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Frequently Asked Questions

As we all know, China is a very complex market. At one stage or another, every company looking to enter the Chinese market might encounter challenges or issues that require ad hoc professional assistance. These could be, for instance, how to identify and comply with product regulations and standards, how to enter China through cross-border e-commerce, how to fulfil administrative and tax obligations, how to deal with potential scammers, how to protect the company's intellectual property rights when visiting China or negotiating with potential partners, etc. For many European SMEs, dealing with this is even more challenging considering that often they have limited resources - both financial and human.
 
Through our ask-the-expert service - which provides free technical assistance service to European SMEs - the EU SME Centre receives, on a daily basis, hundreds of questions and inquiries from European SMEs in need. For this reason, we have collected and produced a list of Frequently Asked Questions (FAQs) to help European SMEs with the most recurring issues in nine main areas:

Do you have a question about doing business in China?

As we all know, China is a very complex market. At one stage or another, every company looking to enter the Chinese market might encounter challenges or issues that require ad hoc professional assistance. These could be, for instance, how to identify and comply with product regulations and standards, how to enter China through cross-border e-commerce, how to fulfil administrative and tax obligations, how to deal with potential scammers, how to protect the company's intellectual property rights when visiting China or negotiating with potential partners, etc. For many European SMEs, dealing with this is even more challenging considering that often they have limited resources - both financial and human.
 
For this reason, we have collected and produced a list of Frequently Asked Questions (FAQs) to help European SMEs with the most recurring issues in nine main areas:
Cross-border E-Commerce
Exports
Financing 
Human Resources 
Intellectual Property Rights
Legal and disputes
Registering a company in China
Standards, certification, license 
Tax and accounting
 
Among these 9 areas you can find over 80 China specific questions related to how to enter, operate or grow within the Chinese market. 
Several of the FAQs also include useful links to related market reports or guidelines from our website, in which more in-depth information can be found, as well as links to external websites for more information.
 
View our frequently asked questions below or ask one of our in-house experts. Through our ask-the-expert service - which provides free technical assistance service to European SMEs - the EU SME Centre receives, on a daily basis, hundreds of questions and inquiries from European SMEs in need. After sending your enquiry you will receive practical and confidential advice within 7 working days. We can provide information and advice relating to business development, market access, legal issues and HR. To ask one of our experts, please click here.
 
Chose the category of business issue that you are interested in below, and the related questions to that category with appear.

Frequently Asked Questions

How to tell if an arbitration clause is valid under the Chinese law?

In order to enforce arbitration awards in China, the arbitration clause stipulated in the contract must be considered valid under Chinese Arbitration Law. Therefore, particular attention should be put when drafting arbitration clauses. According to China’s Arbitration Law (Art. 16 to 20) as well as judicial interpretations of the Supreme People’s Court, the items that are necessary for ensuring the validity of an arbitration agreement or clause are:

-  Both parties’ expression of interest to proceed with arbitration, which should be referred to explicitly;

-  Clear definition of the items for arbitration, which must be arbitrable (e.g. administrative agreements and antitrust civil disputes, etc);

-  Indication of the juridical seat of arbitration and applicable laws;

-  Written and executed by legal persons with full civil capacity.

A standard arbitration clause recommended is “Any dispute arising from or in connection with this Contract shall be submitted to [arbitration institution name] for arbitration, and shall be subject to the laws of [country where the arbitration institution is located] in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties.”

It must be stressed that, there are frequent cases involving foreign vs Chinese companies, where the Chinese party applies to Chinese courts for a declaration of invalidity of the arbitration causes – both successful and unsuccessful. In case of no express indication or agreement on the applicable law between the parties, the applicable laws will be determined by Chinese courts.

Is there a market for olive oil in China?

China is a huge consumer of vegetable oils, and its consumption levels keep growing. The top four varieties are soybean oil (almost half of the consumption), rapeseed oil, palm oil, and peanut oil, but middle- and high-end edible oils (such as olive oil) are gaining market share, especially in wealthy cities.

There is a high awareness of olive oil’s health benefits among residents in large cities like Beijing, Shanghai, Shenzhen or Guangzhou due to years of market education by olive oil companies and distributors. As a result, China has seen rapid growth of olive oil imports.

Whereas in 2010 only about 21,000 tons of olive oil were imported, the amount in 2019 exceeded 53,000 tons, for a total value of CNY 1.27 billion (around EUR 161 million). Spain is the dominant leader (over three-fourths of exports), followed by Italy; increasing competition is, however, emerging from non-EU countries such as Australia, Tunisia and Morocco.

There is a marked difference in price between regular oil, such as peanut oil, which costs about CNY 15 (EUR 1,85) per 500ml and high quality oil, such as extra virgin olive oil, which sells at between CNY 40 (around EUR 6,30) and CNY 100 (around EUR 12,40) per 500ml. Since olive oil is considered a high-end product, higher prices are accepted – consumption is limited to upper middle to high income families, though. Olive oil is used sparingly (e.g. in salads and cold dishes), but due to the fact that many Chinese families tend to rotate their edible oil intake to keep a balanced diet, targeted promotion can influence the customers’ buying decisions at the point of purchase.

A number of regulations concerning labelling, quality control and food safety apply to the import of food products to China. It is advisable to make use of a local agent to ensure compliance. Please refer to our food & beverage report, food & beverage labelling guideline, food & beverage case studies (here, here and here).

Is the “bonded import + offline pick up” model allowed in China?

“Bonded import + offline pick up” refers to a model through which certain e-commerce enterprises are allowed to open an experience store to exhibit and sell their products, usually within a customs special supervision area. Once consumers finish the whole series of online purchasing procedure, they are able to pick up the product on site or use domestic delivery services.

Previously, there used to be some experience stores outside customs special supervision areas, usually located downtown and specifically in Central Business Districts due to their vicinity to consumers. In these cases, however, the customs were experiencing difficulties in preventing relevant CBEC enterprises or platforms to use this model as a trick to evade taxes, by replacing CBEC retail imports with goods imported through general trade.

Therefore, the “bonded import + offline pick up” has now been prohibited in China.

Detailed guidelines on cross-border e-commerce have been produced by the EU SME Centre, including:

- Guidelines on Cross-border E-commerce (2019): Guideline on Cross-border E-Commerce in China (2019) 
- How to set up a cross-border Wechat shop (2018): How to Set Up a Cross-Border E-Commerce Shop in WeChat
- Guidelines on E-commerce (2017): E-commerce in China 
- Recorded webinar on Cross-border E-commerce (2020): Cross border e-commerce in China | Entering the Chinese market through the power of social networks 

How can I protect my IPR when selling on Chinese e-commerce platforms?

*This FAQ was provided by the EU IPR SME Helpdesk in China: https://www.china-iprhelpdesk.eu*

China’s specific IPR regulations related to the internet stipulate that if the IP-protected material is uploaded without the right holder’s consent, the right holder may request in writing that the internet service provider (ISP) removes the infringing work, or removes the relevant website from the ISP’s network and disables access to the copyrighted material. This kind of written warning is known as a ‘take-down notice'.

The general rule is that if the ISP removes the infringing content following a ‘take-down notice’, it will not be held liable for any further compensation. If, however, the ISP knew or should have known about the infringement, then it will be held liable jointly with the person who uploaded the infringing content. In order to avoid liability, Chinese ISPs have developed systems to aid take-down notices.

However, the prerequisite for issuing a take-down notice is that the right holder has registered his/her IPR in mainland China. Registration in your home country is not usually sufficient (although Alibaba does accept IP registered outside of China). For a successful takedown action, you will have to provide the ISP with the registration documents of your Chinese trademark, patents or copyright.

The EU IPR SME Helpdesk has formulated a guide which includes tips on how to spot infringing content online, including a specific case study on Alibaba and Taobao: https://www.china-iprhelpdesk.eu/sites/all/docs/publications/China_IPR_Guide_on_How_to_Remove_Counterfeit_Goods_from_E-Commerce_Sites_in_China.pdf.

Can foreign companies get listed on China’s capital markets?

The short, general answer is no.

It is true that, in recent years, access to China’s capital markets has been encouraged or facilitated for firms from certain countries, for instance through the China-Europe International Exchange AG – CEINEX, but only for D-share markets; or through stock connects such as the Shanghai-London Stock Connect, or the planned China-Deutsche Stock Connect.

However, China-based European enterprises still face significant restrictions. For instance, only joint ventures (foreign-invested company limited by shares) can get listed on A-share markets and on the New Third Board (i.e. the National Equities Exchange and Quotations, NEEQ), and only if they meet additional requirements compared to Chinese companies – including MOFCOM’s approval to obtain at least one foreign sponsor and to have at least half of the shareholders being Chinese domestic permanent residents. The NEEQ is considered to be the most accessible platform for SMEs, as it has less stringer and lower capital threshold requirements for listing compared to the main board; however, data shows that in spite of government’s effort to promote this avenue for financing the number of new listings has been decreasing in the past few years.

Furthermore, it is still not clear whether foreign-invested SMEs can list on the STAR Market, i.e. China’s new science & technology innovation board.

How can I find the relevant Chinese standard for my product?

Chinese national standards have different prefixes: GB and GB/T for national standards (mandatory and recommended, respectively); JB/JBT, YY/YYT for sectoral standards; DB and DB/T for local standards, etc.

Finding relevant Chinese standards for one product is not an easy task – it requires knowledge of China’s standardisation system and Chinese language. We strongly suggest working with professionals in this field.

In any case, a preliminary search of standards can be done through the National Public Service Platform for Standards Information (全国标准信息公共信息服务平台) established by the State Administration of Market Regulation (SAMR): http://std.samr.gov.cn/. The platform contains up-to-date information on all national standards, local standards and sectoral standards issued in China, and an easy-to-use and effective query tool.

Users can make their search by typing in the query tool key words in English, as for each standard issued and published on the platform, the translation of the standard’s name in English is always provided. However, translations are not always entirely accurate, and therefore it is recommended to use key words in Chinese language.

Another method is to use ‘advanced search’ tool (circled in red in the pic above). This allows a more targeted search based on various criteria, including the International Classification for Standards code (ICS, which can be obtained from ISO’s website: https://www.iso.org/files/live/sites/isoorg/files/archive/pdf/en/international_classification_for_standards.pdf). The results obtained will show all the Chinese standards issued for the corresponding ICS code. However, it must be noted that the ICS system is not particularly diffused in China; if known, a better option is to use the Chinese Classification for Standards code (CCS).

In recent years, China has also increased its efforts to increase the transparency and availability of the full texts of its standards. A dedicated platform was established by SAMR for this purpose: http://openstd.samr.gov.cn/bzgk/gb/index.

More detailed information on Chinese standards and standardisation system, including weekly updates on new standards issued in different sectors, or news on upcoming standardisation-related events, please visit the website of the Seconded European Standardisation Expert in China (SESEC) project: http://www.sesec.eu/.

What is the China Energy Label (CEL)?

Similar to the EU, China has too established a dedicated energy consumption label for products – the China Energy Label (CEL, 中国能源效率标识). The main purpose is to encourage Chinese consumers to buy more energy-efficient products, thus stimulating manufacturers to shift their production towards energy-efficient products.

CEL features a five-grade system, for each of which detailed information are provided. Products requiring CEL can only be produced and sold after the label been obtained and registered with the China Energy Label Centre (CELC, www.energylabelrecord.com/). Products requiring CEL are specified in a dedicated Catalogue updated every year by the National Development and Reform Commission, and mostly include: motors, air conditioners, air compressors, refrigerators, washing machines, flat-screen TVs, gas and water kettles, and fluorescent tubes. For every product requiring CEL, a national GB standard has been implemented, and specified in the NDRC Catalogue.

The latest catalogue for 2020 is available at this link: https://www.ndrc.gov.cn/xxgk/zcfb/ghxwj/202004/t20200427_1226859.html).

What are government ‘guidance funds’?

In recent years, a series of government-backed ‘guidance funds’ (引导基金) have started to proliferate everywhere across China. These consist of funds-of-funds (FOFs), private equity funds or venture capital funds investing in innovative startups or MSMEs in key sectors and areas, in line with development priorities but according to market mechanisms. Their aim is to support the growth of innovative startups, and to stimulate the commercialisation of innovative technological achievements.

