A new Foreign Investment Law and VAT rate reductions are among the legal changes announced at this year’s meeting

Every year about this time the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference meet to make the most essential political decisions and set the course for the future. Most important outcomes for this year are the approval of the new foreign investment law and Value Added Tax reliefs for certain sectors.

On 5 March 2019, the approximately 3,000 delegates of the National People’s Congress (NPC) met for their annual ten-day plenary assembly.

The annual meeting is commonly known as the “two sessions” (or “Lianghui” in Chinese) because both the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) meet in parallel during this time.

The NPC is often described as the largest parliamentary body in the world. It comprises of more than 2980 members and represent the highest organ of state power in China. The NPC delegates ratify legislation, government budget and personnel changes in the two weeks of the annual meeting. Meanwhile the CPPCC is considered the political advisory legislative body in the People’s Republic of China. It consists of delegates from a range of political parties and organizations, as well as independent members.

Below you can find a summary of the most important takeaways for foreign businesses from the “two sessions”.

Value Added Tax reliefs announced by Premier Li Keqiang

In order to boost the Chinese economy, Premier Li Keqiang announced far reaching cuts to the value-added tax (VAT) rates in his annual government work report during the opening ceremony of the National People’s Congress. The report points out that policymakers are aware of the risk of an ongoing trade war with the US and its ramifications. Premier Li described the past year as a “crucial year” for the economy and that “China must be fully prepared for a tough struggle.”

Premier Li announced the commitment to a growth target, set at 6-6.5 per cent this year following last year’s target of “about 6.5 per cent,” and outturn of 6.6 per cent, according to official statistics. At the same time the government sets a higher deficit-to-GDP ratio of 2.8 per cent for 2019, from 2.6 per cent in 2018. With its 16.5% deficit-to-GDP ratio China is one of the least indebted countries in the world (Germany – 70.1%, United Kingdom – 89.1%, United States – 103.8%).

Tax reliefs are aiming sectors which got badly hit by the economic slowdown

The Chinese government hopes that tax cuts will provide an immediate boost to corporate confidence amid the slowing economy, but exporters said that they still need more help from the government to offset their lack of access to credit and the effects of the continuing US-China trade war. Despite that, opinions about the upcoming VAT rate reductions are mostly positive. Lu Bingyang, a professor of fiscal science at Renmin University of China, said the cut in the VAT rate is the right move against the backdrop of the economic slowdown, but it will not solve all the problems Chinese businesses are facing. The overwhelming assessment of many experts seems to be good, but no one wants to be too optimistic.

VAT rate reduction: The most important changes

– The 10 percent rate, which applies to construction and transport, will be lowered to 9 percent;

– The 16 percent VAT rate, which applies to the manufacturing sector, will be lowered to 13 percent

However, the 6 percent rate, which applies to other general industries will remain unchanged. In comparison to other Asian countries, a 13 percent VAT in the manufacturing sector appears still high. However, due to a superior logistic network, China will be able to offset these market disadvantages.

Foreign Investment Law: Opening China’s door wider to the outside world

China’s draft for a new profound foreign investment law was submitted to the second session of the 13th National People’s Congress (NPC) for deliberation. Delegates voted overwhelmingly in favor of the law on the final day of the NPC. With only eight against and eight abstentions votes the law will come into effect on 1 January 2020. Different ministries and government agencies will work on issuing guidelines for implementation until then.

It is well received among foreign investors, who believe it will further improve the country’s business environment. NPC deputy Huang Maoxing said in an interview that the law reflects shifts in China’s foreign trade development. According to many experts the Chinese government sends a positive signal towards the US government to ease the trade conflict between both countries.

The law aims to provide more protection and investment promotion than the three existing laws. It is aimed to replace the current three foreign capital laws – the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures and the Law on Foreign-Capital Enterprises. However, the approved law is written very general which leaves many details to be addressed in other regulations and implementation procedures. This is seen as one negative aspect among many international companies. The American Chamber of Commerce made a cautious assessment of the new law: “We are concerned that such an important and potentially far-reaching piece of legislation will be enacted without extensive consultation and input from industry stakeholders”.

Equal opportunities

The enacted law contains certain stipulations which ensure that foreign-invested enterprises participate in market competition on an equal basis with Chinese companies. It will prohibit forced technology transfers through administrative means and extend the protection of intellectual property rights. The European Union Chamber of Commerce in China earlier expressed concern the focus on “administrative methods” might mean officials still are free to use other tactics to pressure companies to hand over know-how.

It is hoped to boost the Chinese economy and further improve the transparency of foreign investment policies.

The overall reaction from foreign companies and economists is optimistic. The law stresses a positive signal for foreign firms in China and will make it more accessible for foreign companies to invest in China. According to the World Bank, China is ranked 46 among 190 countries in the ease of doing business in 2018, up from 78 for 2017.

With its unified approach for market entry, promotion and protection, the law can be considered as “a new and fundamental law” for China’s foreign investment and an improvement of China’s foreign investment legal system level. “The law will give more people confidence in China,” said Adam Dunnett, secretary general of the EU Chamber of Commerce in China.

For a more detailed review of the Foreign Investment Law: click here

Legal text of the new Foreign Investment Law: click here 

Richard Hoffmann

Richard Hoffmann is a partner at Ecovis Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining Ecovis. In addition to being a member of the board of Ecovis International, he is Supervisor for the China business of several respected German companies and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: richard.hoffmann@ecovis-beijing.com

Ecovis Beijing

Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up for our Newsletter, give us a call +86 10-65616609 or contact us directly via service@ecovis-beijing.com.