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China: Tax legislation progress and a new foreign investment law

Lewis Lu of KPMG summarises the two most important tax developments in China at the turn of the decade, as the economy continues to open to inbound and outbound investment.

The draft bill of VAT and consumption tax law

Placing existing Chinese taxes on a statutory basis is part of the Chinese government’s effort to reinforce the rule of law. At the end of 2019, China’s Ministry of Finance (MoF) and State Taxation Administration (STA) issued in tandem the draft VAT and Consumption Tax (CT) Law consultation papers. CT is levied alongside VAT on a number of product categories, and is akin to excise duties in other countries on alcoholic drinks, tobacco and petrol. It is expected that the draft laws will be submitted to the National People’s Congress (NPC) for deliberation in early 2020. 

The issuance of the draft VAT law marks the first step in the process of both elevating the status of VAT rules in China to a legislative form, and in harmonising the rules for both goods and services. The draft VAT law also goes a long way towards implementing more of the OECD’s International VAT/GST Guidelines. In particular, it moves to ensure that VAT only applies where consumption takes place in China, and allows for the refunding of excess input VAT credits. 

There are some variations to existing approaches such as in relation to the scope of taxable activities, mixed sales, deemed sales, and VAT consolidation. The draft VAT law also says that where any existing circulars need to be continued, such circulars may remain effective for up to five years. Given there are many existing circulars which may be either more beneficial to taxpayers or to the tax authorities, or inconsistent with the draft VAT law, it is inevitable that this clause will be the subject of considerable debate. 

For the draft CT law, it appears that the framework of the existing CT rules, and the existing tax burden, will remain unchanged. However, the draft law does clarify that the State Council (i.e. the cabinet) may adjust certain taxable items, tax rates and collection stages where necessary.

The new Foreign Investment Law and its implementation rules

China’s new Foreign Investment Law (FIL) comes into effect on January 1 2020, along with its implementation rules. The new FIL replaces the existing three laws which have governed the foreign investment in China for decades, i.e., the Chinese-Foreign Equity Joint Ventures Law, Wholly Foreign-Owned Enterprises Law and Chinese-Foreign Contractual Joint Ventures Law. This means that foreign investors can use the same forms of Chinese legal entity as used by Chinese investors. Other notable developments are: 

Market entry and business registration: The new FIL clarifies that foreign investment shall be subject to ‘pre-establishment national treatment’ and the ‘negative list’ system. From January 1 2020, the set-up and alteration of a foreign-investment enterprise (FIE) no longer require pre-approvals and recordal filings, so long as the sector of the FIE does not fall within the ‘negative list’. The FIE can simply make a registration with the relevant authorities. The move to this approach had already been made under rule changes in recent years, but the FIL puts this on a statutory basis.

Cross-border remittance: Capital gains, profits and intellectual property license fees, liquidation income gained by foreign investors can be remitted outside of China in RMB or foreign currencies at will. This also applies to salaries and lawful income received by foreign nationals working for the FIE. 

Information sharing: The new law institutes a reporting system for foreign investment information that can be shared between relevant government authorities. Sharing of such information should reduce duplicative reporting burdens for foreign investors and FIEs.

Technology transfer: Government agencies cannot force foreign investors or FIEs to transfer technology, either through administrative license or penalty, or in other forms. 

While the new FIL is a milestone development for foreign investment, some areas of matters remain, such as concerning the use of the Variable Interest Entity (VIE) structure. At present, foreign investors frequently use the VIE structure to invest in restricted sectors under the negative list. Further clarity is hoped for in due course. 


Lewis Lu
T: +86 (21) 2212 3421
E: lewis.lu@kpmg.com


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