Reasons for the changes
The changes were made to address one of the recommendations in the 2011 Peer Review Report of the Virgin Islands (the “Report”).
The Report noted, among other things, that there was an absence of any legal obligation for companies incorporated in the BVI to maintain the underlying documentation (including accounts) relating to transactions, and that there was no specific requirement for maintaining records and underlying documentation for a minimum period of five years. The minimum period was considered to be necessary for the operation of an effective mutual legal assistance regime for tax matters.
Prior to enactment
Prior to the enactment of the new Act, section 98 of the BVI Business Companies Act 2004 stipulates the main record keeping requirement for BVI companies.
Pursuant to this section, BVI companies shall have and continue to have the obligation to keep records which:
are sufficient to show and explain the transactions of the company; and
will, at any time, enable the financial position of the company to be determined with reasonable accuracy. Section 98 of the BVI Business Companies Act 2004 continues to apply to all BVI companies.
After the enactment
Following the implementation of the new Act, all BVI companies must satisfy the following criteria:
Ensure that the records and underlying documentation (including accounts) that are retained by the companies are sufficient to illustrate and explain the transactions of the companies and enable a proper evaluation of their financial position.
Please note that the requirement to keep “ accounts” does not mean that BVI companies are obliged to prepare and maintain financial statements.
Retain the records and underlying documentation for a period of at least five years from the date of completion of the transaction, or termination of the business relationship, to which the records and underlying documentation relate.
Business relationship referred to in this paragraph shall mean a continuing arrangement between a company and one or more persons with whom the company engages in business on a one- off, regular, habitual or regular basis.
Keep the records and underlying documentation at the offices of their registered agent in the BVI, or at such other place or places, within or outside the BVI, as determined by the directors of the company.
Please note the following:
(a) Where the records and underlying documentation are kept at a place other than at the office of the registered agent of the
company,the company shall notify the registered agent in writing of the physical address of the place or places at which the records and underlying documentation are kept.
(b) Where there is a change in the location of the records and underlying documentation of the company, the company shall
provide its registered agent with the physical address of the new location of the records and underlying documentation within
14 days from the date of the change of the location.
At present, the new rules do not impose any sanctions for non- compliance of record keeping obligation for BVI companies.
However, BVI companies shall comply with requests for information from the BVI International Tax Authority.
However, BVI companies that are non- compliant with the statutory record keeping rules under the BVI Business Companies Act shall commit an offence and be subject to a fine of US$10,000.
Company Formation Services
Fung, Yu & Co. CPA Limited are experienced and knowledgeable about company formation in Hong Kong and in China as well as other countries.
The Financial services industry
- A Cross-border RMB transactions test bed is being experimented;
- Pilot cross-border financial loan transactions are allowed;
- Companies registered in the zone can issue bonds on the Hong Kong capital market;
- The creation of a Qianhai’s securities fund is in the agenda;
- The creation of a Qianhai foreign funded equity investment fund is in the agenda;
- Appropriate lowering of entrance requirement for Hong Kong financial institutions under the CEPA framework is considered;
- Pilot setup of new financial institutions and commodities transaction platforms in the Zone is encouraged;
- Establishment of local and foreign financial institutions with international or local management headquarters will be promoted in Qianhai.
- A 15% Enterprise Income Tax regime will be implemented for eligible companies;
- Qualified expatriate personnel can be entitled to a reductionor exemption of their Individual Income Tax;
- Eligible modern logistic companies can benefit from tax collection on a different basis;
Building materials and maintenance parts and fuels for manufacturing process imported by companies registered in the Zone for their own usage can be exempted from Import Tariffs and Import Value Added Tax;
- Machinery, equipment and other supplies being imported for the infrastructure of the Zone’s building purpose will be exempted from Import Tariffs and Import Value Added Tax;
- Raw materials, parts, components, and packaging materials imported by companies in the Zone for producing products dedicated to export will be exempted from Import Tariffs and Import Value Added Tax;
- Transit cargos within the zone will be handled as bonded cargos and will be exempted from Import Tariffs and Import Value Added Tax;
- Exported products will be tax exempted and processed products being exported by the companies in the Zone will be exempted from export tariffs.
The Legal Industry
- Companies in Hong Kong engaged in provision of arbitration services will be allowed to establish branches in Qianhai on an experimental basis;
- Joint ventures between Chinese and Hong Kong law firms will be allowed on an experimental basis under the CEPA framework.
- Conveniences for work and living, easy entrance and departure will be provided for expatriate employees, Chinese employees from overseas, and overseas educated Chinese graduates;
- As approved by the State, Qianhai will be included in the scope of the priority pilot test area of the Guangdong Province;
- Practitioners, already certified in Hong Kong, will be allowed to provide professional services for Qianhai companies and residents but their services will have to be limited to Qianhai’s area;
- Hong Kong CPAs will be allowed to become Mainland Chinese accounting firms’ partners.
The Medical and Education sector
- Hong Kong educational businesses will be allowed to set up wholly-owned international schools;
- Hong Kong medical companies will be allowed to set up wholly-owned hospitals.
The Telecommunications industry
- Hong Kong and Macau telecommunication operators aiming to establish joint ventures in the telecommunications industry are encouraged;
- Innovation in telecommunications will be promoted and innovative local telecommunication companies are encouraged;
- To meet the Qianhai’s companies’ need for international communications, dedicated international communication’s channels will be set up in Qianhai.
The list of the preferential policies issued by the Qianhai Administration Bureau will be continuously updated.
Registration of companies from the following industriesare encouraged within the zone
- Financial industry (banks, non-banking financial institutions, securities companies, security investment institutions, futures and options traders, fund service institutions, investment advisory companies and finance and lease companies);
- Modern logistic industry (supply chain management, trading, agency service, distribution and courier service for e-commerce and third-party logistic service);
- Information service industry (telecommunication infrastructure, value-added telecommunication services and electronic authentication services);
- Specialty services industry (accountants, valuation company, law firm, consultants, engineering services companies, public relation companies, human resources advisors, exhibition services, educational and medical services, etc.).
