After a company has been established in China and the business license has been obtained from the Administration for Industry and Commerce, numerous post-registration matters must be performed before a company can commence business.

The steps to compete the set-up process are:

• Registering with the Public Security Bureau and carving the entity seal;
• Registering the enterprise code with the Bureau of Quality and Technology Supervision;
• Registering with customs;
• Applying for duty-free importation of equipment;
• Registering with the State tax bureau and the Local tax bureau;
• Opening an RMB bank account;
• Opening a foreign capital bank account;
• Registering with the State Administration of Foreign Exchange (SAFE);
• Registering with the National Bureau of Statistics;
• Registering with the Ministry of Finance for finance registration;
• Commodity inspection by the Commodity Inspection Bureau; and
• Capital injection and obtaining the capital verification report.

China places restrictions on how a company may be capitalized and the amount that may be contributed either in the form of direct capital contribution or intercompany shareholder loans. A company’s ‘total investment’ is the cash flow required to finance capital expenditure and working capital requirements and the source of funds may consist of a mix of both equity and debt. However, the regulations determine the minimum equity required in relation to total investment and therefore limit the amount that a company may borrow in relation to its total investment.

Most Foreign Invested Enterprises (FIE’s) in China are involved in foreign trade to some degree. Whether importing parts for assembly into a finished good or exporting wholly Chinese produced goods, foreign companies should be mindful to keep accurate accounting records in conformity with Chinese accounting principles, the tax regulations, and the Customs regulations.

All PRC enterprises are required to register contracts involving foreign trade with the local foreign trade and economic commission as well as the local customs office. Once the registration is complete, the PRC Customs will issue a ‘customs handbook’ which documents the quantities and pricing of the imported parts and component as well as the resulting export prices. Enterprises can then enjoy bonded treatment in which imported items can be temporarily exempted from Customs duties and import VAT. Usually, the contract price filed with Customs is a direct and planned average selling price of commodities based on categories and which may be different from the actual transaction price or an arm’s length pricing.

In China, the tax and customs authorities have different rules for testing an arm’s length price. The PRC tax bureau relies on transfer pricing guidelines established by the Organization for Economic Co-operation and Development (‘OECD’). The PRC Customs relies on transfer pricing guidelines established by the World Trade Organization (‘WTO’). Therefore, the arm’s length transfer price calculated by the tax bureau may be different than that calculated by PRC Customs. Both bureaus of the government have chosen policies that maximize the collection of the types of tax they are respectively responsible for. For PRC Customs, a higher transfer price will maximize the collection of customs duty. For the Tax Bureau, a lower transfer price will maximize income tax collection.

Once the Customs handbook has been issued, a price increase of any size, or a significantly lower price, will cause major problems and may delay import of parts and components. To avoid such problems, many PRC enterprises elect to use the pricing set by PRC Customs rather than arm’s length pricing for PRC financial reporting purposes.

Often, companies establish transfer pricing policies with tax compliance being the primary consideration. However, companies involved in foreign trade should ensure that they are meeting the standards of both the tax bureau and Chinese Customs. Companies should ensure that their products are properly classified for tariff purposes. Importers of components or raw materials should ensure the proper rate of yield or advised quantity to produce a given finished products. Manufacturers should properly account for waste, scrap, defective materials and the use of recycled materials. In addition, any change to the manufacturing process that affect the processing arrangement should be disclosed to Customs in a timely manner.

An agricultural company held a general meeting of shareholders resolving to remove Mr Xu as the company’s Chairman of the Board. However, Mr. Xu did not admit the resolution of the general meeting and refused to hand over the company chop and the books of account. The company’s shareholders, the Agriculture, Industry & Commerce Company (‘AICC’) and the Component Factory (the ‘Factory’) filed suit against Mr Xu in the People’s Court of Shunyi asking for the return of the chop. The court of Shunyi in Beijing decided in favor of the plaintiffs.

