China

1. Openness To, and Restrictions Upon, Foreign Investment

FDI has played an essential role in China’s economic development. Though the PRC remains a relatively restrictive environment for foreign investors, PRC government officials tout openness to FDI, promising market access expansion and non-discriminatory, “national treatment” for foreign enterprises through improvements to the business environment.  They also have made efforts to strengthen China’s regulatory framework to enhance market-based competition.

MOFCOM reported FDI flows grew by about 15 percent year-on-year, reaching USD 173 billion, however, foreign businesses continue to express concerns over China’s pandemic restrictions.  In 2021, U.S. businesses’ concerns with China’s COVID-19 restrictive travel restrictions were at the top of the agenda, along with concerns over PRC’s excessive cyber security and data-related requirements, preferential treatment for domestic companies – including state-owned enterprises – under various industrial policies, preference for domestic technologies and products in the procurement process, an opaque regulatory system, and inconsistent application of laws protecting intellectual property rights (IPR). U.S.-China geopolitical tensions were also cited as a significant concern. See the following:

China’s International Investment Promotion Agency (CIPA), under MOFCOM, oversees attracting foreign investment and promoting China’s overseas investment. Duties include implementing overseas investment policy; guiding domestic sub-national and international investment promotion agencies; promoting investment in industrial parks at the national, subnational, and cross-border level; organizing trainings in China and abroad for overseas investment projects; and, engaging international and multilateral economic organizations, foreign investment promotion agencies, chambers of commerce, and business associations. The agency has offices worldwide, including CIPA Europe in Hungary, CIPA Germany, and a representative office in the Hague to promote investment in the Benelux area. CIPA maintains an “Invest in China” website which lists laws, regulations, and rules relevant to foreign investors. The China Association of Enterprises with Foreign Investments (CAEFI) is a non-profit organization overseen by MOFCOM. The association and corresponding provincial institutions have hotlines to receive foreign investor complaints.

Entry into China’s market is regulated by the country’s “negative lists,” which identify the sectors in which foreign investment is restricted or prohibited, and a catalogue for encouraged foreign investment, which identifies the sectors and locations (often less developed regions) in which the government encourages investment.

In restricted industries, foreign investors face equity caps or JV requirements to ensure control by a PRC national and enterprise.  Due to these requirements, foreign investors that wish to participate in China’s market must enter partnerships, which sometimes require transfer of technology. However, even in “open” sectors, a variety of factors, including ability to access local government officials and preferences, enhanced ability to impact local rules and standards, perceptions of better understanding of the PRC market, and access to procurement opportunities, led many foreign companies to rely on the JV structure to operate in the PRC market.

Below are a few examples of industries where investment restrictions apply:

  • Preschool to higher education institutes require a PRC partner with a dominant role.
  • Establishment of clinical trials for new drugs require a PRC partner who holds the IPR tied to data drawn from the clinical research.

Examples of foreign investment sectors requiring PRC majority stake include:

  • Radio/television market survey.
  • Basic telecommunication services outside free trade zones.

The 2021 negative lists made minor modifications to some industries, reducing the number of restrictions and prohibitions from 33 to 31 in the nationwide negative list, and from 30 to 27 in China’s pilot FTZs. Notable changes included openings in the automotive and satellite television broadcasting manufacturing sectors. Sectors that remain closed to foreign investment include rare earths, film production and distribution, and tobacco products.  However, the government continues to constrain foreign investors in a myriad of ways beyond caps on ownerships. For instance, in the pharmaceutical sector, while JV requirements were eliminated in the 1990s, foreign companies must partner with local PRC institutions for clinical trials. Other requirements that place undue burden on foreign investors include but are not limited to: applying higher standards for quality-related testing, prohibitions on foreign parties in JVs conducting certain business activities, challenges in obtaining licenses and permits, mandatory intellectual property sharing related to certain biological material, and other implicit and explicit downstream regulatory approval barriers.

