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China Inviting Increased Inbound Foreign Direct Investment

The article is authored by Flora Luo (Director of Global Expansion & Tax Advisory) & Scott Heidecke (Senior Consultant) and was first published in Nexia International

While the number of newly registered foreign invested enterprises (FIEs) in China continues to grow annually, the actual injection and use of foreign direct investment (FDI) monies have not kept pace. The slight annual decline in FDI likely results from this decade’s trend in which foreign investment has moved from manufacturing into the service sector. The Chinese State Council understands the importance of the FDI contribution to the country’s economy, and in a July 2017 meeting proposed a series of measures to encourage increased inbound FDI. The Council’s key policy proposals and current results are summarized below.

With the creation of the Shanghai Free Trade Zone (SHFTZ) in 2013, a “negative list” system for determining disallowed or restricted foreign investments was put into use. Since then, five other free trade zones (FTZs) have been established, and the negative list method has been adopted in all cases. In tandem, the negative lists have been modified to allow foreign investment participation in a wider range of industries and project types, and the negative list method is now in use outside of the FTZs as well. In the July meeting, the State Council reiterated its commitment to using the negative list approach and also tasked the National Development and Reform Commission and the Ministry of Commerce to further reduce restrictions on foreign investment projects. In response, the ministries are currently working to expand foreign investment access into China’s transportation, telecommunications, outsourcing, banking, insurance, and securities markets.

In addition to mandating a wider range of allowed foreign investments, the State Council instructed the relevant ministries to improve the overall business environment for foreign investors by simplifying relevant laws and regulations, and by repealing regulations that may conflict with the goal of encouraging wider foreign investment. Not only are the rules and regulations for FIE registration and ongoing compliance being relaxed in this effort, but communication channels for foreign investors with government authorities are also being improved. One example is provided in the release of a November 2017 policy by several key government agencies to allow FIE participation in discussions and development of national standards related to doing business in China. Other State Council mandates include improving protection of cross- border profits and earnings transfers; supporting foreign investors that engage in M&A activities with domestic companies; allowing foreign investor participation in mixed ownership of state-owned businesses; and improving protection of FIE intellectual property.

Harkening back to the days of freely offered tax incentives, the State Council has also requested modification of certain tax policies. In response, the State Administration of Taxation and several other ministries issued a notice in December 2017 to eliminate withholding tax when foreign investors that own FIEs directly reinvest profits distributed by the FIEs. Reinvestment must be in encouraged industries as listed in the Catalogue for the Guidance of Foreign Investment Industries, and must result in either registration of a new FIE or purchase of equity in an existing company. Another new tax policy released in November 2017 offers tax reductions to companies engaged in advanced, high technology, and high value-added services. Qualified businesses in the Information Technology, “Technical Business Process Outsourcing,” and “Technical Knowledge Process Outsourcing” industries will enjoy a 15% corporate tax rate, and the qualification criteria are less rigorous than those defined for hi-tech manufacturing companies several years ago. Other policies provide tax incentives to multinational companies that set up regional headquarters in their jurisdictions. And with intent to bring in higher value-added industries, the State Council has committed to ongoing support for more foreign investment in the various national development zones and special economic development zones being developed in the western and northeastern provinces.

The State Council additionally recognizes the importance of foreign workers in encouraging FDI. Thus the Ministry of Foreign Affairs and the Ministry of Public Security have been instructed to ease restrictions and processes for highly talented foreign employees to enter and remain in China. Long-term work and residence permits are now offered, and the criteria for obtaining permanent resident status are also being modified. These policy changes will no doubt benefit foreign investors who want to staff their FIEs with trusted existing employees.

In the last two months of 2017, several new or revised regulations to directly provide incentives or increased support for inbound FDI were issued by various government agencies. More policy changes are expected for 2018. While questions and doubts do remain as to what extent currently restrictive policies may be relaxed, it is clear that China’s leaders are serious about attracting more FDI dollars. As a result, foreign investors already have increased numbers of investment options, and more are expected, perhaps at an accelerated pace over what has been witnessed in past years. Nonetheless, patience is required. China moves toward its long-term goals step by step.

 

CONTACTS
For more information, please contact:

Flora Luo
Director of Global Expansion & Tax Advisory,
Nexia TS Shanghai
floraluo@nexiats.com.cn

Dr Scott Heidecke
Senior Consultant, Nexia TS Shanghai
scott@nexiats.com.cn