I. GENERAL DATA
China is a unitary sovereign state in East Asia and the world’s most populous country, with a population of over 1.381 billion. The state is governed by the Communist Party of China and its capital is Beijing and is about 9.6 million square kilometers.
It is the world’s second-largest state as terrestrial surface and either the third or fourth-largest by total area, depending on the method of measurement. China has had the largest economy in the world for much of the last two thousand years, during which it has seen cycles of prosperity and decline.
Since the introduction of economic reforms in 1978, China has become one of the world’s fastest-growing major economies. As of 2016, it is the world’s second-largest economy by nominal GDP and largest by purchasing power parity (PPP). China is also the world’s largest exporter and second-largest importer of goods.
The PRC is a member of the United Nations, as it replaced the ROC as a permanent member of the U.N. Security Council in 1971. Is also a member of numerous formal and informal multilateral organizations, including the WTO, APEC, BRICS, the Shanghai Cooperation Organization (SCO), the BCIM and the G-20.
China has the world’s second-largest economy in terms of nominal GDP, totaling approximately US$10.380 trillion according to the International Monetary Fund. If purchasing power parity (PPP) is taken into account, China’s economy is the largest in the world, with a 2014 PPP GDP of US$17.617 trillion. In 2013, its PPP GDP per capita was US$12,880, while Its nominal GDP per capita was US$7,589. Both cases put China behind around eighty countries (out of 183 countries on the IMF list) in global GDP per capita rankings.
In the first ten months of 2016, the total exchange rate between Italy and China, according to Eurostat data, was 38.3 billion euros. China has been experiencing significant growth for years. In the decade since entry into the WTO (December 2001), China jumped from eighth to second place among the world’s economies (in terms of purchasing power it was already before) and could surpass the US within 15 years ( Over the same period the BRIC combined GDP will have exceeded that of the G7).
II. FOREIGN INVESTMENT: WHY CHINA
Prospects for continued growth of the Chinese economy at a much lower rate than in the recent past.
Although the growth rate does not reach double digits as in the past decade, China has the second largest GDP in the world and grows robustly annually: 2015 has proved to be a positive year, albeit in a difficult global economic context. In 2016, the level of growth will continue to be close to 7%, in line with the structural slowdown forecasts of the Chinese economy and the objectives set by the government, but which may vary considerably between sectors and sub-sectors.
The impressive urbanization and the growth of middle class purchasing power are at the base of the steady growth in domestic consumption. This is not only in the so-called first-tier cities (Beijing, Shanghai and Canton) but also in the second and third band (20 metropolises, each with 7-10 million inhabitants), as well as many other urban areas of 3-5 million of inhabitants.
For this reason, the Embassy organizes system missions in the second-tier cities. In 2016, a first mission took place in Hangzhou (May) and the second mission is scheduled in Chengdu (Autumn).
Stay in the market
To grasp the opportunities offered by the Chinese market you need to be present on site. This has the advantage first of all to grasp the emerging trends and the peculiarities of Chinese demand, to shorten the distance between producers and consumers in logistical and commercial terms, to constantly monitor both the regulatory developments and the administrative policies decided and implemented by Provincial and municipal authorities, which can be subject to significant variations due to the continental presence of the country-market.
The driver of consumption: evolution of the tastes of Chinese middle-high income consumers increasing incomes, growing urbanization and the emergence of new trends in culture and fashion inspired by the Western model determine new consumer patterns in the Chinese market. Depending on the sectors, these models can be inspired by the status symbol (luxury, wines, etc., high-value), with strong attention to quality / price ratio (streamlining shopping choices through e-commerce) or from specific factors in certain sectors, particularly in durable goods (process / product quality, after-sales service, etc.).
Numerous industrial sectors with high growth rates
Most foreign companies generate higher profits in China than in the rest of the world. The healthcare sector, the food sector, clean technologies and mobility infrastructures as well as retail and distribution will represent the segments that will show the highest growth rates. Today China is the world’s first automotive market, and all major manufacturers are present on this market with local production. Machinery and chemicals, especially in the segments with higher added value, will continue to show signs of growth.
Where to invest
- Foodstuffs
- Electricity, gas, steam and air conditioning (also from renewable sources)
- Health and social care
- Provision of water, sewerage, waste treatment and remediation activities
- Machinery and equipment
What to sell
- Machinery and equipment
- Health and social care
- Foodstuffs
- Provision of water, sewerage, waste treatment and remediation activities
- Textile products
Strong points
- Prospects for continued growth in the Chinese economy
- Opposition to the Chinese market
- Stay on the market
- The driver of consumption: evolution of the tastes of the
- Chinese high-income consumers
- Numerous industrial sectors with high growth rates
Tax Rate
Corporate Taxes
Tax Base for Resident and Foreign Companies
Resident companies are taxed on their world incomes and the nonresident companies on the Chinese incomes.