Government administrations usually fund one-third of the guidance fund; the remaining is provided by other investors which could include banks, enterprises (both state-owned and privately-held), investment firms, angels, etc. – selected through a rigorous bidding process. The daily operations of the guidance fund are managed by an investment management firm, which identifies and submits investment proposals to board of partners according to two core principles: (i) alignment with priority directions specified in the fund’s operational guidelines and regulations (in most cases available online); and (ii) high market potential and return-on-investment.

In practice, however, the ways in which guidance funds operate are opaque: in most cases there are no websites or clear contact channels available online, and it is hard to assess the level of involvement of the government administration in the investment decision process. Official regulations in many localities explicitly stipulate the possibility for local guidance funds to invest in newly established startups or MSMEs, including foreign-invested ones – although evidence of investments conducted by these funds on foreign-invested companies, so far, is limited to Chinese-majority joint ventures.

What to do if I find a counterfeit product on Chinese e-commerce platforms?

*This FAQ was provided by the EU IPR SME Helpdesk in China: https://www.china-iprhelpdesk.eu*

Although ISPs can help to remove infringing products through a ‘take-down notice’ requested by the right holder (which requires the previous registration in mainland China of the IPR, see previous FAQ), their powers are limited. E-commerce platforms ISPs cannot impose fines on infringers or grant any compensation to right holders. Additionally, the ISP cannot make a judgment on conflicting IP infringement claims. Conflicting claims should be taken before Chinese administrative authorities, e.g. Administration of Industry and Commerce (AIC), or before Chinese courts. More information on enforcing your rights is available in other China IPR SME Helpdesk guides (see the useful links section).

E-commerce websites usually have dedicated systems for dealing with product infringing IPR. For Alibaba and Taobao, for example, the procedure is free of charge and can be completed within 1-2 weeks.

For further information on notice and take-down procedures, consult the Helpdesk’s “How to Remove Counterfeit Goods from E-commerce Websites in China” guide.

What to do when a commercial dispute arises?

What you can do and what you cannot do in case of commercial disputes will depend on the governing law and dispute settlement clauses stipulated in your contract. The first step, therefore, would be to check these two items.

At the same time, a lot will also depend on the quantity and quality of evidence available to you; you should start collecting evidence as soon as possible, before it becomes unavailable.

Can my mainland China business partner be based in Hong Kong?

Finding a trustworthy business partner when exporting, importing or investing is a crucial point in any business plan and doing it successfully is always a mix of good luck, common sense and a thorough investigation.

The EU SME Centre has been stressing the importance of asking to see the business licence of the potential partner. However, recently we have received several enquiries concerning business partners registered in Hong Kong but stating a mainland address in the contract. This is generally the case when the actual factory and the effective seat of the Chinese partner are in mainland China while registration of the company (for different reasons – administration and taxes mostly) took place in Hong Kong. In the cases at hand, only a business licence from Hong Kong could be provided by the Chinese partner while the contract was stamped with a company chop showing a similar company name but an address in mainland China. In such cases it can be very difficult to track and decide the right jurisdiction.

The contract would very probably be considered as null when brought before Chinese jurisdiction and, when not properly executed according to Hong Kong regulations, it will be void according to Hong Kong law, too. We therefore strongly suggest to pay attention not only to the name of the company and registered seat on the first page when concluding a contract, but to the last page of the contract, too, which bears the signatures and company stamps, and investigate who is authorised to sign on behalf of the company.

More information on due diligence on potential Chinese business partners are illustrated in a report published in 2018 by the EU SME Centre: http://www.eusmecentre.org.cn/report/knowing-your-partners-china

How do I find the right distributor / agent in China?

Depending on the geographical region and the market segment, companies selling to China usually need to engage several different distributors and sales offices in China. Since SMEs typically do not have sufficient resources to build an extensive sales network, it is advisable to use a two-stringed sales and distribution model, relying on local distributors in combination with their own direct sales force. The local distributors provide geographical and market scale while the internal sales force’s focus should be on the direct access to existing and new customers, as well as end-users.

Finding the right distributors and partners is critical. A very straightforward approach is to ask customers and industry contacts for recommendations. Chambers of commerce and other supporting trade organisations in China are also good contact points: they can usually provide you with a list of importers/distributors. The EU SME Centre also maintains a free service providers database where you will be able to find potential leads. Finally, trade shows offer the opportunity to meet both small and big distributors. Find the most important ones in our exhibitions database.

In general, importers/distributors/agents in China fall within two large categories:

  • State-owned and private importers which play a significant role in the import of food and beverages to China. These companies focus on volume, and look for products which are already accepted by the general population, like meat, wine, olive oil, dairy, seafood, etc. Price, brand and production capabilities are very important for them; there have been many cases reported of negotiations failed because of disagreement on decimal points.
  • Smaller companies, sometimes set up by foreigners, who understand European products and cater to five-star hotels, foreign restaurants or gourmet stores specialised in imported goods. These operate mainly in first-tier cities and are usually more flexible on volumes and more willing to accept new products.

No matter which option is better suited for your business, it is not recommended to sign any exclusive agreement with one single distributor (unless it is linked to large volumes of sales), as this will limit efficiency and control, especially during expansion.

Exercising due diligence when working with any distributor or other business partner in China is highly advisable. For tips on how to do so, please see the FAQ above ‘How to conduct preliminary due diligence’. For more information on distribution in China, please also see a recording of a webinar on the topic on our website. 

If you have any questions concerning this or any other topic, please feel free to contact our expert team.

Do I need to set up a company in China?

Not all types of businesses necessarily require the establishment of a legal entity in mainland China. In some occasions, a representative office or distribution agreements may be sufficient; a company registered in Hong Kong SAR may also be a possible option. Therefore, whether a legal entity is needed in mainland China depends on your business, your objectives, as well as the specific industry in which you operate. In general, a legal entity in mainland China is required for businesses that require payments to be made and received in China without paying intermediary fees, for businesses that require a large number of employees in the country, as well as for businesses involving production activities. It is also noteworthy that many foreign investors choose to register a company in Hong Kong SAR as an entry point to mainland China. The advantages include: less market entry restrictions, the use of English as official language in contracts and business, internationally-renowned litigation and arbitration mechanisms, free movement of capital and people, as well as generally easier access to capital. More details on the different ways to enter the Chinese market can be found on a recently updated EU SME Centre report: https://www.eusmecentre.org.cn/report/ways-enter-chinese-market. More details on the setting up process of foreign-invested enterprises in mainland China can be found in a report published in 2019 by the EU SME Centre: https://eusmecentre.org.cn/guideline/how-establish-foreign-invested-enterprise-fie-china-2019-update.

Meat: EU producers authorised to export to China

Exporting meat products to China is a complicated and long process. According to Chinese laws and regulations, meat products can be exported to China after a protocol is signed with the government of the exporting country. Therefore, before any planning, meat exporters should ensure that a protocol is in place between their country and China. The updated list can be found (in English) on the website of Chinese customs: http://english.customs.gov.cn/Statics/dd6c77ce-cd25-469c-a45b-714da19b9621.html.

If there is a protocol in place, each single establishment must also register with China’s authorities. The updated list of approved establishments for meat exports to China is provided (in Chinese) on the website of Chinese customs: http://jckspj.customs.gov.cn/spj/zwgk75/2706880/2811812/2812015/index.html, including for individual European countries authorised to export (Austria, Belgium, Denmark, Finland, France, Germany, Hungary, Latvia, Lithuania, Ireland, Italy, Netherlands, Poland, Portugal, Romania, Spain, United Kingdom).

More details on the export process can be found in a step-by-step guide for exporting meat products to China produced and released in 2016 by the EU SME Centre: https://www.eusmecentre.org.cn/guideline/exporting-meat-products-china.

Are the requirements for bilateral treaties and manufacturer registration exempted for certain categories of food products sold via CBEC?

As part of the scope of the general trade supervision system, some merchandise, like dairy products and meat, aquatic products, honey, etc., are subject to bilateral agreements: manufacturers of such products are required to be officially registered with the Certification and Accreditation Administration of the People’s Republic of China.

Although the Notice No. 486 [2018] of the Chinese General Administration of Customs, stipulates that the requirements relating to licensing, registration or filing for first-time imports are exempted, it is still unclear how the customs handle this issue. According to a consultation with customs officials made in January 2019, there have not been enough cases for them to arrive at a definite conclusion on this issue. Some of the officials are inclined to hold the view that these requirements on presence of the treaty and registration of manufacturers are still mandatory.

However, since CBEC Retail Import is a new business mode still under development, and as such many policies are formulated and then adjusted only in due course after a trial period of implementation, the practice may change with time. Therefore, European SMEs engaging in CBEC retail import are suggested to consult and to confirm with local competent customs for their opinion on a case-by-case basis in practice.

Where can I get finance to develop my business in China?

European SMEs can get funding in both the EU and China to finance their market access and growth in China.

In the EU, in addition to banks, traditional financing institutions and ad hoc internationalisation programmes at Member State level, SMEs can access various financing instruments offered by EU institutions. Examples include: the COSME programme, and in particular its Loan Guarantee Facility; the European Scale-up Action for Risk Capital programme (ESCALAR programme); EU loans/guarantees offered by financial intermediaries available on the Access2Finance portal; as well as various grants for technology and innovation related activities, such as the European Innovation Council (EIC) Accelerator, or grants under Horizon2020 (2014-2020) and its successor Horizon Europe (2021-2027)

In China, primarily domestic and a number of international banks are still the primary source of external sources of funding for European SMEs. In addition, many other financing institutions outside the banking system also offer funding solutions, including financial leasing companies, credit guarantee companies, and micro-loan companies. Still, there generally are stricter requirements for foreign-invested companies applying for loans from Chinese commercial banks (see next FAQ). It is also noteworthy that debt instruments such as panda bonds (CNY-denominated bonds from non-Chinese issuers sold in mainland China) are available to SMEs from a certain number of European countries (see FAQ below).

The Chinese venture capital and private equity market is relatively challenging for foreign SMEs, as local investors tend to prefer pre-IPO cases with fast growth prospects, while SMEs usually do not have the required market position, contact networks and market knowledge to expand fast enough. However, in some industries such as clean technology, energy, biotechnology and pharmaceuticals/medical equipment, where the Chinese government encourages technology transfer, opportunities are more frequent and the investment scope can span into pre-revenue cases. It is noteworthy that many local administrations have established ad hoc ‘government guidance funds’ (政府引导基金), in cooperation with other actors such as banks, SOEs or private companies, that invest in particularly promising start-ups / SMEs in priority sectors.

For European SMEs engaged in trading, major Chinese e-commerce platforms (for example Alibaba and JD.com) have started to offer micro-loans (typically a loan size between RMB1000 to 10million) to their existing merchandisers to finance their operation needs.

What are the procedures and costs for obtaining the CCC?

There currently are two different conformity assessment procedures for CCC mark. The first step therefore is to check the CCC Catalogue to determinate which specific procedure applies to your product:

  •  Third-party certification for 84 products with high safety risks and close contact with final consumers.
  • Self-declaration method for 19 products with stable quality and low safety risk. The self-declaration method is, in turn, further divided into method A (requiring type test in any labs recognised by CNAS or members of ILAC + self-declaration), and method B (requiring type test in specifically designated CCC labs + self-declaration).

The total cost of the certification process for the CCC depends on the product category, the components involved, and the specific product. Currently, the average fees are as follows:

  • Application fee: 500 CNY per application
  • Approval and registration fee: 800 CNY per application
  • Factory inspection fee: 2,500 CNY / person / day (plus flight tickets and accommodation for inspectors, usually shared with other factories which will also be inspected during the same inspection tour)
  • Product inspection fee: 90% of the amount stipulated in the NDRC’s Notice On Releasing The Compulsory Product Certification Charging Standard (Trial) (No.38)

In total, the entire process should cost between 15,000 and 25,000 CNY. The composition of the product, selection of models, variations in critical components, use of spare parts and consumables all affect the cost of certification: these can be significant, especially for small series or for spare parts. Additional costs may include consulting fees to intermediary companies assisting with the process, as well as the annual and irregular costs for certification maintenance.

Specific flowcharts on the CCC application procedure can be found in the practical guidelines on the CCC scheme produced in December 2020 by the EU SME Centre: https://www.eusmecentre.org.cn/article/updated-guidelines-china-compulsory-certification-ccc-scheme.More information on Chinese standards and certification, can be found on the website of the Seconded European Standardisation Expert in China (SESEC) project (www.sesec.eu).

Should I pay taxes in China if my company is based abroad but provides services to a company based in mainland China?

