Arrangement on Mutual Recognition and Enforcement of Judgments in Civil and Commercial Matters by Courts of Mainland And Hong Kong SAR
August 22, 2010
The Supreme People’s Court and HK SAR Government hereby make the following arrangement on recognition and enforcement of judgments in civil and commercial matters pursuant to choice of court agreements between parties concerned through consultation according to Article 95 of the Basic Law of Hong Kong Special Administrative Region of the People’s Republic of China:
Article 1 Final judgment, defined with payment amount and enforcement power, made between mainland court and HK SAR court in civil and commercial case with written jurisdiction agreement, the parties concerned shall apply to mainland people’s court or HK SAR court for recognition and enforcement based on this arrangement.
Article 2 “Final judgment with enforcement power” in this arrangement:
(1) On the mainland, it refers to:
1. Judgment of the supreme people’s court;
2. The second instance judgment and judgment made by the upper level people’s court according to judgment supervision procedure is effective, when judgment of first instance is not allowed to appeal by people’s high court, intermediate people’s court and basic people’s court (as appendix) that’s authorized to be in charge of foreign related, HK, Macao and Taiwan related civil and commercial matters of the first instance, or when the appeal is out of prescribed time limit.
(2) In HK SAR, it refers to effective judgment made by court of final appeal, court of the appeal of the high court, court of the first instance and district court.
Judgment in this arrangement refers to judgment paper, ruling paper, mediation agreement and payment order on the mainland; refers to judgment paper, order and evaluation certificate of legal expense in HK SAR.
After the party applies to HK SAR for recognition and enforcement of the judgment, if people’s court of the mainland shall legally review the case, such case should be raised by upper level people’s court of the court that makes effective judgment.
Article 3 “Choice of court agreement in written” in this arrangement refers to a written agreement defining the exclusive jurisdiction of either the mainland people’s court or HK SAR in order to revolve dispute with particular legal relation occurred or likely to occur by the parties concerned since effective date of this arrangement.
“Particular legal relation” of this article refers to contract of civil and commercial matters between parties, excluding contract of employment and contract involving natural person with individual consumption, family affair or other non-commercial purposes.
“Written form” in this arrangement refers to contract, letter and electronic data (including telegraph, telex, facsimile, electronic data exchange and email) and other forms that can physically present the carried content and can be used in the future.
Written choice of court agreement can be constituted of one or more copies.
The choice of court agreement exists independently and any change, relief, termination or invalidation of the contract won’t influence effect of the choice of court agreement, except when it’s otherwise prescribed in the contract.
Article 4 Application for recognition and enforcement of civil and commercial judgment prescribed in the arrangement, should be submitted to intermediate people’s courts of residence, living place or place of property of the applicant on the mainland, or submitted to high court of HK SAR.
Article 5 If residence, living place or place of property of the applicant are under jurisdiction of different intermediate people’s courts, the applicant shall choose one of the people’s court to apply for recognition and enforcement rather than applying it to two or more people’s courts.
If residence, living place or place of property of the applicant is both on the mainland and in HK SAR, the applicant can submit application to courts at these two places at the same time. Judgment enforcement amount of courts at both places shouldn’t exceed fixed amount of the judgment itself. Court that has partly or completely executed the judgment should provide status of executed judgment upon requirement of the other court.
Article 6 Applicant shall submit the following document for application of judgment recognition and enforcement:
(1) Application for recognition and enforcement;
(2) Copy of judgment paper with seal of court that makes the final judgment;
(3) Certificate issued by court of final judgment to prove such judgment is the final judgment referred to in Article 2 of this arrangement and can be executed at the place of judgment;
(4) Identification evidence:
1. If applicant is natural person, he shall submit ID card or notarized copy of ID card;
2. If applicant is legal person or other form of organization, they shall submit notarized copy of registration certificate of legal person or other form of organization;
3. If applicant is a foreign legal person or other form of organization, they shall submit related notarization and authentication materials.
If there’s no Chinese version of submitted document to the mainland people’s court, the applicant shall submit a correct Chinese translation.
Court at the enforcement place doesn’t need to require particular notarization for certificate issued by court prescribed in this article.
