pwc: china compass€¦ · pwc: china compass News for experts pwc Hot topic The Chinese real estate market: features, risks and opportunities . Private equity funds Update on conditions

Summer 2010

pwc: china compass News for experts

pwc

Hot topic The Chinese real estate market: features, risks and opportunities Private equity funds Update on conditions and tax issues for German investors Incentives for foreign companies in China Cities vie for regional headquarters Economic spotlight on Asia Japan: Important changes to tax legislation Renewable energy Strategies adopted by three German companies

Contents

Editorial 3

Hot topic 4 The Chinese real estate market: features, risks and opportunities................................................................................. 4 Survey results on opportunities and incentives for foreign banks in China............................................................................ 10

Reporting and controlling 13 Executive pay to be disclosed in annual statements .................. 13 New accounting standards in China: what they mean for German companies .................................................................... 14

Tax and legal 17 Incentives for foreign companies in China: cities vie for regional headquarters................................................................. 17 Orange alert for non-tax resident enterprises: China strengthens taxation on permanent establishments, tax collection and administration ...................................................... 24 Renminbi trade settlement scheme expanded globally .............. 27

Investment and financing 28 Renewable energy: strategies adopted by three German companies .................................................................................. 28 Private equity funds in China: an update on conditions and tax issues for German investors ................................................. 32

Economic spotlight on Asia 35 Sino-Japanese trade relations and their significance for Germany..................................................................................... 35 Japan 2010: Important changes to tax legislation ...................... 38

Portrait 40 Ralph Dreher: from Shanghai to Tokyo ...................................... 40

Publications 41 China: the third largest media market......................................... 41 Crash or boom? � Analysis of the Chinese real estate market ........................................................................................ 41

PwC China Business Group 42

Imprint 43

2 pwc:china compass | Summer 2010

Editorial

We wish you a relaxing and enjoyable summer. And if you happen to be travelling, remember the words of André Gide (1869�1951): �One does not discover new lands without consenting to lose sight of the shore for a very long time.� We hope you enjoy this issue of pwc:china compass and wish you continued success in your global endeavours.

Dear Reader, Recently, the press has been peppered with headlines like �The property bubble � China wakes up with a headache� (Handels-blatt) and �The Chinese property bubble� (Managermagazin), which surely caused some readers to sit up and take notice. But are things really that bad? Our real estate expert Florian Hackel-berg, PwC Berlin, takes an in-depth look at the issue. His timely article on page 4 illuminates the features, risks and opportunities of the Chinese property market and provides valuable reference points to help you better understand and evaluate it. Our second hot topic focuses on opportunities and incentives for foreign banks in China. Since 2005, PricewaterhouseCoopers has conducted an annual survey of executives of foreign banks in China on the risks, business potential and opportunities for development in the Chinese banking sector. On page 10, Roland Spahr, PwC Beijing, outlines the most telling results of the survey: what challenges foreign banks see themselves facing and what strategies they are following to overcome them.

Jens-Peter Otto Head of China Business Group PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft

Foreign investors have long cited tax breaks as one of the chief reasons for relocating companies to the Middle Kingdom, at least until the 2008 tax reform. The priorities have changed: China is also providing financial incentives in the hopes of making an institutional upgrade appealing to foreign companies, especially when it comes to establishing their regional headquarters in a Chinese city. Dirk Bongers, head of China Tax&Legal, explains in his article on page 17 the functions of a regional headquarters, what requirements have to be met and what measures municipalities are taking to encourage this development. In our �Economic spotlight on Asia� column, Ralph Dreher turns his attention to Japan. After four and a half years in Shanghai, he is now headed to Tokyo, and in the future will be reporting to us from the Land of the Rising Sun. The portrait �From Shanghai to Tokyo� on page 40 tells you a bit more about Ralph Dreher. And in his article on page 38, �

�, he discusses changes in transfer pricing documentation and why investors in Japan should familiarise themselves with the new regulations as soon as possible.

Japan 2010: Important changes to tax legislation

Ralph Dreher�s second fascinating article, �

� (page 35), a topic that is particularly close to his heart, focuses on the differences between the Japanese and Chinese economies, why they are becoming closer than ever despite all reservations and not least, why the World Financial Center in Shanghai has a square � not a round � opening at its top.

Sino-Japanese trade relations and their significance for Germany

We at the China Business Group would like to extend our heartfelt thanks to Ralph Dreher and wish him every success and the best of luck at PwC Tokyo. We are already looking forward to his exciting and, as regular readers of pwc:china compass have come to know, often amusing reports from his new workplace in Japan!

pwc:china compass | Summer 2010 3

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The Chinese real estate market: features, risks and opportunities “The property bubble – China wakes up with a headache” (Handelsblatt), “Will China keep its footing in real estate?” (WirtschaftsWoche), “The Chinese property bubble” (Manager-magazin) – these are just three headlines from the past few months. Are prospects really so gloomy for the Chinese property market? While it is true that international interest is continuing to grow and is certainly no longer limited to real estate investors, the euphoric media coverage at the beginning of the boom has turned increasingly negative and even bleak in the last few years. Pessimists are even talking about a major collapse. This article provides some reference points to help you better understand and evaluate the Chinese property market. A young market In the course of China’s political and economic development, a flourishing real estate market began to replace the previous system of government-assigned housing for a large part of the population. This new market aroused a great deal of interest among international investors, who wanted to take advantage of its momentum and the potential for considerable profits in a very short period of time. As a consequence, China saw a building boom without compare – at times more than three-quarters of the world’s construction cranes could be found in the country. The output of this massive upswing in activity is demonstrated clearly in the following two figures: ● In Shanghai, more than 6,000 high-rises with more than

30 storeys were erected in the past 20 years. ● In 2009, an estimated 8.5m new residential units were sold. And that made China the biggest housing market in the world in 2009. In comparison, consider the United States: there sales figures totalled approximately 375,000. Figure 1 illustrates how the average price of new homes has developed over the past years.

-5%

0%

5%

10%

15%

20%

25%

30%

1999 2001 2003 2005 2007 2009

Primary residential properties in this report refer to first-hand residential units, completed and under construction, directly sold by developers to investors or end-users.

Source: Knight Frank, China Property Market Watch, 2010.

Fig. 1 Average price of new homes in China, year-on-year change

This article explains … ● how the land use rights system works, ● which regions have the most important property markets and ● what you need to know about Chinese lease contracts.

As Figure 1 shows, there were dramatic price increases, which in 2009 averaged more than 25% for the first time and generated speculation about a property bubble. This price trend prompted foreign investors to consider not only the potential capital returns and income returns from rent offered by the real estate, but also the increase in the undervalued Chinese currency and thus additional profits based on currency speculation when calculating their total return.

For more information on the Chinese property market, see the following articles in previous issues of pwc:china compass: ● “No place like home … in Wuhan? Practical advice on purchasing

property in China” (Winter 2009/2010, pp. 23–25) ● “Bewertung von Landnutzungsrechten in China” (Summer 2008,

pp. 23–25) ● “Vom öffentlichen zum privaten Eigentum: Neues chinesisches

Sachenrecht akzeptiert Privatbesitz” (Autumn 2007, pp. 17–19)

Structure The Chinese property market is distinguished by a high level of heterogeneity. This goes for both its structures and its sectors. From region to region, the level of infrastructure development varies sharply, meaning that not all of China’s 170 cities with more than one million residents are considered relevant by international investors at this time. Instead, undivided attention has been focused on the developed property markets, which, like the economy as a whole, are concentrated on the east coast. In contrast, central China and the entire west, consisting of large areas of wasteland and desert, are of little interest to the property sector. Up until this point, only various conurbations and megacities located in these areas have attracted any attention. From a macroeconomic point of view, four different regions can be identified as significant real estate hotspots: ● In the north, the Bohai Bay Economic Zone (BBEZ) around

Beijing, China’s capital and political centre. ● At the centre of the Yangtze River Delta (YRD) is China’s

financial centre Shanghai, flanked by the satellite cities of Nanjing, Hangzhou and Ningbo.

● The southern real estate hotspot, the Pearl River Delta (PRD), consists primarily of the cities Guangzhou and Shenzhen, which, in the shadow of Hong Kong, have been able to establish themselves as manufacturing and trading centres in the last three decades.

● The Central-West Region (CWR) has also earned a mention with the increasing success of the government-sponsored “Open up the West” development programme (Xibu da kaifa).

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Beijing

Jinan

Tianjin

Shanghai

Ningbo

Nanjing

Hang-zhouWuhan

Chong-qingChengdu

Guangzhou

Dong-guan

Zhongshan

Zhuhai

Shen-zhen

Bohai Bay Economic Zone (BBEZ)

Yangtze River Delta (YRD)

Central-West Region (CWR)

Pearl River Delta (PRD)

Source: Centaline Property

Fig. 2 The four major property regions in China

Many potential European investors are probably unfamiliar with the fourth hotspot, the CWR. At its centre is the city of Chongqing, home to over 30m people within its administrative borders. Figure 2 shows where each of the hot spots is located. In addition to this geographic division, international property investors also classify locations according to a hierarchical tier system: Tier Cities

Tier I Beijing, Shanghai, Guangzhou and Shenzhen

Tier II eg, Wuhan, Tianjin, Nanjing, Dalian

Tier III eg, Harbin, Fuzhou, Hefei, Kunming

Tab. 1: First-, second- and third-tier cities Incidentally, this classification, which is common in other contexts as well, is not official. It is used in trade articles and the market

reports issued by major broker firms to describe the level of infrastructure development. The classification is not necessarily based on the size of the city, but rather groups the cities into A, B and C locations for real estate investment. While there are just a handful of first-tier cities, their second- and third-tier counterparts total around 35 � a number that is considerably large and not strictly limited. See Table 3. Prevailing conditions There is no doubt that the Chinese property market is increasingly taking its cues from the structures of the market economy. On account of the ubiquitous influence of the state, however, it is still far from being a truly free market by Western standards. The dominant system of the �socialist market economy� implies constant interventions by the omnipresent regulating hand of the state, something which, in many places, virtually invalidates basic mechanisms of the market economy, such as pricing according to supply and demand. Furthermore, the Chinese property market is

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shaped by a number of national regulations and guidelines which are often the result of ideological considerations and the needs of the market economy. Here, the government system of land use rights takes on a central function, as explained in the sections below. Land use rights Land ownership exists independently of land use rights. The most essential distinguishing feature of Chinese landowning law is the legal separation of ownership and possession. In contrast to German law, Chinese law recognises the ownership of buildings independently of the land on which they stand. But despite all of the reforms in this area, the purchase of land by individuals, legal entities or other organisations is still not allowed. Chinese law still adheres to the original ideology which led to the founding of the People�s Republic of China in 1949. The Regulation on Grant and Transfer of the People�s Republic of China states explicitly that rural property is owned by agricultural collectives, and urban property is owned by the state. Nevertheless, the increasing liberalisation of the Chinese economy in the 1980s brought with it a need to make property rights marketable � but in a manner which still upheld this fundamental ideology. Consequently, a system of land use rights was established in the mid-1980s which made possible the use of state land in exchange for a fee. Today, the system has grown into a complex set of rules and regulations which essentially make possible the purchase of the land through transfer or granting. Please note: the term �land use rights� (LUR) in this context refers to the right to use a particular piece of land for a certain purpose for a specified period of time. As shown in the following table, there are two types of land use rights: �allocated� and �granted�. Both are equal in terms of the law. Please see table 2.

Allocated land use right ● ● ● ● ●

● ●

● ●

Annual administrative fees, no land-granting premium necessary LUR are not transferable and may not be mortgaged Allocated for an indefinite period The government may take back the land at any time Little legal security

Granted land use right

Land-granting premium and annual administrative fees Term is limited to 40 to 70 years depending on use, extension is possible one year before the term expires LUR can be sold and mortgaged Can be reclaimed by the state only after the term has expired (or if it is in the public interest to do so)

Allocated land use rights (ALUR) In essence, allocated land use rights function much like a lease agreement without any payment. In the past, allocated land use rights were usually given to state-owned businesses or public institutions which generally used the land themselves. Allocated

land use rights cannot be transferred. As a rule, allocated land use rights are obtained by the user without any purchase fee upfront, however the state does pass on to the user the �maintenance costs� for the land. Furthermore, the purchasers is also responsible for the ensuing compensation and relocation of the previous user(s) and also bears the development costs of the land. The state can rescind allocated land use rights at any time. Consequently, there is a significant lack of legal security for all business ventures not associated with the state. In practice, this makes them less attractive for commercial real estate development and for international property investors. By nature, allocated land use rights are more akin to a distribution of state responsibility than a transaction of land use rights in the free enterprise sense. Granted land use rights (GLUR) Granted land use rights, which are limited in their duration and subject to fees, first came into being after the property reform of 1988 and function much like traditional ownership of the property, indeed they are quite similar to the legal status conveyed by German Erbaurecht (hereditary building rights). The Regulation on Grant and Transfer specifies the maximum duration of land use according to the purpose defined in the contract, as shown in Table 2. Type of use Maximum duration

Residential use 70 years

Industrial use 50 years

Educational, sport and cultural use 50 years

Commercial real estate (eg, commerce, tourism) 40 years

Mixed usage and other purposes 50 years

Source: Regulation on Grant and Transfer of the People�s Republic of China

Tab. 2 Maximum terms of land use rights according to land use The holder of the rights can apply for an extension of the term at the earliest one year prior to its expiry, although the application may be refused on the grounds of �general public interest�. If no application is made, the land, including all buildings and other structures located there, will be reclaimed by the state. Collective land specified for private use must be converted to state-owned land before GLUR can be conferred, usually through a bidding process. The rights are granted in the form of a contract between the user and the state (usually the local authorities). The contract describes the features of the land (location and size of the land, level of development, existing buildings and structures) and specifies the duration of the use rights as well as the amount of the granting premium and an annual, often nominal administrative fee. Here it is also important to note that any land which has not completed the required GLUR procedure may not be transferred or mortgaged.

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In practice 1 Again and again, compliance with the land use rights system and the associated legal regulations has proven to be a problem for companies. In particular, joint ventures between foreign companies and Chinese former state-owned enterprises seem to encounter difficulties on a regular basis. Not infrequently, it is only years after the establishment of the joint venture that companies realise that the land, which Chinese companies often contribute to the venture in place of capital, was never properly converted for GLUR. Not only can this have a considerable influence on the historical value of the LUR, and thus the Chinese contribution, but it can also negatively impact the existence or potential expansion of the manufacturing location.

Source: Thomas Glatte, Grundstückserwerb in der VR China, in: Grundstücksmarkt und Grundstückswert, Cologne 2005, p. 160

Granted Land Use Right Allocated Land Use Right

compensation payments to

previous users

compensation payments to

previous users

development of property

development of property

Grant Premium

The costs and their percentage of the total costs vary according to location and accessibility.

