The Chinese economy has ended 2016 on a positive note. In December, the Purchasing Managers’ Index (PMI) reached 53.4, up from 53.1 in November. It also reached its highest level since July 2015, indicating a relatively optimistic outlook of Chinese business leaders for the coming year. Industrial Output, too, picked up again and rose by over 6% year-on-year by the end of 2016.
Despite these positive signals, 2016 has also been a year full of challenges for foreign businesses. In April, new regulations for trans-border online trade created uncertainty and caused confusion among foreign importers. In May, the nationwide implementation of the VAT reform led to an adjustment of many businesses’ tax rates, and throughout the year, unannounced audits by the tax authorities caused headaches for seconded expats and their employers.
Many of the reforms launched last year will also be of concern in 2017. Other reforms have already been passed but will enter into force later this year. Finally, broader economic and political trends will add new uncertainty and reinforce some policy measures which had already begun to influence foreign business activity in China during the last couple of months.
In order to give you a heads-up of the most important regulatory issues for 2017, ECOVIS Beijing has compiled a list of reforms and trends which will impact your business in the coming year:
1) New Work Permit regulations
On 9 September 2016, the State Administration of Foreign Experts Affairs unveiled the reform of the current work permit regulations for foreigners living in China, introducing a point system to evaluate and to rank applicants for work permits in China.
Starting from October 2016 onwards, trials of the new policy were launched in Beijing, Tianjin and Shanghai, Hebei, Anhui, Shandong, Guangdong, Sichuan and the Ningxia Hui Autonomous Region, before being implemented nationwide in April 2017.
The core concept of the new regulations is that foreign applicants will be allocated up to 100 points for their qualifications and other factors, such as age or the location of their workplace. According to their score, they will then be ranked in three classes. Class A (>85 points) includes mainly high talents and specialists with a proven track record in either academia or business. Requirements for Class A largely overlap with preferential visa policies already in place.
Requirements for Class B (85-60 points) do basically correspond to the current regulations for a working permit, which include a bachelor degree, a minimum age (24 years), and 2 years of work experience after graduation. However, some new factors, such as Chinese language proficiency and a Chinese university degree are also accounted for, thus making it easier for some foreigners to obtain a working visa.
Class C (<60 points) finally includes manual labor, service personnel, and all those, who do not qualify for the two other classes.
According to the information, which is available so far, the main changes will be procedural rather than substantial. Nonetheless, for companies, who want to hire expats, the new requirements might open some new channels, since they can now also recruit recent graduates from Chinese top universities, a group, which was previously disadvantaged due to the 2-years employment requirement.
2) Stronger Capital Controls
Already in 2016, transferring money out of China has become more challenging for foreign businesses. On 13 July, China’s tax authorities issued new rules for transfer pricing. Although these regulations mainly applied to big enterprises and MNCs – the threshold for reporting is 200 Mil. RMB per year – it nonetheless heralded a larger shift: foreign companies should expect more constraints on capital repatriation.
A month later, the tax administration of China’s southern province of Jiangsu sent a letter to foreign MNCs, urging them to keep more of their profits within China. Although this letter was legally non-binding, it sent a clear signal to foreign companies.
In late November then, the State Administration of Foreign Exchange (SAFE) invited representatives from 20 Chinese banks in order to inform them that, from now on, dividend payments have to be performed via a capital account instead of a credit account and that the limit for transactions from capital accounts had been lowered from 50 million to 5 million USD. Also, dividend payments cannot be divided, but have to be paid once, and only on the effective date that is mentioned in the shareholder agreement. What is more, outbound FDI by Chinese and China-based companies will also be monitored more stricktly.
With the big role that capital controls are playing now in the public discourse, controls and scrutiny is likely to intensify in 2017. Foreign companies should therefore keep a close eye on the amount of their dividends and their shareholder agreements.
3) New Cybersecurity Law
In November last year, China’s standing committee of the People’s Congress passed its first Cybersecurity Law. The law will take effect in June 2017.
Its biggest impact will be felt by foreign businesses providing IT hardware and software solutions, since they are now subjected to a certification process and are obliged to hand over their code and encryption devices to Chinese authorities, raising major concerns regarding IP and IT safety.
But normal businesses, too, might have to do adjustments, especially if they store their customers’ data or use online payment systems. Similar to US and EU legislation, the new law now introduces data localization requirements. In effect, this regulation forces all businesses, which collect Chinese customer information to keep this data on servers within China.
Additionally, some businesses operating in sensitive areas, such as public communication and information services, power, traffic, water, finance, public service, electronic governance might be required to purchase local hard- and software, adding additional costs.
Besides the changes listed above, several trends have also become more pronounced. For example, tax authorities across the country have stepped up their controls of foreign companies’ tax compliance, in particular with a focus on seconded workers and their work duration in China. With the trade quarrels between China, the EU and the US simmering, foreign companies should also be wary of unannounced controls and audits.
Secondly, with an environmental pollution tax taking effect in 2018, foreign businesses might need take a closer look at their energy costs. In turn, businesses offering filter solutions and energy saving technologies might see an increase in demand for their products.
In any case, foreign businesses should expect more detailed regulations and frequent changes in implementation regulations to be issued throughout the year. We therefore recommend to keep a watchful eye on regulations relevant for your business activity and to consult your legal and tax consultants in time, if questions arise.
Continue reading about similar topics such as How to set up a company in China or Company Setup Now Possible Without MOFCOM Approval.
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Grace Shi is a partner at ECOVIS Beijing China. She has over 12 years of experience in accounting, auditing, and tax advisory services in both international accounting firms and large Chinese corporations. She has an international MBA and a US Global Finance Master’s degree. Since 2001, she is a Chinese Certified Public Accountant (CPA) and, since 2002, a Chinese Certified Taxation Agent (CTA). Mrs. Shi is one of the founders of ECOVIS R&G Consulting Ltd. (Beijing). She has perfect skills in written and spoken English and Chinese. For more information, please contact: email@example.com
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