Article 7 The following items should be included in the application for recognition and enforcement:
(1) The name and living place of the party, who is natural person; name and location of legal person or other organization, and name, position and residence of the legal representative or principal;
(2) Reason of application and request content, place of property and property status of the applicant;
(3) Whether the judgment is applied in court of original place and the enforcement status.
Article 8 Applicant shall comply with law of the enforcement place while applying for recognition and enforcement of judgment of court on the mainland or in HK SAR, except for otherwise prescribed.
Application period for recognition and enforcement by applicant is two years.
During the above period, if judgment on the mainland is applied to be executed in HK SAR, it will calculate from the last day of performance period prescribed by the judgment; if the judgment requires performance in different period, it will calculate from the last day of each performance period; if the judgment doesn’t prescribe performance period, it will calculate since effective day of the judgment; if judgment in HK SAR is applied to be executed on the mainland, it will calculate from the day of judgment mandatory enforcement, which is put in the judgment; if the judgment has other prescription during performance period, it will calculate since maturity of performance period.
Article 9 For application for judgment recognition and enforcement, if debtor of the first trial provides evidence that proves one of the following situations and is proved by the court that handles the application, the judgment will not be recognized or executed:
(1) The jurisdiction agreement is invalid according to local law at the original court chosen by the parties concerned, except for jurisdiction agreement that is judged by the chosen court as being valid;
(2) The judgment is performed completely;
(3) Court of the execution place enjoys exclusive jurisdiction based on local law;
(4) The party that loses a lawsuit and doesn’t appear in court has no legal summon or hasn’t acquired legal replying time though with legal summon according to law at the original court, except for cases that original court announce service based on law or related regulation;
(5) Judgment is acquired by cheating;
(6) Judgment of the same lawsuit by court at enforcement place, or judgment of the same lawsuit request by courts abroad, or arbitration made by related arbitration institute have been recognized or executed by court at the enforcement place.
If the people’s court of the mainland believes enforcement of the judgment made by HK SAR impairs social public interests, or court of HK SAR believes enforcement of judgment made by court on the mainland violates public policy of HK SAR, the recognition and enforcement are not permitted.
Article 10 For judgment made by court of HK SAR, if the debtor confirmed by judgment has lodged suit or the procedure is still underway, the people’s court of the mainland, after checking and verification, can pause recognition and enforcement of the procedure. If all or part of the original judgment is maintained after appealing, the reorganization and enforcement procedure can be recovered; if the original judgment is overthrown, the recognition and enforcement procedure can be ceased.
If local people’s court of the mainland has arraigned adjudication of the made judgment according to judgment supervision procedure, or the Supreme Court has arraigned another adjudication, after being checked by the court of HK SAR, the recognition and enforcement procedure can be paused. If the second judgment maintains all or part of original judgment, the recognition and enforcement can be recovered; if the second judgment has changed overall original judgment, the recognition and enforcement procedure should be ceased.
Article 11 The effect of judgment that’s recognized according to this arrangement should be equal to judgment of local court.
Article 12 If the party doesn’t agree to the judgment of whether it’s recognizable or executable, he can apply to the upper level people’s court for review on the mainland, or to lodge suit based on law and regulation in HK SAR.
Article 13 The court won’t handle lawsuit, lodged by the party with the same fact, while the court is handling the application of recognizing and executing judgment of the party.
The court won’t handle judgment that’s recognized or executed if the party lodges lawsuit with the same fact.
The applicant can’t submit application for recognition or enforcement again based on judgment that should not be recognized or executed in Article 9 of this arrangement, but can lodge suit to local court with the same case fact according to law of executing place.
Article 14 Before court handles application for recognizing and executing judgment, they can adopt protective or compulsory measures for applicant property based on regulations of property preservation or assets transferring prohibition of local law and according to application of the applicant.
Article 15 If the party applies to related court for judgment enforcement, they should pay execution fee or court expense based on law and regulation on lawsuit charge of execution place.
Article 16 The bidding scope recognized and executed by courts of the mainland and HK SAR includes but not limited to fixed amount confirmed in judgment, but also interests required by the judgment, lawyer fee and legal cost ratified by the court, excluding tax and fine.
Legal cost in HK SAR refers to lawsuit fee prescribed or ordered amount in evaluation certificate of lawsuit fee by the judge or judicial executive officer.