General guide to set up in the Zone
The scope of business that they are going to enter into based on the Qianhai Bonded Port Zone’s entrance requirement;
Company name to be decided that is not conflicting existing names;
After initial examination and approval of the above, the process of registration with various government bureau can start.
Important points to note
- The applicant must comply with the Industry Investment and Entrance Catalogue for Qianhai;
- The registered capital of the applicant must reach a minimum level (RMB 5,000,000 for general business and RMB 10,000,000 and above for financial institutions, and the amount of registered capital vary depending on the company’s actual scope of business);
- Companies incorporated in the municipality of Shenzhen are not allowed to directly relocate to Qianhai but a new entity is mandatory.
We shall be happy to provide any further information needed.
- Mr. Xu Qin, mayor of Shenzhen, mentioned earlier in Hong Kong that “Qianhai is ready for development and opening on a huge scale…….it will become a hot spot for a new round of reforms and development in Shenzhen; it will become the Manhattan of Shenzhen. More than 10 asset management companies are already registered in Qianhai as tax incentive offered are highly attractive to them.”
- The Zone will be operated as the national pilot test bed and that some specific issues are still in negotiation between the Qianhai Administration Bureau and the Ministry of Commerce. We shall keep you posted of the latest development.
For detailed information about investment in Qianhai, please feel free to contact us at:
Tel: +8620 3762 1108
Manager, Shanghai and Beijing
Tel: +8621 6289 8813
Tel: +33 1 44 50 40 55
Manager, Corporate Service Department, Hong Kong
Tel: +852 2541 6632
Tel: +852 2541 6632
Hong Kong Head Office
10/F., Guangdong Investment Tower,
148 Connaught Road Central,
Tel: +852 2541 6632
Fax: +852 2541 9339
Guangzhou Representative Office
Flat D, 11/F, Yueyun Building,
3 Zhongshan 2nd Road,
Tel: +86 20 3762 1108
Fax: +86 20 8762 0508
Shanghai Representative Office
Suite 904, OOCL Plaza,
841 Yan An Zhong Road,
Tel: +86 21 6289 8813
Fax: +86 21 6289 8816
Beijing Representative Office
Room 2302, E-Tower,
No.12 Guanghua Road, Chaoyang
District, Beijing, PRC
Tel: +86 10 6591 8087
Fax: +86 10 8599 9882
Paris Representative Office
20 Rue Cambon 75001
Tel: +33 1 44 50 40 55
- Capitalise on the opportunities arising from the national Belt and Road Initiative and the Guangdong-Hong Kong-Macao Bay Area development proactively and holistically. Enter into a full agreement on Hong Kong’s participation in the Belt and Road Initiative with the National Development and Reform Commission as soon as possible.
- Provide tax relief to small and medium-sized enterprises: profits tax rate for the first $2 million of profits proposed to be lowered to 8.25%, and standard tax rate at 16.5% for profits exceeding that amount. Only one enterprise nominated by each business group is eligible for the lower tax rate.
- Encourage research and development (R&D) investment by enterprises, propose to introduce a 300% tax deduction for the first $2 million eligible R&D expenditure, with the remainder at 200%.
- Increase the total number of comprehensive avoidance of double taxation agreements to be signed with other tax jurisdictions to 50 in the next few years.
- Further expand the network of our Economic and Trade Offices (ETOs) to strengthen external promotion. Set up a new ETO in Thailand as the third one within the Association of Southeast Asian Nations (ASEAN) countries.
- Further enhance bilateral ties through signing a free trade agreement and an investment promotion and protection agreement with the ASEAN in November this year, and the Hong Kong and Macao Closer Economic Partnership Arrangement this year.
- Demolish and redevelop the three government buildings next to the Hong Kong Convention and Exhibition Centre (HKCEC) in Wan Chai North into a new wing linking and integrating with the existing HKCEC to provide an additional 23 000m² of convention and exhibition facilities.
- Boost development of the tourism industry, including the development of cultural, heritage, green and creative tourism, and opening up a diversified portfolio of visitor source markets with high yield visitors.
- Allocate more resources to the Financial Services Development Council. The Government will take the lead to issue green bonds in the coming financial year to encourage investors to finance their green projects through Hong Kong capital markets.
- Consider adding a wider range of investment products into the two-way mutual access mechanism, such as exchange-traded funds, and extending the Mainland-Hong Kong Bond Connect to cover Southbound Trading.
- The Hong Kong Monetary Authority to launch the Faster Payment System next year to further promote development of more diversified and flexible payment products by the market for the benefit of customers and merchants.
Innovation and Technology
- Promote the development of innovation and technology (IT) on all fronts to bring new economic drive and to improve people’s daily lives.
- Besides the proposed tax concession, set aside no less than $10 billion as university research funding to encourage private companies to increase investment in R&D.
- Kick-start the $500 million “Technology Talent Scheme” to train and pool technology talent; through the injection of $3 billion into the Research Endowment Fund, provide studentships for local students admitted to research postgraduate programmes funded by the University Grants Committee (UGC); and subsidise local enterprises on a matching basis for training their staff on advanced manufacturing technologies.
- Jointly develop with Shenzhen the “Hong Kong-Shenzhen Innovation and Technology Park” at the Lok Ma Chau Loop, and through the Guangdong-Hong Kong-Macao Bay Area development and collaboration between Hong Kong and Shenzhen, develop an international IT hub in the Bay Area.
- Deploy $2 billion under the Innovation and Technology Venture Fund Scheme to co-invest, on a matching basis, with venture capital funds in local technology start-ups.
- Deploy $500 million to encourage government departments to make good use of technology to enhance service quality.
- Invest $700 million to take forward key infrastructure projects for Smart City development to provide an “eID” for all Hong Kong residents, launch a pilot “Multi-functional Smart Lampposts” scheme at selected urban locations, reform the development technology of e-Government and build a big data analytics platform.
