed annually.

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