As highlighted in KPMG China Tax Weekly update (Issue 4, January 2017), on January 2017, the State Council published a new policy on foreign investment (Guo Fa  No. 5) setting out 20 measures to further attract foreign investment. These include, inter alia:
(i) Promote the “Negative List” system (under the “special administrative measures for foreign investment access”) for the administration of foreign investment registrations, and simplify the procedures for establishment and alteration of FIEs;
(ii) Move forward with the construction of free trade zones (FTZs), and leverage the successful experience gained from the FTZs to expand the scope of innovations piloted in the FTZs.
To further ease foreign investment access and opening up, the State Council on 5 June 2017 released Guo Ban Fa  No. 51 (“Circular 51”) with an updated foreign investment negative list for FTZs (“2017 negative list”). This is effective from 10 July 2017, replacing the old negative list issued in 2015 by the State Council through Guo Ban Fa  No. 23.
The negative list was initially issued for the Shanghai FTZ in September 2013, and set out 190 special administrative measures in 18 sectors. The first revision was made in 2014 reducing the measures to 139. In April 2015, the negative list was further revised and adjusted to retain 122 measures in 15 sectors. The negative list was also expanded to apply to Guangdong, Tianjin and Fujian FTZs, in addition to Shanghai. The 2017 negative list will cover all the existing 11 FTZs, including Shanghai, Guangdong, Tianjin, Fujian, Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan and Shaanxi.
The 2017 negative list provides an overview of the sectors in which foreign investment is permitted (including subject to pre-approval where controlling stakes must be held by a Chinese party) or prohibited in FTZs.
The 2017 negative list is compiled based on "Industrial Classification of National Economic Activities"(GB/T 4754-2011), which contains 40 items and 95 special administrative measures in 15 sectors. In comparison with the old negative list, 10 items and 27 special administrative measures are removed from the 2017 negative list, which means the restriction for foreign investments in the FTZs are further lessened. These include sectors such as metal ore and non-metallic mineral mining, aviation manufacturing, ship building, automobile manufacturing, rail transportation equipment manufacturing, communications equipment manufacturing, mineral smelting and calendaring, pharmaceutical manufacturing, road transport, water transport , internet and related services, banking services, insurance business, accounting and auditing, statistics and survey, education, press and publication, radio and television, financial information, culture and entertainment. (click here to see all the eliminated measures set out in Circular 51).
Where foreign investments fall within the 2017 negative list, pre-approval from MOFCOM is required. Those that are not covered in the 2017 negative list shall be treated equivalently to domestically owned enterprises in the FTZs, i.e., recordal filing is required.
* For more information about the foreign investment subject to administration under negative list, please access the following KPMG publications:
A recent posting to the website of the Central Government disclosed that, on 21 June 2017, Morgan Stanley Capital International (MSCI) announced that China A-shares will be included in its Emerging Markets Index (EMI) and All Country World Index (ACWI) starting from June 2018.
MSCI is a leading American provider of global equity indexes. The MSCI global equity indexes have been calculated since 1969 and its indexes include 7 categories. One category is Market Cap Indexes, where the ACWI, EMI and Frontier Market Index are under it. Currently, China’s H-shares, B-shares, red-chips as well as overseas listed Chinese concept stocks have been included in MSCI’s EMI.
MSCI indicated in its announcement that, MSCI plans to add 222 China A Large Cap stocks, representing on a pro forma basis approximately 0.73% of the weight of the MSCI Emerging Markets Index at a 5% partial Inclusion Factor. This will be carried out by two steps. The first inclusion step would coincide with the May 2018 Semi-Annual Index Review followed by the second step which would take place as part of the August 2018 Quarterly Index review.
MSCI also indicated that this decision has broad support from international institutional investors with whom MSCI consulted, primarily as a result of the positive impact on the accessibility of the China A market of both the Mainland China-Hong Kong Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally.
A spokesman of the China Securities Regulatory Commission (CSRC) said that the MSCI inclusion responds to the needs of international investors and shows investors’ confidence on Chinese economy and financial market. China’s capital market will welcome overseas investors in a more open manner. The CSRC will work with relevant parties to further improve the rules and regulations for overseas investors to invest in A-shares and facilitate their investment in various ways including tracking the MSCI index.
** Mutual access between the stock markets of Mainland China and Hong Kong was established through Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, implemented in 2014 and 2016, respectively. For more details about the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect and their transaction tax treatment, please read the following KPMG publications:
As highlighted in KPMG China Tax Weekly Update (Issue 21, May 2017), on 16 May 2017, the People’s Bank of China (PBOC) and the Hong Kong Monetary Authority (HKMA) issued the joint Announcement on the launch of the Bond Connect scheme to operate between Mainland China and Hong Kong (“Bond Connect”). Northbound Trading will commence in the initial phase, i.e. overseas investors from Hong Kong and other countries and areas (overseas investors) will be permitted to invest in the China Interbank Bond Market. The Hong Kong and Mainland Financial Infrastructure Institutions will handle trading, custody, settlement etc. Southbound Trading will be explored in due course.