- Take the lead to provide telecommunications companies with financial incentives to encourage the extension of fibre-based network to rural and remote areas.
- Continue to develop an intelligent transport system, including the installation of a new generation of on-street parking meters for payment of parking fees via remote payment using mobile applications and providing real-time information on vacant parking spaces.
- Propose to inject $1 billion into the CreateSmart Initiative (CSI) to strengthen support for the development of the design and creative industries.
- Provide additional resources to the Hong Kong Design Centre to implement a series of measures to reinforce Hong Kong’s status as a city of design excellence in Asia.
- Review the operation of the Film Development Fund to promote further development of the local film industry, and nurture more professionals for film production or post-production.
- Explore possible measures with the relevant Mainland authorities to facilitate Hong Kong publishers to tap into the Mainland market.
Land and Housing
- The newly established Task Force on Land Supply to examine the different land supply options, so as to draw up a comprehensive package of proposals and a visionary land supply strategy.
- Launch “Operation Building Bright 2.0” with a funding of around $3 billion, and deploy another $2 billion to subsidise owners of old composite buildings to implement fire safety enhancement measures under the Fire Safety (Buildings) Ordinance.
Care for the Elderly and Underprivileged, Improving People’s Livelihood
- Set up a $1 billion Fund to promote gerontechnology and subsidise elderly service units to trial use and procure technology products.
- Allocate an additional $447 million to extend the Short-term Food Assistance Service for three years to 2020-21, and at the same time conduct a comprehensive review of the initiative.
- Mitigate the impact of the abolition of the arrangement for “offsetting” severance payment/long service payment with Mandatory Provident Fund contribution on enterprises, particularly micro, small and medium enterprises by increasing Government’s financial commitment. Put forward a proposal that addresses the interests of the labour and business sectors in the coming months.
- Discuss with the education sector on effective utilisation of the remaining $1.4 billion recurrent funding while measures under the $3.6 billion new education resources started to be implemented in September this year.
- Inject $400 million into the Partnership Fund for the Disadvantaged, including $200 million for implementing after-school learning and support programmes, which will benefit some 130 000 grassroot children.
For details, please refer to the full content of “Policy address 2017”. (https://www.policyaddress.gov.hk/2017/eng/policy.html)
We entrust our business partners and clients would be most concerned about tax relief to small and medium-sized companies: profits tax rate for the first HK$ 2,000,000 of profits is proposed to be lowered to 8.25%, and standard tax rate of 16.5% continue to apply for profits exceeding that amount. This relief is applicable for only one company nominated by each business group.
Planning for small & medium size-business group
A business group may be interpreted as group companies from ultimate holding company down to subsidiaries at lowest hierarchy of shareholding.
This new policy means an instant saving of HK$165,000 (16,5% – 8.25%) on each year of assessment for the first HK$2miilion profits arising from Hong Kong sourced income for a small & medium group of companies. And now businesses should have more room to conduct appropriate tax planning at the group level. As a practitioner, we mostly concerned about what further details will be announced by the government to prevent abuse or misinterpretation. So it is yet to see how new detail ruling and interpretation will be announced by government.
In short, the main features of FTZ lie in terms of business registration easing, no VAT charged for trading within the FTZ, more broadly fewer restrictions coupled with various incentives through preferential policies.
With just over a year after their inception, shadows still persist and FTZ attractiveness seems to be mixed so far. The government set a timeline of three to five years to make them mature so there is still room for improvement and adjustments. According to a survey conducted by the American Chamber of commerce in 2015 in Shanghai, a lot of respondents are still waiting for a clearer picture in terms of requirements and benefits. For example, a policy states that there is no minimum capital required to setup a new business while in practice a minimum amount is actually recommended by certain local industry and commercial administrative bureau in order to get their approval.
The lack of understanding also arises from the fact that the policies are often too general and leave room for interpretation or uncertainty. Given our deep understanding of local policies, we are confident we can help you to get the most out of the policies while avoiding misinterpretation risks.
Not surprisingly, all FTZ are located on the eastern coastal area widely known to receive a large amount of China’s inbound FDI
and each one of them possess at least one major harbor. The map below pinpoints their locations:
Shanghai Pilot FTZ
Inception Date: 29 September 2013
- Trade facilitation through regulation.
- Financial innova- tion through capital account convertibility and liberalization.
Area Covered and Industries to Benefit:
- Waigaoqiao FTZ Bonded Area
- Free trade, export processing, logistics warehousing, displaying and trading.
- Lujiazui Financial Area
- Finance, insurance, securities, Multinationals HQ, futures markets.
- Jinqiao Export Processing Zone
- Advanced & auto- mobile manufacturing, ecological industries, modern home appliances and biomedicine.
- Zhangjiang High Tech Park Integrated circuit
- Total 120.72 sq.km
Tianjin Pilot FTZ
Inception Date: 21 April 2015
Coordinating development of Beijing-Tianjin-Hebei region.
Easing trade, facilitating investment, and high-tech industries.
Area Covered and Industries to Benefit:
- Tianjin Airport Area
- Telecommunications, biological, optoelectrical, advanced manufacturing industries, civil aviation, new energy and materials industries, airport-based logistics industry.
- Binhai CBD area
- FinTech, cross-border e-commerce, cultural, media and creative industries.
- Tianjin Port Dongjiang area
- Container terminal port handling, container logistics processing, trading, leisure and tourism.
- Total 119.9 sq.km
Fujian Pilot FTZ
Inception Date: 21 April 2015
- Leverage the proximity with Taiwan.
- Promote free-flowing of goods, services, capital and person.
Area Covered and Industries to Benefit:
- Fuzhou area
- Advanced manufacturing base, plat- form for the Maritime Silk Road.
- Pingtan area
- Port logistics, electronics industry, R&D headquarters, marine industry, high-end light manufacturing industry.
- Xiamen area
- new high-tech R&D, airport-based industries, international trade related services, financial services, cruise economy, building the cross-Strait economic and trade cooperation.
