Speech: Legal Framework for Investing in China in Shipping Related Industry

This is a speech made at  "Ports & Liners China 2002"

Ports & Liners China 2002, an international symposium held by Singapore IBC Group in Hillton Hotel, Shanghai. With the attendance of leading enterprises' representatives all over the world.

Abstract:

This speech will give you some general idea about the legal framework for investing in China. It covers five parts: the first part is about the general legal environment in China and the basic laws and regulations you must know before you invest in China; the second part will tell you what form can you choose when you invest in China and the advantages and the disadvantages of the forms; the third part focuses on how to establish the foreign investment enterprises; the fourth part introduces the fax for the foreign investment enterprises: corporation income tax, value-added tax and business tax; the fifth part focuses on the particular provisions on shipping related industries, it includes: general policy of China government on foreign investment in shipping related industries, special provisions and Chinaˇs commitment to accession to WTO for the international maritime transport services, auxiliary service, international integrated transport & storage, storage and warehousing services, freight forwarding agency services and ports.

冝 Basic laws and regulations
冝 Forms of foreign investment
冝 Establishment of foreign investment enterprises
冝 Tax for foreign investment company
冝 Particular provisions on shipping related industries

Basic Laws and Regulations
冝 Basic law environment
冝 Guidance of foreign investment
冝 The law on Sino-foreign equity joint venture and its detailed rules and regulations
冝 The law on Sino-foreign cooperative enterprises and its detailed rules and regulations
冝 The law on enterprises operated wholly with foreign capitals and its detailed rules
冝 Income tax law for enterprises with foreign investment and foreign enterprises and its detailed rules and regulations
冝 Other related laws and regulations

Guidance of Foreign Investment
冝 Guidance of foreign investment orientation regulation
冝 Catalogue for the guidance of foreign investment industries
Encouraged industries
Permitted industries
Restricted industries
Prohibited industries

Forms of Foreign Investment
冝 Equity joint venture
冝 Contractual joint venture
冝 Wholly foreign owned enterprises
冝 Sino-foreign joint stock company
冝 Holding company
冝 R&D center
冝 Representative office

Equity Joint Venture(EJV)
冝 Limited liability company
冝 Legal person in China
冝 With both Chinese and foreign investors
冝 Foreign investor(s) hold(s) at least 25% shares
冝 Profit and losses shared according to investorˇs relative share of the registered capital

Contractual Joint Venture (CJV)
冝 Limited liability company or partnership without legal person status
冝 With both Chinese and foreign investors
冝 Contribute capital, distribute income or product and bear risks according to contractual arrangement
冝 Chinese investors generally get fixed benefit
冝 Can be managed by one party(usually foreigner)

Wholly Foreign Owned Enterprises (WFOE)
冝 Limited liability company without Chinese partner
冝 Straightforward management structure
冝 Better intellectual property protection
冝 Easier to terminate
冝 Lack of local support

Representative Office
冝 Non-direct-operational institution
冝 Representing its enterprise
冝 Engage in liaison services, marketing survey, product introduction and technical exchange for its enterprise

How to Get Approval
冝 Project of proposal
冝 Feasibility study report, contract (only for EJVs and CJVs) and articles of association
冝 Certificate of approval
冝 Business license

Who Can Help You
冝 Chinese partner
劔 For EJVs and CJVs, the Chinese partners can help you to prepare and submit the documents and get approval.
冝 Agency
劔 For WFOEs, you have to entrust an agency to help you go through all the procedures till you get the business license.
劔 For EJVs and CJVs, you also can entrust an agency to do it for you.

Corporation Income Tax
冝 Generally:30%+3%(local)
冝 Enterprises registered in special economic zone and manufacturing enterprises registered in state level economic development zone can be levied to 15%.
冝 Enterprises in the industry of resource, transportation, port and wharf and registered in above-mentioned areas can be reduced to 15%.

Tax Holiday
冝 Manufacturing enterprises scheduled to operate for a period over 10 years can be exempted from income tax in the first 2 years from the profit-making year and be granted a 50% reduction in the next 3 years.
冝 High-tech FIE scheduled to operate for a period over 10 years can be exempted from income tax in the first  2 years from the profit-making year and be granted a 50% reduction in the next 6 years.
冝 FIE whose annual export sales value amounts to more than 70% of their annual sales value, can pay the income tax with 50% reduction at that year.