Fig. 3 Costs of allocated and granted land use rights As shown in Figure 3, the user, similarly to holders of ALUR, has to bear not only the costs of the land grant, reflected in the actual

price of the property, but also the costs of compensation and relocation of the previous users, as well as the development costs of the land. In spite of the generally greater legal security offered by GLUR, a closer look reveals a host of legal issues. The most relevant ones concern the possible extension of the term and the legal machinery following the expiration of the land use rights. Table 3 provides an overview of price models for granted land use rights (transaction prices include the grant premium, the development of the land and compensation payments) at different locations with various use options in China. Tenant law aspects Chinese tenant law is not very clearly regulated at the national level and is thus supplemented by a number of local ordinances which differ from one another in terms of both legal theory and practical application. In general, the owners of urban properties are authorised to rent or lease their land once they obtain an official building leasing certificate from the relevant authority. Just as in Germany, tenant law gives more legal security to those renting residential property, and these regulations are stricter than those for commercial property. In the latter case, the contracting parties have more freedom when structuring contract modalities and arranging individual contract options. Still, in all cases a written contract is necessary. Commercial leases are typically concluded for a period of two to three years, although landlords are increasingly pushing for longer terms � usually with some kind of incentive like a rent-free period. Given the relatively short length of the contract, rent reviews tend to be the exception and are primarily conducted during negotiations to extend the lease. The tenant should notify the landlord of the intention to extend the lease no later than three

City Category Location Assessment Use Length of use Price1

Shanghai Tier I Pudong/CBD Very good Commercial/office 40 years 8.755 �/m2

Shanghai Tier I Hongqiao Good Residential 70 years 5.811 �/m2

Shanghai Tier I Nanjing Road Very good Commercial/office 40 years 32.125 �/m2

Shanghai Tier I Xinzhuang Industrial Zone Good Industrial 50 years 74 �/m2

Beijing Tier I Chaoyang District/CBD Very good Office 40 years 2.839 �/m2

Beijing Tier I Chaoyang District Guangqu Road Very good Residential 70 years 3.410 �/m2

Beijing Tier I Beijing Economic-Technology Development Area Average Industrial 50 years 45 �/m2

Tianjin Tier II Hedong District Xinkai Road Very good Residential 70 years 2.275 �/m2

Tianjin Tier II Hexi District Nanjing Road Very good Office 40 years 5.574 �/m2

Tianjin Tier II Jinnan Economic Development Zone Average Industrial 50 years 34 �/m2

Ningbo Tier II Jiangdong CBD Very good Residential 70 years 2.266 �/m2

Ningbo Tier II Industrial Zone Average Industrial 50 years 33 �/m2

Changchun Tier III Countryside Average Industrial 50 years 53 �/m2

Changchun Tier III Countryside Good Industrial 50 years 11 �/m2

1 Transaction prices between 2007 and 2009

Tab. 3 Price, length of use and assessment of selected locations

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months prior to its expiry, so that the lease will be renewed in writing. It is important to note that agreements on options to extend the lease � which would give the tenant security in terms of being able to continue occupying the premises � are not very common.

In practice 2 Many times it is not entirely clear to whom the property is allocated, or there is a lack of explicit proof of ownership. While there is a Chinese land register comparable to that in Germany (Grundbuch), the entries are often incomplete or ambiguous. In many cases unclear ownership status is an issue with privatised or partially privatised state-owned enterprises. Consequently, each individual case must be thoroughly reviewed.

In China, rental property is generally measured in terms of gross area, which is similar to the German system based on gross floor area. This also includes space occupied by structural elements and space that is not usable (eg, outer walls, service shafts, lifts, stairwells). The calculation of the rental price is based on the gross area.

In practice 3 An unclear legal situation may arise when the holder of an official leasing certificate rents out a building or parts thereof located on land with allocated land use rights, which by nature cannot be rented or leased. In this case the landlord can rightly rent out the constructions to a third party, but not the actual land on which they are built (and which may surround them), which generally must be crossed by the tenant to access the rental property (right-of-way).

The rent is normally paid each month or each quarter. In leases for commercial spaces in new buildings, however, it is also not unusual for the contract to specify that the rent be paid upfront, sometimes even several years in advance. These payments then cover the building costs for the project. There is no legally defined upper limit, or cap, on rents for commercial properties. Residential properties, on the other hand, which employers arrange for their employees, are sometimes let for less than the average market price at a fictitious �fixed� rental price. The landlord is responsible for maintenance work when renting out the property. Nevertheless, individual arrangements can be made in commercial leases. It is very common for contracts to specify that the landlord or the company responsible for the administration of the property bears responsibility for the maintenance and repair of fundamental structures (roof and framework) while the tenant is responsible for cosmetic repairs in the interior as well as the maintenance of fixtures they install. Operating costs based on personal consumption (including, water, electricity, telecommunications) are borne separately by the tenant. For commercial property, these costs are already included in the management fee, which can be as much as 10% of the total rent.

Landlords in China are increasingly prepared to allow their tenants to sublet to third parties. They regularly also take in a proportional share of the profits generated when the tenant sublets the property for more than he pays. However, it is usually not allowed to completely transfer the lease to the third party. One exception here is the transfer of the lease to affiliated companies. Encumbrances on property Because land in China is subject to a special ownership status, property ownership can not be used as collateral. According to Section 179 of the Property Rights Law of China, only granted land use rights, buildings and partial ownership of buildings (eg, individual units), buildings in construction or purchased building rights can serve as mortgage securities and an encumbrance on property, similarly to the standard German mortgage. According to Section 183 of Property Rights Law of China, land use rights and the buildings and other structures on the land may not be mortgaged separately. Chinese law differentiates between two types of mortgage: ●

●

The housing mortgage in advance, where the borrower plans to purchase real estate and the target object serves as collateral for the bank. The mortgage for building projects, where a project developer borrows funds from a credit institute to realise the project and the land use rights serve as collateral. In this case, however, it is unclear whether the mortgage also includes structures erected on the land after the mortgage has been granted.

The mortgage becomes effective once a written contract is concluded and an entry is made in the land register of the relevant authority. In order to obtain regulatory authorisation, it is necessary to submit an appraisal of the property in question made by an independent expert. If a building is mortgaged more than once, the other lenders must be informed of this fact, and here the value of the second mortgage may not exceed the residual value of the building after the previous mortgage has been deducted. The mortgage is paid off � in a manner similar to the German regulation in Section 3 of the Grundbuch (land registry) � in a chronologically after registration, whereby procedural costs and possible charges related to the property have to be paid first. The mortgage is closely linked with the liability, that is, with the existence and amount of the liability. The length of the mortgage is clearly limited by the remaining length of the encumbered land use rights. It is not clear how things are to proceed with the remaining mortgage in case of early reversion, that is, if the state reclaims the land use rights in the interest of the general public. Future prospects Given China�s continuing ascent to becoming one of the world�s leading economies, it can be expected that the Chinese property market will continue to change and increasingly adopt Western

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structures. The material value of Chinese buildings will also keep rising. If the growth of the Chinese economy levels off in the future, however, property should not be seen as simply a short-term capital investment but rather as what it truly is: a building project in the sense of a long-term asset. In spite of all the political developments, complete privatisation of the country � in the true sense of purchasing property � is currently unimaginable given the regulatory framework. And simply because the Chinese government wishes to avoid a mass exodus from the countryside. For if things were to change, even more farmers would give up their land in isolated, rural areas to come try their luck in the cities; and migration to urban centres can barely be stemmed as it is. Furthermore, the government can still directly influence the development market through the distribution of land use rights and the flexible structuring of rules. This is something that Beijing still values highly. And something else should be kept in mind: the positive effects generated by the real estate industry go beyond the much talked about economic boom and the predefined economic growth rate of 9% � a large number of Chinese migrant workers depend upon a thriving construction industry for their livelihood. A collapse of the country�s property market would thus have far-reaching and incalculable consequences for China�s entire economy. Naturally, the Chinese government recognised this early on and took appropriate preventative measures. Although local overheated markets and unnatural market developments have seen corrections and price collapses again and again in the past years, the much-prophesied major breakdown has been avoided. And the Chinese government will also do everything in its power to avoid the worst-case scenarios touted in some of German media. Interestingly, the often maligned influence of the state could, therefore, prove to be a very useful regulator in this case. Do you have any questions? Would you like more information? Simply give us a call or send an e-mail. Please see the note on the author�s dissertation on this subject in the �Publications� section on page 41 of this issue.

Contacts [email protected] Tel: +49 30 2636-1166 [email protected] Tel: +49 30 2636-1118

mailto:[email protected]


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Survey results on opportunities and incentives for foreign banks in China Since 2005 PricewaterhouseCoopers has conducted an annual survey of executives of foreign banks in China to glean their opinions on business potential, opportunities for development, risks and challenges in the Chinese banking market. The general opinion is unanimous: the opportunities for development on the market are very limited and the competition is fierce. Nevertheless from a strategic perspective, that is in the long term, executives still consider the Chinese market extremely important. The following article outlines the results of the survey. Forty-two managers of banks participated in the approximately one-hour survey. The following sections outline their responses. According to survey participants, foreign banks worked hard last year to maintain or increase their small market share of 2% in China. A basic prerequisite for business development in China is the right banking licence. The number of local incorporations � which is among the most difficult licences to obtain, but which also affords the bank extensive rights and powers � will rise markedly in 2010. Currently, 30 foreign banks are locally incorporated, and for 2011 more than 50 others are expected to be locally incorporated. Thus, banks are focusing much more on attaining a local incorporation than they have in the previous years. There are two reasons for this: with a branch office, the next-best licence, a bank can only do business in foreign currency and each branch must have at least 200m yuan (currently around �24m) in equity capital. But a local incorporation is not always seen as the best option: some foreign banks are deterred by the loan-to-deposit ratio of 75% which will be required by the China Banking Regulatory Commission (CBRC) from 2011 as a prerequisite to obtain a legal company address. The banks that have been pioneering in terms of securing local incorporations have continually expanded their branch networks in the past years. Similarly, the number of branch offices and partnerships, alliances and cooperations with domestic banks � a measure to procure better and increased market access � will also rise. While Chinese banks can freely invest in other financial services providers, foreign banks are limited to a minority interest of 20% of shares in no more than two banks. Even though many banks have this type of holdings or are still looking for appropriate investment targets among the remaining Chinese commercial banks, there have been very few success stories of any kind up until now. In addition to these investments, the financial divisions focus on asset management, leasing, consumer finance, private equity and trust companies as other possible investment opportunities. All the same, eight foreign banks have stakes in securities companies. The Deutsche Bank has an approximately 30% stake in the Harvest Fund Management Co Ltd. Nevertheless, organic growth is the dominant strategy for foreign banks in China, according to 37 of the 42 participants in the survey.

This article explains � ● what challenges foreign banks see themselves facing in China, ● why foreign banks want to expand their business in the coming

years and ● what strategies are being employed to overcome the challenges.

Foreign banks were unable to benefit from the lending surge that emerged from the government financial stimulus package developed to support the local economy during and after the financial crisis. On the contrary, foreign banks saw a decline in their new loan business in the first half of 2009. This was due on the one hand to the fact that there was a drop in demand for loans by foreign companies in China and on the other hand to the fierce competition coming from domestic banks during this time. Their assets grew by an additional 26%, placing extreme competitive pressure on the foreign banks. While this particular competitive situation is now a thing of the past, it still serves as a lesson in just how much competitive clout domestic banks � working in tandem with the state � can muster up. Thus 2009 marked the first time that China�s banking giants, the Goliaths to a certain extent, were perceived as serious competition by the foreign Davids in their various niche businesses. In terms of the future, many are worried that after cutbacks to the loan budget in the second half of 2009 the pendulum could swing in the other direction in the coming years, and that the number of loan defaults could rise. In the past months, even the CBRC has consistently warned of this possibility and, as a precautionary measure, required domestic banks to increase their capital. Nevertheless, it is also possible that these worries will remain unsubstantiated for the next two years, as the consistently underestimated power of China�s economic growth provides an opportunity for almost every plan and scheme, thus keeping significant defaults at bay. The regulatory environment is still considered a problem by foreign banks, who also see themselves at a considerable disadvantage in comparison to the domestic banks, according to the survey. The regulatory guidelines are complex and are often renewed, something which has a dramatic impact on the pace, direction and extent of the development and strategies of individual banks. In all likelihood, the CBRC will actively take precautionary measures to protect the domestic environment and investors from the global risks and consequences of the financial crisis. Just recently, the CBRC urged banks to exercise particular caution when granting loans to foreign companies. This appeal could also be turned in the other direction or even announced: as advice to exercise particular care when investing money in foreign banks. One considerable factor here is the close collaboration between the Chinese network of banks, the state and supervisory authorities. At the same time, foreign banks have steered clear of such closed, historical relationships, which are also based on strong social ties, and can thus hardly hope to be treated equally in the foreseeable future. Thirty-three of the executives

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● ● ● ● ● ● ● ●

● ● ●

participating in the survey expect to see considerably more regulatory guidelines for foreign banks in China on account of the financial crisis. In the past, new rules were already put into effect regarding

the opening of accounts, balance confirmation, currency regulations, real estate mortgages, wholesale funding restriction, loan-to-deposit ratio, roll-out of wealth management products and onshore location of core banking systems.

A further challenge is presented by the fact that the CBRC requires proof that funds are actually used for the purpose defined in the loan contract and not invested into the overheated real estate market. Regardless of all these challenges, foreign banks are much more optimistic in terms of their future in China as compared to last year. In general, they receive a great deal of support in expanding their activities in China from management in their home country and also express their intent to recruit up to 48% more employees by 2013. As is well known, rapid growth leads to fierce competition for good people. Bankers agree that in the next year, personnel costs will increase, both in terms of fixed salaries and bonuses. More employees will also seize the opportunity to climb the career ladder by changing over to the competition, which will probably lead to a higher labour turnover rate. Some banks expect this to exceed 20%. In accordance with business, foreign banks see the core staff in relationship management for corporate banking. Equally sought-after are risk management specialists and compliance experts, a need which can be traced back to the high amount of regulatory pressure exerted by the Chinese banking supervisory authorities. In terms of services offered, products and the quality of consultation, foreign banks continue to view themselves as having a competitive edge over their Chinese counterparts. But what does this advantage amount to? The opportunities for developing products are severely restricted by bank licences and regulations and thus provide little opportunity to rise above the competition. The clients and products currently in the strategic focus of foreign banks are: high net worth individuals and private banking, investment products and residential mortgages. Services in the wealth management segment will play a prominent role and it is here that foreign banks hope to leverage their advisory expertise to score points with the younger and less experienced Chinese investors. This strategy goes along with the high demand for qualified sales staff and consultants. Products and employees, however, are also things which the Chinese banks can rely on, and on top of that they also have long-standing client relations,

which the foreign banks have yet to develop. In this aspect, however, their image will certainly be of use. In the area of corporate banking, foreign banks expect higher business potential, as the formalities associated with the debt capital market have become more flexible. Foreign banks also believe that structured products could find greater acceptance in China in the long term. Furthermore, the private equity business is expected to continue to develop rapidly. Blackstone Zhonghua Development Investment Fund, the Carlyle Group together with the Fosun Group, and others including SAIF Partners, Hony Capital, Legend Capital and New Horizon Fund are collecting money for a fund in yuan to finance the still small segment of small and medium-sized enterprises (SME) up until their initial public offering. The general strategy of the typical Chinese businessperson is to secure the success of their business through rapid recapitalisation on the stock market and to pave the way for further rapid growth. This approach thus opens up enormous business potential for investors like private equity funds. However, banks consider SMEs to have very high credit risk and therefore remain rather sceptical in terms of the anticipated success in this segment. It becomes particularly obvious that foreign banks are lacking serious clout when one considers their total market share of just 2%. Around half of all survey participants expressed doubt that this share would increase in the near future. The reasons given were the above-mentioned inequality in terms of competitive conditions and economic factors, as well as bank licences which severely limit the type of services and products that can be offered. The competition presented by domestic banks will become even fiercer, since they are improving their service and product portfolios just as quickly and markedly, particularly in the areas of wealth management, credit cards and internet banking. In addition, Chinese banks are working to become comprehensive financial service providers who, by acquiring other companies, can now offer services in the divisions of insurance and wealth management. The image of foreign banks remains a long-term and sustainable competitive factor, and the financial crisis has not swept over foreign banks without leaving its mark on their overall reputation. All in all, however, the financial world remains dynamic, which makes it completely plausible that precisely foreign banks will be considered particularly attractive in China one day. Nevertheless, if foreign banks rely solely on this aspect, the prospects for success are rather small. Consequently, executives identify the following three points as the most important critical factors for success, which must be continually enhanced and expanded:

Outstanding products First-class advisers A globally recognised company name

Hot topic


Foreign banks are still heavily financed by their parent companies. In almost all banks, at least 20% of their loans are financed with money from their home country. Indeed, for 14 of the 42 participants, this rate was more than 50%! This makes it clear that foreign banks also have to work on developing access to the Chinese financing market. With the high level of foreign refinancing the influence of the home country is potentially high as well and thus there is the risk that foreign business models are simply implemented in China, which, as experience has shown, considerably reduces the chances of success. The difficulties become apparent when looking at China�s different understanding of service and also at clients� relatively little experience in handling large amounts of money. Any foreign bank which wishes to become established in the long term and profitable in China needs to get to grips with the particular circumstances in the country and respond with an appropriate and individual business concept. Even though the opportunities for development are heavily regulated and limited in every aspect, the foreign banks surveyed still expressed a strong interest in expanding their business in China. This statement was made by American, European and Asian banks, for example from Japan. In spite of the current tough conditions, it seems that all foreign banks still set great store by business in China and intend to keep at it. From today�s standpoint pulling out of the market � a move which has been discussed here and there and even implemented by some foreign banks in the face of the pressure arising from the financial crisis � would arguably be seen as a strategic error. The results of the survey are available on PricewaterhouseCoopers China�s website at www.pwccn.com/ home/eng/fs_foreign_banks_china_may2010.html. If you have any questions or would like more detailed information, simply call or e-mail the contact below.

