By Ms Flora Luo and Dr Scott Heidecke.
On July 25, 2023, China’s State Council promulgated Announcement  Number 11, in which the members describe their collective opinions as to how China can optimize the environment to attract more foreign investment. It is generally thought that inbound direct foreign investment has been decreasing in recent years, but the Council theorizes that through further opening up to the outside world, better coordination of domestic and international relationships, and the high-quality development of a market-driven, law-based international business environment, inbound foreign investment will grow. Several key strategies are discussed in the Announcement.
Improvement in the Quality of Foreign Investment Utilization
A first area of focus is improvement in the quality of foreign investment utilization. Foreign-invested Research & Development (R&D) centres and scientific research activities shall continue to be encouraged and supported through tax incentives and certain simplified regulatory procedures. Foreign-invested biomedical companies shall be encouraged to carry out clinical trials of cell and gene therapy drugs that have been marketed overseas. Foreign investment in the fields of advanced manufacturing, modern services, and the digital economy, as well as vocational education and technical training shall also be strongly promoted.
Within the modern services sector, foreign investors can expect further opening of access to the value-added telecommunications market, such as domestic internet VPN (proportion of foreign investment not exceeding 50%), information service businesses (excluding online publishing services), and internet service provision for users. Expansion of access in all these areas should be reflected in future releases of the catalogue for foreign investment “negative list.”
Foreign-invested Companies can participate in Government Procurement and the process of setting Government Standards
Secondly, the State Council intends to guarantee that foreign-invested companies in China can participate in government procurement and the process of setting government standards for their industries. The intent here is to support foreign-invested companies in innovation, research, and development of globally leading products in China. The State Council also stresses here that foreign-invested companies, and their products or services shall not be excluded or discriminated against, nor should authorities impose conditions in addition to those governing domestic enterprises with respect to entitlement to favourable policies. Relevant laws and regulations reflecting these commitments will be updated or rolled out this year and next.
Strengthening of Protection for Foreign Investors’ Rights and Interests
The third focus area in the Announcement stresses a continued strengthening of protection for foreign investors’ rights and interests. Not only will the government improve its mechanisms for handling international investment disputes, but there is also intent to “crack down” on malicious speculation activities that infringe upon the legitimate rights and interests of foreign investors. Furthermore, the State Council plans to strengthen enforcement of infringements on foreign investors’ intellectual property rights. And with respect to economic and trade policy development, authorities shall provide higher levels of transparency and predictability than is currently practiced.
Emphasis on Facilitating of Foreign-invested Operations within China
A fourth State Council emphasis relates to facilitation of foreign-invested operations within China. For example, it is recognized that optimization of entry-exit policies and residence facilitation for foreign senior executives and technical personnel and their families is necessary. Permanent residence application processes for foreign senior executives and technical personnel of qualified foreign-invested enterprises shall likely be streamlined as well.
In addition, it is recognized that a convenient mechanism for the security of cross-border data flow be implemented. Lastly in the operational sphere, authorities shall support foreign-invested projects at all levels to overcome difficulties or problems encountered in contract negotiations/signing, construction, and production related to such projects. And it is thought that efforts should be made to properly issue certificates of origin under free trade agreements and provide convenience for foreign-invested enterprises to enjoy tariff relief policies.
Provision of Tax and other Fiscal Support for Foreign-Invested Companies
The fifth area of focus relates to the provision of tax and other fiscal support for foreign-invested companies. Authorities wish to encourage foreign-invested enterprises to reinvest profits within the territory of China by not levying withholding tax on the reinvestment, as is currently done. The council emphasizes the importance of helping foreign individuals enjoy subsidies and allowances for housing, language training, children’s’ education, and other tax exemptions or incentives. Authorities must also help foreign-funded R&D centres enjoy import tax policies supporting scientific and technological innovations and VAT refund policies for purchasing domestically manufactured equipment.
Indeed, a decade ago, direct foreign investment into China was increasing year by year at an astonishing rate. Foreign-invested companies of all sizes rushed into the country hoping to benefit from the huge market that was – and still is – developing there, not to mention the cheaper labour and infrastructure costs of doing business. Even though tax incentives for most business types were on the decrease at that time, direct foreign investment boomed, with the services sector growing faster than any other.
While both the COVID crisis and somewhat deteriorating relations between China and the West in ensuing years have negatively impacted inbound foreign direct investment, China still has much to offer for foreign investors, not the least of which is the vast marketplace. It appears that China is not only willing to again offer the tax incentives of earlier years for a larger variety of industries, but the country’s leaders have clear paths forward to ensure that foreign investment in the country will continue to bring benefits to both the country and those who invest in it.
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Ms Flora Luo
Director, Foreign Investment, China Tax and Legal Advisory
CLA Global TS (Shanghai) Co., Ltd
Dr Scott Heidecke
CLA Global TS (Shanghai) Co., Ltd