foreign currencies are not allowed to be freely converted or used in China. Foreign exchange transactions, such as the payment or receipt of foreign exchange, are regulated by SAFE. Compared with most entities owned by pure domestic investors, an FIE enjoys some relaxation with regard to foreign exchange 16 , as it may accept investments from outside of China, and may settle foreign currency capital contributions made by its foreign investors into renminbi “at will” for its daily operation. The receipt and payment of foreign exchange during the ordinary transactions of an FIE may in general be managed without additional approval by SAFE, although the processing bank may require certain documents be submitted to support the authenticity and legality of the underlying transaction. An FIE may also borrow foreign loans from its foreign parent or other channels to fund its operation. The specific rules are a little complicated; however, normally foreign loans are permitted within the difference between the registered capital and the total investment amount of the FIE, or a quota calculated based on its net assets. The profits of an FIE, after payment of withholding tax (as discussed below) and certain statutory company reserve funds (if applicable), may be legally remitted out of China to its foreign investors.

5) Land In China, all lands are owned by the public; and in this sense, there is no "private land" in China. The ownership of the land is divided into two types: ownership by all people (in this case, the state owns such land on behalf of all people, and therefore the land normally is called “state -owned land”); and ownerships by collectives (such as all farms and villages in the area). Most FIEs can start their business in China with a leased property such as an office. But for FIEs that wish to build facilities or buildings on the land which they have more control, they shall purchase land use rights from the local government which administrates land within its jurisdiction. The procedures required apply equally to foreign and domestic purchasers, which involves a relatively open and transparent public bidding process. Depending on the purpose of use of the land, the applicable term of use varies, such as fifty years for land zoned for industrial use and forty years for land zoned for commercial use. 6) Tax China has a comprehensive taxation system, which is modelled after or similar to some major western countries. Taxes related to a business entity are complicated. For FIEs, the taxes most closely relevant to their business in China are value-added tax (“ VAT ”), income tax and withholding tax.

16 Enterprises with investments from domestic investors may be subject to higher scrutiny with regard to foreign exchange.

ILN Corporate Group – Establishing a Business Entity Series

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