The negative list regulating pilot FTZ zones will lift all barriers to foreign investment in all manufacturing sectors, widen foreign investor access to some service sectors, and allow foreign investment into the radio and TV-based market research sector.  For the market research sector, caveats include a 33 percent foreign investor ownership cap and PRC citizenship requirements for legal representatives. While U.S. businesses welcomed market openings, foreign investors remained underwhelmed by the PRC’s lack of ambition and refusal to provide more significant liberalization.  Foreign investors noted the automotive sector openings were inconsequential since the more lucrative electric vehicle (EV) sector was opened to foreign investors in 2018, whereas the conventional auto sector is saturated. Foreign investors cited this was in line with the government announcing liberalization mainly in industries that domestic PRC companies already dominate.

In addition to the PRC’s system for managing foreign investments, MOFCOM and NDRC also maintain a system for managing which segments of the economy are open to non-state-owned investors. The most recent Market Access Negative List  was issued on December 10, 2020.

The Measures for Security Reviews on Foreign Investments  came into effect January 18, 2021, revising the PRC’s framework for vetting foreign investments that could affect national security. The NDRC and the Ministry of Commerce will administer the new measures which establish a mechanism for reviewing investment activities across a range of sectors perceived to implicate PRC national security, including agriculture, energy and resources, cultural products, and more.

China is not a member of the Organization for Economic Co-Operation and Development (OECD), but the OECD Council established a country program of dialogue and co-operation with China in October 1995. The OECD completed its most recent investment policy review for China in 2022.

China’s 2001 accession to the World Trade Organization (WTO) boosted its economic growth and advanced its legal and governmental reforms.  The WTO completed its most recent trade policy review for China in 2021, highlighting FDI grew at a slower pace than in previous periods but remains a major driver of global growth and a key market for multinational companies.

Created in 2018, the State Administration for Market Regulation (SAMR) is responsible for business registration processes.  Under SAMR’s registration system, parties are required to report when they (1) establish a Foreign Invested Enterprise (FIE); (2) establish a representative office in China; (3) acquire stocks, shares, assets or other similar equity of a domestic China-based company; (4) re-invest and establish subsidiaries in China; and (5) invest in new projects.  Foreign companies still report challenges setting up a business relative to their PRC competitors. Many companies offer consulting, legal, and accounting services for establishing operations in China. Investors should review their options carefully with an experienced advisor before investing.

Since 2001, China has pursued a “going-out” investment policy.  At first, the PRC encouraged SOEs to invest overseas, but in recent years, China’s overseas investments have diversified with both state and private enterprises investing in nearly all industries and economic sectors.  China remains a major global investor and in 2021, total outbound direct investment (ODI) increased for the first time in four years to reach $153.7 billion, a 12 percent increase year-on-year, according to the 2020 Statistical Bulletin of China’s Outward Foreign Direct Investment .

China’s government created “encouraged,” “restricted,” and “prohibited” outbound investment categories to suppress significant capital outflow pressure in 2016 and to guide PRC investors to more “strategic sectors.” The Sensitive Industrial-Specified Catalogue of 2018  further restricted outbound investment in sectors like property, cinemas, sports teams, and non-entity investment platforms and encouraged outbound investment in sectors that supported PRC national objectives by acquiring advanced manufacturing and high-tech assets.  PRC firms involved in sectors cited as priorities in the Strategic Emerging Industries, New Infrastructure Initiative, and MIC 2025 often receive preferential government financing and subsidies for outbound investment.

In 2006, the PRC established the Qualified (QDII) program to channel domestic funds into offshore assets through financial institutions. While the quota tied to this program has fluctuated over the years based on capital flight concerns, in 2021 the State Administration of Foreign Exchange (SAFE) approved new quotas for 17 institutions under the program to allow a potential $147.3 billion in outbound investment.