As a general principle, China-resident enterprises are taxed on worldwide income and non-residents are taxed on Chinese-sourced income. Therefore, even if a company is based abroad, services provided to China-based suppliers will still be considered by Chinese tax authorities as income generated in China. This means that VAT must be paid on the transaction.

If the provider is based abroad, the VAT must be paid by the supplier in China on a withholding basis. There have been frequent cases reported of European providers receiving a small payment than expected, because of a percentage withheld by the Chinese supplier. Therefore, it is strongly advised to draft service contracts requiring all amounts payable by the Chinese supplier to be net of taxes, thus requiring them to be liable for all taxes imposed in China. Chinese suppliers will likely resist this approach, often recurring to threats of abandoning the negotiation: in this case, one could try to increase pricing in advance or renegotiating the deal.

More details on this aspect can be found in a dedicated guide produced by the EU SME Centre in 2017: Understanding Non-resident Enterprise Taxation in China as well as in a free webinar: China’s Taxation on Non resident Enterprises - YouTube

Is it possible to hire foreign interns in mainland China?

In order to be able to legally work in China, foreign workers must possess a work permit tied to a specific employer, and a residence permit for work purpose. Work under any other categories of visa is prohibited and can lead to detention and even deportation.

In recent years, however, China has introduced more flexibility for hiring foreign interns in mainland China. But this only applies to foreign students studying in Chinese universities and therefore already based in China: they can apply for an “internship remark” on their residence permit for study purpose, which needs to be approved in written form by the student’s university (overseas student office). After the “internship remark” is obtained, foreign students can legally start their off-campus internship in mainland China.

For foreigners studying in foreign universities and based abroad, currently there is only one option for legally doing internships in China: being invited for internships by ‘renowned’ enterprises or institutions registered in China. In this case, foreign interns will need to apply to an S2 visa with an “internship remark”, which will have a duration of maximum 180 days.

It is not recommended for foreign interns to enter China with other categories of visas, such as tourism or business. Although until recently a very common practice, this is illegal and can lead to detainment and even deportation (and consequent multi-year ban from re-entering China).

It is also noteworthy that a number of countries, e.g. France, are negotiating or have successfully negotiated bilateral agreements with China to allow the exchange of fresh graduates looking for internships.

What are the requirements that foreign citizens must meet in order to be eligible to work in China?

The basic requirements that foreign applicants must meet in order to become eligible to work in mainland China are:

  • More than 18 years’ old, less than 60 years’ old, and in good health (no communicable diseases)
  • University degree
  • Possession of the skills and 2+ years of work experience in the job
  • Absence of criminal record in the home country and in China
  • Valid passport
  • Presence of a specified employer

It must be noted that some degree of flexibility exists in certain regions or areas (e.g. high-tech zones, western regions, etc.), particularly in case of urgently-needed and highly-skilled talents.

The EU SME Centre has produced an article on the preferential policies, including for talent attraction, of the new Beijing FTZ announced in September 2020: https://www.eusmecentre.org.cn/article/overview-policies-foreign-investors-beijing-free-trade-zone.

What are the general taxation requirements for companies registered in China?

Foreign companies registered in China are subject to a large number of taxes in the same way domestic companies are. Companies not incorporated in mainland China but with their effective management therein, will also be subject to the same tax regime. The most common and important taxes are:

  • Corporate Income Tax (CIT): standard tax on income, with the statutory tax rate at 25%. However, small scale and low profit enterprises * enjoy a preferential CIT policy from 1 January 2019 to 31 December 2021:
    1. a. SMEs with an annual turnover below CNY 1 million (around EUR 126k): 20% CIT rate calculated only on 25% of their turnover;
    2. b. SMEs with an annual turnover above CNY 1 million (around EUR 126k) but below CNY 3 million (around EUR 378k): 20% CIT rate calculated only on 50% of their turnover; 
  • Other preferential CIT rates (e.g. 15%, 175% super deductions, etc.) are applied to companies operating in sectors particularly encouraged by the Chinese government, e.g. companies with High- and New-Technology Enterprise (HNTE) status, software and integrated circuit enterprises, or investing in priority sectors in central and western regions.
  • Value-added Tax (VAT): standard tax on transactions, it applies as a percentage of the invoiced amount for goods and services. The standard VAT rate is 13%, but reduced rates of 9% and 6% also apply (respectively for retail, hotel, entertainment, transports and logistics; and for financial services, consulting, IT, insurance, etc.). Micro, small and medium-sized enterprises may register as ‘Small scale tax payer’, for which a flat 3% VAT rate is applied (see next FAQ).
  • Consumption Tax (CT): sales-based tax, applicable not only to imported goods (see FAQ above) but also to goods manufactured in China. CT applies to products that are harmful to health (e.g. tobacco or alcohol), luxury products (e.g. jewellery and cosmetics), as well as high-end products (e.g. passenger cars, boats, etc.). The specific rate of the CT varies depending on the type of product (ranging from 1% to 56%).
  • Stamp Tax: levied on various contracts, licenses and accounting books. It varies from 0.005% to 0.1% depending on the contract type.
  • Withholding Income Tax: applied to payments done by China-based entities to non-resident enterprises (e.g. parent company in Europe). It is a concessionary 10% tax applicable to interests, rental, royalties and dividends.

Other common taxes include the Real Estate Tax, the Land Value Appreciation Tax, the Resources Tax, etc.

For more details on the type and amount of taxes that foreign companies need to pay in China, see a dedicated guide published by the EU SME Centre in 2016: Understanding Company Administrative and Reporting Rules in China: What to Look Out for When Compiling Company Annual Reports and Financial Statements in China as well as in an article written by the EU SME Centre: Small Businesses’ Guide to the Value Added Tax (VAT) System in China: Scope, Taxpayer, VAT Rates and Invoice System

* Small scale and low profit enterprises (小型微利企业) are defined as enterprises with an annual turnover below CNY 3 million, less than 300 employees, and total asset value below CNY 50 million.

Can I choose arbitration in my country instead of China?

China is a member of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly known as the New York Convention), therefore the answer is yes. 

However, the key challenge of choosing arbitration outside China is the reluctance of Chinese parties to agree to it, who will argue that the governing law or dispute resolution should occur within mainland China. This is because many Chinese domestic companies are not very acquainted with foreign laws and dispute resolution mechanisms. Still, it is not technically impossible to persuade the Chinese party to choose foreign arbitration, particularly if the Chinese party has extensive global operations. A compromise could be to choose arbitration in Hong Kong SAR.

How can I export wine to China?

Importing wine to China is a fairly straightforward process – once you have either found a suitable importer or set up shop yourself in the country.

The first thing you will have to do is translate and register the label you intend to use on the bottles. By law, each bottle has to carry both the original and the translated versions. The labels, as well as the wine itself, will have to comply with a number of standards, compliance to which will be checked by China Inspection and Quarantine (CIQ), which has offices at all points of entry into the country such as airports and ports. These checks might take some time, but with the help of a competent importer and the services of a well-connected agent, they should be done within a few months. If all customs documents are in order (make sure that all information given is correct and consistent with all the customs documents), customs clearance should not be a complicated process. After the Chinese labels have been pasted to the bottles, they are ready for the market.

This process is explained in more detail in the very first EU SME Centre interactive infographic, fittingly entitled “Importing wine to China – A step-by-step guide to Chinese import regulations”. Besides an explanation of the individual steps necessary to import wine from the EU to China, you will find definitions of the main actors involved in the process, examples of necessary certificates and details about the applicable standards. Links connect this easy-to-use application to additional sources of information, most notably all relevant publications available in our online knowledge centre. Find more information on the Chinese wine market directly by downloading our dedicated reports ad guidelines:

Specific case studies in the market here, here and here.

Are there other compulsory certification or administrative requirements in China?

In addition to CCC, other regulations in China require certain products to comply with other industry-specific mandatory certification or administrative licensing schemes. A few examples include mining products (Mining Product Safety Approval and Certification; Explosion-proof Electrical Product Certification), mobile telecom devices (Ratio Type approval), IT equipment with encryption technology (State Cryptography Administration Licence), medical devices (Product registration, China Metrology Approval, Country of Origin Certification for pre-market approval), re-manufacturing of motor vehicle parts, etc.

It must also be noted that, many of these industry-specific mandatory certification or administrative licensing schemes often are based on recommended national standards (GB/T) – making them as de facto mandatory standards in spite by definition they should be voluntary, and in spite China’s Standardisation Law requiring mandatory national standards (GB) to be applied only to areas involving environmental, health and safety protection. Therefore, knowledge of standards in one’s sector is, therefore, vital to ensure smooth market access and operations.

More details on standards – including de facto mandatory standards – are provided in the following FAQs.

Cosmetics: is animal testing required for exporting cosmetics to China?

With the exception of cosmetics sold via Cross-Border E-Commerce, all other imported cosmetics have long been subject to mandatory animal testing in China, regardless of where they were manufactured and whether they have already been tested abroad.

However, the new Cosmetics Supervision and Administration Regulations issued in June 2020 stipulate that, non-special use cosmetics (now referred to as ‘general use cosmetics’) do not require relevant toxicology test if they are manufactured under GMP conditions and which do not present safety risks. This applies to both imported and domestically-produced products. However, animal testing will still be required for cosmetics for children and infant, and for those specified in the Safety Technical Specifications for Cosmetics, and in the case of new ingredients which must be registered and approved by the National Medical Products Administration.

Thus, animal testing remains a requirement for the registration of cosmetics perceived to have safety risks or presenting new ingredients. As such, animal testing is regulated by regulations addressing cosmetic registration and filing issues. The most recent are the Norms for Cosmetics Registration and Filing Documentation, issued by NMPA in August 2020: these stipulate that the exemption for animal testing applies equally to both domestically-produced and imported non-special use cosmetics (general use cosmetics). At the same time, these expand the scope of animal testing-exempt cosmetics, to also include cosmetics with new ingredients which:

(i) do not have the following functions: anti-corrosion, sunscreen, coloring, hair dyeing, freckle and whitening, anti-alopecia, anti-acne, anti-wrinkle, anti-dandruff and antiperspirant; and which

(ii) do not present security risks and thus are not needed to be included in the limited/forbidden items of the Safety Technical Specifications for Cosmetics.

The doc also stipulates the requirements for alternative animal testing methods, and in any case it will not apply to cosmetics for special use. It is also noteworthy that the number of animal-alternative testing methods in China remains low and largely limited to cosmetic ingredients, rather than final products. Two recently approved alternative methods are the direct peptide reactivity assay for skin sensitisation and the short term exposure assay for eye irritation.

For those producers for which animal testing is a big ethics matter, the only way available to avoid this is to sell their products through cross-border e-commerce channels.

More details on how to export cosmetics to China can be found in dedicated reports published by the EU SME Centre in 2019 and 2017: 

Exporting Cosmetics to China (Regulations update 2019) 

The Cosmetics Market in China (2017)

Does my product need CCC?

The product categories that require CCC certification are listed in the CCC catalogue (强制性产品认证目录产品). The Catalogue was last revised by SAMR in April 2020, and currently contains 103 categories of compulsory certification items, divided in 17 product groups, namely: (i) wires and cables; (ii) circuit switches and electrical devices for protection and connection; (iii) low-voltage apparatus; (iv) low power motors; (v) electrical tools; (vi) electric welders; (vii) equipment for household and similar uses; (viii) electronic products and safety accessories; (ix) lighting appliances; (x) motor vehicles and safety accessories; (xi) agricultural machinery; (xii) fire products; (xiii) security and protection products; (xiv) building material products; (xv) children products; (xvi) explosion-proof materials; and (xvii) household gas appliances. The Catalogue is available (in Chinese) at: http://gkml.samr.gov.cn/nsjg/rzjgs/202004/t20200428_314776.html

Products not listed in the Catalogue do not require CCC mark. The Catalogue specifies the basic information of the products and systems involved, i.e. their names, attributes and features, applicable scope and applicable standards. Therefore, it is possible to determine when a product/system falls into the catalogue by checking the following:

- Product’s name;

- Product’s attributes and features;

- Comparison of the standards followed by your product with those provided in the Catalogue;

- Key word search on the websites of official CCC certification bodies;

- Consult official CCC certification bodies and labs;

- Examine the products of your competitors.