Article 17 This arrangement is applicable to judgment made by courts of the mainland and HK SAR since the effective day (including the effective day) of this arrangement.
Article 18 If any problem occurs during implementation of this arrangement or modification is necessary, the Supreme People’s Court and government of HK SAR shall resolve through consultation.
Appendix:
Name List of Basic People’s Court Authorized to Handle Foreign-Related, HK, Macao and Taiwan Civil and Commercial Case of the First Instance (omitted)
Source: http://www.fdi.gov.cn
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Pilot Operations for Individual Foreign Exchange Settlement and Sales Business via E-banking
June 20, 2010
The SAFE Gives a Green Light for Three Commercial Banks to Engage in Pilot Operations for Individual Foreign Exchange Settlement and Sales Business via E-banking
For the purpose of further encouraging business innovation in banks as well as facilitating individual foreign exchange settlement and sales, the State Administration of Foreign Exchange (SAFE) recently approved that three commercial banks, i.e., the Bank of China, the China Merchants Bank, and the Industrial and Commercial Bank of China, will conduct pilot operations for individual foreign exchange settlement and sales business through e-banking.
The Measures for Individual Foreign Exchange Administration and the detailed rules which took effect in February 2007 allow individuals to carry out foreign exchange purchase and settlement businesses within their yearly quota at bank counters by presenting their valid identity documents. Such pilot operations for individual foreign exchange settlement and sales business via e-banking will provide individuals with more efficient and convenient channels to handle the relevant businesses. Domestic individuals are allowed to conduct non-operational foreign exchange settlement and sales business under the current account within their yearly quota via e-banking or via self-service terminals after opening an account at the pilot banks by presenting their valid resident identification cards of the Peoples Republic of China. This will increase the banks efficiency in handling business and help ease pressures at bank counters and reduce bank costs.
By using the data information-sharing mechanism that connects the e-banking system with the Management Information System for Foreign Exchange Settlement and Sales by Individuals, relevant information about foreign exchange purchases and settlement by domestic individuals in the e-banking system will be transmitted automatically in a real-time manner to the Management Information System for Foreign Exchange Settlement and Sales by Individuals, and will be incorporated into the management of the yearly quota of foreign exchange settlement and sales by individuals. The SAFE will closely track and monitor the status of the pilot operations, sum up the experiences from the pilot operations, guard against inflows and outflows of abnormal foreign exchange funds via individual e-banking channels, and continue to maintain a standardized and orderly foreign exchange market.
Source: SAFE
http://www.safe.gov.cn
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CEPA FURTHER LIBERALIZATION MEASURES IN 2010
June 12, 2010
The market access conditions in 14 service sectors will be further relaxed under Supplement VII to CEPA. The 14 service sectors include construction; medical services; technical testing, analysis and product testing; specialty design; audiovisual services; distribution; banking; securities; social services; tourism; cultural services; air transport; qualification examinations for professionals and technicians; and individually owned stores. Among them, “technical testing, analysis and product testing” and “specialty design” are new service sectors. In other words, the service sectors covered by liberalization of trade in services under CEPA will expand from 42 to 44.
Major market liberalization measures under Supplement VII to CEPA are highlighted below:
A. Medical services – Hong Kong service suppliers (HKSS) are allowed to set up wholly-owned hospitals in the municipalities of Shanghai, Chongqing, and the provinces of Guangdong, Fujian and Hainan; and to set up convalescent hospitals in the form of wholly-owned, equity joint venture or contractual joint venture in Guangdong Province. No requirement is imposed on the total investment in setting up hospitals by HKSS on an equity joint venture or contractual joint venture basis in Guangdong Province; and no restriction is imposed on the ratio of capital investment between Hong Kong and Mainland partners in setting up hospitals in the form of equity joint venture or contractual joint venture in the municipalities of Shanghai, Chongqing, and the provinces of Guangdong, Fujian and Hainan. Twelve categories of statutory healthcare professionals who are registered to practise in Hong Kong (medical practitioners, Chinese medicine practitioners, dentists, pharmacists, nurses, midwives, medical laboratory technologists, occupational therapists, optometrists, radiographers, physiotherapists and chiropractors) are allowed to provide short-term services in the Mainland.