- Total 118.04 sq.km
Inception Date: 21 April 2015
- Leverage proximity with HK and Macau through a deeper cooperation.
- Creating an international, market-oriented and regulated business environment.
Area Covered and Industries to Benefit:
- Nansha Area of Guangzhou including Nansha Bonded port
- Shipping industry, logistics, financial industry, international trade & high tech manufacturing.
- Qianhai-Shekou Area of Shenzhen
- Financial industry, modern logistics, and information & technology services.
- Hengqin Area of Zhuhai
- Tourism industry, finance services, cultural and educational industry, high tech industries.
- Total 116.2 sq km
View from the ground
According to the survey mentioned above aiming at capturing a snapshot on how things are perceived and dealt with on the ground, almost 73% of respondents believe that the Shanghai FTZ offered no tangible benefits and around 48% hasn’t noticed any change for their business. Around 45% pointed out a lack of information to clearly understand how the FTZ works and said they believed China’s regulatory environment favored local companies. Now let’s have a look at some of the most recurrent questions arising from our clients when it comes to grasp the FTZ framework and how to benefit from it.
How to set up a business in the FTZ?
The best way to proceed for foreign parties wishing to set up within the FTZ would be to proceed as follows:
For a new business:
(1) Checking to what category the business belongs to: allowed, restricted or forbidden?
(2) Carrying out feasibility studies, getting familiar with general policies and preferential treatment, performing advanced due diligence either in-house or outsourced (recommended).
(3) Discussing and negotiating with regulators (along with professionals recommended).
For an existing business:
For company already registered outside the zone, a legitimate question might arise: should I open a branch within the FTZ or create a new entity within it? A company that sets up a branch within the FTZ might not be eligible to the preferential policies. For instance, it will be harder for the branch to get customs codes, the 10 digit code companies register with China customs in order to benefit from newly liberalized trading policies.
RMB cash pooling: another FTZ comparative advantage
Transferring money to overseas branch from China in order to conduct day to day operations abroad is a recurrent question. In the past few years, it has been possible for some businesses to transfer money abroad for working capital purposes but under strict requirements. For instance, multinationals could benefit from cross-border auto-sweeping between the parent company and their related subsidiaries.
The FTZ makes it now much easier for companies to conduct cross-border RMB cash pooling compared to outside of the zone. On top of that, even SMEs (in theory) are eligible to this service allowing them to reduce their operating cost and manage more efficiently their liquidity.
What to expect on RMB convertibility and capital account openness fronts? Although highly awaited, it doesn’t seem to be a priority for the policymakers at the moment especially in light of the recent developments namely capital outflows and RMB selling pressure. These two delayed but on-going projects will eventually, when completed, increase confidence and willingness to invest in China.
Better to wait or to step in now?
FTZ are still at their early stages so there is room for improvement. Before China, other countries have been promoted FTZ such as Brazil, Japan and South Korea to name a few. The main difference between these FTZ and the one in China lies in the financial openness and liberalization. One potential implication could be that a certain level of financial reforms is actually needed as a prerequisite in order to enable the FTZ to reach its full potential.
That being said, we do think opportunities currently exist within the FTZ. In addition, some factors such as but not limited to, the type of products or services sold, domestic or international market targeted and the limited space available to store bulky goods, should be carefully considered before making any decision. Lastly, opportunities also derive from indirect needs of companies already established in terms of non-core business needs such as accounting, HR, Audit and so on. In other words, these are opportunities for third party players to fill the gap. Firms should therefore not only think about FTZ in terms of preferential policies but also in terms of potential spillover effects.
Article 4 of Circular 36 stipulates that foreign-invested enterprises which primarily engage in investment can transfer directly their share capital into the bank account of the investee company accounts.
The document further clarifies that the foreign exchange capital account shall be temporary suspended as stipulated under “Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues Concerning the Improvement of the Administration of Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises” (“Circular 142”) in the 16 pilot scheme areas.
For overseas Private Equity funds (“foreign PE firm”), this means that the gateway to Chinese equity investment projects have opened once again. Under Circular 142 issued by the SAFE in 2008, foreign-invested enterprises were not allowed to use renminbi capital settlement proceeds for domestic equity investments, blocking nearly all routes for foreign PE firm to legally invest in China. Under this newly issued Circular 36, new channel for equity investment in China is reopened again.
3 Channels for Foreign PE Investment
The first route for entry was the “foreign-invested venture capital enterprise” established by the former Ministry of Foreign Trade (current Ministry of Commerce) in 2002 with the issuance of the “Foreign-Invested Venture Capital Enterprise Management Regulations”. In fact, under the framework of Circular 142, the capital settlement channel of such enterprises was quite accessible.
Our understanding is that with the issuance of Circular 142, SAFE General Office clarifies with various SAFE Branch Offices in Shenzhen, Shanghai and other regions that once the project (or scope of business) of the foreign-invested venture capital enterprises been approved by the Ministry of Commerce, capital can be directly remitted into PRC.
However, in practice, not many foreign PE firm would adopt this route. The reasoning is that under Circular 142, the requirements for project approval are very demanding and requires that invested enterprises be start-up high tech company. The NDRC has a series of financial criteria in place for such enterprises, such as the ratio of research and development costs etc.
The second route is in the form of “foreign investment companies” as established in the Ministry of Commerce’s 2004 “Provisions on Foreign Investment in Investment Companies”. However, the document’s threshold for investors is also very high and requires the investor of at least ten Chinese foreign-invested enterprises.
The third route is in the form of “foreign-invested equity investment enterprises” which are currently limited to regional pilot programs. In late 2010, Shanghai released the “Implementation Approaches on Pilot Work for Municipal Foreign-Invested Equity Investment Enterprises”. Early 2013, Shenzhen also released the “Interim Measures on Carrying Out the Pilot Work for Shenzhen Foreign-Invested Equity Investment Enterprises” and initially established a management system.