- Standard rate 25%
- Small-scale enterprises 10-20%
- High-technology enterprises (HNTE) 15%
- Specific high-tech service enterprises in 21 cities between 1 Jul 2010 and 31 Dec 2018 15%
- Companies engaged in encouraged businesses in certain regions 15%
Tax Rate for Foreign Companies
Generally, foreign companies may only engage in indirect business activities through a representative office (RO) in China. ROs are similarly taxed as Chinese companies but are not allowed to sign contracts with Chinese customers or engage in direct business operations.
Capital Gains Taxation
Capital gains are generally taxed at the corporate income rate.
A real estate tax of 1.2% of assessed value or 12% of rental value of leased property is applied on property owners. The sale of real estate, net development costs, is subject to the Land Appreciation tax at 30 to 60% (depending on the percentage of gain realized).
Main Allowable Deductions and Tax Credits
Generally, all documented expenses, costs and losses in generating taxable income are deductible up to a limit e.g. entertainment (60% deductible up to 0.5% income), advertising (up to 15% income) and donations (up to 12% income). Non-deductible items include dividends, management fees, Enterprise Income Tax (EIT) paid and late tax payment surcharge fees. Refer to worldwide tax guide for more details.
Preferential tax treatment in the form of incentives are further granted to new high-technology enterprises (HNTE), companies in special economic zones (SEZ) and pilot free trade zones (FTZ), while exemptions may apply to agriculture, forestry, fishery, software, infrastructure and other specified environment and technology developments.
ACCOUNTING SYSTEM
I. Accounting Standards
The accountancy standards for companies were put into effect by the Ministry of Finances (MOF). China established its first complete standards specific to accountancy in 1997 and the MOF promulgated an additional 13 standards more specific to accountancy since then. For more information, consult Chinaorbit.
II. Accounting Regulation Bodies
- Ministry of Finance
- CASC, Chinese Committee of Accounting Standards
- CICPA, Chinese Institute of Chartered Accountants
III. Accounting Law
Initially promulgated in 1985, the accounting law of December 1993 was updated in 1999. It includes the legal standards governing accountancy and forms the base for the formulation of administrative rules and regulations for accounting.
Difference between National and International Standards
(IAS/IFRS)
There is a gap between national and international accounting standards IAS/IFRS. China does not follow international accounting practices and directives, although the reforms are being done in this direction. Indeed, accounting standards similar to IFRS are currently mandatory for publicly held companies listed in China and foreign-invested banks). Otherwise, several accounting regulations are similar to the international practice, however there are differences.
ACCOUNTING PRACTICES Tax Year
January 1st to December 31st.
Accounting Reports
Audit reports normally contain a paragraph defining the ‘task’ or ‘scope’ and a paragraph of opinion. The paragraph of opinion aims to establish if the accounts were prepared according to the appropriate rules/regulations and any reservations in opinion must be elaborated above.
Statements of financial accounts or reports should comprise a Balance sheet, profit and loss accounts, a report of gross margin of self-financing, notes on the accounts and an account for appropriation of profits and losses.
Publication Requirements
A fundamental conceptual difference exists between the West and China for auditors. In the West, the auditors are supposed to report to the shareholders, the results and possible mistakes of the company at the general body meeting. In China, the auditors are responsible to work for the management and purely help them in legal formalities.
Professional Accountancy Bodies
CICPA, Website of the Chinese Institute of Chartered Accountants.
Audit Bodies
Chinese law requires representative offices and foreign-invested enterprises to utilize the services of accountants registered in China to prepare official submissions of annual financial statements and other specified financial documents. Only Chinese accountants and joint venture accounting firms may provide these services. Companies must seek a statutory auditor to conduct an annual audit of the financial health of their organization. To find an auditor, contact the National Audit Office of China (CNAO).
CONSUMPTION TAXES Nature of the Tax
Value added tax (VAT) and consumption tax.
Standard Rate
While the standard rate is 17%, it varies depending on the taxpayer status, type of product and service and type of sector. For example, small-scale taxpayers that fall within a certain sales threshold pay only 3% compared to general taxpayers who pay 17%. A reduced rate of 13% applies to specific food, books and utilities.
Reduced Tax Rate
Preferential rate is 3% for small companies.
Sale of certain products (running water, books, medicines, newspapers and magazines, certain agricultural products, chemical fertilizers, liquefied gas, coal for domestic use) are taxed at the preferential rate of 13%. Telecommunication, transportation and postal service providers are subject to 11% (basic services) and 6% (value-added services) VAT.
Exclusion from Taxation
Exported products are exempt from consumption tax. VAT is also not levied on international transport services, including the cross-border and overseas transport of passengers and cargo, and R&D and design services for overseas entities.
Method of Calculation, Declaration and Settlement. VAT rate is applicable on volume (taxation by volume) or on the value of the goods (ad valorem taxation).
Other Consumption Taxes
A consumption tax ranging from 1% to 56% (depending on sales revenue) applies to specific goods classified as non-essential or resource-intensive products (e.g. alcohol, cosmetics, jewellery, golf products and tobacco). Business tax ranges from 3% to 20% applies to the sale of real estate and the sale of other intangible goods and services that are not taxed under VAT.
INDIVIDUAL TAXES
Tax Base for Residents and Non-Residents.
Residents are taxed on their national and international incomes. Non-residents are taxed on the incomes earned in China.