1. Update on China Investment Henry SK Tan Nexia China Nexia TS May 2010

2. Introduction: Foreign Investment  In the 30 years up to 2007, approximately 635,000 foreign enterprises had registered businesses in China.  200 countries represented.  480 Fortune 500 companies.  40 Regional Headquarters in China.  Represents Foreign Direct Investment (FDI) of over USD $770 billion.

3. Introduction: FDI  Both 2008 and 2009 saw a slowdown in the numbers of newly registered companies, nearly a 20% decline from 2007.  During the same time period, the actual FDI input only decreased a few percent, with most foreign enterprises continuing their investment plans.  FDI has now topped USD $100 billion per year.

4. Introduction: FDI  The FDI indications for 2010 are positive.  During January & February 2010: 3163 newly approved foreign companies, up 14.5% year on year; Use of FDI reached USD $14.02 billion, up 4.86% year on year. Total FDI expected for 2010 is over USD $110 billion.

5. Introduction: FDI From February to January 2010, the top ten nations and regions with investment in China (as per actual input of foreign capital) Hong Kong Taiwan Singapore USA Japan R.O.K. Holland U.K. Germany Canada Data extracted from www.fdi.gov.cn

6. Introduction  Due to the new EIT laws that took effect in January 2008, China no longer offers a tax haven for foreign enterprises Most of the tax incentives for foreign invested enterprises were removed Special tax zones also removed for new companies coming in Previous tax incentives and zones are being phased out over 5 years for existing companies  Foreign enterprises must find other motivation to start their businesses in China Large potential market Inexpensive labor and operation costs Some business types are encouraged and may receive CIT tax reductions Participation in the 4 th largest and fastest growing economy in the world

7. Introduction  Encouraged businesses include: High Technology / New Technology Research and Development Environment Preservation / Cleanup Infrastructure Improvements  In some cases, tax incentives are offered: 15% tax rate for High Technology 150% super deduction for R&D costs VAT exemptions for equipment purchased in China for R&D

8. Introduction  China continues to offer a variety of ways for foreign businesses to establish themselves in the country, these include: Representative office (RO) Wholly foreign owned enterprise (WFOE) Equity joint venture (EJV) Cooperative joint venture (CJV) Sino – Foreign Partnership (New as of 1 March 2010)

9. Introduction  In this discussion, we will focus on the following: Types of Foreign Invested Enterprises in China Taxation in China Other considerations for foreign invested enterprises Corporate structure Registered capital Foreign Exchange Transfer pricing Summary and conclusion

10. Sino-Foreign Partnerships  The primary advantages of partnership formation include: No minimum capital requirements Speed and ease of registration  A major disadvantage is that liability is not limited

11. China’s State Administration of Taxation continues to examine and update tax anti-avoidance measures, especially as related to Foreign Invested Enterprises and Non-Resident Enterprises earning profits from China- related business. Most 2009 updates were made in the areas of Transfer Pricing and the Administration of Taxation Collection from Non-Resident Enterprises. Key Tax Updates

12. Transfer Pricing Transfer Pricing (TP) Wide definition of “related parties“ under Circular 114 Covered transactions include: -Sales and purchases, transfer and use of tangible properties -Transfer and use of intangible properties -Capital financing -Provision of services

13. Transfer Pricing (cont.)  Type 1: Exempt from Documentation Annual related-party transactions < RMB 20 Million, or Advanced transfer pricing agreement (APA) in effect with tax authorities  Type 2: Simplified documentation Annual related-party transactions between RMB 20 Million – RMB 100 Million  Type 3: Comprehensive Documentation Annual related-party transactions > RMB 100 Million

14. Transfer Pricing (cont’d) Transfer Pricing Documentation (TPD) Five areas: -Organizational structure -Overview of business operations -Related-party transactions situation -Comparability analysis and -Selection and use of TP methods

15. Transfer Pricing (cont’d) TP adjustment Interest and Penalties -Interest will be computed on a daily basis on the tax unpaid -Interest = RMB base lending rate + 5% -5% penalty may be waived

16. Tax on Sale or Share Transfer of Foreign Owned China Companies Guidance on sale or transfer of shares Affects those that utilize offshore holding companies to set up investments in China If tax burden in offshore intermediate company is less than 12.5%, the non-resident investor making transfer must submit documentation to Chinese authorities Key Tax Updates

17. Non-Resident Enterprise Expatriate Employees Creating Permanent Establishments Overseas companies seconding expatriate employees to their Chinese WFOE or JV entities must carefully consider the assignment contracts. Tax authorities are now looking at such expatriate assignments more closely in order to determine if the overseas company should be considered as a permanent Establishment in China for EIT purposes. Based on the OECD Model Tax Treaty (2008), "the employer is the person having rights on the work produced and bearing the relative responsibilities and risks.”

