Since the adoption of the policy of reform and opening up to the outside world, China has adopted many preferential policies to attract direct foreign investment.

China adopts low-tax policy toward foreign invested enterprises and at the same time grant preferential tax to the industries and regions, which are encouraged by the nation to receive investments. At present, taxes applicable to the foreign-invested enterprises as well as foreign individual (including compatriots in Hong Kong, Macao and Taiwan) includes: enterprise income tax, personal income tax, turn over linkage tax (including value added tax, consumption tax and business tax), tariff, land value added tax, resource tax and city real estate tax etc.

Income Tax

* Income tax rate:

We adopted preferential income tax policies toward foreign invested enterprises. The income tax rate is 15% in Economic Zones, Hi-tech Industrial Zones, Economic and Technological Development Zones; the enterprise income tax rate is 24% in the coastal opening areas and provincial capital cities.

* Tax reduction and exemption policies:

The foreign invested enterprises can enjoy the treatment of income tax exemption in the first 2 years after making profits and income tax reduction by half in the following 3 years. The foreign invested hi-tech enterprises will enjoy the treatment of income tax exemption in the first 2 years after making profits and income tax reduction by half in the following 6 years; in addition to the above mentioned preferential income tax policies of 2 years’ exemption and 3 years’ reduction, the export-oriented enterprises will enjoy the income tax reduction by half so long as the volume of its annual exports accounts for more than 70% of the general sales of the enterprises; if the foreign-invested enterprises purchases domestically made equipment within the volume of the total investment, which are entitled to the Category of Tariff Exemption, they will enjoy the tax credit according to some regulations.

Turn-over Tax

* Ever since January 1st, the year of 1994, the nation implemented unified value added tax, consumption tax, business tax in foreign invested enterprises while abolishing the industrial and commercial consolidated tax, which were promulgated in the 1950s.

* Foreign enterprises and foreign invested enterprises will be exempted from business tax in technological transfer.

* If the foreign invested enterprises purchases domestically made equipment within the volume of total investment, which are entitled to the Category of Tariff Exemption, they will enjoy a refund of value added tax of domestically made equipment.

Tax at Import Stage

* Tariff rate: Since the year of 1991, the Chinese government has reduced its import tariff for 8 times. The 1996 round of tariff cuts covered 4,994 tariff lines, bringing down the average tariff rate from 35.9% to 23% with the scale of reduction reaching 35.9%. On October 1 of the year of 1997, we further moved the average tariff level down ward from 23% to 17% based upon the comparatively large-scale lowering of overall tariff level. This new initiative represents a 26% reduction scale and involves over 4,800 tariff numbers with reduction coverage of 73%.

* To carry out tariff exemption policy for the importation of equipment: the importation of equipment for the foreign or domestic-invested projects encouraged and supported by the state shall be granted tariff and import-stage value added tariff exemption. So long as a foreign-invested project is subject to the Category of Encouragement and Category of Restriction (B) of the Category, all the equipment imported for self-use within its aggregated investment, except for those listed in the Catalogue of Imports for Foreign-invested Projects not Entitled to Tariff Exemption, shall be exempted from tariff and import-stage value added tax. Its aims and significance are in further expanding the utilization of foreign investment, encouraging flow of foreign advanced technology and equipment, promoting the industry structural adjustment and technological advancement as well as maintaining a continuous, rapid and healthy development of the national economy.

Credit and Foreign Exchange

China allows foreign-invested enterprises to get loans from financial organizations inside and outside the country, including loans for fixed assets and for circulation funds, on conditions that are roughly the same as those accorded to domestic enterprises. No limitations are imposed on soliciting loans from financial organizations outside China so long as they register their foreign debts with the Chinese authorities.

Prior to 1994, China imposed strict foreign exchange controls. Domestic enterprises were required to sell their foreign exchange revenue from exports to designated banks, and if they wanted to import equipment or raw materials, they had to apply to banks for foreign exchange according to state-fixed exchange rates. However, foreign-invested enterprises faced fewer limitations. To make it convenient for foreign-invested enterprises to use foreign exchange, China established a foreign-exchange regulation market in 1986, where foreign-invested enterprises were allowed to sell their surplus foreign exchange or buy foreign exchange needed for importing equipment or raw materials according to market exchange rates. In 1994, however, China adopted a new foreign exchange management system, whereby domestic enterprises were required to sell their foreign exchange revenues to designated banks according to the current exchange rate, and when they needed foreign exchange they would buy it from the bank according to the current exchange rate. Foreign-invested enterprises, however, were allowed to retain their foreign exchange revenues if they wished.

Management System

In the early stage of reform and opening to the outside world, economic restructuring had just got underway, and domestic enterprises, state-owned ones in particular, faced heavy government intervention in such fields as production, purchasing, sales, finance and employment. Foreign-invested enterprises, however, were allowed to make their own decisions according to their own conditions. It was not until recently that essential progress was made in economic restructuring, allowing domestic enterprises to begin to have the power to make their own business decisions.

Note: Laws and regulations mentioned in this book are only for reference, please refer to original laws and regulations for details.