Previously, this route was primarily for QFLP pilot programs but with a comparatively small investment amount, complicated approval procedures and other issues. This approach has never been popular. However, experts predict that with the expansion of pilot programs and relaxation of capital settlements under Circular 36, it may become the “main channel” for foreign PE firm investing into China.
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The new DTA provides benefits but also brings in challenges and questions for investors and entrepreneurs. It is based on the OECD model even though many of its parts are custom-made to support the specificities of both French and Chinese tax systems.
In a nutshell, the main aspects of the new DTA are:
- A lower levels of dividends withholding China income tax;
- A clarification of the two taxation approaches under domestic laws, especially regarding capital gains, and a stricter application of the permanent establishment provisions;
- The Introduction of major anti-avoidance provisions in line with the push of tax policy in both countries over the last few years.
In this newsletter, we will first explore the benefits and the challenges created by the new DTA. We will then see how it could impact your business in China and in what extent using Hong Kong, home of many existing WFOE’s holding vehicles, is still recommended or not.
Benefits and clarifications
Reduced withholding income tax rate on dividends
The withholding income tax rate on dividends is reduced from 10% to 5% if the corporate beneficial owners directly hold at least 25% of the company paying the dividends. However, the withholding income tax rates remains at 10% on interest and royalties. On that last aspect, Hong Kong keeps a decisive advantage with a lower rate of 5%.
Updated capital gain tax on the disposal of shares
Similar to the previous treaty, the source country can tax capital gains on companies investing in real estate companies. The innovation of the new treaty lays on the definition of real-estate investments company which is broadened and now covers any company deriving more than 50% of its value, directly or indirectly, from immovable properties located in the source country and holded at any time during the 36-month period preceding the disposal;
The definition of non-real-estate company is also broadened and a company is included in the scope if at least 25% of the company is owned, directly or indirectly, during a 12-month period preceding the disposal.
If the definition is finally clarified, French non-resident taxpayers still may be subject to a 45% tax on capital gains, withheld at source upon the disposal. This regime is still way less favorable than the one applicable to French corporate taxpayers. Conversely, capital gains realized by French corporate shareholders on the disposal of shares in Chinese companies will be taxable in China at the rate of 25%, pursuant to PRC’s tax laws.
Permanent Establishment and business profits
Consistent with China’s new or updated tax treaties in recent years, clearer definition of Permanent Establishment is included in the treaty and provides welcoming certainty to French investors conducting business in China.
The changes include:
- The time threshold for a building site, construction, assembly or installation project to constitute a permanent establishment is extended from 6 to 12 months; The time threshold for constituting a services related Permanent Establishment is changed from 6 months to 183 days within any 12-month period;
- The exclusion of supervision services in connection with the sale or lease of machinery or equipment from constituting a permanent establishment in the current protocol is removed;
Treaty application to partnership or other similar entities
The new treaty clarifies the fiscal treatment of income, profits or gains derived through partnerships. The tricky part was to determine who should be entitled to the tax treaty benefits: the partnership subject to tax or the residing partners.
Both Chinese and French tax systems are “quasi-transparent” on partnership’s treatment. In France, taxable income lies with the partnership but tax liabilities are settled by the partners. Chinese partnerships experience a similar issue but while this is the first tax treaty tackling partnership issue signed by China, France has experience dealing with the topic before signing tax treaty with the United Kingdom, the United States of America and Japan.
The 3 criterias laying down tax liabilities of partnerships are determined by:
- the source of profits;
- the state in which the partnership is settled; and
- whether the income is treated as being that of the partnership or the partners.
For instance, if China sourced income arises from a French partnership, the treaty benefits may be granted either to the French partnership, if it is a taxable person under the French tax laws, or to the French resident partners, if they are treated as the taxable persons under the French tax law.
By the same token, if China sourced income arises from a Chinese partnership where there are French resident partners, the treaty benefits would not be applicable if either France or China views the Chinese partnership as non-transparent.
The anti-avoidance and improved exchange of information challenge
Based on the very new OECD model, the new treaty deals with anti-avoidance limitation on benefits clauses and with improved Exchange of Information. The practical applications are:
- The new treaty’s benefits will not apply to cases where one of the main purposes of an arrangement is to take advantage of the terms of the Double Tax
- Agreement (i.e. treaty shopping);
- These anti-avoidance measures are further supported by the latest version of the Exchange of Information between China and France which will be improved from solely what is ‘necessary’ to administering domestic tax law, to what is ‘foreseeably relevant’;
- Targeting the same direction, a Memorandum of Understanding on Bilateral Cooperation is included in the new treaty and creates the conditions of a future assistance in the collection of taxes.
Under the new treaty, the old tax sparing clause is abolished. It used to give foreign tax credit in respect of China sourced passive income regardless of actual Chinese tax paid but the treatment of past passive income is allowed for a limited period to ease the change of legislation.
Conclusive Observations and why Hong Kong still has a role to play
Taxation wise, clarifications are always welcomed and the new treaty between France and China follows the OECD approach trying to define further what future global taxation cooperation should be. It replaces an aging treaty and clarifies the structure surrounding inbound and outbound investment for both countries. Practically though, what will change for entrepreneurs, managers, accountants, tax practitioners… and how will it impact Hong Kong, traditional gateway to/from China?
One of the main goal of the treaty is to improve exchange of fiscal information and improve the mutual tax collection between the two countries. It means Chinese and French tax authorities are willing to work closer together for clarification and limitation of abusive behavior. Neither China nor France alone are fiscally easy to deal with, so it is going the right way.
Hong Kong still has a role to play. One of the symbolic arrangement of the new treaty is the reduction of the withholding tax on dividends from 10 to 5% similar to what is already set up for years with Hong Kong. Does it means passing by Hong Kong has no interest anymore? Possibly not, a couple of precisions need to be done here:
- It is still more beneficial to pass by Hong Kong for interests and royalties as French Corporates are still subject to 10% withholding tax in the new treaty against 5% for Hong Kong ones;
- Hong Kong jurisdiction is based on a fully bilingual system and using a Hong Kong vehicle still eases the process of setting up a WFOE; Disposal of the Hong Kong vehicle instead of the WFOE is fiscally advantageous. Hong Kong is a gateway but also a good way out from China;
- For Global companies using Hong Kong as a hub for Asian operations is way more flexible than using a French company. Money and assets can be easily redistributed in other Asian countries.