18. Key Tax Updates Non-Resident Enterprise Expatriate Employees Creating Permanent Establishments Form and substance of expatriate secondment agreements should: –Show that the expatriate is the employee of the China entity –Show that the assignment is for the benefit of the China entity and that the China entity bears the risks and responsibilities for employing the expatriate –Not include any payment or reimbursement from the China entity to the overseas entity –Be well documented to prove the case

19. Key Tax Updates Non-Resident Enterprise Expatriate Employees Creating Permanent Establishments If an expatriate assignment is for the benefit of the overseas company, it is likely that a the overseas company will be considered to have a Permanent Establishment in China for tax purposes. Any overseas company sending expatriates to work in China without a domestic employment contract will likely be considered a Permanent Establishment if the employee is working in China longer than the treaty-established time period Specific tax treaties should be consulted. Depending on the activities, PE is established after 30 – 183 days during a given 1-year period).

20. China Tax Resident Enterprise Nature of Enterprise Enterprises established in China Foreign enterprises established outside China but its effective management is based in China Enterprises established outside China and whose effective management is not within China Tax Resident Enterprise (“TRE”) Non-TRE 25% CIT on worldwide income No establishment in China but has income derived from source inside China: 10% WHT (or at lower treaty rate) on the China sourced income No establishment in China and has no income derived from China: NO CIT or WHT imposed China CIT Payer StatusChina CIT Liability Establishment constituted: 25% CIT on income deemed effectively connected to an establishment in China

21. China Tax Resident Enterprise (cont’d) Circular 82 Took effect retrospectively from 1 January 2008 CCCFC is defined as an enterprise established in accordance with the laws of foreign counties (regions) with Chinese enterprises or corporate groups as the main shareholding investors

22. China Tax Resident Enterprise (cont’d) Determination of Chinese TRE Status The places where the senior management personnel execute the daily management and operation are mainly located within China; The decisions in terms of finance and personnel matters are made by or subject to the approval of organization(s) or individual(s) located in China; The main properties, accounting ledger, corporate seal, minutes of the board meetings and shareholders' meetings, etc. are situated or kept in China; and 50% or more of directors with voting rights or senior management personnel ordinarily reside in China

23. China Tax Resident Enterprise (cont’d) Application for Chinese TRE Status Lodge application to the in-charge tax bureau at where the "effective management" is located (or where the main Chinese investor resides) If no application lodged, the tax bureau may initiate assessment of TRE status of the CCCFC Final approval lies with the SAT

24. China Tax Resident Enterprise (cont’d) Implications of Circular 82 Foreign Investors -Before => No China tax -After => China withholding tax applies CCCFC -Need to lodge application for TRE status Non-CCCFC -SAT is likely to issue similar set of rules

25. Beneficial Ownership Circular 601 “Beneficial owner” is defined as follows: -An individual, corporation or other organization that has the ownership and control over the income or the rights or assets that generates such income -A "beneficial owner" shall generally engage in "substantive business activities" which is further referred to as manufacturing, trading and management activities, etc

26. Beneficial Ownership (cont’d) Factors affecting eligibility: -Obligated to distribute most of its income within a prescribed time period -Has no or minimal business activities -Assets, scale of operations and personnel deployment do not match the income -Has no or minimal control and decision-making rights and does not bear any risks -The income is non-taxable or subject to a low effective tax rate -Interest and royalties: Closely matched back-to-back arrangements

27. Beneficial Ownership (cont’d) Implications of Circular 601 Substance Financing / licensing structures: avoid blatant “back-to- back”

28. Indirect Disposals A B C C B D A Overseas China Equity Transfe r Overseas China Circular 698 Addresses tax issues for equity transfers by Non-TREs Took effect retrospectively from 1 January 2008

29. Indirect Disposals (cont’d) Reporting obligation -Conditions: i.The effective tax burden in the jurisdiction of offshore intermediary holding company being transferred is < 12.5% or ii.The jurisdiction in which the offshore intermediary holding company resides provides an income tax exemption for foreign-source income