B. Tourism – Hong Kong travel agents established on a wholly-owned or joint venture basis in Beijing and Shanghai Municipalities are allowed to apply for the operation, on a pilot basis, of group tours to Hong Kong and Macao for registered permanent residents of the Beijing and Shanghai Municipalities.
C. Banking – A Hong Kong bank that has maintained a representative office in the Mainland for more than one year (previously required more than two years) can apply to set up a wholly foreign-funded bank or a foreign bank branch. A Hong Kong bank’s operating institution in the Mainland which has been operating for more than two years and profitable for one year prior to the application (previously required profitable operation for two consecutive years prior to the application) can apply to conduct Renminbi business. Foreign banking institutions established in the Mainland by Hong Kong banks can establish specialized institutions to provide financial services to small enterprises.
D. Securities – Mainland and Hong Kong will deepen the cooperation in financial services and product development, and launch, in the Mainland at an appropriate time, ETF (open-end index-tracking exchange-traded fund) constituted by Hong Kong listed stocks.
E. Construction – Hong Kong professionals who have obtained Mainland’s class 1 registered architect qualification or class 1 registered structural engineer qualification, can act as partners to set up construction and engineering design offices in the Mainland in accordance with the relevant qualification requirements, without restrictions on the ratio of the number of Hong Kong partners to the number of the Mainland partners, the ratio of the total capital contributed by the Hong Kong partners to that by the Mainland partners, or the Hong Kong partners’ period of residence in the Mainland. Hong Kong professionals who have obtained Mainland’s class 1 registered architect qualification or class 1 registered structural engineer qualification by mutual recognition, can register and practise in Guangdong;
F. Air Transport – Airport transport sales agencies set up by HKSS in the Mainland in the form of wholly-owned enterprises, equity joint venture or contractual joint venture, can operate air transport sales agency services in the domestic routes in the Mainland. HKSS can also operate aircraft repair and maintenance services in the Mainland in the form of wholly-owned enterprises or with majority shareholding in the enterprises.
G. Distribution – Distribution enterprises set up by HKSS in the Mainland can sell books published in Hong Kong.
H. Technical testing, analysis and product testing services – Testing organizations in Hong Kong to cooperate with designated Mainland organizations to undertake testing of products under the China Compulsory Certification (CCC) System on a pilot basis, in respect of selected products listed in the CCC Catalogue and processed in Hong Kong (i.e. the processing facilities are located in Hong Kong). These testing organizations have to be accredited by the accreditation body of the HKSARG (i.e. the Hong Kong Accreditation Service) to be capable of performing testing for the relevant products under the CCC System.
I. Audiovisual services – HKSS can set up enterprises on a wholly-owned, equity joint venture or contractual joint venture basis in the Mainland to produce video and sound recording products.
J. Specialty design – HKSS can set up wholly-owned enterprises in the Mainland to provide specialty design services.
Apart from benefiting the larger enterprises, measures in Supplement VII to CEPA would also benefit individuals and small businesses, such measures include allowing registered healthcare professionals to provide short-term services in the Mainland, allowing Hong Kong permanent residents to take the qualification examination for real estate valuer in the Mainland, and allowing Hong Kong permanent residents with Chinese citizenship to set up individually owned stores in the Mainland to provide services in the areas of marriage, renting and leasing of comics books, and pet clinics.
All the service liberalization measures under Supplement VII to CEPA will take effect from 1 January 2011.
In accordance with Article 5 of Annex 4 of CEPA, Hong Kong will not impose any new discriminatory measures on the Mainland’s services and service suppliers in the service sectors covered by CEPA. This commitment will also apply to sectors covered by the liberalisation of trade in services measures under Supplement VII to CEPA.
Enhancing cooperation in area of trade and investment facilitation
To enhance trade and investment facilitation, in addition to strengthening the cooperation in testing and certification, the Mainland and Hong Kong have also included under Supplement VII to CEPA cooperation in the cultural, environmental, innovation and technology industries, as well as cooperation on education.
For cooperation in cultural and environmental industries, Supplement VII to CEPA fosters the joint development of the industries of both sides, mainly through strengthening exchanges and communication between relevant organizations and the trade of both sides, as well as cooperating in organization of visits and trade exhibitions and seminars. For cooperation in innovation and technology industry, both sides agree to progressively involve Hong Kong research institutes and enterprises in the national innovation system and encourage Hong Kong research personnel and organizations to participate in national science and technology projects, and also to strengthen exchanges and cooperation between the two places in high technology research, development and application, fundamental scientific research, etc.