Confirming the role of Hong Kong as an entry point to China for European companies, the arguments in favor of Hong-Kong remain unchanged and therefore give us a new insight about the new treaty. Actually clarifying taxation, the new treaty actually facilitates and orients the flow of China’s ever-growing outbound investment towards France. It is a great tool for future investments in France and a confirmation that China is opening not only thinking about inbound but also getting ready for another mew outbound wave.
1. Introduction of time limit requirements for trademark application, review and objection: a welcomed clarification.
The time cycle for initial trademark application has been reduced from a more than 2 years average to a compulsory 10 months.
In case of refusal, the applicant may request for review. Following the review application, the legislator’s decision has to be announced within 9 months from the date of receiving the review application. Under special circumstances, an extension of 3 months may apply.
In case of objection raised against a trademark previously approved, the legislator’s decision has to be announced within 12 months from the date of the objection. Again and under special circumstances, an extension of 6 months may apply.
2. Improvement of the Trademark opposition system: a major change to clarify the process and limit malicious opposition.
The Renewed Trademark Law takes both into account the credentials of the opposition entity and the opposition reasons. As a result, opposition reasons raised by any prior right holder or stakeholder shall only be limited to relative reasons, while opposition reasons raised by anyone else shall be limited to absolute reasons.
The opposition appeal system is partially abolished to simplify the procedures: once the Trademark Office has decided that the opposed trademark shall be registered, the claimant no longer has the right to initiate proceedings for opposition appeal. However, he can still object the registered trademark through a separate objection process.
Two aims are targeted here: reduce the disturbance power of the claimants in order to ease the registration of valid trademarks and emphase for the claimant the importance of providing sufficient and relevant evidences during the opposition procedures.
3. Strengthening of the protection of registered trademarks exclusive usage rights: an improved anti piracy tool.
The first significant move forward impacts the types of trademark infringement that are further clarified and refined.
The second major improvement regards the process of compensation which is strengthened through a significant increase of the potential compensation’s amount and a clarification of the process’ method. 3 particular points have to be noted:
a) The compensation amount’s determination is specified technically and legally;
b) A punitive damages mechanism is introduced;
c) The upper limit for the compensation amount is increased from RMB 500,000 to RMB 3,000,000.
4. Intensification of the efforts for crack downing and punishing trademark infringement: an essential move forward
Article 60(2) of the new Trademark Law further clarifies the standard of administrative punishment for trademark infringement and increases the intensity of penalties as detailed below:
In the previous version of the Chinese trademark law all tools “specifically” used for manufacturing infringing products and forging trademark labels were intended to be confiscated and destroyed. In the new version, all tools “mainly” used for trademarks’ infringement purposes will be as well subject to seizure and destruction.
Heavier penalties for recidivists are introduced: “offenders that have engaged in acts of trademark infringement for more than twice within five years or in other severe circumstances shall be subject to heavier punishment.”
5. Emphasis on the principle of good faith in trademark application and increase of the efforts to curb malicious trademark squatting.
Article 7(1) of the new Trademark Law provides that “The principle of good faith shall be observed when applying for registration and use of trademarks.”
Malicious trademark squatting by those with contractual, business or other relations and who clearly knows the others’ prior use of the trademark is prohibited. As long as the trademark applicant being opposed “clearly knows” the existence of the previously used unregistered trademark, he is potentially submitted to malicious trademark squatting.
6. Major improvements on the application of trademark registration: structuring the procedures.
A couple of procedures and trademark components detailed below have been added, clarifying the process: Adding sound trademarks to legislation;
Prohibiting the use of national anthems, army emblems, military anthems as well as the names, signs and other marks of central and state authorities as trademarks; Prohibiting deceptive trademarks specifically defining them as “fraudulent marks”;
Adopting trademark registration application of “one trademark under multiple categories”; Allowing submission of documents in electronic format to facilitate the process; Advancing and releasing a time limit for going through formalities for renewal;
Further specifying the requirements for transfer and the procedures and nature for permits being filed on record.
7. Improvement of the trademarks’ administration: rights and duty of a registered trademark.
The use of trademarks is defined as the “act for identifying the source of product.”
In case of inappropriate use of a registered trademark, the new Trademark Law insists that the misuse shall be corrected within a certain time limit. Failing which the Trademark Office will have the power to revoke the registered trademark. Moreover, in case of non-usage of a registered trademark for three consecutive years, the trademark can be revoked by the Trademark Office.
In case of violation or prohibited use of registered trademarks or use of “well-known trademarks” in commercial activities, the new Trademark Law clearly specifies the penalty amount: a fine of up to RMB 100,000 shall be charged by local industrial and commercial administration bureau.
The revocation of registered trademarks that have degraded to generic names is introduced.
Trademarks as part of Business Valuation
When valuing a company the value of trademarks must be considered. The Fung, Yu & Co. CPA Limited Business Valuation service will not neglect this important asset.
Figures and findings
When it comes to the findings, the decennial version seems to lead at first sight to an obviously sibylline conclusion: China is no longer the Eldorado it once was and times are tougher. Veteran entrepreneurs are moaning, most of the time with reasons, about the Chinese SOE’s (State Owned Enterprises) unfair competition, the unpredictable legislative environment, the discrimination they experience as foreigners. Three major topics, illustrated below, emerged:
Profitability is harder to achieve and the competitive pressure is stronger
The percentage of profitable companies decreases from a top 74% in 2010 to 63% in 2014. Among them, only 37% noted an increase of their EBIT margin compared to 2013. For the first time in history of the survey one third of the respondents declare that their margin is lower in their Chinese subsidiary than their global average.