30. Indirect Disposals (cont’d) Reporting obligation -Deadline to report is 30 days after the signing of the share transfer agreement -Extensive list of documents and information needs to be submitted

31. Indirect Disposals (cont’d) Chongqing case Sing Co B Sing Co C China Co D China Co A Singapore China 100 % Chongqing State Taxation Bureau (November 2008) Sing Co B owns 100% of the shares of Sing Co C Sing Co C has share capital of S$100. Its only asset is 31.6% of the equity in China Co D Sing Co B sells 100% of the shares in Sing Co C to China Co A, for a price of RMB 63.38 million CSTB: In substance, Sing Co B sold the 31.6% equity in China Co D. Thus, the sale was subject to China tax on capital gains Sale

32. Indirect Disposals (cont’d) Implications of Circular 698 Review current and contemplated investment structures on the “robustness” Any reporting and tax compliance obligations Assess the potential tax exposures Take necessary actions to mitigate the tax risks Get prepared for sound commercial reasons to substantiate the arrangements, etc

33. Key Tax Updates Contracted Projects and Services by Non-Resident Companies (EIT, BT & VAT liability) Latest documentation requirements for SAT local tax bureaus to track tax liabilities: –Non-resident company to fulfill tax registration within 30 days of contract signing. –PRC contracting party to file Report of Contract Projects and Labor Services, copy of contract, copy of non-resident tax registration and other relevant documents within 30 days of contract signing. –The PRC contracting party must file a Report of Payment of Contract of Non-resident Projects along with copies of invoices and vouchers within 30 days of receipt of invoices from the non-resident company. –Non-resident company must submit copies of completions and acceptance report and complete the deregistration process within 15 days of project completion.

34. Key Tax Updates Withholding of Tax on Non-Resident Companies –Tax authorities may designate the payor of the project and/or service fees to act as the withholding agent when: The estimated contract period or period of service is less than one tax year and evidence exists to show that the tax obligation will not be fulfilled; Tax registration or temporary tax registration has not been carried out and the non-resident has not appointed an agent in China to ensure that the tax obligations are fulfilled; An enterprise has failed to file EIT returns, including a provisional filing in accordance with the regulatory deadlines.

35. Key Tax Updates Withholding of Tax on Non-Resident Companies Appointed or contracted withholding agents must: Within 30 days of signing a contract with a non-resident company, the withholding agent must submit a copy of the contract, a registration form for EIT withholding, and other relevant documents to the local tax authorities. Within 30 days of contract amendment of any kind, the withholding agent must file the changes with the local tax authorities. At the time a payment is due (or made) to the non-resident company, the EIT must be withheld by the agent. Within 7 days of the tax withholding date, the withholding agent must submit the tax payment, along with an EIT withholding reporting form, to the local tax authority.

36. Key Tax Updates Withholding of Tax on Non-Resident Companies For Business Tax (BT) and Value-Added Tax (VAT) liabilities: –A non-resident that is liable to BT or VAT and that has a business establishment in China will itself be required to report and pay BT and VAT. –An agent appointed by the non-resident will be responsible to withhold BT and VAT for a non-resident that is liable to either tax but that does not have a business establishment in China. –If the non-resident has not appointed a withholding agent, the payor will be responsible for withholding BT and VAT.

37. Key Tax Updates Expanded Business Tax Rules on Services: –Service Provider in China + Service Recipient in China + Service Rendered outside of China is BT taxable. Previously BT was not applicable. –Service Provider in China + Service Recipient outside China + Service Rendered outside of China is BT taxable. Previously BT was not applicable. –Service Provider outside China + Service Recipient in China + Service Rendered outside of China is BT taxable. Previously BT was not applicable. –Service Provider outside China + Service Recipient outside China + Service Rendered in China is BT taxable. Previously BT was applicable.

38. REACHING US Mr. Henry SK Tan Email: henrytan@nexiats.com.sg Website: www.nexiats.com.sg

39. Thank you 5 Shenton Way UIC Building #16-00 Singapore 068808 Telephone: (65) 6534 5700 Facsimile: (65) 6534 5766 Email: nexiats@nexiats.com.sg Website: www.nexiats.com.sg China Office: Unit 2104 Hongkong Plaza No. 283 Huai Hai Zhong Road, Shanghai 200021 Tel: (8621) 6390 6000 Facsimile: (8621) 6390 6300 Website: www.nexiats.com.cn