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China's changing business landscape

China General Interest

As we revel in our medal count from the Beijing Olympics, that brief moment of glory for our athletes represents years of focused training and hard work. Even with the best training programme, arriving in China provides a new set of challenges. Environmental differences and the psychological barriers of competing against the world’s best athletes are just a few of the hurdles to be faced in order to stand on the podium and receive one of those elusive and prized Olympic medals.

Similar challenges are faced on a daily basis by our businesses that are prepared to get out of their comfort zone, venture into China hoping to beat the odds and win.

The business landscape in China is constantly changing for both domestic and foreign investors and there are always new developments.

Under the new Corporate Income Tax Law a company qualifying as a High New Technology Enterprise (HNTE) will enjoy a low tax rate of 15%, which represents a 40% reduction on the normal 25% rate that applies from 1 January 2008.

Where these enterprises are established in special economic zones or the Shanghai Pudong New Area they can also benefit from a tax holiday.

It is also important to appreciate that companies that qualified as HNTEs under the old regime are still valid until these incentives expire but existing HNTEs are not automatically entitled to the new preferential tax treatment until they are accredited under the new regime.

The last of the six key qualifying criteria has just been issued and the guidelines are available from the Ministry of Science and Technology or you can contact us here at Ernst & Young for details.

As with anything in China the devil is in the details and it is critical that you go through the process rather than assuming you will qualify.

While this is enough to give you a headache, it is just one example of the underlying complexity of the Chinese tax system. Proving that while it is a given, every business taxpayer complains about compliance and red tape, and when you compare New Zealand’s requirements with those that exist in China we are not even in the race.

Recent circulars also confirm capital contributions to an investment including the establishment of a Greenfield company or the increase of registered capital of an existing company can be in the form of shares in another company. The value of the shares used has to be assessed by a qualified appraisal organisation and the capital contribution verified by a qualified capital verification organisation. There has also been other circulars issued that shed further light on provisional corporate income tax filing requirements and forms. If you require further details please contact us.

Successfully operating in China is a continuous learning opportunity where regulations can be introduced at short notice and without the type of consultation process we have grown used to. If you ever think you have a complete understanding of all the requirements and regulations when it comes to operating in China - think again.

Even with the global slowdown, the importance of China in the world economy is not reducing and is providing both opportunities and challenges for New Zealand businesses.

The window of opportunity from our Free Trade Agreement is however likely to be short lived so it is critical we actively take on the role of being participating athletes, not just spectators.

Joanna Doolan is a Tax Partner with Ernst & Young and Florence Wong is a Senior Tax Manager in our China Business Group. joanna.doolan@nz.ey.com florence.wong@nz.ey.com

Tags: tax