Optimism and trust into the future Chinese Economic performance are slowing down
Level of pessimism is still low (around 5%) but, compared to the 83% of 2008 the level of optimism decreased to a more common 68%. The expression “end of the golden age” arose together with a shared feeling that local companies catch up and are more and more mature. “China doesn’t need FDI ( Foreign Direct Investments) as it did a few years ago.”
The Chinese marketplace is still regarded as discriminatory and new policy developments are yet to convince
A majority of European companies still deplore the unfavourable treatment they claim to receive and regard regulatory development as uncertain. Even if they note the aim to increase the rule and transparency of Chinese law they doubt the Third Plenum Decision of the 18th Central Committee will really change the situation.
Problematic: is the situation that “dramatic” and what does the survey shows of the new Chinese business environment?
To start with, if the nature of the European Chamber’s business confidence survey gives companies “feelings” a rare auditorium one should not forget that macro-economically wise, optimism for China should still be the norm. The relative decrease of GDP growth rate (though still expected to be close to 7.8% in 2014) and the relative labour costs’ increase hide only partially the growing strength of the Chinese Economy. The trend is indeed globally still positive: Chinese GDP will reach USD 9,761 Billion in 2014 according to the IMF, 7 millions of Chinese will be University graduates this year (for the first time in history), global level of R&D of the Chinese exported products keeps climbing…and the list could go on and on.
Having said that, the growing concerns expressed by the survey should not be undermine by pure figures. Something is happening and is expressed by the survey: with the country as all, foreign entrepreneurship in China is changing.
Chinese increased importance in overall revenue
Between 2010 and 2014 the percentage of European Companies settled in China that made more than 10% of their global revenue in China grow from 32% in 2010 to 48% in 2014. This implies that more central operations are managed in China nowadays and the needs.
China as a hub
Europeans businessmen start considering China as a hub for their development in Asia. They use the experience accumulated to develop in other Chinese provinces and other Asian countries. 45% of companies consider expanding to other provinces and 48% are currently reviewing opportunities to invest outside of China but within Asia.
Conclusion, what does it mean:
The European Chamber business survey confirms the premises of a trend that will change the way of investing in China. Competition is tougher, local players are more and more organized and sophisticated, rules are clearer and the central government is on its way to implement a renovated framework for Foreign Direct Investment.
As a result, investing in China is less and less likely to be successful if unprepared. Relying on a network of efficient service providers, lawyers, Chambers of commerce, business partners is the key to structure the opening of an endless opportunities market. With competition, taste for quality is increasing and European businesspeople have a major role to play. The increasing level of education offers new opportunities of rich collaborations and development for European companies. With a good structure, success in China is still incredibly reachable.
The full survey is available here:
For more about Fung, Yu & Co’s services see here:
“Zero Down Payments” (applicable to Domestic Enterprise, WFOE and Sino-Foreign Joint-Venture)
The term “zero down payments” refers to lifting the paid-up capital formerly required for commercial registration. Applicants now are only required to report registered capital upon registration, and administration authorities no longer require capital verification reports from commercial entities, so long as they simply state their subscription amount on their public information platform. In addition, minimum capital and 2-year capital contribution requirements have been removed. These reforms will help to reduce start-up capital costs and improve the operational efficiency of a company’s capital. Meanwhile, the reforms will help to guide companies towards capital contributions that are in accordance with their own needs and capabilities, standardizing registered capital management.
No approval required for Business Scope of Company(only applicable to Domestic Enterprise)
With the implementation of commercial registration reforms, the Industrial and Commercial Administration Bureau will no longer approve the business scope of commercial entities. Relevant administrative authorities will only document the main business categories of the commercial entity within its business license and make no mentioning of specific business projects. The business scope documented within the commercial entity’s prospectus or agreements should be made publicly available through the commercial entity’s information platform.
“One Address and Multiple Licenses” and “One License and Multiple Addresses” are permissible (only applicable to Domestic Enterprise) In addition, the reforms also allow for “one address and multiple licenses” and “one license and multiple addresses”. It has been reported that with the implementation of these reforms, enterprises can expand to additional premises within their respective districts, allowing for “one license and multiple addresses” without the need for separate business licenses for each branch. However, information on the premises shall be reported to commercial registration authorities. As for affiliated investment companies and enterprises located in business parks, the reforms allow for “one address and multiple licenses”, which means that a single address can be used for multiple business licenses. Moreover, to simplify the procedures for registry of domicile and place of business and on the basis of convenient access and to maintain order, rental contracts are no longer a prerequisite for obtaining business licenses.
These current commercial reforms are mainly applicable to domestic enterprises, and changes to the establishment of foreign-invested enterprises is still under review. At the moment, foreign-invested enterprises must still comply with the Foreign Investment Law and MOFCOM regulations. Within the Shanghai Free Trade Zone, however, the commercial reforms for domestic enterprises have already become applicable for foreign-invested enterprises. This indicates that domestic enterprises reforms will gradually extend to foreign-invested enterprises and equity joint ventures.
Fung, Yu & Co CPA Limited provide a comprehensive range of professional services for accounting, auditing, tax services, company set up, company secretarial and HR outsourcing. For more information read our list of services.
1. Salary Tax
Salary Tax and tax under Personal Assessment are proposed to be reduced by 75% within a HK$ 20,000 limit. In addition, the limit of several Allowances for Personal Tax Purpose has been adjusted as follow:
|Single parent allowance
|Married person’s allowance
|Dependent Parent or Grand Parent
|Age between 55 and 59 years old
|Aged 60 or above
|Elderly residential care expenses
2. Profits Tax
Profits Tax for the year of assessment 2015/16 is proposed to be reduced by 75% within a maximum limit of HK$ 20,000. It would be applicable for sole proprietorships, partnerships and limited companies.
ONE-OFF RELIEFS MEASURES AND FINANCIAL INITIATIVES
1) Business registration fees
Business Registration fee for 2016/17 shall be waived for all types of companies that registered under the Business Registration Ordinance.
