Business Guide to China
Essential information on laws, regulations, and taxes for doing business in China
Legal Framework
China's legal system is based on civil law and has undergone significant reforms in recent decades to align with international standards. The primary sources of law include:
- Constitution of the People's Republic of China
- National laws enacted by the National People's Congress
- Administrative regulations issued by the State Council
- Local regulations and rules
Foreign businesses should be aware that China's legal environment is continuously evolving, and it's advisable to consult with legal experts familiar with both Chinese law and international business practices.
Business Structures
Foreign companies entering the Chinese market can choose from several business structures:
Wholly Foreign-Owned Enterprise (WFOE)
A limited liability company entirely owned by foreign investors. This structure provides complete operational control but requires higher initial investment.
Joint Venture (JV)
A partnership between foreign and Chinese investors. JVs can be equity joint ventures (EJV) or cooperative joint ventures (CJV).
Representative Office (RO)
A cost-effective entry method, but with limited functions. ROs cannot generate revenue directly and are restricted to market research and liaison activities.
Foreign-Invested Partnership Enterprise (FIPE)
A newer structure allowing foreign enterprises to establish partnerships with Chinese or foreign entities.
Tax System
China's tax system includes several key taxes that foreign businesses should be aware of:
Corporate Income Tax (CIT)
The standard CIT rate is 25%, with preferential rates available for certain industries and regions. Small-scale enterprises may qualify for reduced rates of 20% or 15%.
Value-Added Tax (VAT)
VAT rates vary by industry:
- Standard rate: 13% (for most goods and services)
- Reduced rates: 9% (for transportation, construction, real estate), 6% (for certain modern services)
- Zero rate: For exported goods and certain international services
Withholding Tax (WHT)
Applied to payments made to non-resident enterprises, including dividends, interest, royalties, and service fees. Standard rates range from 10% to 20%, but may be reduced under tax treaties.
Other Taxes
- Individual Income Tax (for employees)
- Business Tax (for certain services)
- Stamp Duty
- Land Appreciation Tax
- Real Estate Tax
Labor Laws
China's Labor Law and Labor Contract Law govern employment relationships:
- Employment contracts are mandatory and must be in writing
- Standard working hours: 8 hours per day, 40 hours per week
- Overtime pay required: 150% for normal workdays, 200% for weekends, 300% for holidays
- Minimum wage varies by region and city
- Mandatory social insurance contributions (pension, medical, unemployment, work injury, and maternity)
- Annual leave entitlement based on years of service
Employers must register foreign employees with the local labor authorities and obtain work permits.
Intellectual Property
China has strengthened its intellectual property (IP) protection in recent years, but challenges remain:
Types of IP Protection
- Patents (invention, utility model, design)
- Trademarks
- Copyrights
- Trade secrets
- Integrated circuit layout designs
- New plant varieties
Key Considerations
- China follows a "first-to-file" principle for trademarks and patents
- Register IP rights in China separately from other jurisdictions
- Implement robust contractual protections with partners and employees
- Monitor the market for potential infringements
- Consider alternative dispute resolution mechanisms
Compliance Requirements
Maintaining regulatory compliance is essential for foreign businesses in China:
Annual Compliance
- Annual inspection and filing with the Administration for Market Regulation
- Annual corporate income tax filing
- Statistical reporting to relevant authorities
- Foreign exchange registration updates
Operational Compliance
- Business scope restrictions (operations limited to registered scope)
- Licensing requirements for regulated industries
- Environmental compliance standards
- Data security and privacy regulations (especially important for tech companies)
- Anti-corruption laws (including the Foreign Corrupt Practices Act and China's Anti-Unfair Competition Law)
Import & Export Regulations
China has a complex system of import and export controls:
Key Requirements
- Import/Export Registration Certificate
- Customs declaration and clearance procedures
- Import/Export licenses for restricted goods
- Commodity inspection for certain products
- Foreign exchange settlement procedures
Special Trade Zones
China offers various special economic zones with preferential policies:
- Free Trade Zones (FTZs) - Shanghai, Guangdong, Tianjin, Fujian, etc.
- Export Processing Zones
- High-Tech Industrial Development Zones
Financing Options
Foreign businesses in China can explore several financing channels:
Local Banking
- Establishing RMB accounts with Chinese banks
- Working capital loans
- Trade financing (letters of credit, factoring)
- Project financing
Alternative Financing
- Foreign direct investment
- Venture capital and private equity
- Cross-border financing
- Government subsidies and incentives
Foreign Exchange Considerations
While China has liberalized its foreign exchange controls in recent years, certain transactions still require approval from the State Administration of Foreign Exchange (SAFE).