The plaintiffs claimed that the agricultural company (the ‘Company’) was set up by AICC and Factory as shareholders with the investment of 400,000 and 200,000 respectively. From that time onward, Mr Xu served as the chairman of the board, legal representative and general manager of the Company. In November 2007, after beeing dismissed from his position as chairman, legal representative and general manager of the Company, Mr Xu refused to hand over the company chop, the financial chop and materials related to the company’s accounts. Therefore, the shareholders sued to force Mr Xu to hand over the company chop, the financial chop and other Company materials to the new legal representative of the Company.

The Shunyi Court found that AICC and the Factory were still the shareholders of the Company and that the content of the shareholders resolution was legal, valid and enforceable on all directors and management of the Company. Mr Xu was therefore obligated to hand over the company chop, contract chop, and other materials to the new Company chairman and was ordered to do so by the court.

Six government authorities including the Ministry of Finance, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the General Administration of Customs, the State Administration of Taxation and the National Energy Administration jointly released the Circular Regarding Adjustment of Import Duties on Major Technical Equipment recently to make adjustments to custom duties on major technical equipment.

The Circular stipulates that since July 1, 2009, the key spare parts and raw materials which have to be imported by domestic enterprises for producing major technical equipment and other products under national support program shall be exempted from import duties and import-related VAT. Meanwhile, import duty exemption policy on whole machines and complete equipment is scrapped by the Circular. As for those spare parts and raw materials which are domestically available but fail to fully meet requirements and still need to be imported, preferential policies shall continue to be provided with strict examination during a certain period as a transitional measure, while the exemption shall be gradually reduced in both amount and scope.

In the catalogue of major technical equipment and products with national support attached in the Circular, seventeen types of equipment and products are listed, including large-scale clean and highly efficient generating units, ultra-high voltage power transmission and transformation equipment, large-scale coal chemical equipment, civil aircrafts and engines, airborne equipment, large-scale complete set metallurgical equipment, high-speed railways and urban mass transit equipment, large shipping vessels and offshore engineering equipment.

The Circular stimulates that since July 1, 2009, the policy of refunding import duty and import-related VAT for key spare parts and raw materials imported by domestic enterprises to develop and manufacture major technical equipment shall be suspended. Enterprises that have applied for the extension of the refunding policy for key parts and raw materials for major technical equipment imported from January 1, 2008 to June 30, 2009, shall submit application documents in accordance with relevant specialized import duty policy no later than September 30, 2009. Enterprises that apply for import duty exemption on key spare parts and raw materials for major technical equipment and other products imported from July 1, 2009 to December 31, 2009, shall submit application documents no later than October 1, 2009. The eligible enterprises shall start to enjoy the import duty exemption policy of 2009 as of July 1, 2009.

It is learned that the enterprise qualification accreditation shall be conducted once a year for enterprises which have applied for import duty exemption. Enterprises shall submit application documents from March 1 to March 31 each year. Based on the accreditation results of enterprise qualification and other factors provided by industrial supervising or investment supervising departments within the annual budget and tax expenditure framework, the Ministry of Finance shall then collaborate with the General Administration of Customs and the State Administration of Taxation to finalize the list of enterprises eligible for preferential policies and their corresponding import quotas under duty exemption.

In order to regulate the business tax on the personal merchandise of financial goods, the State Administration of Taxation united with the Ministry of Finance issued the Notice of Certain Exemption Policies of Business Tax on the Personal Merchandise of Financial Goods (Hereafter referred to as ‘the Notice’) on Sep 27 2009.

From the Notice, the persons including the personal entities engaged in individual business of industry and commercial will be exempted from the business tax for the incomes generated from the trading of the foreign exchange, securities, non-commodity futures and other financial instruments.

According to the Notice, the policies shall be executed from Jan 1 2009. Since the Notice was issued on Sep 27 2009, in case such business tax has been collected before the issue but after the execution of the Notice, the business tax which has been paid can be refunded to the person.

Some analysts say that the exemption of the business tax on the personal merchandise of financial goods will be useful to the recovery of China stock market under the circumstance of the financial crisis. (Caishui2009(111))