In 2013, the PRC government established a pilot program allowing global asset management companies more opportunities to raise RMB-denominated funds from high net-worth PRC-based individuals and institutional investors to invest overseas. These programs include the Qualified Domestic Limited Partnership (QDLP) pilot program and the Shenzhen-specific Qualified Domestic Investment Entity (QDIE) program. In 2021, the China Securities Regulatory Commission (CSRC) and SAFE expanded the pilot areas to at least seven jurisdictions and quotas for the QDLP to $10 billion, respectively. In April, the Shenzhen Financial Regulatory Bureau amended the Administrative Measures of Shenzhen for Implementation of the Pilot Program for Overseas Investment by Qualified Domestic Investors (“Shenzhen QDIE Measures”) to include investments in the securities market that aligns it with the QLDP program.

11. Labor Policies and Practices

For U.S. companies operating in China, finding, developing, and retaining domestic talent at the management and skilled technical staff levels remain challenging for foreign firms, especially as labor costs, including salaries and inputs continue to rise. COVID-19 control and related travel measures have also made it difficult to recruit or retain foreign staff. Foreign companies also complain of difficulty navigating China’s labor and social insurance laws, including local implementation guidelines. Compounding the complexity, due to ineffective enforcement of labor laws and high mandatory social insurance contributions, many PRC domestic employers and employees will not sign formal employment contracts, putting foreign firms at a disadvantage. The All-China Federation of Trade Unions (ACFTU) is the only union recognized under PRC law.  Establishing independent trade unions is illegal.  The law allows for “collective bargaining,” but in practice, focuses solely on collective wage negotiations.  The Trade Union Law gives the ACFTU, a CCP organ chaired by a Politburo member, control over all union organizations and activities, including enterprise-level unions.  ACFTU enterprise unions require employers to pay mandatory fees, often through the local tax bureau, equaling a negotiated minimum of 0.5 percent to a standard two percent of total payroll.  While labor laws do not protect the right to strike, “spontaneous” protests and work stoppages occur.  Official forums for mediation, arbitration, and other mechanisms of alternative dispute resolution often are ineffective in resolving labor disputes.  Even when an arbitration award or legal judgment is obtained, getting local authorities to enforce judgments is problematic.

The PRC has not ratified the International Labor Organization (ILO) conventions on freedom of association, collective bargaining, or forced labor, but it has ratified conventions prohibiting child labor and employment discrimination. Uyghurs and members of other minority groups are subjected to forced labor in Xinjiang and throughout China via PRC government-facilitated labor transfer programs.

In 2021, the U.S government updated its business advisory on risks for businesses and individuals with exposure to entities engaged in forced labor and other human rights abuses linked to Xinjiang. This update highlights the extent of the PRC’s state-sponsored forced labor and surveillance taking place amid its ongoing genocide and crimes against humanity in Xinjiang. The Advisory stresses that businesses and individuals that do not exit supply chains, ventures, and/or investments connected to Xinjiang could run a high risk of violating U.S. law. In fiscal year 2021, CBP issued four Withhold Release Orders  (WROs) against PRC goods produced with forced labor. The Commerce Department added PRC commercial and government entities to its Entity List for their complicity in human rights abuses and the Department of Treasury sanctioned Wang Junzheng, the Secretary of the Party Committee of the Xinjiang Production and Construction Corps (XPCC) and Chen Mingguo, Director of the Xinjiang Public Security Bureau (XPSB) to hold human rights abusers accountable in Xinjiang. In June 2021, the U.S. Department of Labor added polysilicon for China to an update of the List of Goods Produced by Child Labor or Forced Labor. The Department of Labor has listed 18 goods as produced by forced labor in China. Some PRC firms continued to employ North Korean workers in violation of UN Security Council sanctions. Pursuant to UN Security Council resolution (UNSCR) 2397, all DPRK nationals earning income, subject to limited exceptions, were required to have been repatriated to the DPRK by 22 December 2019.