Contact [email protected] Tel: +86 10 6533-7124

Do you know what stone was considered a symbol of wisdom in imperial China?

Black pearls: They were guarded between dragons� teeth. The Chinese believed that black pearls were formed in the dragons� brains.

Source: Hans Hauenschield, China Takeaway, Ullstein Verlag

你知道了吗

http://www.pwccn.com/�home/eng/fs_foreign_banks_china_may2010.html

http://www.pwccn.com/�home/eng/fs_foreign_banks_china_may2010.html


Reporting and controlling


Executive pay to be disclosed in annual statements Under the new Chinese Accounting Standards, which were announced in 2006, executives’ salaries must be disclosed in the notes to the annual financial statements. This is covered under the section “Accounting standard for related parties”. This article by Jens-Peter Otto takes a look at the potential pitfalls. Disclosure of information on executive pay was also required under the previous standards, the China Generally Accepted Accounting Principles. These distinguished between two groups. In addition to the Accounting System for Business Enterprises (ASBE), publicly listed companies had to comply with 16 specific accounting standards, including the one on related parties. Non-listed companies only had to uphold the ASBE as a minimum standard. Subsidiaries and joint ventures of foreign corporations came under the second group. Although the ASBE also defined key management personnel as related parties, remuneration for these individuals was not explicitly classified as a business transaction and thus not subject to disclosure in the annual financial statement as it is under both old and new specific accounting standards. “Key management personnel” refers to those personnel who have the authority and responsibility for planning, directing and controlling the activities of the enterprise. This therefore includes as a minimum – but is not necessarily limited to – the board of directors and the general manager, as well as the company representative if he or she is not one of the people already mentioned. “Key management personnel” is used in this sense in this article. Pay for key management personnel is generally treated as highly confidential in foreign investment enterprises, particularly in the case of foreign nationals. Differences in pay between foreign and Chinese staff are often significant, raising concerns that awareness of difference might cause envy among Chinese staff. Prudent measures aimed at avoiding undesirable disclosures include shifting payments to external service providers in China or overseas by passing on costs for “management services” without defining these further. In extreme cases, remuneration is also paid by foreign corporate companies directly, bypassing the Chinese entity altogether. Potential tax consequences from these tax structuring arrangements for the Chinese company and the management are not discussed here. As you may have read in previous editions of pwc:china compass, up until now, the 2006 Chinese Accounting Standards have not been binding for foreign investment enterprises; for the time being they are only bound by the ASBE. As a result, most of these companies do not disclose pay for key management personnel in their annual financial statements. German subsidiaries or joint ventures with German equity interests considering whether to convert voluntarily to the new accounting standards should be aware that these rules are only available as a package.

This article explains … ● why overseas companies prefer to keep expatriate remuneration in

China confidential, ● what financial accounting rules apply to foreign investment

enterprises and ● disclosure requirements under the 2006 Chinese Accounting

Standards.

“Cherry picking”, that is, applying the rules selectively, is not permitted and they thus include full disclosure of remuneration to key management personnel. The term used here in Chinese law is remuneration, which, among other things, includes ● fixed salary, ● performance bonus, ● social insurance contributions, ● pension commitments or payments related to a pension

commitment, ● remuneration in the form of company shares and ● severance pay. It is permissible to disclose the aggregate figure for remuneration to key management personnel without a breakdown for each individual. In addition, the disclosure requirements only cover remuneration that appears on the books of the company subject to the disclosure requirements. If remuneration is received from other companies within a group without appearing on the books, it need not be disclosed by that company. If you have any questions or would like more information, simply call or e-mail the contact below.






New accounting standards in China: what they mean for German companies While China may have appeared to only cautiously modernise its accounting standards, the results of that effort are now flying thick and fast. That�s because the new rules for accounting, which previously applied to a select group of operations, are to be applied to small and medium businesses as well. This article summarises the likely consequences of the Shanghai and Beijing authorities� approaches to this issue. Publicly traded companies, financial institutions and certain government enterprises are already required to apply the new China Accounting Standards, or CAS. Until now, however, it was unclear whether and when these new standards would have to be adopted by the rest of the economy, and this led to there being two parallel systems of accounting standards in China. Now, the city of Shanghai has taken the lead. According to an ordinance dated January 26th 2010 (Hu Cai Kuai 2010 No 8), all medium-sized and large companies must adopt the new standards as of the 2011 financial year. What�s more, the city wants at least 50% of these companies to apply the new accounting standards already this year. To achieve this, companies will be approached in a targeted manner by subordinate departments of the municipal finance authority. A working group was set up to increase under-standing of CAS issues, not least on the part of the authorities. And, as CAS is more complex than the old Chinese Generally Accepted Accounting Principles (GAAP), this will have an impact on the processes of finance departments � as well as on the associated costs. The campaign launched by the city of Shanghai makes clear that the significance of CAS will not remain limited to the previous scope of application. In fact, it is a sort of broad field test to determine whether the private economy is prepared for the relatively more complex CAS. That is anything but certain, as China continues to have a shortage of well-trained accountants, particularly outside the greater Shanghai and Beijing areas. The Shanghai initiative coincides with the activities of the Ministry of Finance (MoF) in Beijing, which is drafting a new accounting standard for small and medium-sized enterprises (SMEs) to also come into effect in 2011. This effort mirrors the international trend; the International Accounting Standards Board is also working on an accounting standard for SMEs. How small, medium-sized, and large will be defined remains unclear, as does whether Shanghai will align its efforts to the national government�s plans.

This article explains � ● why there are currently two sets of accounting rules in China, ● why the circle of those who follow the new rules will grow and ● what criteria will be used to distinguish small and medium-sized

businesses from other companies.

Size matters While the MoF considers whether new criteria are needed to define SMEs, an ordinance from 2003 (Guo Jing Mao Zhong Xiao Qi [2003] No 143) outlines quantitative criteria to describe small, medium-sized, and large entities. The criteria vary according to industry, and all criteria must be cumulatively satisfied for a company to enter into the next higher category. The following table illustrates the size categories:

Company size Industry

small medium-sized large

Industry (general)

Revenues < 30m yuan 30�300m yuan > 300m yuan

Total assets < 40m yuan 40�400m yuan > 400m yuan

Number of employees < 300 300�2,000 > 2,000

Construction


Total assets < 40m yuan 40�400m yuan > 400m yuan


Retail


Total assets No criterion No criterion No criterion

Number of employees < 100 100�500 > 500

Wholesale




Transport




Postal services




Hotel and hospitality




Tab. 1 Criteria for the classification of company sizes from 2003



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The 2003 ordinance offers the following explanations regarding the size criteria:

The term industry covers the following conclusive list of industries: mining, processing trade, energy generation and utility networks (electricity/gas/water). Others not included in the list are to be governed by separate provisions. The number of employees is calculated as of December 31st of the respective year. Revenues in the construction industry are to be calculated on the basis of completed projects (in contrast to the new accounting requirements, which specify the percentage of completion method).

China Accounting Standards � so what�s changing? Your pwc:china compass will keep you abreast of the accounting standard for SMEs. But in the meantime, we will take a closer look at the existing CAS. They represent a big step in the direction of the International Financial Reporting Standards, despite some significant remaining differences. The differences between the old and new accounting standards in terms of the recognition and measurement of assets and debts are numerous. The table below provides an overview of typical differences in recognition and measurement which effect foreign-invested enterprise financial statements. In addition, there are many differences relating to the disclosure of balance-sheet and income-statement items: note disclosures according to CAS tend to be more extensive than as required under the previous accounting standards. A new SME accounting standard will more likely lean toward CAS than toward the old Chinese GAAP. A number of uncertainties in the practical implementation of the new guideline are to be expected. For example, it remains unclear what effects these provisions will have on the requirement to prepare consolidated financial statements. Whereas the old accounting standards required the preparation of consolidated financial statements for publicly traded companies and state-owned enterprises only, the new standards do not provide for any exceptions. In essence, that would mean that every company considered to be a parent company per the new consolidation standard would have to prepare consolidated financial statements as soon as it satisfies the relevant size criteria. Due to the requirement of uniformity of accounting methods within a group, this would mean that all companies in the consolidated group would have to apply the new accounting standards, regardless of their location. Thus, subsidiaries outside the city of Shanghai would also be forced to apply the new accounting standards. It is also uncertain whether the size-related criteria are to be applied to the individual companies or to the consolidated group. Keep in mind that all parent companies incorporated in Hong Kong have to prepare consolidated financial statements, no matter what their size.

New Old

Goodwill No scheduled amortisation, annual impairment test

Amortisation over a maximum of 10 years

Start-up costs No capitalisation Deferred expense and recognition as expense as of start-up date

Recognition of development costs as intangible asset

Yes No

Borrowing costs Interest on general operating loans is also capitalised pro-rata as financing costs

Only to the extent the borrowed capital is used expressly to finance the asset

Fixed assets: reversal of impairment charge after elimination of reason for impairment

No Yes

Measurement of financial instruments

At fair value, under certain conditions

At amortised acquisition cost

Measurement of derivative financial instruments

Fair value No mandatory recognition

Hedge accounting Possible As a general rule not possible

Discounting of monetary assets and liabilities

Yes Not mandatory

Onerous contracts Provision required Provision not required

Restructuring gains To be reported as profit in the income statement

To be reported directly in equity

Deferred tax accounting Mandatory Optional

Tab. 2 Significant recognition and measurement differences that effect individual foreign-invested enterprises

Accounting changes: to-dos Companies in Shanghai that exceed the criteria for medium-sized companies are advised to familiarise themselves with the new provisions without delay if they have not already done so. In doing this, the following questions should be considered: ●

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Is the company obligated to apply the provisions as early as 2010? (Voluntary early application is possible at any time.) Is the completeness and correctness of the accounting as it regards the introduction of the new requirements guaranteed? To this end, a project plan should be prepared. What additional note disclosures have to be made, and what departments are required to provide them? Does an opening balance sheet have to be prepared? What effects can you expect on the tax expenditure? Are the IT systems and internal processes at the company capable of generating the additional information required, including the note disclosures?



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Is the accounting department adequately staffed to handle the additional tasks, and is the required know-how in place?

To prepare for the changeover, companies should also undertake the following two measures:

A detailed analysis about the differences concerning recognition, measurement and disclosure of balance-sheet and income-statement items Preparation of a group accounting manual for the group�s companies in China

Quick action is essential for all parties concerned. You can count on your pwc:china compass for staying up-to-date with further developments. Do you have any questions or would you like advice? Then simply call or e-mail the contact below.


Do you know what Chinese wisdom says about friendship?

It should be like a cup of tea: clear and transparent, and you should be able to get to the bottom of it.


你知道了吗


Tax and legal


Incentives for foreign companies in China: cities vie for regional headquarters Until the sweeping corporate tax reform in 2008, tax benefits were at the forefront of foreign investors’ minds when they were looking for new locations for their company. More recently however, there has been an increase in other forms of financial incentive that aim to encourage foreign companies to set up or upgrade offices. The current competition within China for regional headquarters is currently stepping up a gear. This study provides a summary of the regions that are currently falling over themselves to attract companies, and the attributes these regions have to offer. What are regional headquarters? The term regional headquarters (RHQs) describes the central company for a region containing several countries or territories, founded in China by a foreign multinational corporation from which management services and other services for the various companies within the group are performed. There can only be one RHQ within a company group. Therefore, an RHQ is normally the highest management and service company within a particular corporate group that contains several legally independent companies in China or in the Asian-Pacific region, and that coordinates and manages the activities of these various companies. The foundation of an RHQ brings practical benefits with it and is encouraged through cash subsidies, tax benefits, subsidies and eased visa restrictions. Beijing and Shanghai in particular compete with one another and use attractive offers to entice company headquarters to set up offices in their cities. The creation of RHQs that fully comply with regulations is only a serious option for major corporations. Companies that have already been active in China for several years or even decades and are planning to restructure should check to see if they could profit from the new incentives for RHQs. History China’s attractive cities along the affluent East coast started creating incentives to encourage companies to set up RHQs as far back as the late 90s. In 1999 Beijing was the first city with specific, local regulations that were designed to make gaining RHQ status an appealing option for foreign-invested investment or holding companies that had already been formally recognised by the central government. A number of companies sprung up that had been founded to hold and manage what was at times a huge array of stakes in foreign-invested enterprises (FIEs) in China. Shanghai also followed suit in 2002 with a new set of regulations that encouraged foreign-invested investment, holding or management companies to apply for RHQ status with lower equity demands. Towards the end of 2009 such efforts were redoubled, as both Beijing and Shanghai upped their game and revised their local conditions to offer greater incentives for companies to set up there.

This article explains … ● what the functions of regional headquarters are, ● what conditions need to be fulfilled when founding a regional

headquarters and ● how Chinese municipalities actively encourage regional

headquarters.

The spotlight was turned on the issue once again by China’s highest policy-makers as Chinese Premiere Wen Jiabao repeated his intention to encourage multinational corporations to found RHQs in China during his speech in the opening ceremony of the 11th National People’s Congress on March 5th, held in the Great Hall of the People in Beijing. Founding regional headquarters The minimal requirements for founding RHQs are high and, so this is a venture that may not interest every investor. For multi-national companies wishing to expand their activities in China, it could nevertheless be well worth investigating and comparing the incentives (on both a central and regional government level) that are available for founding RHQs. The array of available incentive packages is multifarious and varies depending on context. This does not just apply to Beijing or Shanghai. Outside these two centres – in Guangzhou for instance – companies are also able, in certain cases, to negotiate special concessions with the local authorities by offering to set up their RHQs there. The most important thing to bear in mind is that, although the basic requirements to qualify as an RHQ are fixed, the nature and scope of the subsequent financial benefits are open for negotiation – separately and case by case. Permitted business scope for an RHQ The purpose of creating an RHQ is to perform overriding management services for a multinational corporation’s investments in China or in other countries and territories as well. Chief areas of activity are listed below: ● Decision-making for regional investments and business activity ● Regional production and company management ● Regional financial management, such as financial services for

the group and investment management ● Finance leasing ● Technological support, research and development ● Marketing ● Import, export and distribution ● Logistics services ● Procurement and processing of information ● Education and training of staff ● Carrying out other services within the group One of the essential advantages is that an RHQ can take on far-reaching treasury functions from within otherwise very restrictive China for the entire region (meaning both within and outside China) – for instance in the planning, management and handling of liquid assets and foreign currencies through cash pooling. RHQs are

Tax and legal

Tax and legal


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thus given more freedom to manoeuvre when it comes to foreign currency exchanges than a �normal� company is usually allowed. General foundation process for RHQs Figure 1 depicts the usual procedure by which RHQs are set up and the differences between a Chinese holding company RHQ and management company RHQ. Various forms of RHQs and the basic requirements for applying to set one up RHQs can be established by a wholly foreign-invested holding company or by a wholly foreign-invested management company. Depending on the amount of share capital, the Chinese holding company can exist in the form of an RHQ at state or local level. Management companies on the other hand can only be registered at city level. There are therefore fewer demands placed on them. The next sections will outline what this entails exactly. Foreign-invested holding company The legal basis for a Chinese holding company is provided in the regulations on the establishment of companies by foreign parent companies and other associated companies. A Chinese holding company only really comes into consideration when larger-scale

acquisitions are planned for the future. A Chinese holding company can also subsequently go through a second phase and �upgrade� itself into an RHQ or it can be set up as one from the outset. The preconditions for holding companies are characterised by the fact that the foreign parent company and the holding company itself must fulfil set criteria. In addition, there are restrictions regarding the use of the company�s share capital. Demands on the foreign parent company The requirements as laid down by the central government concerning the foreign parent company of a foreign-invested holding company (irrespective whether on a state or local level) are that

in the year prior to the establishment of the RHQ, the foreign parent company has to possess assets valued at no less than $400m and have set up at least one foreign-invested enterprise in China already and invested at least a total of $10m in registered capital in China or have already founded ten foreign-invested enterprises in China and already invested at least $30m in registered capital in the country.