In some cases, products may be so complex that it becomes hard to assess clearly whether CCC is required or not. It is noteworthy that sometimes, the specific name and description used to claim one product (for customs purposes) when exporting to China may also make a difference. Another possible way to assess whether CCC is required, is to consult whether the HS code under which one product is traded is included in the CCC Catalogue, available in the practical guidelines on CCC produced by the EU SME Centre in December 2020: https://www.eusmecentre.org.cn/article/updated-guidelines-china-compulsory-certification-ccc-scheme.

Nonetheless, it must be noted that, in general, products and systems requiring CCC mark are consumer products for personal/domestic use; industrial products for commercial use usually do not require CCC mark (but must comply with other factory- or work safety-related regulations). Products with low safety risks are also generally except from CCC mark – such as those with low-voltage (generally <12 volts).

More information on Chinese standards and certification, can be found on the website of the Seconded European Standardisation Expert in China (SESEC) project (www.sesec.eu).

Cosmetics: certificate of free sale in the EU as a requirement to export cosmetics to China

In order to export cosmetics to China, relevant producers must file a registration with the China’s Drug Administration. There have been reports of European companies that, during the registration process, were requested by the authorities a proof that the cosmetic had already been selling in the country of origin and/or in the European Union. However, there was uncertainty in terms of what could constitute such proof.

Such proof is a document, in general (there can be differences depending on individual Member States) issued by central, or regional, government agencies for medical and health products. In some countries can also be issued by chambers of commerce. One example of such proof is the ‘certificate of free sale’ below:

More details on how to export cosmetics to China can be found in dedicated reports published by the EU SME Centre in 2019 and 2017: 

Exporting Cosmetics to China (Regulations update 2019) 

The Cosmetics Market in China (2017)

Can foreign workers work for short-term periods in mainland China?

Foreigners are allowed to work in China by means of secondment from their overseas headquarters: the procedure requires the applicant to submit a secondment letter instead of a Chinese labour contract. To date, however, this policy only applies to very limited locations, including Beijing and Shanghai. In addition, the secondment letter must be submitted by the mainland China-based subsidiary, which may be challenging for enterprises which have complex operational systems and internal mobility programmes.

The issue remains challenging for workers that come to China for short-term projects – very common especially for enterprises conducting R&D activities.

Are EU Geographical Indications recognised in China?

In September 2020, the EU and China signed an agreement on cooperation and protection of Geographical Indications (GIs) – according to which China will recognise and protect 100 EU agri-food GIs, and the EU will do the same with 100 Chinese agri-food products. The agreement will come into force in January 2021.The full list of European GIs covered by the agreement is provided at this link: https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/food_safety_and_quality/documents/eu-100-list-of-gis-eu-china-agreement_en.pdf.

The agreement will in particular safeguard the protection of the translation and transliterations of GI names in Chinese language; it will also automatically reject all trademark applications misusing the GIs, as well as third-party registration of protected GIs.

Although previously China had already recognised 10 European GIs (as a result of the “10 plus 10” project concluded in 2012), this is the first large-scale agreement between the EU and China on GIs. Furthermore, four years after its entry into force, the scope of the agreement will expand to cover an additional 175 GIs from both sides; a mechanism to add even more GIs in the future is also included.

What taxes are involved when goods are imported to China?

Different taxes are applied to goods imported into China. These are:

  • Custom duties: China’s custom duties include (i) general duty rates; (ii) temporary duty rates; (iii) MFN duty rates; (iv) Conventional duty rates; (v) Special preferential duty rates (list available at this link); and (vi) Tariff rate quota (TRQ) rates. Certain imports may be exempt from custom duties, as it is the case for key technical equipment not produced domestically. Occasionally, higher custom duties may be applied as response to behaviours, e.g. in the context of trade wars. While custom duties are exempted for many products originating from countries with which China has signed Free Trade Agreement (list available at this link).
  • Value-added tax: since April 2019 (Announcement of the State Taxation Administration on Deepening the VAT Reform: http://www.chinatax.gov.cn/n810341/n810755/c4160283/content.html), China’s import VAT on imported goods has been lowered to either 9% or 13%. The 9% rate is applicable mostly to agricultural and utility goods, while the 13% rate applies to most manufactured goods. Services are subject to a 6% VAT rate
  • Consumption tax: applicable to products that are harmful to health (e.g. tobacco or alcohol), luxury products (e.g. jewellery and cosmetics), as well as high-end products (e.g. passenger cars, boats, etc.). The specific rate of the CT varies depending on the type of product (ranging from 1% to 56%), and can be calculated by using either the ad valorem or quantity-based method.

How does the Chinese government supervise CBEC imports?

Although CBEC policies involve many governmental departments, they are all implemented in practice by the Chinese Customs.

There are three Customs Supervision Systems applicable to imported goods into China:

  • General Trade Supervision System
  • Postal Article Supervision System
  • Supervision System on Retail Import through e-commerce (Retail Import Supervision System)

The General Trade and Postal Article Supervision Systems apply to both ecommerce and non-e-commerce international trades; the Retail Import Supervision System applies to e-commerce retail import only, and specifically the products included in the List of the Goods under CBEC Retail Import.

The Chinese Customs maintain a supervision code system for customs declaration purpose, which currently includes a total of 102 codes. Different codes are subject to different customs supervision policies. Among these, three relate to CBEC: codes 9610, 1210, and 1239. Under the Retail Import Supervision System, there are two main logistics patterns:

  • Direct import pattern – supervised under the code 9610: goods are shipped by overseas supplier to Chinese consumers after they make an order on an e-commerce platform
  • Bonded warehouse import pattern – supervised under code 1210 (“bonded import in CBEC pilot cities”) and code 1239 (“bonded import in all other cities”): goods are shipped at anytime and stored in a bonded warehouse in China; from here, the goods are shipped to the final Chinese consumer after an order is made on an e-commerce platform.

As of 2020, there are a total of 86 CBEC pilot cities and the whole island of Hainan.

Detailed guidelines on cross-border e-commerce have been produced by the EU SME Centre, including:

- Guidelines on Cross-border E-commerce (2019): Guideline on Cross-border E-Commerce in China (2019) 
- How to set up a cross-border Wechat shop (2018): How to Set Up a Cross-Border E-Commerce Shop in WeChat
- Guidelines on E-commerce (2017): E-commerce in China 

Can foreign SMEs participate in standardisation activities in China?

The short, simple answer is yes. But the situation is much more complex and challenging than it ought to be.

China, in recent years, and especially since the publication of the Guiding Opinions on the Participation of Foreign-invested Enterprises in Standardisation Work in China in November 2017, has achieved substantial progress in increasing the openness of its technical committees (TCs) for standards-formulation. With only a few exceptions, all TCs are now technically open to the participation of international companies. The Foreign Investment Law also stipulates that FIEs should have equal access to standardisation activities in China. Furthermore, standards are now effectively considered as final research achievements and as basis for scientific evaluation.

Nonetheless, despite de jure equal participation rights are granted by Chinese legislation to foreign-invested enterprises in China’s standardisation work, international actors remain not fully involved in a number of key technical committees or working groups and encounter informal barriers to participation. For instance, they may be granted observer status only, they may not be eligible to become working group chairs or to hold decision-making membership positions, or may be notified of working group meetings only on very short notices. According to the European Union Chamber of Commerce in China, as well as direct feedback collected from relevant European stakeholders, examples of standardisation groups still presenting restrictions to foreign participation are: selected working groups of TC260 on Information Security; IMT2020 successor for 6G; CSTC, verbally open but no in practice; CAICT’s cross-border data transfer industry alliance; the National Standardisation General WG on Smart City; BDIA for big data; ODCC for open data centres; standards in the field of food contact materials, led by the National Health Commission, etc.

At the same time, international actors are not involved in macro-level initiatives, for instance the project ‘China Standards 2035’, which aims to further simplify and streamline China’s standardisation system and to reduce burdens for companies to comply.

What are inspection and quarantine requirements for CBEC imports?

In order to protect human, animal and plant life and health, as well as to protect the environment, the import and export commodities shall be inspected.

For this purpose, the former AQSIQ issued a catalogue of goods which are subject to compulsory inspection and quarantine – available at: http://www.gov.cn/xinwen/2017-01/03/content_5155830.htm. The sale of these goods is forbidden if they are not inspected by AQSIQ. The consignee of the imported goods shall apply for inspection at the local CIQ.

What are the general accounting requirements for foreign enterprises in China?

In general, China’s accounting principles are pretty close to international financial reporting standards. All foreign companies in the country must strictly follow the rules of the central and local government where they are based in order to be compliant. Basically, there are three steps to follow:

-  Annual audit report: composed of a balance sheet, an income statement and a cash flow statement. This must be conducted by external licensed firms and finally signed by a certified public accountant registered in mainland China.

-  Corporate Income Tax (CIT) reconciliation report: though CIT is generally paid on a quarterly basis, an annual CIT reconciliation report must be prepared to certify that all taxes have been paid, and to eventually know if supplementary taxes must be paid or reimbursements obtained.

-  Annual report to local bureaus of industry and commerce: through the enterprise credit and information publicity system of the jurisdiction where the enterprise is located.

-  Annual report to national authorities: through a dedicated reporting system.

In general, all the above documents must be completed within the first four or six months of the following year.

Are there any exemptions for CCC?

The CCC mark is not required for products meeting one of the following conditions:

  • Personal belongings of diplomats working in foreign embassies, consulates or international organisations in China;
  • Personal belongings of officials from Hong Kong and Macao SARs offices in China;
  • Personal belongings carried by all citizens arriving in China;
  • Goods donated by foreign governments to China;
  • Samples for CCC testing.

In addition, the CCC mark can be submitted by manufacturers, importers, sellers or other distributors to local inspection and quarantine authorities, in case of:

  • Products needed for scientific research and testing;
  • Components needed for technology assessment;
  • Products needed directly by end users for maintenance purposes;
  • Equipment and components required for factories and production lines (not including office equipment);
  • Products to be displayed during exhibitions and fairs, but not to be sold;
  • Products imported temporarily, to be shipped out of China thereafter (including exhibitions or testing);
  • Parts imported as regular trading goods, for the purpose of exporting the whole system;
  • Parts imported to process materials supplied by clients, for the purpose of exporting the whole system.

It is noteworthy that products sold via cross-border e-commerce (CBEC) in general can be considered as personal goods, which may be exempted from the CCC mark. Indeed, many European SMEs use CBEC – either the direct import pattern or the bonded warehouse pattern – as a key means to avoid certification or conformity assessment procedures, such as CCC and animal testing for cosmetics. However, it must be stressed that this remains a grey area and the situation might change soon.

For more information on the advantages of goods sold via cross-border e-commerce, see relevant FAQs on the EU SME Centre’s website

How can I export to China?

Basically, there are four ways to export goods or services to China:

  • Direct exporting: direct exportation of goods/services from the producer in one country to the final consumer in China.
  • Indirect exporting: selling of goods/services through an intermediary involved in the producer’s sector and market, who in turn sells to final consumers in China. Such intermediaries are agents, distributors, and franchisees.
  • Cross-border e-commerce through direct shipping: goods/services sold and shipped by producers abroad directly to the final consumer after customs clearance.
  • Cross-border e-commerce through bonded warehouses: goods/services sold and shipped from bonded warehouses located in mainland China, directly to the final consumer after customs clearance.

While each model of market entry has strengths and weaknesses, most companies develop a gradual approach based on the time and resources available to them and the market responses they receive along the way. Considerations regarding the model of entry most suitable for an individual company’s business plan include: (i) size of the enterprise; (ii) nature of its products; (iii) previous export experience and expertise; (iv) business conditions and regulations in China (both exporting and investment requirements); (v) need for on-the-ground representation (such as marketing and after-sales services); (vi) need for control of the product and IP rights protection; (vii) time and resources available to the company.

It comes without saying that each model requires exporters to comply with different regulations, and that no matter the model chosen, EU SMEs should always ensure that all their IP rights are properly registered in China before exporting.

Detailed information on all the above models can be found on a recently updated EU SME Centre report: Ways to Enter the Chinese Market (Update – 2020), available in English, French, Italian and Spanish.

The EU SME Centre has also produced a guideline and a webinar on how to draft sales contracts when exporting to China in order to avoid common mistake: Drafting Sales Contracts When Exporting to China (Update - 2016)  and How to Avoid Common Mistakes when Entering into Sales Contracts in China

How are payments handled on Chinese e-commerce platforms?