2) Government Rates
Government rates payable by all property owners shall be waived for 4 quarters for 2016-17 (instead of just two quarters in last year budget), with a ceiling of HK$ 1,000 per quarter.
3) Relief for the tourism and F&B industry
In view of the decline in tourism and F&B industry, the license fee for 2016-17 will be waived for:
• Travel Agencies;
• Hotels and Guesthouses;
• Restaurants, hawkers and operators with restricted food permit.
4) Incentive to develop the role of Hong Kong as a platform for owning IP rights
The tax deduction for capital expenditure incurred for the purchase of Intellectual Property rights shall be increased.
Note: More to come. Please note that the proposed budget still has to be formally enacted. Items might be added or removed before the enactment. For further details, please refer to: http://www.budget.gov.hk/2016/eng/index.html
On 16 November 2011, the PRC Government carried out a major reform on the tax system on goods and services, which is a further important measure on structural tax cuts after the full implementation of VAT Reform in 2009. This is also an important step towards the VAT Reform.
The reform helps in eliminating the current problems of the double taxation of VAT and business tax respectively on goods and services. This is different to the issue of cross-border double taxation between China and Hong Kong. Through optimizing the taxation structure and reducing the tax burden, it strengthens the service industry and accelerates the pace of development, and is advantageous in facilitating economic development and modernizing the economic structure.
In accordance with the plan, this tax reform may bring to an end in Business Tax and replace it with VAT in all industries throughout the whole country in 4 years. The selection of the transportation industries and certain modern service industries in Shanghai to be the pilot sites will be advantageous in accumulating experience in the full implementation of the reform.
Industries Subject to VAT and Their Applicable Rates:
- Provision of Transportation Services
- Land Transportation
- Marine Transportation
- Air Transportation
- Pipeline Transportation
Applicable VAT Rates: 11%
Current Business Tax Rates 3%
- Provision of Certain Modern Services
- Technological R&D Services
- IT Services
- Cultural & Creativity Services
- Logistics & Auxiliary Services
- Consulting Services
Applicable VAT Rates: 6%
Current Business Tax Rates 5%
- Leasing of Tangible Assets Services
- Other Taxable Service stipulated by MOF and SAT
Threshold for VAT levies (varies across different localities):
1) Assessment on periodic basis: when the assessable monthly sales revenue reaches RMB5,000 to RMB20,000 (inclusive);
2) Assessment on transactional basis: when the assessable sales revenue each time (day) reaches RMB300 to RMB500 (inclusive).
Revision of the threshold will be determined by the Ministry of Finance and the State Administration of Taxation. The relevant Bureau of Finance in different provinces, autonomous regions, municipalities and the State Administration of Taxation shall determine the applicable threshold to a particular locality according to the actual circumstances, and they will be reported to the Ministry of Finance and the State Administration of Taxation for record.
– General Taxpayer: entity with assessable annual sales revenue more than RMB5,000,000.00.
– Small-scale Taxpayer: entity with assessable annual sales revenue less than RMB5,000,000.00. The tax rate of VAT for in pilot site is 3%.
Management of VAT Invoices:
General Taxpayers who provide taxable services must issue VAT invoices to the customers, and state the sales amount and taxable amount respectively on the VAT invoices.
Small-scale Taxpayers who provide taxable services may apply to the relevant tax bureau for the issuance of the
VAT invoices to the customer.
Consideration of the Pilot Enterprises in Shanghai:
It is our understanding that the Shanghai Municipal Tax Bureau has already sent “Confirmation of Results by VAT Payer” to the selected pilot enterprises, which sought to clarify the policy. The pilot enterprises in Shanghai have the obligation to:
– Clearly understand the relevant regulations of the pilot services, and assess the financial impact brought by the issue
of tax reform;
– Revise and update the contracts with customers, and consider adjusting or re-establishing the prices for services.
Please feel free to inform us anytime for further question regarding the above.
Constitutional Document and Common Seal
Abolition of Memorandum
Articles of association become the only constitutional document of a company. The memorandum of association is abolished for all Hong Kong incorporated companies.
Model Articles are prescribed under the new CO for use by private companies limited by shares, public companies and companies limited by guarantee.
The keeping and use of a common seal is optional.
Mandatory Regime of No-par
All Hong Kong incorporated companies’ shares will have no nominal value. The amounts standing to the credit of a company’s share premium account and capital redemption reserve account become part of the company’s share capital.
Statement of Capital
A statement of capital is required to be delivered for registration whenever there is a change in a company’s share capital.
Restricting Corporate Directorship
Every private company must have at least one director who is a natural person.
Long Term Service Contract
An employment contract of a director exceeding 3 years shall be approved by members of the company.
Annual Returns and Accounts
The annual return of a private company should be filed within 42 days after the anniversary date of the company’s incorporation (unchanged).
The annual return of a public company should be filed within 42 days after 6 months of the end of the company’s accounting reference period (previously within 42 days after the date of Annual General Meeting (AGM)).
The annual return of a guarantee company should be filed within 42 days after 9 months of the end of the company’s accounting reference period (previously within 42 days after the date of Annual General Meeting (AGM)).
Accounts and Reports
Small and medium enterprises may prepare simplified financial statements and directors’ reports.
A private company is qualified for simplified reporting if it satisfies any two of the following conditions:
- total annual revenue does not exceed HK$100 million;
- total assets does not exceed HK$100 million;
- average number of employees during the financial year does not exceed 100.
Companies may dispense with the holding of AGMs by unanimous shareholders’ consent.
General meetings can be held at more than one location by using electronic technology device.
A certified copy of the instrument creating or evidencing a charge or a certified copy of any instrument evidencing satisfaction or release of a charge is required to be delivered with the relevant specified form to the Registrar for registration within one month.
The above is a brief elaboration of the major amendment in the new CO. We shall be more than happy to provide you further consultation and advice regarding the implementation of the new CO and how you as a company incorporated / registered in Hong Kong can react.
For detailed information about Hong Kong new companies ordinance, please feel free to contact us at one of our offices listed below.