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Foreign Banks Gain Exemption From Chinese Taxes

by Mary Swire,, Hong Kong

11 April 2007

The Chinese government has reportedly issued a circular which describes how locally-incorporated foreign banks will in future be exempt from a number of taxes under new banking rules.

According to the Xinhua state news agency, the circular, issued jointly by the Ministry of Finance and State Administration of Taxation, revealed that the taxes covered include business tax, value-added tax, corporate income tax, stamp tax, and real estate transaction tax.

In addition, the transfer of property rights and equities from a former bank branch to the wholly-owned foreign bank is exempted from business and value-added taxes, the agency reported. A wholly-owned foreign bank should also continue to enjoy the tax holidays which the former bank branch had enjoyed, the report added.

Under Chinese financial sector reforms which went into force last December, foreign banks operating in China have the same preferential legal and tax treatment given to domestic banks. The changes mean that foreign banks already operating in China can offer yuan-denominated services to local customers, putting them on an equal footing with domestic banks. The new laws honour a commitment given to the World Trade Organisation that China would open its financial services markets to foreign banks.

While the reforms have been generally welcomed by the global banking industry, some experts have argued that a high minimum capital threshold will mean that many foreign banks will struggle to gain a foothold in the country's market, with only the largest banks able to compete with state-run domestic institutions, which have already established networks with thousands of branches.

Under the new rules, foreign banks that choose to incorporate locally have to put up 1 billion yuan (US$127 million) in capital in order to gain full access to China's vast retail banking market. Those that do not incorporate will be restricted to taking minimum deposits of 1 million yuan - effectively barring them to all but the wealthiest Chinese residents. They will also not be permitted to take part in the bank card business.

However, the Chinese authorities argue that this will be a vast improvement on the old rules, which restricted foreign banks to offering local currency services to businesses in 25 cities, while lending or deposit-taking business had to be conducted in foreign currency.

"We believe that with China's ongoing development and improved financial supervision, foreign banks will have broader scope in which to develop," Song Dahan, deputy director of the Legislative Affairs Office of China's State Council, told a news conference last year.

The official also noted that foreign banks will continue to enjoy preferential tax treatment over their domestic rivals.

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