United Kingdom

1. Openness To, and Restrictions Upon, Foreign Investment   

The UK actively encourages inward FDI.  With a few exceptions, the government does not discriminate between nationals and foreign individuals in the formation and operation of private companies.  The Department for International Trade, including through its newly created Office for Investment, actively promotes inward investment and prepares market information for a variety of industries.  U.S. companies establishing British subsidiaries generally encounter no special nationality requirements on directors or shareholders.  Once established in the UK, foreign-owned companies are treated no differently from UK firms.  The UK government is a strong defender of the rights of any UK-registered company, irrespective of its nationality of ownership.

Foreign ownership is limited in only a few strategic private sector companies, such as Rolls Royce (aerospace) and BAE Systems (aircraft and defense).  No individual foreign shareholder may own more than 15 percent of these companies.  Theoretically, the government can block the acquisition of manufacturing assets from abroad by invoking the Industry Act of 1975, but it has never done so.  Investments in energy and power generation require environmental approvals.  Certain service activities (like radio and land-based television broadcasting) are subject to licensing.

The National Security and Investment Act (NSIA) 2021 came into force on January 4, 2022.  The NSIA created a new screening regime for transactions which might raise national security concerns in the UK called the Investment Security Unit (ISU).  The ISU sits within the Department for Business, Energy and Industrial Strategy (BEIS).  It is responsible for identifying, addressing and mitigating national security risks to the UK arising when a person gains control of a qualifying asset or qualifying entity.

The UK requires that at least one director of any company registered in the UK be ordinarily resident in the country.  The UK, as a member of the Organization for Economic Cooperation and Development (OECD), subscribes to the OECD Codes of Liberalization and is committed to minimizing limits on foreign investment.

The Economist Intelligence Unit and the OECD’s Economic Forecast Summary have current investment policy reports for the United Kingdom:

http://country.eiu.com/united-kingdom 
https://www.oecd.org/economy/united-kingdom-economic-snapshot/ 

The UK government has promoted administrative efficiency successfully to facilitate business creation and operation.  The online business registration process is clearly defined, though some types of companies cannot register as an overseas firm in the UK, including partnerships and unincorporated bodies.  Registration as an overseas company is only required when the company has some degree of physical presence in the UK.  After registering their business with the UK governmental body Companies House, overseas firms must separately register to pay corporation tax within three months.  Since 2016, companies have had to declare all “persons of significant control.”  This policy recognizes that individuals other than named directors can have significant influence on a company’s activity and that this information should be transparent.  More information is available at this link: https://www.gov.uk/government/publications/guidance-to-the-people-with-significant-control-requirements-for-companies-and-limited-liability-partnerships .  Companies House maintains a free, publicly searchable directory, available at https://www.gov.uk/get-information-about-a-company.    

The UK offers a welcoming environment to foreign investors, with foreign equity ownership restrictions in only a limited number of sectors covered by the World Bank’s Investing Across Sectors indicators.

https://www.gov.uk/government/organisations/department-for-international-trade 
https://www.gov.uk/set-up-business 
https://www.gov.uk/topic/company-registration-filing/starting-company 
http://www.doingbusiness.org/data/exploreeconomies/united-kingdom/starting-a-business 

The British Overseas Territories (BOTs) comprise Anguilla, British Antarctic Territory, Bermuda, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands (Islas Malvinas), Gibraltar, Montserrat, Pitcairn Islands, St. Helena, Ascension and Tristan da Cunha, Turks and Caicos Islands, South Georgia and South Sandwich Islands, and Sovereign Base Areas on Cyprus.  The BOTs retain a substantial measure of responsibility for their own affairs.  Local self-government is usually provided by an Executive Council and elected legislature.  Governors or Commissioners are appointed by the Crown on the advice of the British Foreign Secretary, and retain responsibility for external affairs, defense, and internal security.