There are two types of cross-border e-commerce payment methods:

  • Online payment – which includes e-account payment and international credit card payment, suitable for small scale cross-border retail;
  • Bank remittance (suitable for larger scale cross-border transactions)

In addition, third-party payment platforms are currently the most widely used method of payment. Comparing to the high rates of commercial banks and the limited number of professional remittance companies, third-party payment platforms are considered as more convenient solutions with lower rates.

E-commerce companies now can also initiate transactions in the currency of sale, convert to Chinese Yuan (CNY) and route converted payments to payees throughout China via the local clearing system (CNAPS). This creates advantages that mutually benefit ecommerce merchants and their China-based suppliers.

What are the general technical labelling requirements for F&B products?

Labelling and marking is one of the major reasons why products exported to China get stuck at the Chinese customs. The Chinese authorities require that all products imported and sold in China meet specific labelling and marking requirements, which are generally stipulated in Chinese national standards.

For F&B products, according to various national standards (e.g. GB 7718 for Food Labelling Standards, GB 13432, 28050 and 10344 for labelling of pre-packaged food, etc), in general the labelling should contain information on: specification, net content; producer name, address and contact details; name of the importer and distributor in China; table of ingredients and nutrition facts; production date, shelf life / expiration date; storage requirements; name of food additives; code of product or national standards; and other information in line with applicable regulations and food safety standards.

The issue to remember is that all labelling and marking must be registered and approved by Chinese authorities before the products are actually shipped to China. F&B products generally require the label in Chinese and English to be registered (in both paper and electronic) through CIQ: only after approval your product is allowed to be exported.

More information on technical labelling requirements for F&B products can be found in dedicated guidelines produced by the EU SME Centre: https://www.eusmecentre.org.cn/guideline/fb-technical-requirements-and-labelling; as well as in our food & beverage reportand in a number of case studies (herehere and here).

Can I choose foreign law as the governing law of business contracts?

According to China’s Law on the Laws Applicable to Foreign-related Civil Relations, the Law on International Economic Contracts, and an interpretation of the Supreme People’s Court, the two parties of a contract may choose in autonomy the laws applicable, provided that:

-  There must also be a clear foreign-related element in the relation between the two parties (which is always the case for contracts involving SMEs based in Europe);

-  The application of foreign laws will not damage the social and public interests of China.

Contracts between two domestic parties in China cannot choose foreign law as governing law. It is understood that, affiliates of European companies based in mainland China are – in this case – considered domestic entities and therefore cannot choose foreign law.

Dairy products (not including infant formula): EU producers authorised to export to China

Exporting dairy products to China is a complicated and long process. According to Chinese laws and regulations, dairy products can be exported to China only after a bilateral agreement and health certificate has been signed with the exporter’s country of origin. Then, the exporter should register as a dairy producer and foodstuff exporter with the relevant Chinese authorities. The updated list of approved producers for dairy exports to China is provided (in Chinese) on the website of Chinese customs: http://jckspj.customs.gov.cn/spj/zwgk75/2706880/2811812/jkrpjwscqyzcmd3/index.html, including for individual European countries authorised to export (Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, United Kingdom).

More details on the export process can be found in a step-by-step guide for exporting dairy products to China produced and released in 2016 by the EU SME Centre: https://www.eusmecentre.org.cn/guideline/exporting-dairy-products-china.

What are the benefits of outsourcing HR management in China?

To manage risks and reduce administrative burdens, many companies (particularly SMEs) choose third party organisations to manage their HR needs. This is especially true in China, where complex labour regulations and a fast-evolving regulatory environment can often baffle foreign companies in the market. China obliges employers to file their staff employment and dismissal with relevant government bureaus, maintain employees’ personnel files (a Chinese document that records employment and academic history of an employee), withhold and pay social benefits as well as individual income tax on behalf of their employees.

Outsourcing employee recruitment management means that you can reduce costs, as you will avoid having to hire and manage an in-house HR team, and can concentrate on your core business activities. Please note that this is the only choice available to Representative Offices in China as they cannot hire Chinese citizens. Common services provided by such services commonly include:

§  HR outsourcing/dispatching Chinese staff to representative offices

§  Personnel file transfer & management

§  Social insurance & housing fund management

§  Medical services & local employee welfare solutions

§  Payroll & taxation services for local employees

§  Recruiting services

§  Training & development

§  Chinese labour law consultancy

Many companies have found this option very useful particularly for employing Chinese citizens in cities in which the company does not have any registered legal entity (e.g. a company registered in Shanghai but with an office in Beijing without any legal branch in the city),and for reducing liabilities and risks. However, it must be noted that legislation in this area of ‘labour dispatch’ in China is changing fast. For instance, in July 2020 the Beijing Municipal Government issued new regulations tightening social insurance filing services by third-party HR agencies, restricting third-party HR agencies from filing social security on behalf on non-Beijing resident enterprises – thus requiring them to find alternative solutions.

What are the advantages of selling via CBEC, and which products are authorised to be sold via CBEC?

The main advantages of selling via CBEC is that products are considered personal goods and therefore granted customs clearance, without the need of pre-registering the product and obtaining relevant certifications or licences.

A total of 1321 products, specified in the List of Products Authorised for Retail Import via Cross-Border E-commerce – issued by the Chinese Ministry of Finance and available at this link: http://nmg.mof.gov.cn/lanmudaohang/zhengcefagui/202006/t20200609_3528682.htm

A translated list can be provided by the EU SME Centre upon request (please use the ‘ask-the-expert’ function).

Detailed guidelines on cross-border e-commerce have been produced by the EU SME Centre, including:

- Guidelines on Cross-border E-commerce (2019): Guideline on Cross-border E-Commerce in China (2019) 
- How to set up a cross-border Wechat shop (2018): How to Set Up a Cross-Border E-Commerce Shop in WeChat
- Guidelines on E-commerce (2017): E-commerce in China 
- Recorded webinar on Cross-border E-commerce (2020): Cross border e-commerce in China | Entering the Chinese market through the power of social networks 

What is a fapiao?

In China, all business transactions are required by law to be recorded on an official receipt (or ‘fapiao’ 发票 in Chinese). Contrary to other countries, fapiaos are more than just ordinary receipts. Fapiaos are distributed, and administrated by tax authorities, and taxpayers are required to purchase the fapiaos they need from the tax authorities according to their business scope. Fapiaos are physical paper invoices printed with a special printer by specially trained and qualified employees of companies that have achieved “general VAT taxpayer” status (see next FAQ).

When an enterprise is incorporated, it needs to state what activities it intends to perform on its business Licence, and keep its actual operations within this scope. The fapiao system is one means to enforce this requirement, as the enterprise cannot issue fapiao for activities outside its business scope.

VAT Fapiao can also be sorted into two categories:

  • Special VAT fapiao: the most commonly input VAT vouchers for input VAT deduction, issued by a general VAT taxpayer to another business;
  • General VAT fapiao: for all other instances, including sales to small-scale taxpayers and consumers, VAT-covered transactions done by small-scale taxpayers (more below), or sales of tax-free goods and services.

More details on China’s VAT system can be found in an article written by the EU SME Centre: https://www.eusmecentre.org.cn/article/small-businesses-guide-value-added-tax-vat-system-china-scope-taxpayer-vat-rates-invoice

Can I choose arbitration in Hong Kong instead of mainland China?

Considering the reluctance of Chinese parties to agree on foreign governing laws and arbitration in contracts, a compromise could be to choose arbitration in Hong Kong SAR.

China’s Supreme People’s Court and the government of Hong Kong SAR have entered into an agreement allowing, from 1 October 2019, the enforcement of interim measures orders from one territory into the other. This is a unique agreement that allows arbitration proceedings from Hong Kong SAR to be effectively enforced in mainland China.

The advantage of selecting Hong Kong SAR as the forum for arbitration are the territory’s independence and renowned experience as global dispute resolution hub, which also benefits from the large presence of foreign judges and the recognition of English as official language for business and contracts. In addition, Chinese parties are generally more open to accept Hong Kong SAR as a compromise for arbitration.

What are the general accounting requirements for foreign enterprises in China?

In general, China’s accounting principles are pretty close to international financial reporting standards. All foreign companies in the country must strictly follow the rules of the central and local government where they are based in order to be compliant. Basically, there are three steps to follow:

Annual audit report: composed of a balance sheet, an income statement and a cash flow statement. This must be conducted by external licensed firms and finally signed by a certified public accountant registered in mainland China.

Corporate Income Tax (CIT) reconciliation report: though CIT is generally paid on a quarterly basis, an annual CIT reconciliation report must be prepared to certify that all taxes have been paid, and to eventually know if supplementary taxes must be paid or reimbursements obtained.

Annual report to local bureaus of industry and commerce: through the enterprise credit and information publicity system of the jurisdiction where the enterprise is located.

Annual report to national authorities: through a dedicated reporting system.

In general, all the above documents must be completed within the first four or six months of the following year.

For more details on the reporting requirements that companies need to follow in China, see a dedicated guide published by the EU SME Centre in 2016: Understanding Company Administrative and Reporting Rules in China: What to Look Out for When Compiling Company Annual Reports and Financial Statements in China 

What are the procedures for hiring foreign employees in China?

In order to be able to work in China, all foreign citizens must possess a legal work permit, and a residence permit for work purpose. Working without such permits prohibited and can lead to administrative detention and even deportation, as well as fine for companies.

Similar to Chinese employees, foreign employees can only be hired directly by WFOEs and JVs; representative offices must hire them through third-party HR agencies such as FESCO and CIIC.

The procedure for hiring foreign employees is mainly based on 5 steps:

  • The employer and foreign employee sign a letter of intention of employment in line with Chinese law, and obtain a health certificate after a physical examination.
  • The employer submits a pre-application for the work permit, online through the system of the labour bureau where the employer is based. Hard copy materials (which should include notarised and legalised copies of academic degrees, health certificates and criminal records issued by foreign institutions) will be submitted through appointment after approval of the pre-application.
  • After the work permit is obtained, the employer will apply for an invitation letter to the industry department where it is based.
  • With the work permit and the invitation letter, the foreign employee applies for a Z visa to the Chinese consulate in his/her home country (this step can be skipped if the foreign employee is already in China).
  • Within 30 days after entry into China, the Z visa must be converted into a residence permit for work purpose at the Public Security Bureau.

The foreign employee is not allowed to start work until the work permit is released. This applies regardless of whether the foreign employee is already based in mainland China or not. The entire procedure must take as long as 4 months.

It must be noted that the work permit is tied to the specific employer, and that the foreign employee is allowed to work only within the scope and region specified in his/her labour contract. After the labour relationship between the employer and the foreign employee is terminated, the employer must immediately start the procedure for cancelling the work permit of the foreign employee. Foreign employees that change jobs and employers in China must, within 10 days of termination of their previous job, start the procedure for transferring their work permit to the new employer – which is much simpler.

How can I sell my products on major e-commerce platforms in China?

If a SME simply intends to sell its own goods and services to Chinese customers on the internet, the easiest way is perhaps to do it on a China-based third-party platform, opening up a virtual store on such e-commerce platforms. With this approach, the SME does not have to spend too much time and costs in building the online sale portal. In addition, it is not required to obtain license or permits that apply to the operation of such online sale portal under the PRC laws.

To adopt this business model, companies should first choose one or more e-commerce platforms they intend to engage with and then sign service contracts with the platform operators to secure access to their platforms. There are many well-established e-commerce platforms in mainland China (see FAQ ‘What are China’s main e-commerce platforms?’): each platform may have its own entry requirements and management rules by which companies should abide.

Although in this business model SMEs do not have to concern about the license or permits for the online sale portal, companies should nevertheless comply with certain special licenses or permits requirements that apply to the sale of its own goods or services under the PRC laws, no matter whether the sale is conducted online or offline. Companies cannot fully rely on a third-party e-commerce platforms to solve all the license/permit issues under the PRC laws. Before entering into the PRC market, SMEs are always advised to conduct a general legal assessment to find out what particular license/permit may be required by the PRC laws for the sale of their goods or services in the PRC, and whether such license/permit is available to the FIE (WFOE or JV).

Detailed guidelines on cross-border e-commerce have been produced by the EU SME Centre, including:

- Guidelines on Cross-border E-commerce (2019): Guideline on Cross-border E-Commerce in China (2019) 

- How to set up a cross-border Wechat shop (2018): How to Set Up a Cross-Border E-Commerce Shop in WeChat

- Guidelines on E-commerce (2017): E-commerce in China 

Are alternative dispute resolution mechanisms common in China?

