China Focus – January 2018

Beijing promises to further open up economy at a faster pace

China’s top representative at the annual World Economic Forum in Davos, Switzerland, pledged that the country would push forward reforms and open up its economy at a faster pace.

Liu He, director of the General Office of the Central Leading Group for Financial and Economic Affairs and one of President Xi Jinping’s top economic advisors, told the Forum on 24 January that China will continue to let the market play a decisive role in resource allocation, as well as providing better protection of property rights, especially intellectual property rights.

Liu said that “some measures will exceed the expectations of the international community”, and noted that the reforms will celebrate the 40th anniversary of China’s reform and opening up policy.

China will open its market wider to the world across the board, he said. There will be further integration with international trade rules and easier market access. The market will see more opening in the services and financial sector, and a more attractive investment environment will be created, Liu said.

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Withholding Tax Deferral for Foreign Investment in China

On 21 December 2017, the Ministry of Finance (MOF), State Administration of Taxation (SAT), National Development and Reform Committee (NDRC) and Ministry of Commerce (MOFCOM) jointly issued a new circular – Circular 88 – which sets out formal guidance on the withholding tax deferral incentive for foreign investors. This will apply to qualified reinvestment made after 1 January 2017.

Before 2008, foreign investors were generally exempt from withholding tax (WHT) on dividend income derived from their investment in China under the prior PRC Enterprise Income Tax Law for Foreign Invested Enterprises and Foreign Enterprises.

This preferential treatment was abolished by the new PRC Enterprise Income Tax Law, which generally subjects foreign investors to 10% WHT on their dividend income, unless a more favourable rate can be accessed through a relevant tax treaty. However last year, China’s premier Li Keqiang announced to the State Council’s executive meeting that China would be rolling out a series of new policies and incentives to further boost foreign investments.

Under Circular 88, if foreign investors directly reinvest their profits distributed by China resident enterprises to some ‘Encouraged Industries’ and meet certain prescribed conditions, then the 10% WHT on the distributed profits may be deferred until the foreign investors’ disposal of such reinvestment in China.

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Sovereign hosts Annual Overseas Permanent Establishment conference

Sovereign China hosted – in Beijing on 24 January and Shanghai on 25 January – its Annual Overseas Permanent Establishment Conference to address the establishment of overseas residence for foreign nationals. The conference looked at the best options for individuals looking to move and invest overseas and focused on four jurisdictions in particular – the UK, Cyprus, Malta and Portugal.

Growth in the demand for IIPs worldwide has been led by investors from China over the last decade. According to research, there are more than one million high-net-worth individuals (HNWIs) with investible assets of more than $1.6 million in China, of which around 10% have already completed an IIP while around 50% have considered making an IIP application in the future. As private wealth continues to grow, demand for IIPs from wealthy Chinese individuals is likely to increase over the next decade.

The three most popular IIPs for Chinese HNWIs have traditionally been the US, Canada and Hong Kong, but all three face uncertain futures. The US programme reached its limit in 2014, Canada cancelled its federal programme in 2014 and Hong Kong suspended its Capital Investment Entrant Scheme in early 2015.

Targeted at both advisers and clients, the Sovereign conference examined the rules and regulations for outbound investments from China and the potential advantages of the IIPs offered by the UK, Cyprus, Malta and Portugal.

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Re-inventing Innovation: China’s ‘future’ changes over time

Formerly a diplomat, Gabor Holch moved to China in 2002 and switched to management consulting. He is the founder and director of Shanghai-based Campanile Management Consulting and specialises in leadership and nurturing personal talent. In addition to Campanile, he is a member of consulting firms in the EU and the US.

China continues to be a puzzle. Few foreigners understand an investment environment where a state-controlled flow of resources and ideas (which is bad, right?) leads to economic growth, massive modernisation and, most recently, undeniable splashes of innovation (which is good, it seems).

But whether they get it or not, investors cannot ignore China. As Shaun Rein, author of The War for China’s Wallet points out, a China strategy isn’t optional any more. And since investment is essentially betting on future scenarios, what could be more exciting than trying to predict how this new, confident kid on the global block will approach innovation, the primary value creator of our time?

In January 2011, I spoke at the China Renewable Energy Association’s annual conference in Beijing. My topic wasn’t energy (I have no expertise in that field) but the prospect of Chinese and European companies becoming a shared community during a landslide market shift. A heavily export-driven China at the time needed the European market as much as cheap Chinese production was essential to meet the EU’s energy modernisation targets. Although Asia lagged behind in several essential requirements, the two sides were on a Life of Pi-style ‘sink-or-swim’ journey together.

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Sovereign (China) Limited

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