This issue covers legislation published in June 2017
Revised Catalogue for the Guidance of Foreign Investment Industries (2017 Edition) released
Special Administrative Measures on Foreign Investment Access to Pilot Free Trade Zones (2017 Edition Negative List) issued
Opinions on Optimizing the Administration of Automobile Investment Projects published
Multilateral Convention to prevent BEPS signed
EU-China strategic framework for customs cooperation signed
Preferential policy on enterprise income tax for small and low-profit enterprises expanded
Revised Catalogue for the Guidance of Foreign Investment Industries (2017 Edition) released (2017 )
On June 28, 2017, the Ministry of Commerce ("MOFCOM") and the National Development and Reform Commission ("NDRC") jointly released the Catalogue for the Guidance of Foreign Investment Industries (2017 Edition) (the "Catalogue"), six months after the draft (the "Draft") was released for public comment.
The Catalogue includes the list of Industries with Special Foreign Investment Requirements (Negative List for Foreign Investment) introduced by the Draft, combining industries with shareholding requirements, restricted industries and prohibited industries. Compared to the Draft,1 the Catalogue adds the following industries to a specific category:
Services for making certain contents available to the public on internet
Publication of books, newspaper and magazines
Production of audiovisual products and electronic publications
Research institutes of humanities and social sciences
In line with the NDRC's approval of the Volkswagen-JAC project, the limitation on the number of joint ventures for whole vehicle manufacturers (currently, no more than two) does not apply to fully-electric vehicle manufacturers.
The telecommunications sector is limited to transactions that comply with WTO commitments.
1 See our January 2017 Legal Flash for further details on the draft: http://www.cuatrecasas.com/media_repository/gabinete/publicaciones/docs/1484050614en.pdf
Research, development and manufacture of virtual reality and augmented reality devices
Research, development and manufacture of key components for 3D printing devices
Establishment and operation of hydrogen refueling stations
Manufacture of key components for new energy vehicles (e.g., fuel-cell catalyst of low platinum, air compressor and hydrogen circulating pump)
Development and manufacture of foods for special medical purposes
Date of issue: June 28, 2017. Effective date: July 28, 2017
Special Administrative Measures on Foreign Investment Access to Pilot Free Trade Zones (2017 Edition Negative List) issued (2017 )
On June 16, 2017, the State Council issued the revised Special Administrative Measures on Foreign Investment Access to Pilot Free Trade Zones (2017 Edition Negative List) (the "2017 FTZ Negative List").
The 2017 FTZ Negative List has removed 27 restrictions from the 2015 Edition and now stands at 95 items, in line with changes implemented in the Catalogue.
Other noteworthy changes:
Newly established fully-electric vehicles manufacturers are no longer required to (i) have their own brand for the products they manufacture, (ii) hold intellectual property rights, or (iii) hold the relevant authorized invention patent.
The percentage of equipment manufactured domestically for urban railway projects can now be lower than 70%.
Investment in premises providing internet services for a fee is allowed.
Foreign-invested banks are not required to have been established for a specific time to be able to conduct RMB-related business.
Foreign-invested insurance companies can engage in reinsurance transactions with their affiliated companies without approval of the China Insurance Regulatory Commission.
Investing in performance management agencies still requires a Chinese majority shareholding, unless they provide services to provinces with pilot free trade zones.
According to MOFCOM's statistics, until April 2017, 8,734 foreign-invested enterprises were established in the Shanghai Pilot Free Trade Zone, investing RMB 688 billion. In the pilot free trade zones in Fujian, Guangdong and Tianjin, 12,712 foreign-invested enterprises were established, investing RMB 1,135 billion. These four free trade zones attract almost a tenth of all foreign investment in China. Further trial and liberalization is expected to encourage investment in all eleven pilot free trade zones across China.
Date of issue: June 16, 2017. Effective date: July 10, 2017
Opinions on Optimizing the Administration of Automobile Investment Projects published ( )
On June 4, 2017, the NDRC and the Ministry of Industry and Information Technology ("MIIT") jointly published their Opinions on Optimizing the Administration of Automobile Investment Projects (the "Opinions"), which restrict the manufacturing capacity for conventional fuelrun vehicles.
This means the following projects will no longer be approved:
New enterprises manufacturing conventional fuel-run vehicles.
Cross investment in passenger vehicles or commercial vehicles for current whole vehicle manufacturers.
Relocation to or investment in another province for existing whole vehicle manufacturers suffering from overcapacity, continuous losses or insolvency.
Moreover, existing whole vehicle manufacturers must strictly meet the following requirements to expand their manufacturing capacity: (i) the percentage of the
manufacturing capacity they use must exceed industry average; (ii) their percentage of new energy vehicles must exceed industry average; (iii) their R&D expenses must exceed 3% of their main business income; (iv) their products must compete in the worldwide market; and (v) their average fuel consumption must meet the national standards.
The limitation on the number of joint ventures for whole vehicle manufacturers (currently, no more than two) only applies to traditional fuel vehicle manufacturers.
Date of issue: June 4, 2017. Effective date: June 4, 2017
Multilateral Convention to prevent BEPS signed ( )
On June 7, 2017, the Commissioner of the State Administration of Taxation ("SAT") and representatives from 67 other countries and regions participated in the signing ceremony of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the "Multilateral Convention").
The Multilateral Convention is the working result of the BEPS Action Plan (Action 15) to implement tax treaty related measures using a swift, coordinated and consistent multilateral instrument. Instead of relying on the amendment of the existing over 3,000 bilateral tax treaties globally, the Multilateral Convention amends the articles of the OECD's Model Convention according to the results of BEPS action plans, and the participating countries can choose whether they accept the amended articles, as some amendments are mandatory (minimum standard) while others are not.