Alternative dispute resolution (ADR) mechanisms are gradually becoming more diffused in China – though still not at levels comparable to Europe, also due to lack of a solid legal framework on the basis of which these could be effectively enforced.

A key driver has been the Belt and Road Initiative: one of the key principles of the Opinions Concerning the Establishment of the Belt and Road International Commercial Dispute Resolution Mechanism and Institutions issued in mid-2018, is to persist on “diversified dispute settlement mechanisms” – encouraging, in addition to litigation, other alternative dispute resolution mechanisms such as mediation. A key example in this regard is represented by the signing of a MOU, at the beginning of 2019, between Singapore’s International Mediation Centre (SIMC) and the China Council for the Promotion of International Trade (CCPIT) to jointly develop mediation rules and procedures to address, manage and enforce disputes emerging from Belt and Road Initiative (BRI) projects – through the establishment of a panel of mediators formed by mediators from Singapore, China, and other BRI jurisdictions.

Can I get loans from Chinese banks?

The short, general answer is yes.

However, in practice the situation is more complicated that it should be. Specifically, the financial requirements for loans from Chinese banks are generally higher than those in the EU and compared to domestic companies, and must be obtained against guarantees from banks outside China – thus requiring further risk assessments. At the same time, loans in foreign currency are affected by ‘borrowing gaps’ – i.e. foreign debt quota, that is the maximum amount that can be borrowed from offshore third-parties. Finally, although innovative credit instruments and schemes have been established and vigorously promoted in China in recent years – IPR pledge financing, i.e. using IPR as collaterals for loans – it is not clear whether these are available to foreign companies.

Indeed, ‘access to financing’ continues to be one of the top issues encountered by foreign companies in China (as indicated e.g. by annual business confidence surveys published by various European chambers of commerce in China).

Are there preferential policies for setting up a company in China?

In addition to national level regulations governing foreign investment (see FAQ above), in general all local-level authorities – starting from district/park level to provincial level – have some latitude to adapt and apply local rules which may be advantageous to FIEs.

The key point to keep in mind is that, local governments in China often compete very fiercely to attract foreign direct investment within their jurisdictions, particularly when involving advanced technologies or operations in line with national or local priorities. Therefore, in order to increase their attractiveness vis-à-vis other competing local administrations, local administrations regularly offer a series of incentives and preferential measures, such as relaxed market access requirements, favourable terms for the acquisition of suitable land, fast channels to obtain permits or licenses, tax rebates, etc. Preferential policies are generally specified in ad hoc policy docs available on the websites of the local administration (usually called 优惠政策), but it has been reported that ad hoc incentives tailored to the investor’s specific needs may be negotiated in case of particularly strategic and large investments.

Furthermore, it is noteworthy that pilot FTZs feature innovative policies with respect to finance, customs, liberalisation of foreign investment, tax treatment, and simplified administrative measures e.g. reduced investment barriers with respect to the qualifications of foreign investors, application requirements of some licences, equity holding percentage and business scope restrictions.

Are there Sino-foreign joint arbitration centres?

China in recent years has been significantly updating and expanding the jurisdiction of its arbitral institutions to also cover foreign investment disputes, and those under the UNCITRAL.

In addition, in 2015 the China-Africa Joint Arbitration Centre was established to resolve commercial disputes between Chinese and African parties (located in China, Johannesburg and Nairobi). This is the only Sino-foreign joint arbitration centre currently existing in China – though joint mediation rules and procedures are also being established with Singapore for BRI projects (see previous FAQ).

What is the point scoring system for foreign employees in China?

In 2017, China introduced a new three-tier point scoring system to assess the qualifications of foreign workers:

  • Tier A: scoring >85
  • Tier B: scoring >60, <85
  • Tier C: scoring <60

A-grade workers are most welcome and enjoy specific advantages, such as eligibility to apply to China’s permanent residence permit (green card), longer duration of residence permits and shorter waiting times. Tier B workers do not seem to face particular restrictions, while those in Tier C face stricter entry requirements, lower duration of work and residence permits, and possible harsher conditions in the future as China is trying to focus only on quality and skilled foreign workers.

The points of the scoring system are calculated based on criteria such as: annual salary, time spent working in China every year, education background, work experience, proficiency in Chinese language, age, location of employment (points given to workers in Western/North-eastern regions or least developed areas); extra points may be given to workers with previous work experience in Fortune 500 companies, graduated from world-leading universities, with registered IPR and patents, or who have already worked in China for 5 years.

How do I select a location for setting up my company in China?

Mainland China consists of 23 provinces, four municipalities and five autonomous regions, and within these there are 22 pilot Free Trade Zones, more than 200 national industrial/economic development zones, more than 170 high-tech zones, and numerous local industrial parks.

There are various factors to consider when selecting a location for your foreign-invested company in mainland China, including (but not limited to):

  • Target consumer group: where are your consumers concentrated?
  • Infrastructure: different locations are connected in different ways (both domestically and internationally), each presenting different logistics challenges, time and costs
  • Human resources required: highly skilled talents (e.g. top scientists and engineers) are more available in first-tier cities and areas with polytechnic universities; however, larger cities have higher salary requirements
  • Incentives provided by the local administration: including tax incentives, financial subsidies, access to services, reduced red tape, support when applying to grants or loans, etc.

Currently, most FIEs are concentrated along the eastern coast and in large cities. This has led to a significant imbalance in terms of socio-economic development vis-à-vis central and western regions, as well as old industrial bases such as Northeast China, or specific regions within provinces (e.g. north Guangdong; northwest Anhui, etc.). For this reason, foreign investment in those regions is highly encouraged by both the central and local administration through various preferential policies and incentive schemes (e.g. the national Catalogue of Priority Industries for Foreign Investment in Central and Western China).

The EU SME Centre has produced an article on the preferential policies of the new Beijing FTZ announced in September 2020: https://www.eusmecentre.org.cn/article/overview-policies-foreign-investors-beijing-free-trade-zone.

Can goods sold on foreign online platforms enjoy preferential policies in China?

Goods imported through e-commerce platforms (including foreign platforms, whether self-operated or third-party ones) whose networks are not connected to that of the Chinese Customs, may still enjoy the benefits of the preferential measures, regardless of whether the goods follow the direct import pattern or the bonded warehouse import pattern. The only prerequisite is that a Chinese express delivery enterprise or postal service enterprise – registered both at the Chinese Customs and Chinese State Administration of Market Regulation – can collectively provide electrical information on the transaction, payment and logistics to the Chinese Customs, and promise to take on the relevant legal responsibilities regarding data accuracy, completeness and authenticity.

Although this approach is allowed from a legal perspective, in practice it is hardly chosen in business because express delivery service providers are not willing to assume relevant legal liabilities, and at the same time e-commerce companies are reluctant to share payment details.

Detailed guidelines on cross-border e-commerce have been produced by the EU SME Centre, including:

- Guidelines on Cross-border E-commerce (2019): Guideline on Cross-border E-Commerce in China (2019) 
- How to set up a cross-border Wechat shop (2018): How to Set Up a Cross-Border E-Commerce Shop in WeChat
- Guidelines on E-commerce (2017): E-commerce in China 
 

What are panda bonds?

A ‘panda bond’ is a CNY-denominated bond issued by non-Chinese issuers but sold in mainland China. These instruments are perceived easier to access for foreign companies in China, and are thus becoming increasingly appealing.

Panda bonds have been around for more than a decade. In order to be eligible to issue panda bonds, foreign issuers are required to apply to either the People’s Bank of China or the National Association of Financial Market Institutional Investors. A number of European governments were approved to issue panda bonds, including: Hungary, Poland, Italy; and France.

What is the distinction between ‘General VAT payer’ and ‘Small-scale VAT payer’?

All entities based in China need to register for the payment of VAT once their sales exceed a certain level (varying between regions, but generally very low e.g. starting at 10,000 - 20,000 RMB per month). When the registration is made, companies need to choose whether they are ‘General VAT payers’ or ‘Small-scale VAT payer’, based on their annual turnover. The distinction is very important:

- ‘Small scale VAT payer’ applies to companies with annual turnover below 800,000 CNY for commercial companies, or 500,000 CNY for manufacturing companies. For them, the VAT is calculated at a flat rate of 3%, rather at the statutory 13%, 9% or 6% rate. Small scale VAT payers, however, will not be able to deduct input VAT, nor to issue VAT invoices (‘fapiao’) to Chinese clients.

- ‘General VAT payer’ for all other entities, for which VAT is calculated at the statutory 13%, 9% or 6% rate. A general VAT payer enjoys input VAT credit for the purchase of goods or services.

It is noteworthy that, in limited cases for certain businesses, SMEs may find it more convenient to register as ‘General VAT payer’ rather than ‘Small-scale VAT payer’, because the benefits from deducting input VAT may be higher than those obtained from lower VAT rates; at the same time, the vast majority of Chinese suppliers will require VAT invoices (fapiao) when doing businesses, which ‘small-scale VAT payers’ will be able to provide only through intermediaries (after the payment of a fee).

More details on China’s VAT system can be found in an article written by the EU SME Centre: https://www.eusmecentre.org.cn/article/small-businesses-guide-value-added-tax-vat-system-china-scope-taxpayer-vat-rates-invoice

What is the return policy for CBEC imports?

Under CBEC Retail Import, the domestic agent of the CBEC enterprise, or its authorised postal/express delivery enterprise, are allowed to apply for sales return. Returned goods should be qualified for second-time sale and should arrive, in original condition, at customs supervision area within 30 days from clearance. Relevant tax will not be levied.

In practice, it is noticed that due to the complexity of returning goods back to bonded areas, some enterprises may stock the goods outside customs supervision areas. There are potential risks of violating relevant provisions such as being considered as reselling CBEC Retail Imports and/or failing to meet the requirements regarding qualified consumers.

Detailed guidelines on cross-border e-commerce have been produced by the EU SME Centre, including:

- Guidelines on Cross-border E-commerce (2019): Guideline on Cross-border E-Commerce in China (2019) 
- How to set up a cross-border Wechat shop (2018): How to Set Up a Cross-Border E-Commerce Shop in WeChat
- Guidelines on E-commerce (2017): E-commerce in China 

Intellectual Property Right

The EU SME Centre does not provide technical assistance on IPR-related issues. Such enquiries should be directed to the EU IPR SME Helpdesk, another project financed by the EU and with a free ‘ask-the-expert’ function for general enquiries. Please visit: https://www.china-iprhelpdesk.eu.

The EU IPR SME Helpdesk has also produced a handbook of FAQs on IPR-related issues, covering general aspects, cross-cutting issues, as well as specific issues relating to copyrights, designs, patents, and trademarks. The FAQs handbook is accessible via this link: https://www.china-iprhelpdesk.eu/content/faqs

How to conduct primary due diligence in China?

You can check your potential Chinese partner with the official online database of National Enterprise Credit and Information Publicity System (国家企业信用信息公示系统). A person who can read and write Chinese is needed to do the check as the online database is available in Chinese only. We strongly recommend doing verification based on the information included in the business licence of the Chinese company (营业执照, facsimiles can easily be found online) – a copy of which should always be requested by European companies!

Key steps:

1. Go to the website of the National Enterprise Credit and Information Publicity System established by the State Administration of Market Regulation (SAMR) Industry and Commerce: http://www.gsxt.gov.cn/index.html

2. Fill in the Chinese name of your potential Chinese partner (all characters must be as stated on business licence) or its unified social credit code / registration number, and press the red button "查询"

3. A window will pop-up. Do the verification as required in the window, and press "查询" again

4. If no result shows up, it is possible that the company does not legally exist

5. If results show up, you may click the result with the name of the company (should be the exact name); you will then be able to see detailed information such as:

  • Unified social credit number
  • Company name
  • Type of enterprise
  • Legal representative, registered capital, registered address, date of establishment, operation starting date and expiry date, business scope, registration authority, approval date, registration status, and shareholder information.

6. If there are some differences between the result and the information in the business license, it is possible that some information were updated in due course: try to see the dedicated section of the platform relating to historical records and changes.

7. When in doubt, always ask to the potential Chinese partner!

Kindly note that the information obtained through such online check may not always be up-to-date or complete, and cannot be used as full basis to tell if you should do business with a potential Chinese partner. This system permits only a preliminary online check, through the comparison of the information claimed by the potential Chinese partner with that officially registered with authorities.

Please also note that, in addition to conducting due diligence on companies, the contact person within the company should also be verified, especially to confirm whether he/she is authorised to act on behalf of the company.