Legally registered upon

issuance of business licence

CHC

Apply with Municipal Commission of Commerce (�MCC�) for

approval on the establishmentof the CHC-RHQ

Apply with MOC for Approval Certificate

Apply with Municipal Administrative Bureau of Industry and Commerce

(�ABIC�) for approval

Apply with the MCC for RHQ status

Other subsequent registrations, such as Public Security Bureau, Tax Bureau, Finance Bureau,

etc.

Registration with State Administration of Foreign

Exchange and open bank account

Capital injection and verification

Business licence renewal

Legally registered upon

issuance of business licence

Validation of business plan

Apply with Municipal Commission of Commerce (�MCC�) for

approval on the establishmentof the MC-RHQ

Apply with Municipal Administrative Bureau of Industry and Commerce

(�ABIC�) for approval

Apply with the MCC for RHQ status

Other subsequent registrations, such as Public Security Bureau, Tax Bureau, Finance Bureau,

etc.

Registration with State Administration of Foreign

Exchange and open bank account

Capital injection and verification

Business licence renewal

Name registration Application package preparation

CHC-RHQ MC-RHQ

Comparison between a Chinese holding company RHQ and a management company RHQ

Tax and legal


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These conditions vary slightly for the upgrade to RHQs (compare Tab. 2). Minimum capitalisation State level conditions, which apply to the minimum capitalisation requirement for the Chinese holding company itself, are that

the registered capital amounts to at least $100m or the following three conditions are fulfilled cumulatively:

the share capital amounts to at least $50m and the value of the company�s assets before submitting the application amounts to at least 3m yuan and profits are in excess of 100m yuan.

Companies that fulfil these requirements are classified as foreign-invested investment companies (FIIC). The Ministry of Commerce (MOFCOM) first granted them the right to apply for recognised RHQ status in 2004. What are the requirements regarding the registered capital that a Chinese holding company has to fulfil at a local level?

The registered capital has to amount to at least $30m and be invested in the company within at least two years after the company is issued its operating licence. The management company�s registered capital must amount to at least $2m. The company applying for permission to set up as or upgrade itself to an RHQ has to demonstrate that the highest administrative and decision-making body within the company hierarchy is located in China.

Appropriation of the share capital There are also regulations on the appropriation of the registered capital. Those applying for RHQ status have to use at least $30m of the registered capital for

setting up foreign-invested companies, fulfilling any share capital contributions that are still due from the parent company or associated companies founded by other foreign-invested companies, carrying out capital increases for existing companies or investing in shares in Chinese companies or in foreign-invested companies owned by the parent company or another associated company.

Finally, the company applying for RHQ status has to have founded at least one R&D centre in China. Companies that fulfil these requirements can take advantage of the benefits created for RHQs by central government. RHQs approved by the MOFCOM can make use of an integrated system for the management of their foreign currencies (within or outside of China). They can include all Chinese shareholders in the process to thereby adopt central financial management and cash pooling functions, even when this involves bank accounts outside of China. RHQs can also provide operating and finance leases,

set up other finance companies and provide financial services for the other companies within their group. Since these RHQs are approved at central government level, they are free to invest anywhere in China, irrespective of where their main offices are registered. Foreign-invested management company The demands placed on a management company that is only seeking RHQ status at the municipal level are not as complicated. The following rules apply to the management company�s parent company:

The total asset value in the year prior to submitting the RHQ application must have amounted to at least $400m. The aggregate registered capital injected into the parent company�s pre-existing investments in China must amount to at least $10m. No less than three companies must be administered by the management company. The equity requirement for a foreign-invested management company itself is only $2m in registered capital, which is significantly lower than that for a holding company at state level.

Management company RHQ (municipal level) According to Circular Hufufa (2008) 28, these companies are allowed to run management operations, administration and services as follows:

Make decisions on investments and the business activity Appropriation of capital and financial controlling R&D, technical support Domestic trade, import, export Merchandise and other logistics services Shared services within the group and awarding of services to companies outside China Staff training and administration

Low thresholds at local level To motivate companies to form RHQs and thus �entice� a greater number of RHQs to their administrative district, Beijing, Guangzhou and Shanghai have each passed new regulations that promise greater benefits for companies. All investment or holding companies approved by MOFCOM are entitled to set up their RHQ in Beijing, Guangzhou and Shanghai. On top of this, every city or province offers other advantages that reflect the economic profile of the particular region. Nanjing (Jiangsu province), Shenzhen (Guangdong province), Tianjin � which is close to the seat of government in Beijing � and Xiamen (Fujian province) all strive to have RHQs set up or relocate there as well. As a reaction to Beijing and Shanghai�s efforts to convince foreign RHQs to set up or relocate to their areas, in 2006 Guangzhou (formerly Canton) passed the Provisions for Encouraging MNCs to Establish Regional Headquarters and Sub-Regional Headquarters in Guangzhou.

Tax and legal


Permitted activities Local level State level

Treasury/finance

In-house Foreign currency management (subject to approval by the State Administration of Foreign Exchange) yes yes

Lending yes yes

Securities for loans yes yes

Management of liquid assets and finances (cash pooling) yes yes

Operations leasing of machinery and office equipment to companies invested in yes yes

Provision of finance leases and operating leases � yes

Pooling of foreign currencies from the companies invested in and issuing loans to associated foreign companies � yes

Founding a finance company for the group and finance leasing company below the Chinese holding company � yes

Trade and sales

Import Raw materials for manufacturing in the companies invested in yes yes

Products for system integration yes yes

Parent company�s products yes yes

Products of the associated companies under the parent company yes yes

Auxiliary materials and parts used in conjunction with after-sales services for products of the companies invested in yes yes

Export Products of the companies invested in yes yes

Products of a third party (if not otherwise subjected to an export quota or permit) yes yes

Goods purchased in China by procurement centres yes yes

Domestic sales Products of companies invested in yes yes

Products for system integration yes yes

Parent company�s products yes yes

Products of the associated companies under the parent company yes yes

Agent Purchasing machinery and raw material for companies invested in yes yes

Products of companies invested in yes yes

Work with local agents to conduct engineering services abroad, as agreed in contracts yes yes

Engineering services abroad, as agreed in contracts � yes

Investments

Investment holding yes yes

Investment management yes yes

Foundation of or investments in public limited companies (non-listed shares) yes yes

Services

Sales orientated After-sales service yes yes

Shared services Market development, management and investment advisory services yes yes

Staff recruitment yes yes

Technical training yes yes

Transport and warehouse services for companies invested in yes yes

IT services yes yes

Subcontracting yes yes

Logistics services yes yes

Other services Outsourced services by domestic and foreign companies yes yes

Research and development

Research and development services yes yes

Foundation of an R&D centre yes yes

Tab. 1 Permitted range of activities for state and local holding companies as well as municipal management companies

Tax and legal


Of the three competing cities, Guangzhou has set up the lowest hurdles for the founding of RHQs. Investment and holding companies, management companies, R&D centres as well as certain manufacturing-based, foreign-invested enterprises are allowed to apply for RHQ status in Guangzhou, while only investment and holding companies and management companies are allowed to become RHQs in Beijing or Shanghai. In addition, in Guangzhou small sub-RHQs � which manage only some of a company�s foreign-invested enterprises in China � are also granted many benefits that RHQs enjoy. In June 2008 Shanghai passed a set of revised regulations, entitled Provisions for Encouraging MNCs to Establish Regional Headquarters in Shanghai, which were followed by its implementation rules in December of the same year. In response, Beijing revised its own RHQ regulations in May 2009 (Several Provisions to Encourage Multinational Companies to set up Regional Headquarters in Beijing) and published the accompanying implementation rules in June 2009 (Detailed Implementation Rules of Several Provisions to Encourage Multinational Companies to set up Regional Headquarters in Beijing). The introduction and implementation rules made the granted benefits even clearer. They entail, for instance, reduced thresholds, various cash benefits and opportunities for financial support, as well as preferential treatment for employees. Beijing now offers the largest cash payouts to RHQs and has eased the requirements for granting RHQ status, if the company applying for it is a multinational company known around the world (details in Tab. 1 and 2). Even though the revised regulations increase the capital city�s appeal in the competition with other regions (including Guangzhou, Hong Kong, Shanghai and Singapore), the fact remains that Beijing is the only city that demands a Beijing-based RHQ to be the highest administrative body in the company�s hierarchy in China. On a city level, Chinese employees in an RHQ enjoy preferential treatment in the issuing of travel visas to Hong Kong, Macao, Taiwan and countries abroad. Chinese senior managers and

technical staff are also given advantages in applying for permanent residency permits (hukou) for Beijing and Shanghai. Depending on their employee status, foreign RHQ staff also receive preferential treatment when applying for a Multiple Entry F Visa (a special form of visa granting the holder frequent travel to and from the country), as well as work permits or even longer-term residency permits. RHQs registered in Beijing or Shanghai may also enjoy benefits in customs declarations and inspections. In addition, on a district level and in individual cases (ie, subsequent to negotiations), the municipal governments of Beijing, Guangzhou or Shanghai grant (and frequently put into practice) a range of further benefits for registered RHQs. These include tax privileges, such as tax holidays, tax rebates for the local portion of business tax, corporate tax and income tax or even for acquisition costs, as well as subsidised rent for offices (see Tab. 4). Such benefits boil down to the fact that the authorities have themselves been issued with relocation targets and budgets that are becoming increasingly difficult to attain in view of the numbers of foreign companies that have already set up offices in China and current conditions in the economic crisis. For this reason, their own interests do not always match up with those of other authorities involved and the competition among districts, cities and provinces is intense. As the seat of government, Beijing of course has an advantage when it comes to location. For instance, the district of Chaoyang, which, with a total of 25 RHQs, holds the most RHQs in the capital, currently offers a premium to relocate or set up regional offices ranging between 500,000 and 1m yuan for certain new companies. In addition subsidies are also provided for trade show companies, wholesale and retail chains, globally recognised international brands (in fashion and similar areas), as well as for companies in the service industry. It is definitely worth turning the competition for RHQs to your own advantage. Binding agreements always require negotiations with the authorities involved on a case-by-case basis, so it is impossible to generalise.

Beijing Shanghai Guangzhou

The parent company has assets of at least $400m.



The parent company manages or invests in at least six companies or manages or invests in at least three companies and has at least $10m registered capital in China and

The parent company manages or invests in at least six companies or manages or invests in at least three companies and has at least $10m registered capital in China and

The parent company manages or invests in at least three companies or manages and has at least $30m registered capital in China and

the company applying for RHQ status has equity of at least $2m and

the company applying for RHQ status has equity of at least $2m.

the company applying for RHQ status has equity of at least $2m.

the company applying for RHQ status is the highest management company in the group hierarchy for the parent company�s Chinese subsidiary.

Sources: Municipal government of Beijing, Municipal government of Shanghai, Bureau of Foreign Trade and Economic Cooperation of Guangzhou

Tab. 2 Local requirements for the granting of an RHQ

Tax and legal


Relocation of RHQs Anyone who is considering relocating their RHQ to a seemingly more attractive city should consider one thing first: the authorities in the current location are unlikely to be happy to see an RHQ slip away. Relocation from a city has to be approved just as relocation to a new one does. Therefore you should avoid coming to a

decision about relocating before the authorities’ position in the current location has been made clear. It could be possible that a mere reference to existing benefits in other cities is enough to reach an agreement that is acceptable for both sides.


● One-off set-up subsidy paid in three yearly instalments to RHQs founded in Beijing after January 1st 2009

● 5m yuan subsidy, if the RHQ’s registered capital is between 100m to 500m yuan

● 8m yuan subsidy, when RHQ’s registered capital is between 500m to 1bn yuan

● 10m yuan subsidy, when the RHQ’s registered capital is more than 1bn yuan

● 5m yuan set-up subsidy for RHQs that have been newly founded or relocated to Shanghai paid in the three years following the foundation or relocation (40%, 30%, 30%)

● 30% rental subsidy for self-used, rented office space for newly-founded RHQs – ie, up to 2.628m yuan (max. 8 yuan / m2 / day x max. 1,000 m2 x 365 days x three years x 30%)

● Set-up subsidy of 2m to 5m yuan for recognised RHQs

● One-off subsidy of 1000 yuan per m2 (max. 5,000 m2) for RHQ offices in Beijing founded after 1 January 2009

● One-off subsidy towards acquisition / construction costs of up to 2,400 yuan per day (for calculation, see above) awarded to RHQs that purchase or construct office space

● One-off subsidy towards acquisition / construction costs of 1,000 yuan per m2 in three yearly instalments for the office spaces of newly formed RHQs

● RHQs that rent office space in the district of Chaoyang are entitled to a subsidy over three years – worth 30%, 20% and 10% of the annual rent

● Subsidy of 5m yuan, paid in three yearly instalments, for foreign-invested investment companies that are granted RHQ status for the first time

● Subsidy of up to 30% of the typical market value for office space rent for newly formed RHQs


Tab. 4 Local subsidies for recognised RHQs


● One-off subsidy, payable in three yearly instalments

● 1m yuan subsidy in the financial year when the RHQ exceeds revenues of 100m to 500m yuan for the first time

● 5m yuan subsidy in the financial year when the RHQ exceeds the revenue threshold of 500m to 1bn yuan for the first time

● 10m yuan subsidy in the financial year when the RHQ exceeds the revenue threshold of 1bn yuan for the first time

● One-off subsidy of 10m yuan, paid in instalments over three years (40%, 30% and 30%), as soon as the annual revenue of a foreign-invested investment company with registered RHQ status exceeds 1bn yuan

● Half the profit threshold (500m yuan) and the subsidy (5m yuan) apply to management companies.

● According to Guangzhou’s municipal government’s rules, subsidies are awarded to RHQs and sub-RHQs that make a significant contribution to the local economy. Details as to the exact criteria or the size of the subsidies are not given.

● Income tax-free cash premiums of up to 500,000 yuan for the RHQs’ highest ranking management representatives, payment over three successive years, beginning the year following the RHQs founding, as measured against the contribution made by the managers to local tax revenues

● Cash premium to the sum of 500,000 yuan for the highest management representative in an RHQ, if the growth in tax revenue from income taxes generated locally ranks as one of the top ten tax-paying companies in the city

● One-off premium of 5m yuan in instalments over three years from the financial year when the RHQs of a management company generates revenues in excess of 500m yuan for the first time

● Differing benefits exist in various districts of Guangzhou (such as detailed subsidy rules for RHQs, sub-RHQs and the top management level).