As regards cooperation on education, both sides agree to strengthen exchanges, communication, and exchange of information in respect of education, to strengthen cooperation in training and organizing visits, etc. to support the Mainland’s education institutions and Hong Kong’s higher education institutions to jointly provide education programmes, to establish joint research facilities and to nurture talents at undergraduate or above level in the Mainland
Moreover, for testing and certification, both sides agree to strengthen co-operation between relevant authorities of both sides, and the Mainland will also assist Hong Kong’s testing laboratories to be recognized under the international multilateral systems on mutual recognition of testing and certification that are open to national member bodies.
By establishing the above cooperation mechanisms, we hope to promote long-term cooperation in the aforementioned industries or service sectors between the two sides, and to jointly open up business opportunities and scope for development.
Conclusion
Inclusive of the measures in Supplement VII to CEPA, the two sides have so far announced nearly 280 liberalization measures in trade in services.
The measures under Supplement VII to CEPA will expedite and facilitate Hong Kong service industries to enter and expand in the Mainland market, and foster service industries integration and professional exchanges between the two sides. Moreover, most of the new measures cover the four pillar industries and six economic industries that Hong Kong has competitive edge, and as such will help consolidate Hong Kong’s status as an international financial, trade, logistics and high value-added service centre, and will lay the foundation for the two sides to jointly develop education, medical services, as well as testing and certification, environmental, innovative technology and cultural industries.
Since 2008, the Mainland and Hong Kong announced 41 measures (including related measures in Supplement VII to CEPA) for “early and pilot implementation” in Guangdong Province. These pilot measures serve to demonstrate the effect of liberalization in the respective service sectors and contribute positively to the exploration of cooperation and integration of the service industries of Hong Kong and Guangdong, and substantively respond to the policy direction of enhancing cooperation between the service industries of Guangdong and Hong Kong as stipulated in the “Framework for Development and Reform Planning for Pearl River Delta Region”; as well as to the positioning with respect to fostering the development of modern service industries under the “Framework Agreement on Hong Kong/Guangdong Co-operation”.
ECONOMIC IMPACT OF CEPA
HKSARG has been closely monitoring the implementation of CEPA from 1 January 2004. We collect statistics relating to the Certificates of Hong Kong Service Supplier (HKSS) and “Individual Visit Scheme” (IVS) etc. to conduct statistical analysis, as well as to assess the impact on Hong Kong’s economy. HKSARG has just updated the assessment of the impact of CEPA liberalisation of trade in services and IVS on Hong Kong’s economy. As reflected by the assessment report, during 2007-2009, liberalisation of trade in services and IVS have continued to bring benefits to Hong Kong enterprises and the economy as a whole.
During 2004-2009, cumulative business receipts obtained by companies in Hong Kong due to CEPA from Mainland-related business reached HK$61.6 billion. During 2007-2009, CEPA-induced business receipts obtained by operations established by Hong Kong service suppliers on the Mainland amounted to HK$198.5 billion. During the same period, companies in Hong Kong obtained additional business receipts totalling about HK$55.1 billion due to CEPA.
IVS is a tourism cooperation measure first introduced under CEPA in 2003. By now, the scheme has been extended to 49 Mainland cities. By March 2010, over 49 million Mainland visitors have come to Hong Kong under the scheme. The number of IVS visitors has drastically increased from 4.26 million in 2004 to 10.59 million in 2009, representing a robust average annual growth rate of 20%. In 2009, benefiting from the implementation of the “multiple-entry” individual visit endorsement to Hong Kong for Shenzhen permanent residents with effect from 1 April, an additional HK$26.4 billion in spending was generated by IVS visitors in 2009, which was almost 40% higher than that in 2008. In cumulative terms, during 2004-2009, IVS visitors brought about additional spending totalling over HK$84.8 billion.
As at end 2009, due to liberalization of trade in services and IVS under CEPA, a total of 54,700 jobs were created in Hong Kong, while 40,600 jobs were created on the Mainland.