Personal Income Tax

Turnover Tax
冝 Value-added tax (VAT)
generally:17%
冝 Business tax
劔 For transport enterprises: 3%
劔 For storage and other service: 5%

Particular Provisions on
Shipping Related Industry
冝 General policy on foreign investment
冝 International maritime transport services
冝 Auxiliary service
冝 International integrated transport & storage
冝 Storage and warehousing services
冝 Freight forwarding agency services
冝 Ports

General Policy on Foreign
Investment (Encouraged)
冝 Under the encouraged list:
劔 Public wharf construction and operation
劔 Wharf equipments designing and manufacturing
劔 Ferry facility construction and operation (JV)
劔 International maritime transport services (subject to WTO commitment)
劔 International container integrated transport (subject to WTO commitment)
劔 Storage facility construction and operation

General Policy on Foreign Investment (Restricted)
冝 Under the restricted list:
劔 Container manufacturing
劔 Maritime cargo-handling services
劔 Freight forwarding agencies services
劔 Maritime agencies services

International Maritime Transport Services (Freight & Passengers)
冝 Establishment of registered companies for the purpose of operating a fleet under the national flag of P.R.C:
冝 Permitted to establish JV shipping companies;
冝 Foreign investment shall not exceed 49% of the total registered capital of the JV;
冝 The chairman of directors and the general manager of the JV shall be appointed by Chinese side

Auxiliary Service
冝 Maritime cargo-handling services, customs clearance services for maritime transport, container station and depot services:
劔 Only in the form of joint venture
劔 Foreign majority ownership is permitted.
冝 Maritime agencies services
劔 Only in form of joint venture
劔 Foreign equity share no more than 49%
劔 The chairman of directors and the general manager of the JV shall be appointed by Chinese side

International Integrated
Transport & Storage
冝 Encouraged but subject to WTO commitments:
劔 Foreign equity share no more than 50 per cent
劔 No later than 11/12/2002, foreign majority ownership will be permitted
劔 No later than 11/12/2005, wholly foreign ownership will be permitted

Storage and Warehousing Services
冝 Construction and operation of storage related to transport are encouraged
冝 Upon accession to WTO, only in the form of joint venture, with foreign investment not to exceed 49 per cent.
冝 Within one year after Chinaˇs accession, foreign majority will be permitted
冝 Within three years after Chinaˇs accession, wholly foreign-owned subsidiaries will be permitted

Freight Forwarding
Agency Services
冝 Upon accession, foreign freight forwarding agencies which have at least three consecutive years experience are permitted to set up JV, with foreign equity share not to exceed 50 per cent; Within one year after chinaˇs accession, foreign majority ownership will be permitted; Within four years after chinaˇs accession, wholly foreign-owned subsidiaries will be permitted.
冝 The minimum registered capital of the JV shall no less than US$1million. Within four years after accession, national treatment will be accorded.
冝 Operation term of  the JV shall not exceed 20 years.

Freight Forwarding
Agency Services (2)
冝 After one year operating in china, the JVs can set up branches when the registered capital of the both sides has been provided. Another US$120,000 shall be added to the original registered capital of the JV for the set-up of each branch. Within two years after chinaˇs accession, this additional registered capital requirement will be implemented on the basis of national treatment.
冝 A foreign freight forwarding agency may set up a second JV after its first JV has been in operation for five years. Within two years after Chinaˇs accession to the WTO, this requirement will be reduced to two years.

Ports
冝 Construction and operation of ports is encouraged.
冝 The operation term can be longer than 30 years
冝 Scope of business can be expanded into related business under approval, if the amount of the investment is large and profit returns are long
冝 Income tax rate is 15%, if operation term is over 15 years can be exempted from income tax in the first 5 years from the profit-making year and be granted a 50% reduction in the next 5 years.
冝 Reinvestment in wharf, 40% of the income tax paid can be refunded

Thank You
Good luck in China!
Contact me if you need any help:
Chambers Yang
Attorney-at-law/Partner
Haworth & Lexon
Suite 606 CIMIC Tower, 1090 Century Avenue, Pudong, Shanghai 200120, P.R. China
Tel: 0086-21-68767750   Fax: 0086-21-68767740
E-mail: chambers@HLlawyers.com
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