China Updates – August 2024

China Beefs Up Sci-Tech Industry with Preferential Policies

Four key government bodies in China, namely the Ministries of Finance, Science and Technology, Industry and Information Technology, and the National Financial Regulatory Administration, have jointly issued a circular outlining the implementation of a special guarantee scheme aimed at supporting scientific and technological innovation. 

Built upon the National Financing Guarantee Fund, the new initiative seeks to incentivise banks and state-backed financing institutions at all levels to boost support for tech-driven enterprises. In addition, the scheme aims to channel more financial resources towards cultivating technological advancements. This will, in turn, expedite the development of advanced productive capacities, thereby promoting high-quality economic growth.

China launched the National Financing Guarantee Fund in 2018 to address financing challenges for SMEs in the agricultural sector. Since its inception, the fund’s re-guarantee operations have reached the tune of RMB 4.73 trillion, benefitting around 4.2 million businesses and over 40 million employees.

The published circular outlines that SMEs meeting the basic criteria and one of the specified conditions are eligible to apply for support. The maximum financing amount that can be guaranteed for a single SME engaged in sci-tech innovation has been raised from RMB 10 million to RMB 30 million.

Additionally, the document details the risk-sharing ratios for various financing institutions. Risk liabilities shall be shouldered by banks and the government financing system, with each party responsible for no less than 20 per cent and no more than 80 per cent of the loan amount respectively. Provincial-level re-guarantee institutions, on the other hand, must assume at least 20 per cent of the risk. Where feasible, provincial-level guarantee and re-guarantee institutions should consider increasing their share of risk, thereby easing the burden on city and county-level institutions.

China’s Revised Company Law Comes into Force

China’s revised Company Law came into effect on 1 July 2024. Originally enacted in December 1993, the PRC Company Law has seen two major revisions over its 30-year history. The last significant update took place in October 2005. It had undergone four subsequent amendments, the most recent being in 2018.

The legal revamp introduces significant reforms, encompassing a broad range of areas, including capitalisation, corporate governance, and shareholder rights. Specifically, amendments related to shareholder rights aim to strengthen the protection of all shareholders, with an emphasis on safeguarding the interests of minority shareholders.

The most notable change that demands particular attention concerns capitalisation requirements. Shareholders of a limited liability company are required to pay up the registered capital in full within five years from the company’s incorporation date.

For companies established prior to 30 June 2024, the deadline for the amendment of their Articles of Association is 30 June 2027. In addition, their full capital contribution must be made no later than 30 June 2032. Companies that have opted for a large subscribed capital amount can apply for a capital reduction as part of the three-year grandfathering arrangement. This can be done 20 days following the posting of an announcement via the National Enterprise Credit Information Publicity System, so long as no objections are raised by creditors. In light of the new rules, it is imperative for shareholders seeking to establish a foreign-invested enterprise to carefully evaluate the capital contribution amount and schedule.

For more information regarding the registered capital management system under the new Company Law, read our article here.

Hong Kong Secures ASEAN Support for RCEP Membership

From 28 July to 2 August 2024, the Hong Kong Special Administrative Region Government (“HKSAR Government”) led a high-ranking delegation to Laos, Cambodia, and Vietnam. The visit aimed to bolster economic ties, consolidate diplomatic relations, and explore new avenues for cooperation as well as further cultural exchanges. The ASEAN tour yielded very productive and encouraging outcomes, significantly enhancing Hong Kong’s strategic partnership with its ASEAN counterparts.

During the six-day tour, Hong Kong signed a slew of agreements and memoranda of understanding: 12 with Laos, 13 with Cambodia, and 30 with Vietnam. These agreements cover a wide spectrum of areas, including trade, investment, and tourism promotion as well as customs cooperation, educational mobility, and cultural exchanges. 

Moreover, the trip reinforced the support from the governments of Laos, Cambodia, and Vietnam for Hong Kong’s early accession to the Regional Comprehensive Economic Partnership (“RCEP”).

RCEP is the biggest regional free trade pact. Its signatories represent nearly one-third of the world’s population and contribute to around 30 per cent of global gross domestic product. The free trade zone under the agreement encompasses Australia, Brunei, Cambodia, China, Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand, and Vietnam.

Support from the ASEAN states underscores Hong Kong’s unique role as a “super-connector” and “super value-adder”, linking the rest of Asia and beyond with the abundant opportunities within Hong Kong itself as well as in the Chinese market across the boundary. Recently, a rising number of Chinese and multinational companies have been leveraging Hong Kong’s prized position as an international financial centre to expand to ASEAN, and as a conduit for their regional investments.