CEPA also has a positive impact on attracting Mainland and foreign investments to Hong Kong. According to the information provided by InvestHK, among the 265 foreign companies assisted by InvestHK to invest or expand in Hong Kong in 2009, 70 (or 26%) cited CEPA as one of the key considerations for investing in Hong Kong. Moreover, since the Mainland streamlined the application procedures for Mainland enterprises to invest in Hong Kong in August 2004, the trade and investment between the Mainland and Hong Kong has further increased. According to the information provided by the Ministry of Commerce, between September 2004 and December 2009, 2,602 Mainland enterprises were granted approval to invest in Hong Kong, involving over US$24.4 billion of investment.
We would wish to point out that, as implementation of CEPA deepens, the economic impact of CEPA has become more closely interwined with the overall macro economic environment, and as such it has become more and more difficult to single out the CEPA-induced benefits for quantitative analysis. Also, the longer CEPA has been implemented, the respondents’ impression of the CEPA-induced effects might become less clear with the passage of time, and the value of conducting quantitative analysis of CEPA-induced impact through opinion survey would reduce over time.
Source: HK Trade and Industry Department
http://www.tid.gov.hk
Tags: CEPA, mainland, Hong KongRelated Posts:
New Rules For Non-Resident Enterprise Income Tax
March 24, 2010
On February 20, 2010, the State Administration of Tax (the “SAT”) issued “Measures on the Administration of Approval and Collection of Non-resident Enterprise Income Tax” (the “Measures”). Non-resident corporations, defined in Article 3, Paragraph 2 of the Enterprise Income Tax Law of China, are governed by the Measures regarding enterprise income tax (EIT) issues. The EIT of representative offices of foreign enterprises is covered by Circular 18 [2010] issued by SAT on the same day. The Measures went into effect of the date of issuance.
Under the Measures, non-resident enterprises shall: set up their account books in accordance with the Law on the Administration of Tax Collection and relevant laws and regulations; record and settle their accounts in accordance with legal and valid invoices; and, in accordance with the principle of correspondence of actual functions to assumed risks, accurately calculate their taxable income, and report and pay the EIT for their actual situation.
If a non-resident corporation has not properly kept account books and cannot calculate the amount of its taxable income, the tax authority will use one of the following methods to decide the amount of payable EIT.
(1) Gross Income-Based Method — This method should be applied when a non-resident corporation calculates its gross income correctly but cannot accurately compute its costs and expenses. The formula is as follows:
Deemed taxable income = Gross income * Deemed profit rate
(2) Cost-Based Method – This method applies when a non-resident corporation calculates its costs and expenses accurately but cannot correctly compute its gross income. The formula is as follows:
Deemed taxable income = The total of costs and expenses / (1 – Deemed profit rate) * Deemed profit rate
(3) Expenditures-Based Method – This method applies when a non-resident corporation accurately calculates its expenditure for operations but cannot correctly compute its gross income or its costs and expenses. The formula is as follows:
Deemed taxable income = Total of expenditure for operations / (1 – Deemed profit rate – EIT rate) * Deemed profit rate
The tax authority should use the deemed profits rate below when calculating the deemed taxable incomes:
(i) The deemed profit rate for income from project construction, design and consulting is 15% to 30%;
(ii) The deemed profit rate for income from management service is 30% to 50%;
(iii) The deemed profit rate for income from other business activities should be no less than 15%.
The tax authority may raise the profit rate if it reasonably holds, with good grounds, that the actual profit rate of a non-resident corporation is higher than the corresponding deemed profit rate. Where a non-resident corporation generates income from more than one type of the activities listed above, the tax authority shall divide the income from the different types of activities and apply appropriate deemed profit rate to the different elements of the income. If the income cannot be divided accurately, the higher deemed profit rate will be applied.
When a non-resident corporation provides equipment installment, training, management and other services to a Chinese resident buyer of its equipment or other goods, the sales contract of such equipment or goods may not stipulate the price of such related services, or the price of service may be unreasonable. In those cases, the tax authority can refer to the general price in the same or similar industry and decide the deemed income from the services provided. In case where there is no general price to refer to, the tax authority may decide the deemed income from the service, which should be no less than 10% of the total price of the sales contract.