● Cash premium of 300,000 yuan for a senior manager of the RHQ (at least deputy managing director) for two years’ successful work


Tab. 3 Overview of the local operating subsidies or premiums for an RHQ

Tax and legal


For tables 3 and 4: The subsidy is usually granted to a newly founded RHQ. The operating subsidy is spread over three financial years: 40% in the first year, 30% in the second and the remaining 30% in the third. The accumulated reward may not exceed 10m yuan.

Conclusion The requirements on the capital resources of the parent company and RHQs are undoubtedly high and therefore only apply to companies over a certain size. If the criteria for company size named above are met, it is definitely worth taking a closer look and seriously checking the incentives on offer for RHQs. This applies in particular when considering restructuring measures for your existing organization, especially with a view to your company�s overall strategy for Asia and conditions in China, which may well have changed since your company first entered the market there. The advantages are obvious: corporate functions can be harmonised and streamlined. The results that are certainly worth pursuing include more efficient processes, a higher standard of scrutiny and lower costs. If you have any questions or want more information, please call us or simply send us an e-mail.




Tax and legal


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Orange alert for non-tax resident enterprises: China strengthens taxation on permanent establishments, tax collection and administration Foreign invested enterprises used to have a relatively cosy relationship with the Chinese tax authorities. Not any more. The relationship is getting more normal. A good example is the taxable income attribution for non-tax resident enterprises (non-TREs): the China State Administration of Taxation (SAT) has published no fewer than 14 circulars since the start of 2009 to strengthen taxation as well as tax collection and administration on non-TREs. This article by two tax experts in Beijing and Shanghai provides a summary of the developments. Non-TREs and staff who are sent to China for a multitude of projects � particularly recently for the Expo 2010 World Exhibition � may be subject to corporate, business and individual income tax in China. These enterprises need to be aware not only of the taxation rules, but also of the requirements for tax administration and collection in China and how these can impact their enterprise. The first question is: when are non-TRE service providers subject to tax in China? To make it a little easier for you to work out how your enterprise is classified, we lay out the main criteria used by the authorities in the paragraphs below. Corporate income tax If a non-TRE is registered under a tax jurisdiction that has concluded a DTT with China, its profits are not subject to corporate income tax (CIT) in China unless the foreign enterprise maintains a profit-making permanent establishment in China. For the purposes of the Germany-China DTT, the term �permanent establishment� means a fixed place of business through which the business of any enterprise is wholly or partly carried out. The term includes especially:

a place of management, a branch, an office, a factory, a workshop or a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

A construction site, installation project or related supervisory role constitutes a permanent establishment only if it lasts more than six months. An enterprise is also deemed to have a permanent establishment if it provides services, including consultancy services, through employees or other persons engaged by the enterprise in China (for the same project or an associated project) for a period exceeding the aggregate six months in any twelve-month period.

This article explains � ● when non-TRE service providers are subject to tax in China, ● what a �withholding agent� is and what it does, ● the effects of the new regulations on double tax treaty (DTT)

benefits and ● that manufacturing enterprises may also be taxed as service

providers.

So as you can see, the type of services and in some cases the time spent in China determine whether a non-TRE service provider is ultimately subject to Chinese CIT. If a non-TRE service provider maintains a permanent establishment in China, the profits derived by the permanent establishment are subject to corporate income tax at 25%. New rules on the taxation of permanent establishments: Guoshuifa (2010) Number 19 On February 20th the SAT released Circular Guoshuifa (2010) No 19 (hereafter referred to as Circular 19/2010) which represents a root-and-branch overhaul of the administrative directives on taxation of permanent establishments. Some of the most important changes relate to the methods for determining the taxable income in China, the deemed profit rates and the allocation of onshore and offshore income. In principle, taxation should be based on actual profits, provided the books are maintained correctly and based on valid documentation, and provided that the taxable income reflects the functions and risks of the permanent establishment. If a non-TRE service provider is unable to correctly compute the taxable income due to inaccurate or incomplete accounts or other reasons, the Chinese tax authorities can assess the taxable income using one of the following �deemed profit methods�. Deemed profit method

Scope of application Formula to compute taxable income

Actual revenue deemed profit method

Revenue can be ascertained but not costs or expenditure

Taxable income = revenue x deemed profit rate

Cost-plus method Costs can be ascertained but not revenue

Taxable income = Cost : (1 � deemed profit rate ) x deemed profit rate

Expenditure-plus method

Expenditures can be ascertained but not revenue or costs

Taxable income = expenditures : (1 � deemed profit rate � business tax rate ) x deemed profit rate

Tab. 1 Methods for determination of taxable income: Scope of application and calculation of taxable income

Tax and legal


Depending of the nature of the service, Circular 19/2010 also sets out deemed profit rates that are on average 5% to 20% higher than those under the former foreign enterprise income tax (FEIT) regime. Table 2 compares the former (FEIT) and the new system (CIT): Industry CIT (Circular 19/2010) FEIT regime

Construction projects, design and consultancy services

15% to 30% Minimum of 10% for construction projects, 15% for design services

Management services

30% to 50% 20% to 40%

Other services At least 15% 10%

Tab. 2 Comparison of CIT and FEIT regime The Chinese tax bureaus at provincial level are allowed to determine the range of deemed profit rate to be used in their region within the percentage limits given above. The tax authorities may also impose a profit rate higher than the range above if there is evidence to support such a rate. If taxpayers simultaneously render services with differing profit rates, the higher profit rate may be applied to all services unless a separate tax assessment basis has been recorded. Non-TREs that supply China with complex technical products should be particularly attentive. Under Circular 19/2010 the tax authorities can, where appropriate comparisons with similar or identical services are available, reclassify a portion of the total income as services income. This would apply where a foreign investment enterprise sells equipment to a Chinese enterprise and provides after-sales service in China at the same time � such as installation, technical training or supervision � if the sales contract does not explicitly include a realistic allocation between the sales price and the fee for services. In the absence of suitable reference data the tax bureau may assume that up to 10% of the total fee is related to services, which are deemed to have been provided in China and therefore are subject to CIT. As you may know, there was already a similar policy in place under the former FEIT regime, but the minimum acceptable apportionment rate for deeming service income was only 5%. Allocation of onshore vs. offshore service income Non-TRE service providers are only subject to CIT for service fees relating to services rendered in China. If a service provider renders services both inside and outside China, the income from the services must be allocated into an onshore and offshore portion. If the tax bureau casts doubt on the reasonableness and truthfulness of the onshore and offshore service income allocation, they can request the non-TRE to provide evidence to substantiate the allocation. Where the non-TRE is not able to provide the evidence, the tax bureau may in extreme cases deem

the entire service income as onshore service income and thus subject to CIT. Under the former FEIT regime (Circular Guoshuifa [2000] No 82), the policy on services � irrespective of whether they were rendered inside or outside China � was to allocate at least 60% of the contract amount to services rendered in China even if the actual offshore portion was lower. Although Circular 19/2010 dispenses with the mandatory requirement for an allocation, it should be assumed that in practice � at least for the near future � some tax authorities will continue to apply the 60/40 allocation if only to secure their tax revenues. Business tax Under the Business Tax (BT) regulations that have applied in principle since January 1st 2009, services provided and received by Chinese enterprises are both subject to BT. Services provided by a non-TRE to a client based in China are therefore subject to BT irrespective of whether a permanent establishment is created in China. For most services the business tax rate is 5% of gross revenue. A reduced business tax rate of 3% applies to services in the transportation, telecommunication and sport sector as well as plant construction and culture. Circular 19/2010 does not address BT treatment for income derived by non-TRE service providers from their permanent establishment in China. It is therefore highly likely that they are also subject to the regulations referred to above. Individual Income tax As agreed in the Germany�China DTT, China may only tax the income of German employees if they spend more than 183 days in one calendar year in China and their salary is not borne or paid by Chinese establishment. However if a worker provides services that are apportionable to a permanent establishment, their salary is deemed to have been borne by the permanent establishment and the employee therefore becomes liable to individual income tax in China from their first day in China. In this case the length of stay in the country is no longer of relevance.

Further reading Taxation of non-TRE service providers has been touched on several times in pwc:china compass articles about other topics. If you would like more details we recommend that you read the following articles. ●

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International assignments in China: How companies and employees can avoid tax pitfalls, pwc:china compass, winter 2009/2010, pages 16�18. Tax presence in China: practical variations and applications, pwc:china compass, summer 2009, pages 39�41. New developments affecting the taxation of partnership enterprises, pwc:china compass, spring 2009, pages 26�28.

Tax and legal


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Mandatory registration requirement for non-TRE service providers Circular Guoshuifa (2009) No 19 (hereafter referred to as Circular 19/2009), which came into force on March 1st 2009, sets out the registration procedure for non-TREs that provide project contracting or other services in China. The Circular contains regulations on CIT, BT and value added tax (VAT) and applies equally to foreign invested enterprises and individuals. According to the Circular, as of March 1st 2009 a non-TRE service provider must register with the relevant tax authorities within 30 days after a contract is concluded if it provides the services that have been referred to above in China. Project contracting covers:

Construction Installation Assembly Planning Development Other contracting services

Other services include: processing, repair and assembly, transportation, consultancy, design, warehousing, culture and sport, education and training, entertainment, tourism, technical services and other types of service. The broad definition of �contracting services� and �other services� basically covers all services rendered by foreign providers in China. This means that all non-TREs, providing services in China, are required to register with the tax authorities. This requirement imposes a significant administrative burden on non-TREs and will have a particular impact on enterprises with smaller contracts. In addition, a non-TRE service provider that renders project contracting services in China must report to the tax bureau and perform tax de-registration within 15 days after the project has been completed. The following sections cover pitfalls to be avoided in tax fillings and when paying tax. CIT It is primarily the responsibility of the non-TRE service provider to file tax returns and to pay CIT. The non-TRE service provider is obliged to file preliminary quarterly corporate income tax returns and an overall annual corporate income tax return and to settle its tax liabilities upon the completion of the respective project. This applies in all cases except where the tax bureau has transferred the requirement to withhold tax to the entity based in China that pays the remuneration. The non-TRE service provider is not required to perform an annual corporate income tax filing if one of the following conditions is met:

The project in China lasts less than one year and is completed before the end of the year. Tax de-registration is completed with the tax bureau before the tax filing deadline.

The tax bureau has approved the company�s application to be exempt from having to perform an annual corporate income tax filing.

Although it is primarily the duty of the non-TRE service provider to perform the filings, the tax bureau may appoint the payor as �withholding agent� if one of the three cases below apply:

The expected duration of a project is less than one tax year and the non-TRE service provider is not fulfilling its tax obligations. The non-TRE service provider has not completed tax registration. The non-TRE service provider has not complied with the duty to file the quarterly or annual corporate income tax returns within the deadline.

In any of these cases the tax bureau should inform the designated withholding agent of its future duties by issuing a notice. BT/VAT Where a non-TRE service provider does not maintain an enterprise in China and has also not appointed a withholding agent, the withholding agent for BT and VAT will be the recipient of the services. In the authors� experience, Circular 19/2009 has not yet been applied in practice, since local tax authorities are simply overwhelmed by the work involved in the practical implementation and associated administrative activities. However, in individual cases an agreement with the relevant local tax bureau is recommended to avoid any fines for failing to submit reports or missing deadlines. Claiming benefits under the DTT On August 24th 2009 Circular Guoshuifa (2009) No 124 (hereafter referred to as Circular 124/2009) was published by the SAT. It states that before claiming benefits under a DTT, foreign entrepreneurs must submit an application to the relevant tax bureau for approval of any benefits under a DTT on passive income. These relate to dividends, interest, royalties and capital gains or registration (record-filing) for benefits on other income such as commercial income from permanent establishment(s) or services. To be approved, the application as well as the record-filing procedure must be accompanied by comprehensive documentation and information � such as contracts, certificate of residence for tax purposes, etc. Even after approval has been given, the tax bureau may claw back additional sums for up to three years after the tax is paid. Circular 124/2009 also defines the six-month grace period referred to in the Germany-China DTT as an exemption under the DTT and this should also be reported before being taken up. In order to avoid fines for failure to submit reports or missing deadlines, an agreement with the tax bureau is recommended in

Tax and legal


individual cases even though Circular 124/2009 has not yet been applied in practice. Conclusion In view of the new administrative and tax regulations for permanent establishments in China, enterprises would be well advised to scrutinise their current and future projects � particularly in relation to future handling and application of Circular 19/2010 by the local tax authorities � and adapt their practices to meet the new conditions as necessary. If you have any questions or would like advice, please call or e-mail one of the contacts below.


Renminbi trade settlement scheme expanded globally On June 22nd the People�s Bank of China (PBoC) announced that the pilot scheme from 2009 would be expanded effective immediately from a small number of economic zones to the entire world. This report contains a summary of what we know so far. The winter 2009�10 edition of pwc:china compass reported on a typical Chinese pilot scheme: the renminbi (RMB) trade settlement scheme was announced by the State Council of China in April 2009 (�Pilot renminbi trade settlement scheme�, pp. 33�34). Under the pilot scheme, �pilot enterprises� could take part in five trial locations in China, namely Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan. These �pilots� were allowed to choose between the RMB or another currency when settling cross-border trade with overseas companies from Hong Kong, Macau and the countries of the Association of Southeast Asian Nations. On June 22nd the PBoC expanded the scheme to cover trade with the entire world. The number of pilot enterprises was also increased significantly. In the future, 18 provinces and regions will participate in the scheme: Beijing, Tianjin, Inner Mongolia, Liaoning, Jiangsu, Zhejiang, Fujian, Shandong, Hubei, Hainan, Chongqing, Yunnan, Sichuan, Jilin, Heilongjiang, and the autonomous regions of Guangxi Zhuang, Tibet and Xinjiang. Observers believe that the move is part of the Chinese government�s efforts to reduce its reliance on the dollar, to avert foreign exchange fluctuations and to strengthen the RMB�s international standing. According to data released by the PBoC, the total value of RMB transactions between July 2009 and May 2010 was 44.55 billion RMB (just under �5.4 billion). The central bank said in an online statement that deals settled in RMB had risen sharply and that this was the right time to expand the pilot scheme. As you can see from the article in our winter 2009�10 edition, the pilot scheme earlier only covered trade settlements in RMB. Although it is expected to be rolled out gradually to cover other cross-border, non-trade transactions � such as service trade or foreign direct investments � over the long term, these were not included in the PBoC�s announcement on June 22nd. It therefore remains to be seen when the PBoC will in fact go down this road. Your pwc:china compass will keep you updated. Do you have any questions or are you interested in more details? If so, simply call or e-mail one of the contacts below.

Contacts [email protected] Tel: + 86 10 6533-3203




Investment and financing


Renewable energy: strategies adopted by three German companies China’s targets for reducing carbon dioxide emissions are very ambitious, and renewable energy has an important part to play in achieving them. The market is growing rapidly with the boom set to continue, opening up huge opportunities for foreign investors. Establishing a market presence does of course still involve a certain risk, despite Chinese willingness to make significant compromises to secure access to Western expertise. At the same time, China continues to make concerted efforts to build up the dominance of local players. Based on the experience of a number of companies in this sector in China, this article by Roland Spahr reports on the most promising strategies. China has set itself ambitious goals in combating climate change. From 2020, carbon dioxide (CO2) emissions are to be curbed significantly and peak in 2030. By 2050 China intends to reduce emissions to 2005 levels. At the same time, the Beijing government expects economic growth to continue, which will bring with it a continuing increase in energy requirements. For 2010 growth is expected to be around 10%. To achieve the CO2 goals without throttling back the growth in demand for energy, China has launched a series of initiatives and incentive schemes for renewable energy. By 2007 China had already invested around $12 billion in renewable energy. $220 billion out of a total economic stimulus package of $586 billion are to be spent on green technology, including renewable energy such as wind power, solar energy and biogas. According to the China Greentech Initiative, the total market for green technologies in China lies between $500 billion and $1 trillion. Targets for renewable energy are set by the National Development and Reform Commission (NDRC) and political and market economy structures are being deployed to ensure they are met. In the past, the targets were often adjusted upwards as a result of the rapid growth in markets dominated by optimistic investors and companies. The proportion of renewable energy is to grow from 7% in 2005 to 20% in 2020. The specific targets, which nobody doubts are achievable, are as follows: ● Wind power generating capacity was just 1.3 gigawatts (GW) in

2005 and is to rise to 30 GW by 2020. The manufacturing and installation of plants were on target in 2008 and 2009. This has led the NDRC to revise the 2020 target unofficially to 100–150 GW of capacity.

