China’s new Enterprise Income Tax law, passed by the National People’s Congress on March 8, should have surprised no one.

Beijing had long telegraphed its intention to unify the disparate tax rates paid by foreign-invested and domestic companies, with the former paying as little as 15 per cent and Chinese enterprises taxed at 33 per cent or even higher. Shanghai-based Bank of Communications, for example, is estimated to have paid a 70 per cent tax rate in 2004.

Under the new law, all companies will be taxed at 25 per cent. Foreign investors who have campaigned for “national” – by which they mean equal – treatment when it comes to market access could hardly complain. “The new tax law provides a level playing field,” says Becky Lai, a tax services partner with Deloitte.

If the enforcement of a new unified rate was as far as the new law extended, adapting to it would be easy enough. But beyond the law’s headline changes, its small print contains important provisions that could force foreign companies to alter their China investment structures radically.

Under China’s old tax regime, investors could take refuge behind borders. If a company was not incorporated in China then it could rest assured that it would have few if any mainland tax liabilities. “Because money is mobile you can [book] a financial transaction anywhere,” Ms Lai notes.

This made life easy for everyone from Hong Kong-based companies with cross-border “contract processing” operations to investors domiciled in popular tax havens, such as the British Virgin Islands.

No longer. Under China’s new tax law, a company’s “place of effective management” will determine liability. A Hong Kong-based company whose executives spend most of their time across the border, in effect exercising control there, could be deemed to be operating in China and therefore liable to its higher tax rates.

As a result, it is crucial for such companies to establish a real presence in Hong Kong and be able to demonstrate that they exercise operational control from the territory. This is especially true for Hong Kong companies that outsource manufacturing operations to “contract processing” factories across the border.

“If you are a contract processor you [could be deemed to] have a permanent establishment [in China]. You have to pay Chinese tax,” says Lee Chee Wing, also a tax partner with Deloitte. “They (the Chinese tax authorities) are really waving a red flag.”

Mr Lee notes that even Hong Kong-based investment bankers who spend much of their time doing initial public offering work across the border could be deemed liable. “The Chinese would just say ‘thank you very much’,” he says.

Ms Lai adds: “You need to hire people [in Hong Kong]. You need to create some kind of presence in Hong Kong.” Otherwise, she says, “you might be falling into the [China] residence trap”.

For companies and executives that do split their operations and time between China and Hong Kong, to limit potential liabilities Mr Lee and Ms Lai recommend “ring-fencing” their activities in both jurisdictions and documenting “where you do what at what time”.

Investors with export-only contract processing operations should also consider restructuring them into wholly foreign-owned enterprises, which would allow them to sell into China’s domestic market.

China’s new law could also make life more complicated for investors based in tax havens that do not have double tax agreements with China. At present, such companies do not have to pay withholding tax on their China investments. As of January 1 , however, they will be subject to a 20 per cent withholding tax.

“This is quite a serious development for them,” Ms Lai says. “The British Virgin Islands has a disadvantage because it doesn’t have a DTA [with China].”

Beneficiaries of this crackdown should include tax-efficient jurisdictions that have already concluded DTAs with China. Examples include Hong Kong, Barbados and Mauritius, all of whom have agreements with China that cap investment vehicles’ withholding exposure on dividends, interest and royalties at 5-10 per cent.

Hong Kong and Mauritius-based investors are also exempt from capital gains withholding taxes on investments in which they hold less than a 25 per cent stake. For investments in which they hold 25 per cent or more, capital gains are taxable.

Barbados’s DTA with China is by far the most favourable, as it also exe­mpts capital gains regardless of the size of an investor’s holding. Ms Lai, however, notes that the agreement between China and Barbados could be revised in future.

For those investors based in tax havens not protected by China DTAs, they have until the end of the year to restructure. Options include rebasing themselves in jurisdictions with China DTAs, but they will have to demonstrate a real presence in their new homes.

Whatever solutions they do seize upon, they will have to move fast before the changes take effect next year. “These seven months are critical,” Mr Lee says. “Time is of the essence.”

Arbitration is the preferred method of dispute resolution for foreign investors in China. For a variety of reasons, foreign parties also prefer to arbitrate outside China.

However, the first question confronting any party wishing to arbitrate China-related disputes outside China is does Chinese law permit the parties to do so? The answer, at least for now, is a qualified Yes.

Mainland Chinese law permits the parties to a “foreign-related” contract to choose their method of resolving disputes. “Foreign-related” cases are those involving at least one foreign party or, if they are both Chinese parties, cases where either the facts establishing the legal relationship between the parties occurred in a foreign country or the subject matter in dispute is in a foreign country.

This seems straightforward enough. However, foreign investors investing in China through China-incorporated subsidiaries sometimes do not realise that disputes involving these subsidiaries on the one hand, and pure Chinese domestic entities on the other, are “domestic” disputes, meaning that the parties must resolve their disputes within China, at least if they want their awards to be enforceable there.