Many of the territories are now broadly self-sufficient.  The UK’s Foreign, Commonwealth and Development Office (FCDO), however, maintains development assistance programs in St. Helena, Montserrat, and Pitcairn.  This includes budgetary aid to meet the islands’ essential needs and development assistance to help encourage economic growth and social development to promote economic self-sustainability.  In addition, all other BOTs receive small levels of assistance through “cross-territory” programs for issues such as environmental protection, disaster prevention, HIV/AIDS, and child protection.

Seven of the BOTs have financial centers:  Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat, and the Turks and Caicos Islands.  These territories have committed to the OECD’s Common Reporting Standard (CRS) for the automatic exchange of taxpayer financial account information.  They are already exchanging information with the UK, and began exchanging information with other jurisdictions under the CRS from September 2017.

Of the BOTs, Anguilla is the only one to receive a “non-compliant” rating by the Global Forum for Exchange of Information on Request.  The Global Forum has rated the other six territories as “largely compliant.”  Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, and the Turks and Caicos Islands have committed in reciprocal bilateral arrangements with the UK to hold beneficial ownership information in central registers or similarly effective systems, and to provide UK law enforcement authorities with near real-time access to this information.  These arrangements came into effect in June 2017.

Anguilla:  Anguilla is a neutral tax jurisdiction.  There are no income, capital gains, estate, profit or other forms of direct taxation on either individuals or corporations, for residents or non-residents of the jurisdiction.  The territory has no exchange rate controls.  Non-Anguillan nationals may purchase property, but the transfer of land to an alien includes a 12.5 percent tax on the assessed value of the property or the sales proceeds, whichever is greater.

British Virgin Islands:  The government of the British Virgin Islands offers a series of incentive packages aimed at reducing the cost of doing business on the islands.  This includes relief from corporation tax payments over specific periods, but companies must pay an initial registration fee and an annual license fee to the BVI Financial Services Commission.  Crown land grants are not available to non-British Virgin Islanders, but private land can be leased or purchased following the approval of an Alien Land Holding License.  Stamp duty is imposed on transfers of real estate and the transfer of shares in a BVI company owning real estate in the BVI at a rate of four percent for belongers (i.e., residents who have proven they meet a legal standard of close ties to the territory) and 12 percent for non-belongers.  There is no corporate income tax, capital gains tax, branch tax, or withholding tax for companies incorporated under the BVI Business Companies Act.  Payroll tax is imposed on every employer and self-employed person who conducts business in BVI.  The tax is paid at a graduated rate depending upon the size of the employer.  The current rates are 10 percent for small employers (those that have a payroll of less than $150,000, a turnover of less than $300,000 and fewer than seven employees) and 14 percent for larger employers.  Eight percent of the total remuneration is deducted from the employee, while the remainder of the liability is met by the employer.  The first $10,000 of remuneration is free from payroll tax.

Cayman Islands:  There are no direct taxes in the Cayman Islands.  In most districts, the government charges stamp duty of 7.5 percent on the value of real estate at sale, but certain districts, including Seven Mile Beach, are subject to a rate of nine percent.  There is a one percent fee payable on mortgages of less than KYD 300,000 ($360,237), and one and a half percent on mortgages of KYD 300,000 ($360,237) or higher.  There are no controls on the foreign ownership of property and land.  Investors can receive import duty waivers on equipment, building materials, machinery, manufacturing materials, and other tools.

Falkland Islands (Islas Malvinas):  Companies located in the Falkland Islands (Islas Malvinas) are charged corporation tax at 21 percent on the first £1 million ($1.4 million) and 26 percent for all amounts more than £1 million ($1.4 million).  The individual income tax rate is 21 percent for earnings below £12,000 ($16,800) and 26 percent above this level.

Gibraltar:  The government of Gibraltar encourages foreign investment.  Gibraltar has a buoyant economy with a stable currency and few restrictions on moving capital or repatriating dividends.  The corporate income tax rate is 20 percent for utility, energy, and fuel supply companies, and 12.5 percent for all other companies.  There are no capital or sales taxes.  Gibraltar is not currently a part of the EU, and its post-Brexit relationship with the bloc is the subject of ongoing negotiations between London and Brussels.  Under the terms of an agreement in principle reached between the UK and Spain on December 31, 2020, free movement of workers and goods across the land border between Gibraltar and Spain is temporarily continuing.