● Power generation from photo-voltaic cells was just 0.07 GW in 2005 and is to rise to 1.8 GW by 2020. Here too the target has been adjusted unofficially to 20 GW.

● Power generation with biomass was 2 GW in 2005 and is to be 30 GW by 2020.

This article explains … ● why China is and will continue to be a major market for producers

of renewable energy, ● the local conditions facing foreign investment enterprise in China

and ● what strategies German companies are already using to compete

on the Chinese market.

China’s ambition of meeting future energy demands in a rapidly growing economy mainly from renewable energy sources brings enormous opportunities for business. It seems tailor-made for German companies with their unrivalled experience and technical expertise in the renewable energy segment. It is true that many companies are already active in China. But many companies also remain nervous about entering the Chinese market. The potential benefits – cheap manufacturing within China for export to other markets or selling products within China and providing consultancy in the renewable energy sector – remain largely untapped. Where they are taken up, they can often fail as a result of the unfamiliarity of the conditions imposed by China on foreign entrepreneurs. To help you get an idea of the situation, this article presents three companies and their China strategies. They provide good examples of the opportunities (and challenges) faced by German companies in China. The authors are very grateful to the experts and their companies working in Beijing for their insights into strategic and operational aspects of doing business in China. We would like thank Dieter Launert, Head of Renewable Energy Division Siemens AG; Sven Mantwill, CFO of Nordex SE in Asia; and Martin Dilger, CDM Technical Director and CIM Integrated Expert at OASIS Science and Technology (Beijing) Co Ltd, in close cooperation with Umwelt-Projekt-Management GmbH (OASIS with UPM). Siemens AG Siemens AG already has a long tradition of working in China. In 1872, the company installed the first telegraph poles for Emperor Tongzhi as well as selling other products to China. Siemens currently has offices in China employing around 45,000 staff in the three sectors of energy, industry and health care. The industry division provides solutions on energy consumption including automated buildings, energy conservation and enhancing turbine efficiency. The energy division develops products for primary power generation, supplying the big five energy companies China Huaneng, China Datang, China Huadian, Guodian Power and China Power Investment. In the wind power sector, Siemens’s largest market share was in the US and EU as a result of high demand. However, with China now the world’s biggest manufacturer of offshore wind power stations, the market is increasingly important. Siemens’ wind power product portfolio is currently comprised of plants generating between 2.3 megawatts (MW) and 3.6 MW.




Siemens also works on solar thermal or concentrated solar power. This uses parabolic reflectors to heat a mixture of thermal oil or salt which evaporates water via a heat exchanger. The steam generated is then used to drive a turbine. This relatively recent technology has so far been used in Spain, the US and elsewhere with a total capacity of around 50 to 60 GW. The figures envisaged for the Chinese projects are around 200 GW. Siemens is also relying on local suppliers for installations using this technology. Siemens sets up the core technology, an area in which there are no local competitors, whilst the concrete foundations for these plants or the steel frame for the reflectors can be installed by local Chinese partners. This ability to cooperate at the local level is one of the keys to Siemens� success on the China market. Siemens� long experience has enabled it to implement a huge range of projects in China successfully. According to the company, it is crucial to adapt to the Chinese way of thinking and working. In China, connections between companies, authorities and universities are particularly significant and foreign companies have only just started to learn how to make the most of these. These networks are much larger and more significant than in Germany, for example. Involving all interest groups is essential if companies are to succeed in the market. Another challenge for any company director is the sheer size of the orders and the rate of economic growth. The present annual increase in China�s generating capacity is equivalent to Germany�s entire annual energy requirement. To maintain major market shares, companies need to plan and invest wisely to avoid over-concentration. Nordex SE Nordex SE manufactures wind power stations and employs over 2,000 people worldwide. As a manufacturer of onshore plants Nordex provides 1.5 MW as well as 2.5 MW plants. It has installed over 4,000 wind turbines with a total operating capacity of 5.7 GW. Given the fact that the wind power market in the main European countries � such as Germany, Spain and Denmark � is practically saturated, Nordex has taken the bold step of entering the booming Chinese market. It installed its first wind power stations there in 1998. The company has now installed over 400 plants with a total output of over 400 MW. China is one of Nordex SE�s most important markets alongside Europe and North America. Nordex manufactures in Germany (Rostock) as well as in China (Yinchuan and Dongying). Around 80% of the components required for the Chinese market currently come from the Chinese manufacturing industry, with a future target of 100%. Local supply chains are essential for the company to remain competitive on price and avoid high logistics costs and the risks of exchange rate fluctuation. They also avoid exchange rate fluctuation risks. Local production and local suppliers entail significant cost savings,

which Nordex uses to counter the price pressure on the Chinese market whilst at the same time maintaining high quality standards. The wind power industry in China benefits from a directive from the NDRC that sets a fixed price per kilowatt and by region, which makes investment in wind parks profitable. Because of its local manufacturing sites in China, Nordex no longer thinks of itself as a foreign investment enterprise. However, like all other foreign bidders, it continues to face difficulties in competing against local bidders in big state tenders. The well-connected, large local manufacturers Xinjiang Goldwind, Dongfang Electric and Sinovel Wind in particular tend to be favoured in the tender processes. Local companies are approximately 5% to 10% cheaper, but are often unable to comply with international technical standards. The NDRC�s broad control of the Chinese market is a major challenge facing companies in China. The award of a 5 GW tender in April 2009 by the NDRC was based purely on price and went exclusively to the three big Chinese producers of wind power stations. In recent years, the NDRC�s targets have regularly been exceeded with market growth outstripping expectations. In 2008 new installations amounted to 6.25 GW and in 2009 China overtook the US as the largest global market. Although the impressive rates of growth in recent years (over 100% on average) are no longer being achieved, new installations are expected to exceed 8 GW per year in the long term. Wind parks have so far mainly been restricted to the north and northwest, but they will be installed in the south and east and even offshore in the future. The NDRC�s focus on pricing in tender processes in recent years has led to international manufacturers losing market share, whilst huge economies of scale have sharply reduced production costs for local bidders; in addition, the quality of Chinese wind power plants is rising steadily. Foreign companies can still look to investors who are prepared to pay a premium for product quality and reliability and to factor life-cycle costs into their assessments and decisions. In a booming market, even foreign producers managed to increase their absolute sales of wind power stations via this route. In the past under the �local content requirement�, 70% of production had to take place in China. This requirement has recently been removed. Market analysts suspect that the government now considers the big Chinese manufacturers Sinovel, Dengfang and Goldwind � which between them account for around 75% of the total market � fully competitive and its target of setting up a supply industry met. The removal of this requirement has therefore been only marginal significance for those foreign manufacturers already manufacturing in China.



Local content requirement (LCR) Under a LCR policy, countries oblige foreign companies to use a certain proportion of locally made parts and components. Foreign supplies are only permitted once this threshold has been reached. To maintain the quality of the final product, local suppliers are certified, whereby foreign companies have to transfer technological expertise to them � which is in turn offered to local competitors.

Despite the many challenges facing them in relation to local bidders and authorities, Nordex SE expects that the market share of international manufacturers will be between 10% and 20% in the long term. Given the boom in demand there continue to be good opportunities for companies to become established in the Chinese market. OASIS with UPM UPM has been represented in China since about 2006 and has run a consultancy company since 2008 with its own offices (UPM Environment Project Financing and Management Co, Ltd). It provides advice for financial and technical projects on the Clean Development Mechanism (CDM) and on the purchase and sale of Certified Emission Reductions (CERs). CDM is a flexible system under the Kyoto Protocol whereby industrialised nations can reduce their emissions by investing in projects in developing countries that can reduce CO2 emissions. These projects confer certificates on emission reduction that can then be traded. UPM�s particular focus is on consultancy, financing and developing biogas systems in China. UPM works in collaboration with the Chinese company OASIS. UPM deliberately did not pursue a joint venture and instead agreed on a close cooperation, which manifests itself in shared office space, close physical proximity and a team mentality. This back-to-back approach allows each company a free hand while letting them make use of the expertise and network of the other partner. While the German side concentrates on expertise and consulting, the Chinese partner arranges market access. CDM projects are high-risk. The extreme volatility of CERs pricing and the fact that the Kyoto Protocol expires in 2012 cause uncertainties over the implementation of CDM projects, which are only profitable if they generate certificates. The regulatory requirements and conditions that have to be met before a CDM project is approved by the CDM Executive Board of the UN Framework Convention on Climate Change are particularly complex and time-consuming. A key issue for potential investors is China�s regulatory requirements and challenges which are significantly different from those in Germany � but not necessarily worse. For example, for a CDM biogas project all stakeholders and in particular the local population must be given the opportunity for their views to be aired in an official hearing, especially the urban population. Without their consent, the project cannot go ahead. In addition,

meticulously formulated contracts, which are standard fare in Germany, are often viewed with mistrust in China. Chinese companies tend to prefer looser wording. UPM also identifies the lack of transparency across the hierarchies of the different Chinese authorities as a particular difficulty. And the low level of equity held by its smaller business partners acts as a brake on the company�s development opportunities. Despite the challenges and the confusing bureaucratic environment in China, UPM�s experience of providing consultancy services has been a positive experience, not only for its investors and potential German technology suppliers but also for UPM itself. Cooperating with the Chinese partner has contributed significantly to the success of its projects. Without appropriate advice, ventures of this kind often fail for lack of technical expertise. In particular, involving local investors in CDM projects requires extensive international experience that local project owners generally do not have. Projects also frequently fail due to inefficiencies in biogas production plants, lack of standardisation and communication problems at an international level. German companies who are skilled in technical innovation and are specialised in biogas technology are still in a good position to exploit the booming demand for energy in China in general and the demand from biogas plants in particular. The growth in local industry also offers market opportunities. UPM also sees China as a future market but also as a springboard to doing business in other Asian countries. Conclusion All this goes to show that potential investors should approach the Chinese market and its particular environment with caution. In recent years China has dismantled many of its former barriers to trade and its bulky regulatory frameworks. The same period has seen huge potential for business emerging in the renewable energy sector. However companies do well to remember that the People�s Republic of China is not a free market economy. Decision-making processes often suffer from a lack of transparency and favour Chinese competitors. The China Greentech Initiative has identified a total of 19 different national decision-making bodies for the green technologies. An even greater number exist at the local level. Regulations, requirements and incentive schemes vary widely across the different economic zones and cities and investors should conduct a thorough assessment of advantages and disadvantages of each. One example is a report published on January 4th by four local authorities in Beijing entitled �The Interim Measures on Establishment of Foreign-Invested Private Equity Investment Fund Management Enterprises�. Details of the catalogue of measures can be found in the article �Private Equity Funds: Beijing provides incentives for foreign corporations� in the spring edition of pwc: china compass, page 39 onwards. Under the new regulations, foreign investors may establish private equity companies as joint ventures with a Chinese partner or as a wholly



foreign-owned enterprise provided they meet certain conditions. A similar regulation has been in place for Shanghai since mid-2009, although the conditions are different. Growing investment certainty combined with the increasing number of well-trained specialists is a sign that the quality of environmental technology products is improving rapidly � though this depends on the level of government support and local circum-stances. Government support measures can take many forms such as the NDRC�s fixed energy supply premiums and special tax regimes under the law for the promotion of renewable energy. The growth in the renewable energy sector provides German companies, particularly small and medium-sized enterprises, with huge opportunities. But the risks (of acting as well as failing to act) are equally huge. Local competition and the local environment are an issue for any company that decides to manufacture in China. Superior Western technology can be crucial for success provided that the company keeps producing cutting-edge innovations. Given that the Chinese are currently filling the technological gaps in their own products at a rapid pace, the West�s technological advantage will be squeezed unless foreign investors continue to drive development forward. Established manufacturing sites and processes in China can create cost and competitive advantages for global markets. It is becoming apparent that companies that fail to act in the face of the competition from China will ultimately lose business as they attempt to compete with cheaper products of equal quality. Reports from the field suggest that cooperation agreements, strategic alliances or even joint ventures with a Chinese partner with an established market presence can be a significant advantage. In the mid- to long-term Germany, as a powerhouse for renewable energy, cannot afford to ignore the Chinese market. Germany�s quality advantage in many areas is rapidly disappearing; competition from Chinese manufacturers is even starting to make its presence felt in domestic markets. In the wind power sector, for example, the first Chinese manufacturers have already begun exporting wind power stations to North America. And American companies are also starting to cooperate with Chinese manufacturers. By 2010 renewable energy is to account for 12% of China�s total energy consumption. This is equivalent to 120 GW of installed capacity � around five times the total capacity in Germany. Every year, new installations in China amount to the equivalent of the total capacity already installed in Germany. New projects are often many times larger than comparable schemes in Europe or the US. In 2009, for example, tenders were invited for a 5 GW wind park scheme. These comparisons make clear the huge opportunities offered by the market in China for German manufacturers and suppliers since their expertise is much in demand here.

The problems and risks typically associated with investing in China continue to frighten off many potential investors. At the same time the market is growing and with it China�s competitiveness in global markets. Companies need to adjust to the particular conditions of the Chinese market in order to create a base from which they can achieve successful and sustainable business opportunities. If you have any questions or would like advice, please call or e-mail the contact below.


Do you know what gift you want to bring to your next party?

If you can�t think of a suitable gift for a wedding, you can simply go with a goose. In Chinese culture, it symbolises marital happiness. If someone who has just passed a test invites you to a party, come bearing a firefly. It stands for beauty, persistence � and exam success.

You see, in China, almost every animal is a symbol. The thing is, where can you get fireflies these days?


你知道了吗




Private equity funds in China: an update on conditions and tax issues for German investors New administration provisions implementing the 2007 Partnership Enterprise Law came into force in March 2010. Under the new rules foreign investors are now eligible to form a foreign-invested partnership (FIP) in China together with foreign partners. Thus, foreign investors should also be able to set up Chinese private equity funds in the form of partnerships. This article provides a brief summary of the usual structure of partnership-based private equity funds and depicts how Chinese private equity funds may be set up for foreign investors in the light of the latest catalogue of administrative measures. The article concludes with a summary of the key tax issues German investors face when acquiring interest in foreign partnerships. Usual structure of a private equity fund A private equity company is usually formed by capital investors coming together to participate in non-listed companies (portfolio companies) using private equity or financial instruments that are equivalent to private equity. By disposing of their equity interests later, investors generally intend to benefit from the increase in value of these portfolio companies. In most cases, private equity funds are set up as limited partnerships (comparable to a German private limited partnership or Kommanditgesellschaft). The fund is usually managed by the general partner; the investors are generally limited partners in the company with their liability generally limited to their equity investment. The limited partners are usually not authorised to manage the company. There are fund initiators who structure the funds and investment managers whose tasks include selecting investments and coordinating the operation of the fund. The fund initiator is permitted to participate economically in the fund company, but the majority of the underlying share capital is borne by the investors. The fund initiators generally receive performance-related remuneration in the form of carried interests. The investment manager usually receives non-performance-related remuneration in the form of management fees. While the overall partnership is based on a limited partnership agreement, other individual agreements are usually drawn up between the private equity funds and individual investors within a �side letter� attached to the agreement. For German investors, these side letters usually contain details on the reporting and disclosure requirements under German tax compliance legislation. Private equity funds in China Foreign investors� interest in the Chinese market has risen sharply in recent years. According to the latest survey by PricewaterhouseCoopers, China was rated second in the list of

This article explains � ● specific issues relating to private equity funds in China, ● tax compliance requirements for German investors in foreign

private equity funds and ● the minimum tax requirements that German investors should

address in a �side letter�.

destinations that will increase most in terms of how attractive they are for private equity investment in the next five years (�Private Equity Trend Report 2010�, February 2010, p. 31). This may enable China to continue the positive trend of the last few years and compete with the traditional markets in the US and Europe. Generally, there are two main ways of engaging via private equity in China: foreign private equity funds may acquire (directly or indirectly) shares in Chinese portfolio companies. Alternatively, foreign investors can set up private equity companies in China as an investment opportunity. It has been possible for foreign private equity funds to acquire shares in Chinese companies for some years now. In practice, several private equity funds were set up outside China (offshore) to invest in Chinese portfolio companies. In some cases these funds may be managed from the Chinese region (as in Hong Kong, for example). German investors can become shareholders in these private equity funds, most of which take the form of limited partnerships, and, thus, participate in the Chinese market. Furthermore, the local authorities have recently increased the incentives for foreign private equity companies to set up in China.