More information on due diligence on potential Chinese business partners are illustrated in a report published in 2018 by the EU SME Centre: http://www.eusmecentre.org.cn/report/knowing-your-partners-china

What is the distinction between ‘General VAT payer’ and ‘Small-scale VAT payer’?

All entities based in China need to register for the payment of VAT once their sales exceed a certain level (varying between regions, but generally very low e.g. starting at 10,000 - 20,000 RMB per month). When the registration is made, companies need to choose whether they are ‘General VAT payers’ or ‘Small-scale VAT payer’, based on their annual turnover. The distinction is very important:

- ‘Small scale VAT payer’ applies to companies with annual turnover below 800,000 CNY for commercial companies, or 500,000 CNY for manufacturing companies. For them, the VAT is calculated at a flat rate of 3%, rather at the statutory 13%, 9% or 6% rate. Small scale VAT payers, however, will not be able to deduct input VAT, nor to issue VAT invoices (‘fapiao’) to Chinese clients.

-  ‘General VAT payer’ for all other entities, for which VAT is calculated at the statutory 13%, 9% or 6% rate. A general VAT payer enjoys input VAT credit for the purchase of goods or services.

It is noteworthy that, in limited cases for certain businesses, SMEs may find it more convenient to register as ‘General VAT payer’ rather than ‘Small-scale VAT payer’, because the benefits from deducting input VAT may be higher than those obtained from lower VAT rates; at the same time, the vast majority of Chinese suppliers will require VAT invoices (fapiao) when doing businesses, which ‘small-scale VAT payers’ will be able to provide only through intermediaries (after the payment of a fee).

More details on China’s VAT system can be found in an article written by the EU SME Centre: https://www.eusmecentre.org.cn/article/small-businesses-guide-value-added-tax-vat-system-china-scope-taxpayer-vat-rates-invoice

What is the influence of customs’ enterprise credit system on foreign sellers?

According to the Notice No. 486 [2018] of the Chinese General Administration of Customs, CBEC operators are included in the customs enterprise credit system. Corresponding customs clearance measures will be applied in accordance with different credit levels and records.

For those enterprises that have lost credibility or with poor credit, stricter supervision measures will be enforced. For instance, if the enterprise has a poor credit record at the Chinese customs, they may face stricter examination, more frequent spot check and consequently longer time for customs clearance.

However, to date the influence in practice of the credit records on the international level is still unknown.

What arbitration institutions can be chosen in mainland China?

The Supreme People’s Court of China has, in many of its judicial interpretations, frequently remarked its pro-arbitration positions.

If arbitration in your home country or in Hong Kong SAR are not viable options, there are a number of arbitration institutions in mainland China that are more experienced in handling cases relating to foreign companies. These are: China International Economic and Trade Arbitration Commission (CIETAC); Shanghai International Economic and Trade Arbitration Commission – also called Shanghai International Arbitration Centre (SHIAC); South China International Economic and Trade Arbitration Commission – also called Shenzhen Court of International Arbitration (SCIA); the China Maritime Arbitration Commission (CMAC); as well as arbitration commissions in different cities such as the Beijing Arbitration Commission (BJAC) and the Xi’an Arbitration Commission.

Among these, CIETAC is probably the most experienced in handling foreign-related arbitration, also thanks to its around one-fourth of arbitrators being non-residents of mainland China. Furthermore, in recent years CIETAC underwent through several improvements and changes especially in terms of flexibility. It also offers mediation-arbitration.

Nonetheless, European SMEs are strongly advised to recur to this option only in case other options in their home countries or Hong Kong SAR cannot be pursued.

Can I choose to go to court in my country instead of China in the contract?

It depends on whether the Chinese party has assets available for enforcement in your country, and if there is a bilateral treaty between your country and China on enforcement of judicial judgment. If the answers to both are negative, then choosing litigation in your country will make the judgment made there unable to be enforced in practice. In such case we suggest not

Can a company registered abroad employ Chinese citizens in China?

According to Chinese labour law a foreign company (a company registered abroad) cannot conclude labour contracts with Chinese citizens if the place of work performance is in China (there are different regulations in place for cases in which the place of work is outside China).

In order to be able to employ a Chinese citizen in China, the foreign company must either establish a representative office and employ local individuals through agencies like FESCO or CIIC, or establish a foreign-invested enterprise in China. These arrangements allow foreign-invested companies or partnerships to employ local individuals in its own name.

For those foreign companies which do not wish to have any permanent establishment in China but still need someone ‘on the ground’, there is only one solution: establishment of a commercial relationship between the company and a self-employed individual.

More details on how to establish a foreign company in China, can be found in corresponding FAQs in the section ‘registering a company in mainland China’.

How do I translate my brand name into Chinese?

Giving your brand a good Chinese name is an essential step to ensure your company’s future success in the Chinese market, especially for companies that sell products directly to Chinese customers. A good translation, which is a combination of both sound and meaning, boosts the chances of your products being remembered and recognised by more local Chinese customers. The following should help SMEs that have not yet decided on a Chinese brand name get on the right track from the start.

1. Translate your brand names into Chinese and register the relative trademarks

In China, registration of a trademark in roman characters does not automatically protect the trademark against the use or registration of the same or similar trademark written in Chinese. Therefore, it is highly advisable to register a Chinese version of a foreign trademark to protect your business from the start. In addition, if there is no existing Chinese character name for a foreign brand, random translations by shop keepers, customers, suppliers and even competitors may occur, which sometimes carry negative connotations. To get further advice on registering trademarks in China, please contact the China IPR SME Helpdesk, another EU-funded project providing free services to European companies: https://www.china-iprhelpdesk.eu/.

2. Choose a translation with both phonetic and semantic associations with the original and adjust the emphasis and visibility of the Western/Chinese name according to the targeted consumer categories and the relative marketing strategies.

There are four common strategies that foreign companies in China adopt to translate their brand names: (i) no adaption; (ii) sound adaption; (iii) meaning adaption; and (iv) dual adaption. The best outcome is to have a Chinese name with both phonetic and semantic associations with the original (dual adaptation), especially for those companies that aim at reaching the wealthier sections of Chinese consumers.

To ensure your translation is adequate, ask for advice from your local Chinese friends, colleagues or professional translation companies. If you are looking for professional translation companies, see our Service Providers Database.

It is also noteworthy that a wide range of articles and case studies on this topic are available online.

Seafood: EU producers authorised to export to China

Exporting seafood products to China is a complicated and long process. According to Chinese laws and regulations, seafood products can be exported to China after a protocol is signed with the government of the exporting country. Therefore, before any planning, seafood exporters should ensure that a protocol is in place between their country and China. The updated list can be found (in Chinese) on the website of Chinese customs: http://www.customs.gov.cn/spj/zwgk75/2706880/2811792/3030674/index.html.

If there is a protocol in place, each single establishment must also register with China’s authorities. The updated list of approved establishments for seafood exports to China is provided (in Chinese) on the website of Chinese customs: http://jckspj.customs.gov.cn/spj/zwgk75/2706880/2811812/2812040/index.html, including for individual European countries authorised to export (Belgium, Bulgaria, Croatia, Denmark (including Greenland and Faroe Islands), Estonia, Finland, France, Germany, Greece, Iceland, Latvia, Lithuania, Ireland, Italy, Netherlands, Norway, Poland, Portugal, Spain, Sweden, United Kingdom).

More details on the export process can be found in a step-by-step guide for exporting seafood products to China produced and released in 2017 by the EU SME Centre: https://www.eusmecentre.org.cn/guideline/exporting-seafood-china-market-trends-regulations-and-procedure.

Can I register a company in co-working spaces / incubators?

In order to register a company in China, investors must provide an exclusive office address, which will be the company’s legal business address appearing on its business license. This means that investors must rent dedicated office spaces.

An exception may apply for new start-ups. Following the growth of entrepreneurs and start-ups in China, most co-working spaces, incubators and accelerators in China allow resident entrepreneurs to register a virtual company address within their facilities – for modest fees compared to other office buildings.

Taking as example The Lab, a landing platform for foreign start-ups and international entrepreneurs launched by Innoway in Zhongguancun, virtual company registration is one of the services provided (together with other services such as accounting, legal consulting, entrepreneur visa, matchmaking, etc.), for an annual fee of 11k RMB (around 1.4k EUR).

Can I select foreign testing, inspection and certification bodies in China for conformity assessment, including CCC?

Testing, inspection and certification (TIC) requirements and procedures in China are mainly governed by the Regulations on Certification and Accreditation (中华人民共和国认证认可条例). According to official SAMR figures, by the end of 2019 there were 415 foreign TIC agencies officially approved in China, a +23% increase on the previous year, but still accounting to less than 1% of the total TIC agencies approved (one-fourth of which are state-owned, in constant decrease from previous years).

When it comes to CCC, currently there are 35 officially recognised certification bodies – none of them is foreign-invested. Among the 243 officially recognised laboratories, 6 of them are foreign-invested. However, it must be noted that each certification body and laboratory may have specific fields of specialisation, and thus may not accept applications for certain products out of their scope. In addition, it is understood that some officially recognised Chinese laboratories may, out of their own initiative, partner with other laboratories based in Europe for conducting the testing of product directly in Europe: this procedure which relies simply on partnerships between laboratories, and it is not officially recognised by CNCA.

The list of officially recognised CCC certification bodies and laboratories is available (in Chinese) at: http://www.cnca.gov.cn/zw/gg/gg2020/202009/t20200908_63989.shtml.  

What are China’s main e-commerce platforms?

China’s e-commerce is not only Taobao or Alibaba. In fact, China has a wide range of e-commerce platforms addressing different types of audiences across different geographical locations, presenting different features, and selling different types of products. The most popular ones are:

  • Taobao: owned by Alibaba, is a C2C and B2C e-commerce platform with more than 700 million active users, allowing individuals and small businesses to sell all types of products and services directly to consumers, including food and beverage.
  • Tmall: owned by Alibaba, is a B2C platform with more than 500 million active users, covering all China and featuring a wide range of products from fashion to electronics and food.
  • JD.com: second largest B2C platform, with more than 200 million active users, it features a wide range of products but it is most famous for electronics, home appliances and books.
  • Pinduoduo: China’s largest social commerce platform, with more than 350 million active users, it sells mainly low-cost items for audiences based in lower-tier cities across China. In the past, it had a negative reputation of selling fake goods, but significant efforts have been made by Pinduoduo to solve this issue (e.g. opening of a dedicated section for certified branded goods)
  • Vipshop: China’s largest flash sales platform, with more than 60 million users, sells medium to high-quality products (including renowned fashion brands) at discounted rates, but only for limited periods of time.
  • 1haodian: owned by JD.com, and with 90 million active users, it sells mostly food and beverage products, including fresh food, as well as FMCG and healthcare products.
  • Xiaohongshu: lifestyle sharing platform that functions as a guide community for e-commerce, famous mostly for imported and overseas products. It has more than 250 million active users and it is most popular among developed cities on China’s eastern coast.
  • Suning: China’s largest Online-to-Offline smart retailer, with over 400 million active users, focusing on electronics and home appliances.

European producers should carefully analyse the strengths of each platform and their largest user bases, and develop a complementary portfolio mix accordingly.

Detailed guidelines on cross-border e-commerce have been produced by the EU SME Centre, including:

- Guidelines on Cross-border E-commerce (2019): Guideline on Cross-border E-Commerce in China (2019) 
- How to set up a cross-border Wechat shop (2018): How to Set Up a Cross-Border E-Commerce Shop in WeChat
- Guidelines on E-commerce (2017): E-commerce in China 
- Recorded webinar on Cross-border E-commerce (2020): Cross border e-commerce in China | Entering the Chinese market through the power of social networks 

How can I repatriate profits from China to the parent company abroad?

The most common way to repatriate profits from China to abroad (e.g. China-based subsidiary to parent company in Europe), is to pay dividends directly to the parent company. However, dividends (as well as interests and royalties) are subject to a 10% Withholding Tax; however, dividends can only be repatriated on the accumulated profits of the China-based enterprise, and only for profit that has been audited in that year.

The 10% withholding tax – which was first introduced in 2008 but reduced from the original 20% rate – can be reduced under tax treaties signed by China and the country of residence of the company receiving the dividends. It is noteworthy that dividends paid out on pre-2008 profits are exempt from the withholding tax.

How do I know when new standards are published for my product?