On 21 June 2017, the PBOC issued interim measures to better regulate Bond Connect. The interim measures apply to Northbound Trading, which clarify, inter alia:
The interim measures also clarify the responsibilities of domestic/overseas custody institutions and overseas e-trading platforms, trading procedures as well as administration for funds conversion. Per PBOC, the detailed rules and implementation guidance for e-trading platforms and domestic/overseas custody institutions will be put in place, once it has been approved by the regulatory authorities of both Mainland China and Hong Kong.
* On 12 June 2017, the National Interbank Funding Center published the draft Trial Trading Rules for Bond Connect (“the draft”) to seek public comments. Please refer to KPMG China Tax Weekly Update (Issue 24, June 2017) for more details.
As highlighted in KPMG China Tax Weekly update (Issue 19, May 2016), the State Council on 12 May 2016 issued Guo Ban Fa  No. 35, setting out the opinions on the establishment of entrepreneurship and innovation demonstration bases, and listing the first batch of demonstration bases, which including 28 bases.
To further move forward the drive for greater entrepreneurship and innovation, the State Council on 15 June 2017 issued the opinions on establishment of the second batch of demonstration bases (Guo Ban Fa  No. 54, hereinafter referred as to “2017 opinions”. The second-batch includes a total of 92 demonstration “bases”. Among them, 45 are set up in city districts or economic zones of certain provinces and municipalities, including Beijing Shunyi District, Tianjin Binhai High Tech Industrial Development Zone; 26 are universities and scientific research institutions, including Peking University and Fudan University; and 21 are enterprises, including Aviation Industry Corporation of China, and Baidu, amongst others.
According to the 2017 opinions, the administrators of the second-batch demonstration bases shall (i). before the end of July 2017, draw up a work plan setting out goals and focus areas; and (ii) before the end of 2017, put relevant policies in place and accelerate the construction of demonstration bases. In the first half of 2018, the National Development and Reform Commission (NDRC) will, in conjunction with other authorities, review and evaluate (by third-party) the work of these two batches of demonstration bases.
On 13 June 2017, a list of case decisions made by the Beijing-based Chinese Supreme People’s Court (SPC) were published on the SPC’s website. Among these, there are two tax appeal cases.
One of these was an appeal by Guangzhou Defa Housing Construction Co., Ltd. against an imposition of tax and penalties by the Guangzhou Local Tax Bureau (LTB), specially the Guangzhou 1st Tax Audit Bureau within the LTB (hereinafter referred to as “Defa case”) (see KPMG China Tax Weekly Update (Issue 16, April 2017) for details of Defa case).
A second case was brought as an appeal by the UK-based The Children’s Investment (TCI) Master Fund against an imposition of Corporate Income Tax (CIT) by Hangzhou State Tax Bureau (STB), namely the West Lake Office within the STB. We set out details on the TCI case below.
The TCI case, prior to its elevation to the SPC, initially underwent administrative review with Hangzhou STB. It was subsequently brought before Hangzhou People’s Intermediate Court and finally the Zhejiang Province People’s High Court in December 2015. This succession of appeals follows Article 19 (1)(2) of the Tax Administrative Review Rules (TARR) and Article 88 (2) of the Tax Collection and Administration (TCA) Law. At administrative review, and then at Hangzhou and Zhejiang court levels, the case was repeatedly decided in favour of the tax authorities.
The SPC on 8 September 2016 decided to reject the application of TCI for retrial, meaning the imposition of CIT by the Hangzhou tax authority was affirmed.
The background facts to the TCI case are as follows:
The judgments made by the courts, following an administrative review decision in favour of the tax authorities, were as follows:
A number of observations may be made on the TCI case:
As highlighted in KPMG China Tax Weekly Update (Issue 16, April 2017), an 19 April 2017 executive meeting of the State Council decided on a three-year extension to certain existing tax incentive policies that were due to expire by the end of 2016. These include, inter alia, reduction of VAT, urban maintenance & construction tax (UMCT), education surtax and IIT/CIT for new businesses or new employments (as relevant) set up or entered into by college graduates, the long term unemployed, or ex-servicemen.
To this end, on 12 June 2017, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) together with the Ministry of Human Resources and Social Security (MOHRSS) and the Ministry of Civil Affairs (MCA) issued separate circulars (Cai Shui  No. 49 and Cai Shui  No. 46). These clarify that the current tax incentive policies for new business and new employment by the abovementioned people will be extended and will continue in force from 1 January 2017 to 31 December 2019.