Doing Business in China: Key Considerations

Hiring Employees in China

Labor Contracts

• Relevant Laws:
  • Labor Law of the PRC (1994, revised in 2018)
  • Labor Contract Law of the PRC (2008, revised in 2012)
  • Social Insurance Law of the PRC (2010, revised in 2018)
• Standard Labor Contract Inclusions:
  • Work location
  • Workdays and hours
  • Standard workday up to 8 hours
  • Overtime regulations:
    • 150% pay for overtime
    • 200% pay for rest day work
    • 300% pay for statutory holidays
    • Max 3 hours overtime per day, 36 hours per month
• Flexible and Comprehensive Working Hour Systems:
  • Comprehensive: Adjust working hours over weeks, months, quarters
  • Flexible: Employees choose work schedules within task requirements
  • Approval from the local labor bureau required

Probation Period

• Fixed term >3 months, <1 year: Max 1 month
• Fixed term >1 year, <3 years: Max 2 months
• Fixed term >3 years or non-fixed: Max 6 months
• No probation for terms <3 months or task-based contracts

Confidentiality and Non-Competition Clauses

• Protects business secrets and IP
• Non-competition period max 2 years
• Compensation typically 20-50% of previous wages
• Applies to senior management, technical personnel

Employment Handbook

• Details company policies, procedures, guidelines, and benefits
• Essential for legal protection and compliance

Payroll Requirements

• Wages paid monthly, no delays for holidays
• Employers act as withholding agents for income tax
• Compliance with social insurance and other benefits

Contractors and Freelancers

• Governed by Contract Law, not Labor Law
• Avoid misclassification as employees:
  • No fixed salary or benefits
  • Independent work guidelines
  • Not performing core business functions
• Standard contract terms:
  • Scope of work, project details, start/end dates
  • Compensation, payment structure
  • IP rights, liability, NDAs, non-compete clauses
  • Termination clauses

Employer of Record (EOR)

• Acts as legal employer for foreign companies
• Manages labor contracts, payroll, benefits, visa sponsorship
• Simplifies market entry and ensures compliance with local laws
• Protects intellectual property and reputation

PRC Tax System and Administration

• Value-Added Tax (VAT)

  • Applies to sales/importation of goods, services, intangible assets, real estate
  • Rates: 13% (goods), 9%-10% (special sectors), 6% (services)
  • Small-scale VAT taxpayer rate: 3%

• Customs Duty

  • Applied to imported goods based on transaction value or specific duty
  • Rates depend on goods category and country of origin

• Consumption Tax

  • Levied on specific consumer goods (e.g., alcohol, tobacco, cosmetics, jewelry, gasoline, automobiles)
  • Based on sales amount and/or volume
  • Imposed in addition to VAT and customs duty

• Corporate Income Tax (CIT)

  • Standard rate: 25%
  • Reduced rate for qualified new/high tech enterprises: 15%
  • Micro and small-sized enterprises: 5%-25% depending on revenue and profits

• Individual Income Tax (IIT)

  • Progressive rates: 3%-45% for comprehensive income
  • 5%-35% for income from operations
  • Fixed rate of 20% for other incomes (e.g., interest, dividends)
  • Standard annual deduction of RMB 60,000

• Other Taxes

  • Resource tax, real estate tax, stamp tax, deed tax, urban construction and maintenance tax, educational surcharge, etc.

Tax Residency

• PRC Tax Resident Enterprise (TRE)

  • Taxed on worldwide income
  • Can deduct overseas tax paid within limits if a Double Taxation Avoidance Agreement (DTAA) is in place
  • All registered legal entities in China are TREs

• Non-TRE

  • Taxed only on China-sourced income
  • Typically overseas entities without a registered legal entity in China
  • Representative Offices (ROs) are non-TREs

Double Taxation Avoidance Agreements (DTAA)

• Agreements with 112 jurisdictions as of January 31, 2023
• Provides relief from double taxation on income, assets, or financial transactions
• Allows for tax credits to be claimed in China up to the amount paid in foreign tax

Preferential Tax Treatments

• Focus on industry-oriented and limited geography-based incentives
• Industries: agriculture, forestry, animal husbandry, fishery, infrastructure, environment protection, energy conservation, high tech
• Incentives: tax reduction and exemption, reduced tax rates, additional tax deductions

Accounting & Tax Compliance in China

Official VAT Invoices (Fapiao)

• Types of Fapiao:
  • General VAT Fapiao: Used for CIT expense deductions, not for offsetting input VAT.
  • Special VAT Fapiao: Used for CIT expense deductions and allows input VAT deduction from output VAT.
  • Limited issuance per period, request more if needed.
  • Includes customer’s bank details and address.
• Golden Tax System: Monitors transactions to ensure correct VAT calculation and payment.

Filing Requirements

• Fiscal Year: January 1st – December 31st.
• Tax Reporting:
  • Monthly, quarterly, or transactional, depending on business activities.
  • Annual CIT Return: Due before May 31st, includes reconciliation sheet and possibly a tax audit report.
  • Annual Related-Party Transaction Report: Required for frequent intercompany transactions.
• Filing Frequency:
  • Small-Scale VAT Taxpayer: Quarterly VAT filing, annual CIT reconciliation.
  • General VAT Taxpayer: Monthly VAT filing, annual CIT reconciliation.

Annual Joint Inspection

• Conducted by: MOFCOM, MOF, SAT, AQSIQ, NBS, SAFE.
• Submission: Financial reports and additional registration information via National Enterprise Credit Information Publicity System by June 30th.
• Requirements: Registration status, investments, paid-in capital, employee and financial data.

Annual Statutory Audit Report

• Not mandatory for all companies, but required if:
  • Substantial tax losses jeopardize continuity.
  • Distributing dividends.
  • Mandated by shareholders or trustees.
  • Seeking financing.
• Includes: Audit of balance sheet, income statement, cash flow statement.

China Accounting Standards (CAS)

• Governs accounting practices.
• Framework:
  • ASBE: Used by most Foreign Invested Enterprises, similar to IFRS and US GAAP.
  • ASSBE: Simplified for small businesses, closer to tax laws.
• Discrepancies: Exists between CAS and IFRS; conversions needed for overseas reporting.