On the positive development of this alternative form of foreign investment, see the article �Private equity funds: Beijing provides incentives for foreign corporations� in the spring 2010 edition of pwc:china compass.

Before the tax reform, however, it was not possible to set up a Chinese private equity fund in the form of a partnership with foreign partners. China�s 2007 law on partnership enterprises explicitly limited participation in Chinese partnerships to Chinese partners. Under the Administrative Measures for Foreign Corporations and Individuals to Establish Partnership in China (hereafter referred to as the Measures), which came into force on March 1st, China now permits foreign companies and private individuals to set up FIPs. Foreign investors can set up a new FIP together with another foreign investor, or acquire a stake in an existing FIP. Foreign investors are also permitted to set up a joint FIP with Chinese companies or private individuals. This gives foreign investors the chance to invest in China, together with a regional partner who is familiar with the special nature of the Chinese market and has the right contacts among government offices and Chinese investors.



In case the planned activities of the FIP are subject to approval from the relevant regulatory bodies, such permission needs to be applied for first. In addition, a business licence must be issued by the local State Administration for Industry and Commerce before the FIP may commence its business. However a permit from the Chinese Ministry of Commerce is not generally required. The new rules are a further step to open up the Chinese market to foreign investors. These investors may now have the possibility to set up a private equity fund in China in the common international form (as partnerships). However, there are a number of specific issues that remain to be clarified. For instance, the Measures envisage that FIPs which mainly concern investment transactions, as is usually the case in private equity funds, will be subject to further (as yet unspecified) regulations. In practice, a private equity fund has already been set up as a FIP with Chinese and foreign shareholders. It remains to be seen whether FIPs will become the investment vehicle of choice for foreign private equity investors in China. Tax issues for German investors The taxation of FIPs in China is not yet finally regulated. According to the general tax principles for Chinese partnerships, the partnerships themselves are not subject to taxation, which remains a matter for shareholders. However, it is still unclear whether and to what extent foreign shareholders in FIPs will be subject to tax in China. German investors who hold partnership interest in FIPs should nevertheless comply with the tax regulations that apply generally in Germany in case of participations in foreign partnerships. The section below deals with the most important requirements. These are based on the assumption that the foreign private equity fund is comparable with a German partnership and is not subject to the German Investment Tax Act (Investmentsteuergesetz , or InvStG). Duty of cooperation and increased duty of cooperation in case of foreign tax matters German taxpayers need to support the tax authorities in determining the relevant facts for taxation. They have an increased duty to support the fact finding where cross-border matters are involved (as will usually be the case when participating in foreign private equity companies). If taxpayers fail to meet their increased duty to comply � for example, by not exhausting all legal and practical opportunities to determine the facts relevant for taxation � the tax authorities may estimate the basis for the tax assessment. Obtaining all the information required is normally very time consuming, and is often hardly possible in practice because of the complex multinational structures involved.

Against this background, it is recommended that German investors incorporate a clause in the side letter that obliges the private equity fund to file all tax returns which are required under German law with the relevant tax office or to provide the German investor with the information and supporting documents required for the preparation of such tax returns. Notification of participations in a foreign private equity funds Investors subject to unlimited tax liability in Germany must notify their local tax office when they acquire, dispose of or amend shares in a foreign partnership (known as a reportable event). The notification needs to be made using the appropriate form within one month after the reportable event. Disregard may result in penalty payments. Separate and uniform determination of profits If more than one of the partners in a foreign private equity fund is subject to tax in Germany these partners need to file a tax declaration � more precisely, a uniform and separate determination of profits (Feststellungserklärung), as prescribed under sections 179 and 180(1)(2)(a) of the German General Fiscal Code (Abgabenordnung, or AO) � with the tax office in the region where the partners with the highest total partnership interest reside. In principle, the declaration must be submitted within five months after the end of the calendar year in which the tax liability arose. If the declaration is not filed by this deadline, then the tax authorities may impose a penalty for late filing, or may estimate the basis for the tax assessment. Interest may be charged on deviating tax assessments. Declaration of imputed income amounts in accordance with the German CFC Rules In cases where foreign companies within the fund structure are subject to the German Controlled Foreign Corporations (CFC) regime under the Foreign Tax Act (Aussensteuergesetz, or AStG), there are further reporting requirements for German resident taxpayers. In most cases a wide range of information is required to check whether the CFC Rules are applicable and to identify the imputed income amounts. In practice, this will usually be time-consuming. Applications for return of capital Alongside the requirements referred to above, where there are foreign corporations within the fund structure, the investor should also bear in mind that it is possible to file an application to determine payments under section 27(8) (return of capital) of the German Corporate Income Tax Act (Körperschaftsteuergesetz, or KStG), to ensure that the capital repayments remain tax-neutral. There are conflicting views as to whether this procedure also applies to capital repayments by corporations from third countries (outside the EU). In our experience, the German Federal Central Tax Office does not accept applications for third countries in practice.



Conclusion In principle, the new administration provisions in China should enable foreign investors to set up a private equity fund in the form of a FIP in China. However FIPs, which are mainly concerned with investment transactions, will be subject to separate and as yet unspecified detailed provisions. The taxation of Chinese partnerships and their foreign partners has also not yet been clarified. German investors who hold partnership interest in FIPs should comply with the tax requirements that apply generally in Germany to shares being held in foreign partnerships. Detailed provisions that govern the assignment of reporting duties and obtaining information should be included in the side letter between the German investor and the fund. It remains to be seen whether FIPs will become the investment vehicle of choice for foreign investors making private equity investments in China. If you have any questions regarding the taxation of Chinese or other private equity funds (partnership enterprises), please call or e-mail one of the contacts below.




Economic spotlight on Asia


Sino-Japanese trade relations and their significance for Germany China is set to replace Japan as the world’s second largest economy after the US. At the same time, in 2009 China became the largest export market for Japanese products for the first time, which will further strengthen Sino-Japanese trade relations. This will also have an impact on German companies. That’s reason enough to take a close look at Japan, which has long been a key factor affecting trade in Asia. Japan: the “Germany” of East Asia People who have not experienced Asia directly often fail to distinguish between the different countries that make up the region. Assuming that all “Asian” countries are the same is clearly as big a mistake as lumping all European countries together. A particular distinction is to be drawn between Japan and China, two countries that could not be more different and whose relationship is still to some extent dogged by their history of conflict. But the differences also become clear if we compare the economies of the “big players” in the Far East. Geographically, China and Japan are only separated by a narrow strip of the East China Sea, a fact which even today gives rise to disputes over the sovereignty of a few small islands there. This proximity has led to each country impacting on the other through the centuries, as demonstrated by the fact that one of Japan’s three scripts (kanji) is based on Chinese characters. Economically, however, trends have been in quite the other direction. The overwhelming success of China’s market economy in recent times did not start until the mid-70s when the country was opened up under Deng Xiaoping. According to the International Monetary Fund’s current estimates, this success story will continue throughout 2010, when China’s growth will again be in double digits. By contrast, the Japanese economy, which lay in tatters after the end of the Second World War, experienced its first boom as early as the 60s. This boom was based in part on factors that have remained characteristic of Japan’s development processes and products up to the present day. One of these factors is encapsulated in the Japanese word kaizen, under which foreign turnkey technologies are not only adopted but subjected to a continuous optimization process involving constant analysis of manufacturing processes. This led to Japan making rapid progress on process automation, which by the 80s had earned the country its reputation for being a favourable location for cutting-edge technology. However, real estate and share market speculation during this boom period led to a bubble that burst in the early 90s, resulting in a deflationary spiral. After a somewhat “lost” decade, Japan’s economic growth entered positive territory in 2003, due at least in part to the impetus the boom in China was giving to the (East) Asia region as a whole.

This article explains … ● the differences between the Japanese and Chinese economies, ● why Japan and China continue to forge ever closer relations

despite all their reservations about each other and ● why the World Financial Center in Shanghai has a square – not a

round – opening at its top.

But unlike China, India or most South Asian economies in the Association of Southeast Asian Nations (ASEAN; see information box), Japan is not an emerging economy. It is an established industrialised nation that faces economic challenges that are more comparable to those of Germany. For example, growth forecasts for 2010/2011 range from 1% to 2%, roughly equivalent to expectations across the euro zone (China, by contrast, is forecast to grow by just under 10%, India by 8% to 9% and the ASEAN countries as a whole by 5% to 6%).

ASEAN The Association of Southeast Asian Nations (ASEAN) is an organisation of ten countries from South East Asia. Its headquarters are in Jakarta in Indonesia. Originally founded to promote trade, political and social cooperation, ASEAN now covers issues of security, culture and environmental protection.

Sino-Japanese trade relations The current trade relationship between Japan and China was originally based on the concept of a cheap manufacturing location: the low wage economy and short logistics routes offered an attractive alternative to increasingly expensive production in Japan. This has developed into close economic ties across a range of sectors. In 2009 China was the main destination for Japanese exports ahead of the US and Europe with 18.9% of the market. During the same period, 22.2% of Japanese imports came from China. This means that Japan imports and exports around twice as much from and to the Middle Kingdom as Germany does. China (including Hong Kong) accounted for 11.4% of direct foreign investment by Japanese companies in 2009, ranking third behind the Cayman Islands and the US. Total investment by Japanese companies in China was almost four times as much as that of German companies (disregarding financial institutions). According to a large-scale survey by the Japanese External Trade Organization in December 2009, 74.9% of the Japanese companies surveyed were actively investing in China. For 2009, 60.6% of the companies were planning to expand or enter the Chinese market for the first time. There is also a significant rise in Chinese direct investment in Japan: the value of business combinations and mergers in 2009 was ¥28.5 billion (roughly €260 million), which represents a fourfold increase over the previous year.




Although these forecasts suggest that the future belongs to the emerging economies, one may not forget that interdependency is a key factor in the economic development of the region as a whole. Certainly, during the latest global economic crisis China � not least as a result of the measures taken by Beijing to kick-start the economy (the stimulus programme) and relatively stable domestic demand � acted as an engine for the global economy. However, China still depends heavily on importing innovative technologies from other countries to meet the new challenges it faces on protecting environmental and natural resources, infrastructure and sustainability as a result of its rapid growth. Japan, as well as Europe and the USA, plays an important role in this. More than 50% of Japan�s foreign trade goes to the Asia region, and the trend is upwards. Or, to put it in the words of the former head of the important Japanese foreign trade association, the Nippon Keidanren: �the crisis shifted global growth from the West to the East�. Japan benefits from this trend in two respects. On the one hand its geographical proximity to these markets of the future offers logistical advantages. On the other hand, for all the differences and discrepancies between the countries, there is at least a degree of pan-Asiatic solidarity. Despite some continuing reservations, commercial interests continue to offset historic resentments left over from the difficult Sino-Japanese past. This is not only evident in the trade figures; it has also left traces on the Shanghai skyline. For example, the Shanghai World Financial Center � currently China�s tallest building � is backed by a Japanese investor, the Mori Group. And the Takashimaya department store chain is opening an eight-storey temple to consumerism in a prominent city location in 2010. But this also extends to day-to-day city life in Huangpu, with restaurants offering sushi or teppanyaki (Japanese dishes prepared on steel dishes directly at the table). It is now impossible to imagine the city without them, or without the famous Japanese food retail brands that shoppers love to pop in their trolleys � and not just the many Japanese shoppers (in 2008 there were around 33,500 Japanese people in Shanghai, making them the largest group of official foreign residents; Germans represent less than 5% with 7,300 people) but also the growing Chinese middle class.

Red sun on white background in Shanghai? Unthinkable! Shanghai might be very interested in Japan and Japanese investors, but when it comes to the architectural features of a landmark building that could be interpreted as national symbols of Japan, this is a step too far for many Chinese people. This is made clear by a story that became popular when the World Financial Center was being built. The story goes that a round opening was originally planned for the top of the highest skyscraper financed by the Japanese investment group MORI . There were objections from many people that at sunset, this might be interpreted as a reference to the Japanese flag, which for historical reasons, many Chinese people have � to put it mildly � mixed feelings about. According to the legend, this is why the round opening was replaced by a square one. People differ as to whether or not the story is true. But resentment clearly continues to be nursed by many.

At the same time, Japan is becoming a favourite destination with Chinese tourists. According to figures released by the Japan National Tourism Organization, in 2009 there were 1,006 million tourists from mainland China, making them the third largest group, just behind visitors from South Korea (1.587 million) and Taiwan (who are in a wider sense also Chinese, 1.024 million). Trips to the Land of the Rising Sun are also a very popular way of acquiring electronic and electrical products (rice cookers in particular) as well as high-end luxury goods and cosmetics. Japan as rival to Germany As mentioned above, Japan�s modern economy developed from more or less the same starting point as Germany�s did, making them rivals in the Far East region with its dynamic growth. If Japan�s competitive advantages, based on its geographical, historical and cultural proximity can be offset by the popularity of the Made in Germany brand is at question. In order to strengthen its presence in the growing Asia region further, Japan is busy concluding bilateral and multilateral free trade agreements. ASEAN has an important role in this. At its 15th summit meeting in 2009, members agreed to create a common economic space modelled after the European Union. Both China and Japan have concluded free trade agreements with the ASEAN bloc. Both countries are looking to gain significant advantages, in particular from the agreement contained in the treaties to abolish major trade barriers within ten years (and above all, to get rid of the 90% tariffs on traded goods). The parties are also looking for further improvements in trade relations from the so-called ASEAN+6 talks. ASEAN has invited China, India, Japan, South Korea, Australia and New Zealand to attend these talks, where options for an expanded economic area are to be discussed. Although many doubt whether the ASEAN+6 talks will be held in the near future, this is at least evidence of a trend that is likely to mean increased competition for German companies in the region. On the other hand, companies may be able to offset this competitive advantage, at least in part, by focusing strategically on the region, since any trade concessions will also apply to Japanese subsidiaries of multinational companies. Meanwhile, in the high-tech sector, it is no longer just foreign companies that are competing for market share in China. Local competition is heating up, not just in the automotive industry � which is leading the way � but also in the infrastructure sector (particularly power plant construction and railways). Even in the past, Chinese customers were adept at exploiting competition between foreign providers to negotiate concessions, particularly over technology transfer. One example involving railway technology shows how far this can go. China took the knowledge it gained from the competition between the German ICE technology, the Japanese Shinkansen system and others to develop its own Hexie (�harmony�) high-speed trains. These are



initially intended for deployment within China, but there are already plans for export, especially within Asia. Conclusion Despite its geographical proximity to China and other Asian emerging economies, Japan�s economy is entirely different from theirs and in comparison closer to that of Germany. As a highly developed industrialised nation, Japan is competing with Germany for market share in China and other emerging Asian economies. In addition to its logistical, historical and cultural advantages, Japan is expecting to gain comparative advantage from signing free trade agreements (with ASEAN, ASEAN+6 and others). Along with short-term pressure on cost and profit margins, competition with Japan and comparable industrialised nations may lead to an increase in technology transfer in the medium term and consequently to the emergence of local Chinese competitors. On the one hand, this is likely to make it tougher to gain or retain market share. On the other hand, there are opportunities for companies that adopt a targeted strategy in these countries to benefit from the competitive advantages, as well. If you have any questions or would like advice, please call or e-mail one of the contacts below.