There are different ways to monitor the formulation and development of new standards in China – although all require knowledge of Chinese language:

In addition, mandatory GB standards are regularly notified to the WTO, while recommended standards are not. However, it must be noted that in China there still are frequent cases of ‘de facto mandatory recommended standards’ – that is cases in which recommended standards (whose implementation should remain voluntary) are used as basis for compulsory certification or administrative licensing schemes, such as the CCC or industry-specific regulations, especially involving telecoms, electronics, machinery, automotive, and mining. Such cases are not notified to the WTO, because they are treated as ‘recommended standards’ for voluntary implementation which are not subject to WTO notification requirements.

More detailed information on Chinese standards and standardisation system, including weekly updates on new standards issued in different sectors, or news on upcoming events on standards, please visit the website of the Seconded European Standardisation Expert in China (SESEC) project: http://www.sesec.eu/.

More details on ‘de facto mandatory recommended standards’ can be found in the European Union Chamber of Commerce in China’s Position Paper of the Standards and Conformity Assessment Working Group: http://www.europeanchamber.com.cn/en/publications-position-paper.

What is the China Compulsory Certificate?

Market access for products and services to China is generally not free nor automatic: many product and service categories require government approval before they can be imported in the Chinese market.

These approvals come in various forms, such as licences, certifications, registrations, marks, and in some cases even individual approval of shipments. But they all have one thing in common: they will be regularly checked at the borders, or by inspection authorities in China in case of products produced domestically.

One of these compulsory requirements is the China Compulsory Certificate (CCC) scheme. First introduced in 2002 by the China National Certification and Accreditation Administration (CNCA), the scheme applies to all products and systems – both imported and domestically manufactured – that are sold in China and that present health, safety and environmental protection risks. Any product or system that requires the CCC mark, must undergo a strict inspection, testing and certification procedure, before it can actually enter the Chinese market.

The EU SME Centre has produced practical guidelines on the CCC scheme, which can be accessed at: https://www.eusmecentre.org.cn/article/updated-guidelines-china-compulsory-certification-ccc-scheme.More information on Chinese standards and certification, can be found on the website of the Seconded European Standardisation Expert in China (SESEC) project (www.sesec.eu).

Alibaba, Aliexpress, Taobao? What are the differences?

Alibaba, Aliexpress and Taobao all belong to Alibaba Group founded by Ma Yun. However, they present major differences which do not make them competitors, for instance:

  • Taobao focuses mostly on Chinese domestic market (therefore it is available only in Chinese language), while Alibaba and Aliexpress target international sellers and buyers based anywhere in the world (therefore both are available in English language).
  • Alibaba is a B2B platform aiming at wholesale or large-volume transactions between businesses; Aliexpress is a B2C platform where generally there is no requirement in terms of minimum order.
  • Payments on Alibaba and Aliexpress are generally easier (e.g. concluded through Paypal), while payments made on Taobao are more complicated for users not based in China.
  • Taobao’s sellers must be companies legally registered in China, while sellers on Alibaba and Alipay can be based in any country.

Therefore, if you plan to sell your products to Chinese domestic consumers, your best options will be to open stores on Taobao, Tmall, as well as other platforms.

Are there restrictions for setting up foreign-invested companies in China?

Entry in the Chinese market is regulated by a series of ad hoc regulations, most notably those called ‘negative lists’. These documents stipulate open, restricted or prohibited sectors for foreign investment. There are three main types of negative lists:

  • The Special Administrative Measures on Access to Foreign Investment, also called Foreign Investment Negative List, applies nationwide and indicates the industries in which foreign investment is restricted or prohibited. The latest 2020 edition was published by the NDRC and MOFCOM in June 2020, and can be accessed at this link.
  • The Free Trade ZoneSpecial Administrative Measures on Access to Foreign Investment, also called FTZ Foreign Investment Negative List. It follows the same logic of its nationwide counterpart, but contains less restricted or prohibited sectors and it only applies to the 22 Free Trade Zones established across China. The latest 2020 edition was published by the NDRC and MOFCOM in June 2020, and can be accessed at this link.
  • The Market Access Negative List is similar to the previous lists, but it applies to all actors in mainland China regardless of their nature (state-owned, private, non-profit) and country of origin (Chinese entity or foreign-invested). The latest 2019 edition of the list was published by NDRC and MOFCOM in November 2019, and can be accessed at this link.

Foreign investors looking to open companies in China should carefully review all these lists before making any decisions, starting from the Foreign Investment Negative List (either national or FTZ) and ending with the Market Access Negative List. According to the new Foreign Investment Law (entered into force in January 2020), for all sectors not included in any of the above lists, foreign investors will be treated on equal footing as domestic investors with no need for pre-approval from authorities.

It is noteworthy that, since their establishment in 2017, the content of the three negative lists has been gradually reduced every year – though often not in line with the expectations of foreign investors.

Besides the negative lists, China has also established the Catalogue of Encouraged Industries for Foreign Investment, a ‘positive list’ indicating which sectors are particularly open and welcoming for foreign investment, both nationwide as well as in central and western regions. Foreign investors in these sectors will receive much stronger support from local administrations, in terms of incentives, preferential policies, access to administrative services, etc. The draft of the 2020 edition of the list was published by NDRC and MOFCOM in August 2020, and can be accessed at this link.

A very useful and easy-to-read flowchart on the differences among these negative lists, and the processes that foreign investors should follow, was produced by the European Union Chamber of Commerce in China: https://europeanchamber.com.cn/en/national-news/3025/invest_in_china_how_to_navigate_the_negative_lists.

The EU SME Centre has produced an article on the preferential policies of the new Beijing FTZ announced in September 2020: https://www.eusmecentre.org.cn/article/overview-policies-foreign-investors-beijing-free-trade-zone.

What are the main tax preferential policies for companies registered in China?

The Chinese government has established a preferential Corporate Income Tax (CIT) rate for small scale and low profit enterprises (小型微利企业), i.e. enterprises with an annual turnover below CNY 3 million, less than 300 employees, and total asset value below CNY 50 million. Specifically, from 1 January 2019 to 31 December 2021:

  • Annual turnover below CNY 1 million (around EUR 126k): 20% CIT rate calculated only on 25% of their turnover;
  • Annual turnover above CNY 1 million (around EUR 126k) but below CNY 3 million (around EUR 378k): 20% CIT rate calculated only on 50% of their turnover.

In addition, the Chinese government has also established various preferential tax schemes to attract or stimulate investment in certain priority areas or regions, mostly involving CIT. Key examples include the CIT rate reduction from 25% to 15% for companies which are recognised with High- and New-Technology Enterprise status (HNTE, 国家高新技术企业) or Technology Advanced Service Enterprise status (TASE, 技术先进型服务企业): the former requires ownership from the China-based entity of the IP rights, as well as R&D investments in key sectors exceeding 5% of the turnover; the latter requires the company to be engaged in BPO, ITO or KPO services. A similar tax break is offered for a few years to software and integrated circuit enterprises.

The CIT rate reduction to 15% is also provided to foreign investors investing in certain sectors in particularly encouraged geographical areas, such as central and western regions (according to the national Catalogue of Priority Industries for Foreign Investment in Central and Western China, link), or in the Hainan Free Trade Port (announced in August 2020).

It is also noteworthy that tax incentives or subsidies may also be given by local governments (including high-tech zones and industrial parks) to foreign investors investing in priority sectors within their jurisdictions. A common incentive, for instance, is the reimbursement of a certain % of the CIT paid by the enterprise in the previous year. Such incentives are usually specified in ad hoc policy documents usually published on the websites of the local government, and should be a key factor to consider before investing in China, and to negotiate with the local administration.

Finally, in addition to CIT incentives, other tax incentives offered may include the exemption of input VAT for all imported high-tech equipment that cannot be produced domestically.

The EU SME Centre has produced an article on the preferential policies of the new Beijing FTZ announced in September 2020: https://www.eusmecentre.org.cn/article/overview-policies-foreign-investors-beijing-free-trade-zone

What types of companies can I establish in China?

Historically, there have been different types of companies that foreign investors could establish in China:

-        Wholly Foreign-owned Enterprise (WFOE, 外商独资企业)

-        Equity Joint Venture (EJV, 中外合资企业)

-        Cooperative Joint Venture (CJV, 中外合作企业)

-        Representative Office (代表处)

-        As well as other less common forms such as Foreign-Invested Company Limited by Shares, and Foreign-Invested Partnership Enterprise.

These distinctions of different types of foreign-invested enterprise (FIEs) were abolished by the new Foreign Investment Lawthat entered into force on 1 January 2020. All FIEs are now uniformly categorised ‘foreign-invested enterprise’ – although a five-year transition period is given to FIEs established before the Foreign Investment Law took effect.

Nonetheless, regulations governing the type of investment that can be done in China by foreign investors still apply, such as the Foreign Investment Negative List and the Market Access Negative List (see FAQ ‘Are there restrictions for setting up foreign-invested companies in China?‘ below).

More details on the setting up process of FIEs in mainland China can be found in a report published in 2019 by the EU SME Centre: How to establish a Foreign Invested Enterprise in China (Update – 2019)  

Infant formula: EU producers authorised to export to China

Exporting infant formula to China is a complicated and long process. According to Chinese laws and regulations, infant formula can be exported to China only after a bilateral agreement and health certificate has been signed with the exporter’s country of origin. Then, the exporter should register with the relevant Chinese authorities. The updated list of approved producers for dairy exports to China is provided (in Chinese) on the website of Chinese customs: http://jckspj.customs.gov.cn/spj/zwgk75/2706880/2811812/jkrpjwscqyzcmd3/index.html, including for individual European countries authorised to export (Austria, Denmark, Estonia, Finland, France, Germany, Ireland, Italy, Netherlands, Poland, Spain, Sweden, United Kingdom).

Notarisation in China: necessity or scam?

The EU SME Centre receives enquiries related to scams on a regular basis. One of the most common one is what we refer to as ‘notary fee case’.

The usual scenario is represented by a foreign company based in Europe or a foreign-invested company based in China that is about to sign a contract (usually a sales and purchase contract) with a local company in China. The local company in China, however, asks to pay a ‘notary fee’ or other administrative fees shortly before the actual signing of the contract; the fee is not usually paid directly to the notary, but to the local company which promises to ‘arrange’ or ‘take care of everything necessary’.

However, according to Chinese law, there is no mandatory provision to notarise ordinary sales and purchase contracts. This requirement exists only for some contracts of special importance, as for example real estate transfers. Moreover, even if both parties agree on the notarisation of a contract, the physical presence of both parties in the notary office is required, otherwise it will be impossible to notarise a signature.

In one specific case that the EU SME Centre dealt with, the foreign company was wise enough to question the notarisation of a contract/signature without being present in the notary’s office themselves, as this was not common practice in their home country. Those justified doubts saved them about EUR 8,000 of ‘notary fees’ as well as more money and troubles in the future, as the likelihood of repeat offences would have been very high. Such naive attempt to cheat a prospective partner should serve as a warning and discourage any further engagement, as a formal due diligence procedure would likely expose many more risks, making sustainable business with them very unlikely.

More information on due diligence on potential Chinese business partners are illustrated in a report published in 2018 by the EU SME Centre: http://www.eusmecentre.org.cn/report/knowing-your-partners-china

Is it possible to outsource accounting procedures in China?

Yes. The costs of outsourcing accounting services are mostly based on the volume of transactions, with higher costs for higher volumes. Prices can in general start for as little as 1,000 CNY for a couple of dozens of fapiaos every month, to up to 5,000-6,000 CNY for volumes exceeding one or two hundred fapiaos every month.

Start-ups and SMEs, which have less resources and a relatively small volume of transactions, would therefore benefit from outsourcing their accounting services: in this way, they do not need to pay salary plus social security costs for in-house accounting employees. On the other hand, larger companies or those with large volumes of transactions should opt for a dedicated in-house team.

How to know what custom duties apply to my products to be imported in China?

It depends on the HS code classified for the relevant product. Once the HS code is identified, the relevant custom duty rate can be found on the effective Customs Import and Export Tariff of the People's Republic of China (http://app.gjzwfw.gov.cn/jmopen/webapp/html5/jckspslPC/index.html). Please keep in mind that the competent Chinese customs will have the final say on the HS classification.

It is also noteworthy that every year in December, the Chinese customs and State Council publish annual plans of temporary duty rates for certain goods. The latest plan for 2020 is available at: http://www.customs.gov.cn/customs/302249/2480148/2807705/index.html.

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