Hong Kong To Resume Hotel Accommodation Tax

Recently, the HKSAR Government has served a notice to the Legislative Council, proposing a resolution to resume the levying of the hotel accommodation tax (“HAT”), effective from 1 January 2025.

Pursuant to the Hotel Accommodation Tax Ordinance, the HAT applies to hotel and guesthouse accommodation and is charged on the fees paid by guests to the proprietors. In the latest Budget Speech, the Financial Secretary proposed reinstating the collection of the HAT at a rate of 3 per cent. The rate had been cut to 0 per cent on 1 July 2008.

From 1 January 2025, hotels and guesthouses must comply with the quarterly requirement to pay the HAT at a rate of 3 per cent on all accommodation fees and submit the relevant HAT return to the Inland Revenue Department (“IRD”).  Once the proposal becomes law, a quarterly HAT return shall be issued on the first working day of each quarter. Hotels and guesthouses will be obligated to pay the HAT and file the completed return within 14 days after the end of the quarter.

Based on the effective date of 1 January 2025, hotels and guesthouses must pay the HAT and submit the return for the period from 1 January 2025 to 31 March 2025 by 14 April 2025.

In light of the impending re-instatement of  the HAT, hoteliers and other hospitality providers are well advised to undertake the following preparatory steps:

–  Amending accounting and billing systems to separately itemise accommodation charges and the HAT payable; and

–  Updating websites, room-price lists, and other relevant marketing literature to include the HAT payable. Where the specified rate excludes the HAT, this should be clearly indicated.

Hong Kong Releases Further Guidance on Foreign-Sourced Income Exemption (“FSIE”) Regime

Hong Kong’s IRD has recently issued additional guidance on its FSIE regime, which became effective on 1 January 2023. The regime underwent a subsequent amendment to align with the EU’s further guidance. The scope of foreign-sourced disposal gains was extended to cover gains derived from the disposal of all types of assets including immovable and movable property. To this effect, the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Ordinance 2023 came into force on 1 January 2024.

The updates to the IRD’s guidance on the FSIE regime encompass the scope of qualifying income, the economic substance and participation requirements, as well as providing illustrative examples.

According to IRD’s clarification on its website, providing that FSIE income is used to purchase an overseas immovable or movable property, and the property in question is later sold, the resulting proceeds from the sale will still be deemed the original FSIE income.  Therefore, the audit trail of such funds must be carefully documented. Where the sales proceeds are transferred back to Hong Kong, they would be deemed as received locally and, thus, subject to profits tax. Tax exemptions conditions may, however, apply; these include the economic substance, participation, and nexus requirements.

It is important to note that, no matter how many times the sales proceeds are subsequently reinvested in acquiring other immovable or movable property, they will still be chargeable to profits tax in Hong Kong when they are eventually remitted back to the city. The amount of the original FSIE income should remain unchanged, regardless of any later acquisition or disposal of assets. Whether the gains or losses arising from the later disposal of the assets are subject to profits tax is a separate matter, which will be determined on a case-by-case basis.

Fast-Track Mainland Travel Permit Introduced for Non-Chinese Permanent Residents of Hong Kong

From 10 July 2024, permanent residents of Hong Kong and Macao Special Administrative Regions who are not Chinese citizens can apply for a five-year permit for short-term visits to the mainland, including for business, investment, leisure, tourism, and exchanges. Purposes, such as work, study, and newsgathering, are however excluded from the scope of eligibility.

Permit holders are allowed to stay on the mainland for up to 90 days per visit and benefit from expedited self-service clearance at control points after completing the requisite entry procedures, such as fingerprinting and having photographs taken.

Permanent Hong Kong residents of any nationality or occupation can apply for the permit. Applications can be made via China Travel Service in Hong Kong and Macao. Once approval has been granted, it takes 20 working days for the permit to be issued. The fee for the initial application is HKD 260, while renewals or replacements on the mainland cost RMB 230.

Prior to the introduction of the measure, the majority of non-Chinese permanent residents of Hong Kong had to apply for separate visas to visit mainland China. The processing time for a standard visa is approximately three to four days, with fees ranging from HKD 230 for a single-entry visa to HKD 690 for a multi-entry visa.

The new measure will greatly aid international talent based in Hong Kong in capitalising on the wide array of opportunities arising from the rapid progress on the mainland, especially the continuous development of the Guangdong-Hong Kong-Macao Greater Bay Area.

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