With regard to non-resident enterprises providing labor services for customers located in China, if the entire service is provided within China, the revenue in full shall be subject to EIT in China. If the service is provided both inside and outside of China, then the revenue shall be divided by services provided within China and outside of China, and the revenue derived inside China shall be subject to EIT.
Source: Jingyuan Sun
www.sheppardmullin.com
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New Tax Rules For Representative Offices Of Foreign Enterprises
March 12, 2010
On February 20, 2010, China’s State Administration of Taxation (the “SAT”) issued a Notice On Interim Measures For Tax Administration Of Representative Offices Of Foreign Enterprises (Guoshuifa [2010] No. 18, also referred to as “Circular 18″). Circular 18 states measures governing enterprise income tax (EIT), business tax, and value added tax (VAT) on representative offices of foreign enterprises (including those in Hong Kong, Macau and Taiwan). It takes effect retroactively as of January 1, 2010.
Main Points
Enterprise Income Tax
According to Article 6 of Circular 18, a legally registered representative office of a foreign enterprise must set up accounting books pursuant to relevant laws, regulations and rules. Furthermore, it must maintain the books based on legitimate vouchers, calculate the amount of its taxable income and tax liabilities according to the principle that function should match the risks taken, and declare EIT and business tax amount 15 days before the end of a quarter.
In a case where a representative office cannot correctly keep the books or calculate its costs and expenses, or where it does not objectively declare taxes as required, the governing tax authority can determine its taxable income by either of the two following methods:
1. Expenditure-Based Method – This method applies to representative offices that can correctly calculate its expenditure on operation but not its gross income or costs and expenses.
The formulas are:
Deemed gross income = Expenditures for operation of current period / (1 – Deemed profit rate – Business income tax rate;
Deemed payable tax amount = Deemed gross income x Deemed profit rate x EIT rate.
Expenditures for operations include: (i) salaries, bonuses, allowances, welfare allowances paid inside and outside of China to its personnel; (ii) payments on equipment and immovable properties; (iii) communication expenses; (iv) traveling and accommodation expenses; rental payments for equipment, and other expenses. The other expenses include: (i) cost of samples (including its transportation) purchased by the representative offices within China for the head quarter; (ii) storage and customs clearance expenses incurred within China when samples are shipped to China; (iii) interpretation and translation expenses for personnel of the headquarter who visit China; (iii) bid documents expenses for projects in China paid by the headquarter on behalf of its representative office.
The cost of purchasing fixes asset and the cost of decoration when an office is opened or relocated will be treated as one-time expenditures for operation when occurred. The expense that is actually incurred for marketing and public relationship is treated as an expenditure for operation. In addition, interest income cannot be used to offset against the expenditures for operation.
The following are excluded as expenditures for operation: Charitable donations made in cash within China, late payment fees and fines paid in Cash by the representative offices, and expenses unrelated to the representative office’s business and paid by it on behalf of the head quarter.
2. Gross Income-based Method – This method should be applied when an representative correctly calculates its gross income but cannot accurately compute its costs and expenses. The formula is as follows:
Deemed EIT = Gross income x Deemed profit rate x EIT Rate
According to Circular 18, the new deemed profit rate is 15%, amending the previous rate of 10% which was used for more than a decade. The actual profit-based method will replace the expenditure-based method and the gross income-based method if a representative office can accurately keep the books and compute its taxable income and gross income correctly.
VAT and Business Tax
Under Circular 18, representative offices that engage in VAT and taxable business activities will be subject to VAT and business tax according to the relevant laws and regulations. According to the relevant Chinese laws, VAT is imposed on sales of merchandise services related to processing, repairing and assembling and import of goods.
Other Matters
Detailed document list and procedure for tax registration and fillings are also provided for by Circular 18. In addition, representative offices seeking tax treaty benefits must complete tax registration and filings pursuant Article 6 of Circular 18, and must follow the applicable tax treaty and Guoshuifa [2009] No. 124 regarding nonresidents’ eligibility for tax treaty treatment.
Guishuifa [1996] No. 165, Guoshuifa [2003] No. 28 and Guoshuihan [2008] No. 945 are abolished upon Circular 18′s effective date of January 1, 2010. Local tax authorities no longer accept applications for EIT exemption by representative offices, but they will continue to handle the EIT exemption applications that have already been approved.
Source: Jingyuan Sun
www.sheppardmullin.com
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