Custom essays on Wholly Foreign Owned Enterprises

If the law and local realities allow establishing a wholly foreign owned enterprise instead of the joint venture and successfully develop the business, this option is preferable and safer than creating a joint venture, because the registration process, management mechanism, and taxation, in general, coincide, however, the risk associated with the settlement of relations with Chinese partners is significantly lower (Regev 2010). Most of the relationships that the Chinese partners are seeking to consolidate within the joint venture can be formalized by contracts between a wholly foreign owned enterprise and its Chinese counterparts (Kirby 2003: 229-242).
Wholly foreign owned enterprises are the most common form of foreign investment. Their activities are regulated by the PRC Law of 12.04.86 on wholly foreign owned enterprises and by the regulations of the PRC on the application of this Law, as well as the Law of the PRC of 01.07.79 on joint stock enterprises. Wholly foreign owned enterprises are mainly established in the form of limited liability companies. With the permission of the relevant authorities the establishment of organizations of other forms of liability is allowed. For limited liability companies established by means of foreign investors, the PRC applies the law of 01.07.94 on the companies (Shira 2007: 23-34).
The activity of foreign investors is regulated by the Rules of foreign direct investments of 2007 and other by regulations. Control over foreign investments is implemented by the Ministry of Trade of China, responsible for the development and adoption of rules for the implementation of foreign investment (Shira 2007: 41-45).
Wholly foreign owned enterprises in China pay the taxes like income tax, VAT, sales tax, excises, tax on use of resources, tax on real property, charges for use of ship and cars numbers, the VAT from land use, tax on slaughtering, personal income tax, etc. (Tung 2000: 105-135). In addition, China has a policy of incentives to attract foreign capital in the areas of economic freedom (Regev 2010).
Income tax from wholly foreign owned enterprises is set at 30% of annual profits. An additional 3%fee is charged as the local rate. The rate of income tax on industrial foreign owned enterprises located in an open area on the Liaodong Peninsula is 24%, and the rate for manufacturing companies located in the areas of economic development of Dalian, Yingkou and Shenyang is 15%.

Production foreign owned companies with over 10 years of longevity, during the first and second year after gaining profit are exempt from enterprise income tax, and during the third to fifth years after gaining profit they pay income tax halved (Weiguo 2002: 503-510).
Export foreign owned enterprises after the fixed term get exempt from taxation; if the total annual volume of export production exceeds 70% of annual production of the enterprise, it shall be exempted from the half-rate enterprise income tax. An analogical rule is established in respect to wholly foreign enterprises belonging to the category of high-tech enterprises (Weiguo 2002: 503-510). For these enterprises the term of benefits is also extended for additional three years (Tsang 2009: 757-766).
Wholly foreign owned enterprises, in the case of 5-year reinvestment of the share received by the foreign investor, get 40% of taxes on the part of the reinvested funds returned. Moreover, if such an enterprise with over 5 years of longevity reinvests into export enterprises or high-tech enterprises, the income tax on reinvested funds is returned in full. When transferring the earned income abroad, the transferred amount of profit is exempt from income tax (Shaoguang 2001: 93-111).
The income received by the parties of a wholly foreign owned enterprise may be distributed between them according to the resolution of the meeting of participants. The distribution is made after the payment of income tax at the rate fixed for this type of enterprise (Wong 2006).
While allocating the net profits, the company registered in the PRC is required to deduct 10% of their profits to a special fund, whose assets are controlled by the company and may be used if necessary to cover its losses. When the fund reaches the level of 50% of the company’s share capital, the deductions may be stopped (Leong 2000: 129 – 168).
Up to 2008 the profits distributed as the dividends of parties of wholly foreign owned enterprises were not subjected to taxation in the PRC. The new edition of China Law on corporate profit tax and the regulations on the application of this law state that the dividends will be taxed on profits at a rate of 10% (Wong 2006).
Wholly foreign owned enterprises have become the most dynamic and productive companies in the Chinese economy. The volume of their production in the industrial sector has been growing four times faster than those of other enterprises, and labor productivity has become almost twice the level achieved by public sector companies. Employment in wholly foreign owned enterprises grew fourfold in the 90-ies involving 6 million people. In general enterprises with foreign capital employed 16.2 million people in 2008 (Regev 2010).
FDI created a new sector of the economy oriented on export, due to which the growth of China’s foreign trade exceeded the analogical indicator of the whole world trade by 4,5 times since 1978 (Ding 2002: 431-449). The key role in this achievement is played by wholly foreign owned enterprises. Since 1985, their share in exports increased from 1 up to 50%; they accounted for over a half of total export growth of China (Regev 2010).