But what about arbitrating in Hong Kong? Is Hong Kong arbitration “foreign” or “domestic” for this purpose? Since July 1997, Hong Kong has been part of China and therefore arbitrations in Hong Kong ought not to be regarded as “foreign” arbitrations.

How the Chinese courts will deal with applications to enforce such awards remains unclear, althoughI am not aware of any courts in China having refused to enforce a Hong Kong award on this basis.

What is true, however, is that an increasing number of “domestic” contracts under Chinese law (where both parties are Chinese domestic entities) are providing for arbitration in Hong Kong.

For example, the Hong Kong International Arbitration Centre (HKIAC) was involved in 394 cases during 2006. Of those, 18 involved pure mainland parties whose arbitration clause specified Hong Kong as the place of arbitration.

This compares with 15 cases in 2005, 20 in 2004, 14 in 2003, 13 in 2002, seven in 2001 and five in 2000.

The trend contrasts with that of the Stockholm Chamber of Commerce, the traditional choice for conducting China-related disputes, where the number of China-related cases has fallen – from 15 in 2002 to five in 2006.

So why is Hong Kong gaining ground as a centre for arbitration for mainland contracts, even though its precise status is uncertain under mainland law?

One important factor is that Hong Kong has arbitration legislation that reflects best international arbitral practice. Hong Kong and Beijing have also agreed on a mechanism to allow reciprocal enforcement of arbitral awards.

However, most practitioners would agree that the territory’s real advantage over Stockholm – and other European venues – is the perception that its arbitrators are more culturally attuned to mainland business practice, together with the advantage of relatively close proximity to the Chinese parties.

There is also a readily available pool of qualified arbitration practitioners and counsel who are culturally sensitive to the needs of Chinese clients. Hong Kong has established specialist arbitration judges, and this, coupled with the pro-arbitration attitude of the courts, will ensure greater certainty and better judicial decisions that help facilitate the arbitration process.

Given these advantages, there is every reason to believe that Hong Kong will continue to see an increasing number of China-related arbitrations.

The writer is a partner in Freshfields Bruckhaus Deringer’s Hong Kong office

Singapore’s state-run investment groups have been given the go-ahead to increase their holdings in India’s largest private sector financial institution, ICICI Bank, beyond the normal ownership limits for foreign groups that are controlled by the same shareholder.

The Reserve Bank of India on Monday told the Financial Times it would approve of any move by the pair – Temasek and government of Singapore Investment Corporation – to increase their respective shareholdings to 10 per cent.

This represents an exemption to the usual rule that limits foreign investors controlled by the same entity to acquiring a total stake in an Indian bank of up to 10 per cent.

Temasek has a 7.37 per cent stake in ICICI, while GIC owns 2.24 per cent.

Any exemption could raise eyebrows among foreign investors not just in the banking sector but in other industries, such as telecoms, in which overseas buyers have faced strict controls on how much they can acquire of domestic companies.

Vodafone of the UK was grilled for weeks by the government this year over whether its plan to buy a controlling stake in domestic mobile operator Hutchison Essar conformed with foreign ownership limits.

The news on Temasek and GIC comes as ICICI is holding the largest share offering by an Indian company – a $5bn domestic and international follow-on issue that would provide a prime opportunity for the two Singaporean agencies to increase their stakes.

The share sale by ICICI is part of a wave of record-sized offerings by Indian companies including the country’s biggest domestic IPO, a $2.25bn listing by property developer DLF, and the nation’s biggest overseas listing, a $2.1bn issue by miner Sterlite Industries, which was to be priced in New York overnight.

The RBI said on Monday that Temasek and GIC would need to buy the shares in ICICI first, according to the usual procedure, after which the central bank would approve the purchase.

The central bank had conveyed to the two agencies its intention to approve such a transaction, a spokesperson at the RBI said.

However, a Temasek spokesperson on Monday declined to comment and a spokesperson at ICICI said that he was unaware of any notification from the RBI of the decision. The GIC was unavailable for comment.

Meanwhile, a person familiar with the situation at the Reserve Bank of India said on Monday that he move was a “one-off” reached as part of India’s bilateral trade agreement with Singapore known as the Comprehensive Economic Co-operation Agreement (Ceca).

Industrial companies have traditionally favoured hiring “second-hand” MBAs – those who have cut their teeth in banking or management consultancy and want to move on. Now, this is changing.

In spite of recent concerns in the business school world that MBA degrees do not teach students skills that companies need, recruiters are increasingly giving the professional services firms a run for their money when it comes to recruiting newly minted MBAs directly from business school. These days companies such as BP, BT, Google, Pepsico, Samsung and Shell are names as familiar on the business school campus as investment banks and management consultancies.

The sea change came with the classes that graduated in 2002 and 2003. Following the terrorist attacks in the US and subsequent economic uncertainty, management consultancies and bankers slashed staff numbers and stayed away from business schools. Industrial companies saw their chance.