Montserrat:  The government of Montserrat welcomes new private foreign investment.  Foreign investors are permitted to acquire real estate, subject to the acquisition of an Alien Land Holding license, which carries a fee of five percent of the purchase price.  The government also imposes stamp and transfer fees of 2.6 percent of the property value on all real estate transactions.  Foreign investment in Montserrat is subject to the same taxation rules as local investment and is eligible for tax holidays and other incentives.  Montserrat has preferential trade agreements with the United States, Canada, and Australia.  The government allows 100 percent foreign ownership of businesses, but the administration of public utilities remains wholly in the public sector.

St. Helena:  The island of St. Helena is open to foreign investment and welcomes expressions of interest from companies wanting to invest.  Its government is able to offer tax-based incentives, which will be considered on the merits of each project – particularly tourism projects.  All applications are processed by Enterprise St. Helena, the business development agency.

Pitcairn Islands:  The Pitcairn Islands have approximately 50 residents, with a workforce of approximately 29 employed in 10 full-time equivalent roles.  The territory does not have an airstrip or safe harbor.  Residents exist on fishing, subsistence farming, and handcrafts.

Turks and Caicos Islands:  The islands operate an “open arms” investment policy.  Through the policy, the government commits to a streamlined business licensing system, a responsive immigration policy to give investment security, access to government-owned land under long-term leases, and a variety of duty concessions to qualified investors.  The islands have a “no tax” status, but property purchasers must pay a stamp duty on purchases over $25,000.  Depending on the island, the stamp duty rate may be up to 6.5 percent for purchases up to $250,000, eight percent for purchases $250,001 to $500,000, and 10 percent for purchases over $500,000.

The Crown Dependencies:

The Crown Dependencies are the Bailiwick of Jersey, the Bailiwick of Guernsey, and the Isle of Man.  The Crown Dependencies are not part of the UK but are self-governing dependencies of the Crown.  This means they have their own directly elected legislative assemblies, administrative, fiscal, and legal systems, and their own courts of law.  The Crown Dependencies are not represented in the UK Parliament.

Jersey’s standard rate of corporate tax is zero percent.  The exceptions to this standard rate are financial service companies, which are taxed at 10 percent; utility companies, which are taxed at 20 percent; and income specifically derived from Jersey property rentals or Jersey property development, taxed at 20 percent.  A five percent VAT is applicable in Jersey.

Guernsey has a zero percent rate of corporate tax.  Exceptions include some specific banking activities, taxed at 10 percent; utility companies, which are taxed at 20 percent; Guernsey residents’ assessable income is taxed at 20 percent; and income derived from land and buildings is taxed at 20 percent.

The Isle of Man’s corporate standard tax is zero percent.  The exceptions to this standard rate are income received from banking business, which is taxed at 10 percent, and income received from land and property in the Isle of Man, which is taxed at 20 percent.  In addition, a 10 percent tax rate also applies to companies that carry on a retail business in the Isle of Man and have taxable income in excess of £500,000 ($695,000) from that business.  A 20 percent rate of VAT is applicable in the Isle of Man.

The tax data above are current as of March 2022.

The UK is one of the largest outward investors in the world, often through bilateral investment treaties (BITs), which are used to promote and protect investment abroad and have been adopted by many countries.  The UK’s international investment position abroad (outward investment) in 2020 was $2.1 trillion.  The main destination for UK outward FDI is the United States, which accounted for approximately 25 percent of UK outward FDI stocks at the end of 2020.  Other key destinations include the Netherlands, Luxembourg, France, and Spain which, together with the United States, account for a little over half of the UK’s outward FDI stock.  Europe and the Americas remain the dominant areas for UK international investment positions abroad.

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The Lessons of 1989: Freedom and Our Future