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How does a foreign investor set up a financial institution in the PRC?

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How does a foreign investor set up a financial institution in the PRC?

8. Tax Issues

As there are no specific tax provisions developed solely for taxing financial entities in the PRC, we set out below the general tax treatment that may be applicable to financial entities.

Tax law and policy are developed jointly by the State Administration of Taxation (the “SAT”) and the Ministry of Finance. The SAT is the government body responsible for collecting tax and enforcing compliance. The SAT is assisted by the state and local tax bureaus at the provincial level and below.

Corporate income tax

The Corporate Income Tax Law of the PRC (中华人民共和国企业所得税法) (the “CIT Law”) promulgated by the National People’s Congress took effect from 1 January 2008 and applies to both domestic and foreign-invested enterprises.

Under the CIT Law, a tax resident enterprise (a “TRE”) refers to an enterprise established in accordance with Chinese law or an enterprise established under foreign law, but which has its effective management located in China. TREs are subject to corporate income tax on their worldwide income, while non-TREs are taxable only on their China-sourced income. Enterprises registered in China are always TRE and a foreign enterprise with effective management in China may also be regarded as a TRE.

The standard corporate income tax rate is 25%. Lower tax rates are available for qualified enterprises under the PRC’s tax incentive policies which place emphasis on “industry-oriented” incentives aimed at directing investment into those industry sectors and projects encouraged and supported by the PRC government. Such industry sectors currently do not include the financial sector.

Taxable income generally includes profits, capital gains and passive income, such as interest, royalties and rents. Dividends between TREs are not taxable except where a dividend is paid on stocks publicly traded on a stock exchange which have been held for less than 12 months.

Withholding tax

A 10% withholding tax on dividends paid to a non-TRE was introduced in 2008. Previously, dividends paid by a Chinese company held as to at least 25% by foreign investors were exempted. It should be noted, however, that dividends paid out of pre-2008 earnings continue to be exempted from withholding tax. Interest, rental, royalties and other passive income, such as the gains from the sale or transfer of real estate property in a PRC company, are also subject to the 10% withholding tax. The 10% withholding tax rate may be reduced under an applicable tax treaty.

Capital gains tax

There is no separate capital gains tax; capital gains (and losses) of companies generally are combined with other operating income and taxed at the normal corporate income tax rate.

9. Others Financial Entity Structures Permitting Foreign Investments

There are other types of financial entities in which foreign investment is permitted. They may not however be appropriate depending on the types of activities the Company wishes to conduct in the PRC, and thus we provide only a brief overview of these financial entity types below. Please do not hesitate to contact us if you would like us to provide further details.

A. Trust companies

Trust companies in China are regulated under the Trust Law of the People’s Republic of China (中华人民共和国信托法), which became effective in October 2001 and the Measures of China Banking Regulatory Commission for the Implementation of Administrative Licensing Matters Concerning Non-bank Financial Institutions (中国银行业监督管理委员会非银行金融机构行政许可事项实施办法) (No. 13 of [2007] of the People’s Bank of China), which became effective from June 2007 (the “Measures on Non-Bank Financial Institutions”).

A trust is an act by which a settlor entrusts certain property rights it owns to a trustee, who will in turn manage or dispose of the trust property in its own name in accordance with the settlor’s instructions and for the benefit of one or more beneficiaries, or for other specific purposes. Trust companies receive remuneration for managing a trust.

Conditions applicable to a foreign investor

Article 9 of the Measures on Non-Bank Financial Institutions requires an overseas financial institution which invests in a PRC trust company to meet the following conditions:

  1. it must have had total assets of at least US$ 1 billion at the end of the year immediately preceding the application to establish a trust company;
  2. its long-term credit must be rated good or better by an international rating agency accredited by the CBRC in the previous 2 years;
  3. it must be financially sound and have had a positive balance for the previous 2 financial years;
  4. its capital adequacy ratio must not be less than 8% if the foreign investor is a bank; or if it is any other type of financial institution, it must meet the minimum capital adequacy ratio set by the financial regulatory authority of its home country or region;
  5. it must have a sound organisational structure, management system and risk control system;
  6. it must not transfer or pledge its shareholding in the trust company within 3 years (unless directed to do so by the CBRC) and it must state this restriction in its articles of association; and
  7. the financial regulatory authority of its home country or region must have a sound legal and regulatory system;
  8. its home country must have a good economic condition; and
  9. other conditions as may be prescribed by the CBRC.

Restriction on foreign investment

A foreign investor cannot hold 20% or more of the shares of a PRC trust company, and a foreign investor and its related parties are not allowed to own shares in more than 2 trust companies.

B. Financial leasing companies

Financial Leasing Companies are regulated mainly by the Measures for the Administration of Financial Leasing Companies (金融租赁公司管理办法) and the Measures on Non-Bank Financial Institutions.

A financial leasing company refers to a non-bank financial institution established with the approval of the CBRC which is mainly engaged in financial leasing. “Financial leasing” refers to a transaction in which a lessor leases property to a lessee for use and collects rents from the lessee in return, in accordance with the terms of a lease contract. Only fixed assets are suitable for financial leasing transactions, except as may be otherwise specified by the CBRC.

Conditions applicable to financial leasing companies

Article 29 of the Measures on Non-Bank Financial Institutions requires a proposed financial leasing company to meet the following conditions:

  1. its articles of association must comply with the Companies Law and the relevant requirements of the CBRC;
  2. it must have qualified investors;
  3. it must have registered capital of at least RMB 100 million or its equivalent in a freely convertible currency, which must be paid up in one lump sum;
  4. it must have directors and senior managers who meet the post-holding qualification requirements, and employ staff who are qualified professionals familiar with the finance leasing business;
  5. it must have a sound organisational structure and sound internal controls and risk management systems;
  6. its business premises and safety measures must meet the needs of its business operations; and
  7. other conditions as may be prescribed by the CBRC.

Restrictions on foreign investment

Article 31 of the Measures on Non-Bank Financial Institutions requires that when a foreign major shareholder of a finance leasing company is a foreign commercial bank, the following conditions must be satisfied:

  1. its capital adequacy ratio must be no less than 8% and must meet the minimum capital adequacy ratio set by the financial regulatory authority of its home country or region;
  2. it must have had total assets of at least RMB 80 billion or its equivalent in a freely convertible currency at the end of the previous year;
  3. it must have had a positive balance sheet for the 2 preceding financial years;
  4. it must be in compliance with the laws and regulations of its home country and must not have materially violated any applicable laws or regulations in the previous 2 years;
  5. it must have good corporate governance, a sound system of internal controls and high-level risk management policies and procedures;
  6. its home jurisdiction must have supervision and management rules in place, and if the investor will be a major shareholder, its home country must have a good economic condition; and
  7. such other conditions as may be imposed by the CBRC.
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Posted on

2014-11-06