The numbers tell the story. At London Business School, for example, only 15 per cent of recruiters were in industry in 2001, but by 2003 that figure had tripled to 45 per cent. Last year saw it fall to 33 per cent.

In addition to those corporate recruiters who began recruiting in 2002, the past three years has also seen a new breed of recruiter looking for future leaders. As a result, on-campus recruiter figures are on the up.

At the Kellogg School at Northwestern University, for example, nearly 250 organisations recruited on campus at Evanston this year, says Roxanne Hori, assistant dean and director of the Kellogg career management centre. “It’s crazy,” she adds.

At the Haas school at Berkeley it is a similar story. Abby Scott, career services director, reports that there were 23 per cent more recruiters on campus this year than last.

At the Tuck school at Dartmouth College, at least half of the on-campus recruiters were corporate, says Becky Joffrey. “It’s striking how many more companies came to Tuck rather than professional service firms,” she says.

However, corporate recruiters face problems competing with the professional service firms. First, says Diane Morgan, head of career development at LBS, many corporate jobs need filling as soon as they fall vacant, not as part of an annual intake. And as professional service firms start hiring in September for appointments the following summer, corporate recruiters often miss the boat.

Nor do corporate recruiters have the recruitment budgets that the McKinseys and Goldman Sachs of the world can boast.

However, corporate recruiters are becoming much more savvy. Peter Abery, programme director of the Future Leadership Programme at BT (see left) says the company has learnt a lot since the programme started two years ago. “The time to be on campus in the US is in September,” he says. This year BT will be there.

BT is not the only company recently to commence an MBA recruitment programme. In the past two years, Ericsson and Nike have introduced MBA recruitment programmes in Europe, says Katty Ooms, director of MBA admissions and career services at IMD, where 70 per cent of the graduates enter the corporate world.

Certain industries are proving particularly popular this year, notably the energy sector, where MBAs aspire to work in alternative energy. “This category is very, very hot,” says Ms Scott.

Those companies that are successful with this approach mimic the professional service firms, searching through “face books” and bringing in teams of recruiters to select the candidates they like. They often have assessment centres and invite their chosen candidates to two or three-day events at the company. “These recruiters are becoming much more professional,” says Ms Ooms.

Interestingly, a growing number of corporate recruiters have set up fast-track leadership programmes for MBAs. Such programmes promise students the chance to move quickly to executive positions and it is a policy that is proving popular with participants, says Ms Hori at Kellogg. The idea of getting into a company and leading it “still resonates”, she says.

Ms Joffrey says that, in the past, MBAs would go to management consultancy because they believed they could then enter a corporation at a higher level. Fast-track development programmes now ensure that corporate recruits can get to the top just as rapidly. In 2006 and 2007, Tuck graduates went into such programmes at companies including Bausch & Lomb, Nissan, PepsiCo and Monster Worldwide.

The task for business school recruitment directors is to match the right graduate with the right corporate recruiter, the latter often having different requirements from the professional service recruiter. In particular, says Ms Joffrey, industrial corporations often look for candidates with previous commercial experience, such as in sales or operations. They also seek those who have excelled in their previous career, irrespective of sector or function, as well as candidates who are willing to travel and work across the globe.

Corporate recruiters have also learnt that they have to pay competitive salaries, says Ms Joffrey. “Finally, companies have matched the ante of professional service firms.” A graduate entering a marketing role in the late 1990s would get a starting salary of $70,000. Today, someone going into a leadership development programme would earn $130,000.

If nothing else, these salaries show that those who predicted the demise of the MBA may well have got it wrong.

In at the deep end: a new recruit gets hands-on with BT’s transformation

At his first day at work after getting his MBA, Emmanuel Lebaut was called into the chief executive’s office and given a project that would help change the way the company operated. It was a degree of visibility, he says, which most MBAs crave but never see in the traditional bank or consulting firm.

Mr Lebaut had been recruited by BT OneIT, the IT and technology arm of telecoms group BT, to be one of the first members of the company’s Future Leadership Programme. That was in 2005. Less than two years later, BT has recruited 54 MBAs to the team and has become one of the most visible corporate recruiters in the top cadre of US and European business schools.

A Frenchman and an engineering graduate, Mr Lebaut says he had never intended to work for BT when he graduated from his two-year degree at London Business School. But during his programme he had focused on change management and had been won over by the vast programme for transformation that was planned at BT.

“BT is changing itself radically, to adapt in advance to what it sees happening in the future,” Mr Lebaut says. “It is quite rare that you get such a scale of change in such a large company.”

The change programme was first implemented in OneIT, but groups from the programme are now working for all divisions within BT. Although 14 of the 54-strong team have moved on to work in other areas of BT, none have left the company, says Peter Abery, programme director of the Future Leadership Programme.

Typically, MBAs will see a project through to implementation, Mr Lebaut says. “We don’t do the nice pack of slides and then drop it over the wall for someone else. We run with it.”