Contacts [email protected] Tel: +81 3 5251-2225 [email protected] Tel: +49 69 9585-2881 [email protected] Tel: +49 89 5790-6442

Do you know how symbolic natural phenomena are in China?

The sun represents the east, masculinity, birth and spring. The rain symbolises fertility and procreation. Snow is the symbol of old age, wind of rumour and jealousy. The clouds are a sign of happiness and peace and of the union of Yin and Yang. You see, with Chinese symbols you can pretty much enjoy every kind of weather.


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Japan 2010: Important changes to tax legislation Like other countries, Japan regularly reviews its tax legislation, adjusting it to reflect practice or closing loopholes. This routine revision takes place on an annual basis in Japan and is referred to as tax reform. Although it does not generally lead to fundamental systemic changes on the scale of the comprehensive reform of corporate income tax in China in 2008, these tax rules � which are perhaps better referred to as tax amendment laws � are also highly significant for foreign investors. The 2010 tax reform was announced on March 31st and the vast majority of the new rules come into force on October 1st. This article summarises some of the key changes. Group taxation The 2010 tax reform introduced a new group taxation regime for Japanese companies that are wholly owned by a group of companies. This applies whether the group is Japanese-owned or foreign-owned. The rules are also applicable to individuals holding assets above a certain value and to Japanese group companies with a foreign holding company. Under the first group taxation regime to be introduced, it is now compulsory to defer built-in gains and losses from transfers between companies within the same group. Prior to the 2010 tax reform, built-in gains or losses were generally disclosed and tax was paid on them in the year in which they were transferred (unless they were part of a qualified and therefore non-taxable corporate reorganisation). From now on, recognition of built-in gains or losses from the intra-group transfer of assets for tax purposes is deferred until these assets are disposed of or transferred to a non-group company. Once the 2010 tax reform comes into force, the acquiring entity will no longer be required to declare and pay taxes on the built-in gains and losses resulting from transfers in the case of non-qualified mergers. Therefore, the taxpayer no longer has a choice; the acquiring entity can no longer increase write-offs by declaring these built-in gains and losses. This group taxation regime should not be confused with the Japanese version of tax consolidation (comparable to the German fiscal unity referred to as Organschaft). As in Germany and unlike China, Japan permits tax consolidation at the corporate level under certain conditions. Whereas the taxpayer elects to exercise this option, group taxation is applied automatically if the conditions are met.

This article explains � ● what the recent introduction of a new group tax regime will mean, ● how the rules on transfer pricing documentation are changing and ● why investors in Japan should get to grips with the new rules as

early as possible.

Donations between companies within the same tax group A donation is defined as the difference between the fair market value and the price actually paid for an asset or service. A donation may arise where the price is greater or less than the fair market value. Prior to the 2010 tax reform, a donation between related companies was subject to the following tax treatment: ●

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Donor: the donation is treated as a non-deductible operating expense. Donee: the donation is treated as taxable income.

Donations within a consolidated tax group were exempt. In future there will be no tax implications where a donation occurs between group companies (except for group companies owned by an individual). This means that the donation is treated as a non-deductible operating expense at the donor company level and as non-taxable operating revenue at the donee level. This amendment will also apply to members of a consolidated tax group. Special tax measures for small- and medium-sized enterprises (SMEs) Under Japan�s tax system, companies with paid-in capital of ¥100m or less (roughly �892,000) qualify as small- and medium-sized enterprises (SMEs) and are eligible for certain benefits including a reduced corporate income tax rate of 18% on taxable income up to ¥8 million instead of the usual rate of 30% and the option of carrying back tax losses. Eligibility for treatment as an SME was determined on a stand-alone company basis. This has now changed. In future group companies will be subject to a more intensive scrutiny of their eligibility. Companies that meet the requirement for paid-in capital will no longer qualify as an SME if the parent company has paid-in capital of ¥500m yen or more (�4,495,500). In the authors� view, this implies that the tax authorities will include the capital of all the group companies when assessing eligibility, including the foreign holding company. However, it is also possible that they may decide that only the direct parent company�s capital should be considered. Dear Ralph Dreher, do you agree with the way we have formulated these points? If so, great. If not, no problem. Please just alter them. Fine with me, thanks! These new rules have been in force since April 1st.



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Transfer pricing documentation In contrast to emerging economies such as China, Japan has extensive experience in tax audits and tax treatment of transfer pricing between related companies. This includes many years with practical experience of implementing external transfer pricing audits. Unlike Germany and China, however, taxpayers to whom transfer pricing applies are under no formal obligation in Japan to document the transactions or methods used to determine transfer prices. In particular there are no special penalties for incomplete or missing documentation. In Japan, documentation is more often part of a strategy for ensuring that a company is well prepared for a tax authority audit. Under the 2010 law on tax reform, documentation is required in two areas in the event of a tax audit. Where the taxpaying body is unable during the audit to provide documentary evidence of its transactions with foreign related companies, or of the methods it uses to determine transfer pricing levels, the auditors are entitled to take more liberties in the way they set prices. To do this they can make use of data that is not publicly available about other market participants in comparable business sectors. However these sources, also known as secret comparables, may have a disadvantageous impact on the taxpayer because of the lack of transparency and of any monitoring to ensure that they are in fact comparable. The Japanese tax authorities never specified precisely what would constitute adequate documentary evidence in these two areas. For this reason, taxpayers were always exposed to legal uncertainties during transfer pricing audits, not knowing whether the authorities would take recourse to these secret comparables. Under the 2010 tax reform, these guidelines were extended and a detailed list of documentation requirements for both areas was added. This includes (but is not limited to) the usual information, such as

a summary of the allocation of functions and risks between the taxpayer and related companies, information on transfer pricing policy in terms of amounts paid and received and details of the price negotiations between the taxpayer and related companies, comments on how the transfer pricing method was selected and other documents compiled when identifying fair market value and a justification for adjustments made to the transfer pricing calculation basis and the methodology used for the adjustment.

Please note that this list is not exhaustive! This new list also includes in particular information on the profit and loss situation of the Japanese and foreign companies relating to specific cross-border transactions. Since this is sensitive information that the Japanese company will often not be authorised to disclose, it remains to be seen how the Japanese authorities will proceed in cases where this information is not provided.

In the past this information had to be produced �without delay,� and even under the reform no specific deadline has been imposed. In practice, the tax authorities frequently viewed a deadline of one month as sufficient. Where special circumstances apply, tighter deadlines are also a possibility. As you will know, a taxpaying body in Japan� unlike Germany � is not directly liable if it fails to provide complete documentation or misses a deadline. This is different to China, for example, where the taxpaying body may face a fine 5% above the usual rate if it fails to meet documentation requirements by the deadline. However, tax adjustments that are based on corrections to transfer prices are subject to Japan�s general regime for interest penalties and fines. Depending on the individual case, this may involve a levy of up to 15% on the taxes due to be paid. However, if the Japanese tax authorities increasingly take up the option of making adjustments using secret comparables, this will increase the risk that companies will be disadvantaged as a result of the authorities arbitrarily selecting comparable companies. To avoid this situation, companies are advised to ensure preliminary documentation is in place and to work in cooperation with the public auditors. Please note, however, that some of the information specified under the tax reform will not be available to a Japanese subsidiary. For example, it would be difficult for many multinational companies with a global transfer pricing policy to say precisely how much room there is for negotiation for the Japanese company, let alone how any such negotiations would be documented. Investors would therefore be well advised to get to grips with the requirements on the list as quickly as possible. The experts from PricewaterhouseCoopers would be delighted to advise you on this. If you have any questions or would like to know further details, please call or e-mail one of the contacts below.




Portrait

Ralph Dreher: from Shanghai to Tokyo Ralph Dreher joined PricewaterhouseCoopers (PwC) in 2001 as a German attorney-at-law (Rechtsanwalt) in the tax department of the Cologne office. To prepare for his work abroad, he joined the Asia Tax Group in Düsseldorf in 2005, after passing the exam as a certified tax advisor (Steuerberater). From February 2006 he served as senior manager of the German Business Group in Shanghai. There, he was the point person for German-speaking clients, and in this context, worked closely with the German chamber of commerce where for the last two years he was the chairman of the controlling workshop.


Two highlights of his time in China were the 2008 Olympics in Beijing and this year�s Expo in Shanghai. Of all the issues he worked on, he says, the most challenging were the sometimes downright explosive tax changes made during what by German tax standards has been a relatively short stay in China. Ralph Dreher still remembers well one of his first clients, just as he began working on the German Business Group in Shanghai in 2006. It was an elderly gentleman from the south, a seasoned businessman and doer who, with entrepreneurial pride, introduced several of his products out of a roll container. Unfortunately, the charming gentleman had done almost everything wrong in the founding of his Chinese subsidiary: blind trust in a flighty Chinese friend whom he appointed managing director, lack of control and the failure to translate such key documents as the business license. The first consultation was sobering, but necessary for a consolidated new beginning. Even though such cases are thankfully rare, they nevertheless keep coming. But as Ralph Dreher�s experience has shown, more and more investors are doing their homework, and have realised that practices in China are quite different than at home and pose different risks. But even so, tax conditions can change quite quickly. The major reform of corporate tax law, with all its challenges, is one example. The regulatory upheaval was accompanied by significantly improved training of tax officials (especially at the level of the State Administration of Taxation and in the area of transfer pricing). While this will certainly raise new tax challenges for companies, it may increase the level of transparency in the application of existing laws and regulations. During the financial crisis, Ralph Dreher says, China has demonstrated its role as the engine of the world economy. He believes China will maintain this role for the foreseeable future. After four and a half years in Shanghai, Ralph Dreher has recently headed to new shores � across the East China Sea to Tokyo, where he will provide German clients of PwC Japan with tax advice. Although a flight from Shanghai to Tokyo takes just over

two and a half hours, Japan as an investment destination is subject to completely different conditions and poses new challenges. Ralph Dreher is excited about his new role in the German Business Group and will support you with any questions you have about the Japanese tax system. Ralph Dreher�s successor in Shanghai will be Ulrich Reuter, whom you already know as an author of pwc:china compass. Ulrich Reuter was a tax advisor in the Düsseldorf office, speaks Chinese and has been active in the China Business Group since 2005. Learn more about Ulrich Reuter here in the next edition of your �news for experts�.

Personal details Ralph Dreher is a German attorney-at-law and tax advisor. He has been working for PwC since 2001 (Cologne, Düsseldorf, Shanghai and since June 1st, Tokyo). In his spare time, he participates in endurance sports and is working on establishing a �Tatort�-viewing club in Tokyo, as he had in Shanghai.

Do you know which people to steer clear of, according to an old Chinese proverb?

Avoid those whose bellies don�t shake when they laugh.


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Publications

China: the third largest media market

Crash or boom? � Analysis of the Chinese real estate market

Industrial nations are seeing only a moderate economic recovery, yet figures in the media industry are clearly on the rise. After a decrease of 3% to some $1.32 trillion in 2009, worldwide revenue in the industry is expected to increase by 2.6% to nearly $1.36 trillion this year. The sustained strong economic growth of emerging markets is also making itself felt in the media industry: with expected industry sales of almost $95 billion, China is set to become the third-largest media market in 2011, behind the US ($446 billion) and Japan ($171 billion), relegating Germany ($92 billion) to fourth place. That is the main finding of the �Global Entertainment and Media Outlook: 2010�2014� by PricewaterhouseCoopers, and is one of many interesting results from the study. The paper examines key trends in the global entertainment and media industry and develops revenue forecasts for 13 subsectors in 48 countries for the next five years. Some of the segments analysed include internet (advertising revenue and access charges), television (including advertising and fees), music, movies, video games and radio as well as the traditional and predominantly non-electronic media (newspapers, trade press and popular magazines) and outdoor advertising. The German edition of the �Outlook� comes out in mid-October and will be presented at Mediadays in Munich (October 13th-15th).

Global Entertainment and Media Outlook: 2010�2014 Published by PricewaterhouseCoopers USA For more information and to order www.pwc.com/outlook Contacts [email protected] Tel: +49 211 981-5848 [email protected] Tel: + 49 211 981-1317

Although the Chinese real estate market is increasingly oriented towards private-market structures, it is still far from a free market by Western standards. What economic, regulatory and material conditions factor into it? How do they affect valuation, and how can they be sufficiently considered? What future developments can we expect? Will it come to a screeching halt, or will the market continue to boom? These are the questions that the author answers in his dissertation. The empirical basis for his analysis is provided here by a survey of property experts in China, upon which the author bases recommendations. The work combines a theoretical perspective on valuation with a practical assessment of the Chinese real estate market. The author, Florian Hackelberg, is an authorised officer in Valuation & Strategy at PricewaterhouseCoopers AG Wirtschafts-prüfungsgesellschaft. He advises national and international clients in real estate questions, and spent several years working in China.

Immobilienbewertung in China � unter besonderer Berücksichtigung der wirtschaftlichen, regulatorischen und materiellen Einflussfaktoren (in German only) Published by Immobilien Zeitung Verlagsgesellschaft. ISBN 978-3-940219-11-4 Contact [email protected] Tel: +49 30 2636-1118


http://www.pwc.com/outlook




PwC China Business Group


PwC China Business Group

Shanghai

WP StB Jens-Peter Otto Leader China Business Group Partner Assurance Tel: +86 21 2323-3350 [email protected]

Marc Wintermantel Partner Advisory Tel: +86 21 2323-3993 marc.m.wintermantel @cn.pwc.com

Ulrich Reuter Manager Tax Tel: +86 21 2323-2723 [email protected]

Bertram C. Schaich Assistant Manager Advisory Tel: +86 21 2323-2632 [email protected]

Beijing

Hong Kong Singapore

Dr Roland Spahr Associate Director Advisory Tel: +86 10 6533-7124 [email protected]

Lea Gebhardt Manager Tax Tel: +86 10 6533-3203 [email protected]

Björn Vogt Senior Manager Tel: +852 2289-1907 [email protected]

Sönke Langhoff Senior Manager Tel: +65 6236-4483 [email protected]

Germany

Nikolaus Thoens Partner Tax Tel: +49 211 981-7345 [email protected]

Dr Volker Fitzner Partner Advisory Tel: +49 69 9585-5602 [email protected]

Jun Shi Operations Manager Tel: +49 40 6378-1204 [email protected]

Katja Banik Managing editor Tel: +49 40 6378-1337 [email protected]













Imprint

Publisher PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft New-York-Ring 13 22297 Hamburg www.pwc.de Managing editor Katja Banik [email protected] Phone: +49 40 6378-1337 www.pwc.de/de/china Subscriptions and address changes [email protected] Fax: +49 69 9585-902010 Translation transparent Language Solutions Berlin Typesetting Nina Irmer, Digitale Gestaltung & Medienproduktion Frankfurt am Main The articles herein are intended as information for our clients. For resolution of relevant issues, please refer to the sources provided or to the China Business Group in your local PricewaterhouseCoopers office. No portion of this publication may be reproduced or duplicated without the express prior written consent of the publisher. The opinions expressed herein reflect those of the individual authors. © August 2010 PricewaterhouseCoopers refers to the German firm PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft and the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.


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pwc: china compass€¦ · pwc: china compass News for experts pwc Hot topic The Chinese real estate market: features, risks and opportunities . Private equity funds Update on conditions