China's response to the global financial crisis has largely focused on stimulating its domestic economy; however, it has also made a number of adjustments to ease the burden on foreign investors.
China's headline response to the global financial crisis was a Rmb4 trillion stimulus package, a sum to be spent largely on infrastructure and rural initiatives. China has also promised to improve its social security net and indicated that additional stimulus packages will be available as needed. In terms of foreign investment, we outline below a number of the steps that China has taken which are directly focused on assisting foreign investors.
- Delegating approvals
- M&A tax deferrals
- Beijing regional headquarters
- Deferring registered capital payments
- Lowering payroll costs
For additional background on China's foreign investment regime, please see the Herbert Smith China investment guide.
1. Delegating approvals
All foreign investment in China must be approved by the Ministry of Commerce (MOFCOM), which in turn delegates certain approval authority to its local branches. The State Administration of Foreign Exchange (SAFE) is in charge of approvals for various transactions involving foreign currency, and it too delegates to its local branches.
Over the last few months, both MOFCOM and SAFE have delegated additional approval authority to their respective local branches. With approvals at the local level typically being more straightforward and less time-consuming than at the central level, these delegations may simplify foreign investment in China.
Under regulations issued from March through May 2009, MOFCOM's provincial-level branches (and, in some cases, lower-level branches) may now approve the following foreign investment:
- M&A transactions in (i) "permitted" and "encouraged" sectors, if the total transaction amount is up to US$100 million, and (ii) "restricted" sectors, if the total transaction amount is up to US$50 million. Previously, these thresholds applied to the post-merger/acquisition total investment amounts of the enterprises being merged or acquired.
- Establishment of new enterprises in certain "restricted" sectors (such as medical facilities, and exploration and mining of certain mineral resources), if the total investment falls below US$50 million. Previously, such investments required MOFCOM approval.
- Venture capital enterprises and venture capital management enterprises with total capital of up to US$100 million. Previously, MOFCOM was the final approval authority.
- China holding companies with registered capital of up to US$100 million. Previously, MOFCOM approval was required.
- Establishment of new enterprises in "encouraged" sectors and which are not subject to national comprehensive balancing. Previously, MOFCOM's practice was to approve total investment amounts of US$100 million or more. State Council approval may still be needed for "encouraged" sector investments of US$500 million or more.
From 1 June 2009, SAFE's local branches may approve:
- the opening of capital accounts within that locality by a foreign-invested enterprise that is registered elsewhere;
- the provision of certain guarantees to overseas enterprises; and
- the purchase or redemption of QFII funds exceeding a monthly amount of US$ 50 million.
- M&A tax deferrals
New rules allow the deferral of tax for corporate restructuring deals (including M&A deals) that meet certain criteria. Although issued late April 2009, the effectiveness of the rules has been backdated to 1 January 2008. Clients wishing to take advantage of the rules should seek expert tax advice.
Companies may elect to enjoy special tax treatment (mainly tax deferrals) if:
- the restructuring has a reasonable commercial purpose;
- the assets or equity transferred reach certain prescribed ratios (75% of the target for equity or asset acquisitions; there are no prescribed ratios for mergers and spin-offs);
- the original business activities of the target company do not change within 12 months after restructuring;
- at least 85% of the total deal consideration is paid in equity of the buyer (tax deferrals are only available for the portion of the consideration paid in equity); and
- the sellers do not transfer the equity which they receive as consideration within 12 months after the restructuring.
A company involved in a cross-border corporate restructuring may also elect to enjoy special tax treatment if:
- the restructuring meets the five criteria listed above; and
- the restructuring is one of several specified types of restructuring in which the company transfers assets or equity to its 100% owned subsidiary.
In particular, if a PRC resident company transfers assets or equity interests to its 100% owned overseas subsidiary, income tax associated with the transfer may be paid over 10 years in equal instalments. This is intended to encourage Chinese outbound investment.
3. Beijing regional headquarters
From 21 May 2009, the Beijing government has promised various incentives to regional headquarters (RHQs) in Beijing. These incentives include:
The ability to engage in various additional activities, including outsourcing, logistics and information service. Three-year subsidies to newly-established or relocated RHQs that either (i) have a registered capital of RMB100 million or more, or (ii) rent offices in Beijing. Newly-established or relocated RHQs that purchase or build offices in Beijing may also enjoy a one-off subsidy. A financial award for RHQs whose annual revenue, for the first time, reaches RMB100 million or more. These incentives are similar to incentives introduced in Shanghai in mid-2008.
4. Deferring registered capital payments
Subject to approval, foreign-invested enterprises that:
- have not had their capital contribution paid up as scheduled; or
- have delayed commencement of operation or have suspended operation due to the global financial crisis,
may delay capital contribution payments or the commencement of operations until the end of 2009. Approvals are needed to amend the articles of association and change the registration records.
5. Lowering payroll costs
In January 2009, Chinese labour authorities issued regulations aimed at encouraging employers to avoid or reduce redundancies by adopting alternative cost-cutting measures, including:
- wage reduction
- work adjustment (including job-sharing)
- unpaid leave
- annual leave rotations
Other flexible working arrangements are also encouraged, as are collective negotiation mechanism in order to facilitate communication and solve labour issues.