In particular, the Multilateral Convention includes the following tax treaty related BEPS action plans:
Neutralizing the effects of hybrid mismatch arrangements (action plan 2).
Preventing access to treaty benefits under inappropriate circumstances (action plan 6).
Preventing the artificial avoidance of permanent establishment status (action plan 7).
Making dispute resolution mechanisms more effective (action plan 14).
After signing the Convention, China gave the OECD a provisional list of its expected reservations, which may still be subject to further changes and notifications. It accepted the provisions referring to the minimum standards and rejected those that are not mandatory.
The highlights of China's position:
Relevant BEPS action plan
Article of the Convention Article 2 Interpretation of Terms
China's provisional position
The Convention covers all tax treaties signed by China from November 2016, except those entered into with Chile and India, and with Taiwan,2 and the special administrative regions of Hong Kong3 and Macau.
Action plan 2: Hybrid mismatch arrangements (not mandatory)
Article 3 Transparent Entities Article 4 Dual Resident Entities
Not applicable Applicable
"Where a person other than an individual is a resident of more than one Contracting Jurisdiction, the competent authorities of the Contracting Jurisdictions shall endeavor to determine by mutual agreement the Contracting Jurisdiction of which such person shall be deemed to be a resident. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by the Covered Tax Agreement except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting Jurisdictions."
2 Not yet effective.
3 China also signed the Multilateral Convention on behalf of Hong Kong (reservations analyzed here are limited to China, and may differ from a Hong Kong perspective).
Action plan 6: Treaty abuse (principal purpose test is minimum standard; other not mandatory)
Article 5 Application of Methods for Elimination of Double Taxation Article 6 Purpose of a Covered Tax Agreement
Not applicable Applicable
"Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions), [...]."
"Desiring to further develop their economic relationship and to enhance their cooperation in tax matters, [...]." Article 7 Prevention of Treaty Abuse
"The principal purpose test."
Applicable (not extended to simplified limitation on benefits or combination)
Article 8 Dividend Transfer Transactions
"Provisions that exempt dividends from tax or that limit the rate at which such dividends may be taxed shall apply only if the ownership conditions described in those provisions are met throughout a 365 day period." Article 9 Capital Gains from Alienation of Shares or Interests of Entities Deriving their Value Principally from Immovable Property
Not applicable (according to China's domestic regulation, a three-year period is implemented)
"Provisions providing that gains derived by a resident of a Contracting Jurisdiction from the alienation of shares or other rights of participation in an entity may be taxed in the other Contracting shall apply if the relevant value threshold is met at any time
Action plan 7: Avoidance of permanent establishment status (amendments are not mandatory)
Action plan 14: Improving dispute resolution (improving mutual agreement procedures is minimum standard, other amendments are not mandatory)
during the 365 days preceding the alienation." Article 10 Anti-abuse Rule for Permanent Establishment Situated in Third Jurisdictions Article 11 Application of Tax Agreements to Restrict a Party's Right to Tax its Own Residents Article 12 Artificial Avoidance of Permanent Establishment Status through Commissionaire Arrangements and Similar Strategies Article 13 Artificial Avoidance of Permanent Establishment Status through the Specific Activity Exemptions Article 14 Splitting-up of Contracts Article 15 Definition of a Person Closely Related to an Enterprise Article 16 Mutual Agreement Procedure
Article 17 Corresponding Adjustments Article 18-26 Arbitration
Not applicable Not applicable
Partially applicable (China made a reservation on presenting the case to the competent authority of either Contracting Jurisdiction, unless a Covered Tax Agreement allows that) Applicable Not applicable
Date of issue: June 7, 2017. Expected effective date: 2018 (depending on ratification procedures in China and other signing countries)
EU-China strategic framework for customs cooperation signed ()
On June 2, 2017, during the EU-China summit held in Brussels, the European Commissioner for Economic and Financial Affairs and the General Administration of Customs of China signed the Strategic Framework for Customs Cooperation 2018-2020, reaffirming their commitment to enhance trade security and facilitation.
The action plans created cooperation objectives, and priorities to achieve them include:
enhancing supply chain security and facilitation for reliable traders, specifically upgrading cooperation on Authorized Economic Operator mutual recognition;
strengthening enforcement of intellectual property rights;
developing statistical cooperation;
establishing customs cooperation in crossborder e-commerce; and
taking horizontal actions through specific working committees to enhance policy exchange and develop areas requiring improvement.
Date of issue: June 2, 2017. Effective date: June 2, 2017
Preferential policy on enterprise income tax for small and low-profit enterprises expanded ( )
On June 6, 2017, the SAT and the Ministry of Finance released Circular Caishui  No. 43 to further expand the enterprise income tax preferential policy for small and low-profit enterprises by raising the cap on annual taxable income from RMB 300,000 to RMB 500,000.4 Qualifying enterprises benefit from an effective 10% tax rate for the period from January 1, 2017, to December 31, 2019.
Date of issue: June 6, 2017. Effective date: June 6, 2017
4 In addition, to qualify as a small and low-profit enterprise, (i) the company cannot conduct business in industries restricted or prohibited by the State; (ii) it must have fewer than 100 employees in the case of industrial enterprises, or 80 in the case of others; and (iii) its total assets must not exceed RMB 30 million in the case of industrial enterprises, or RMB 10 million in the case of others.
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