“……There are different investment options available to foreign investors. Each of the above options is different and is bound by different allowable business scope, and each comes with different financial and tax implications …… The question remained is whether the business decision makers can fully appreciate the differences / implications of these options and are properly advised of the best model before making the decision.”
China is not a single market. Despite the national regulations, the local regulations and practices can vary to such an extent that investing in each different region (or city) within China would be considered as investing in different markets.
When foreign investors make their first entry into China, they must give careful consideration to some fundamental issues such as whether special licenses are required for their intended business and whether their business are allowed under the China's foreign investment catalogue. From a planning perspective, it will be equally important to decide on the proper investment vehicle or structure to carry out your business in China. Moreover, it is also important to constantly review your investment structure as the rules in China are fast changing.
The most direct way to penetrate into the China market is to set up your own local presence, rather than relying on your “Chinese local contact / agent” to conduct business on your behalf for risk management reason.
Setting up a representative office (RO) has been the simplest way to get into China and gain local market experience. However, a RO can only engage in liaison services and can neither perform direct business activities nor hiring local staff.
Otherwise, setting up a separate legal subsidiary in form of a wholly foreign-owned enterprise (WFOE) will allow management to retain full control and flexibility, but this would require a higher capital commitment.
Apart from the traditional manufacturing WFOE, foreign investors may now also set up trading WFOE, service WFOE, wholesale and retail WFOE, etc to suit their business needs.
Alternatively, the setting up of a sino-foreign Joint Venture, in some cases, is required especially if the relevant industry has imposed restrictions on foreign investments.
As said, there are different investment options available to foreign investors. Each of the above options is different and is bound by different allowable business scope, and each comes with different financial and tax implications. To make the business decision even more complicated, the same structure may no longer be commercially desirable as the business expands in different stages in China.
The question remained is whether the business decision makers can fully appreciate the differences / implications of these options and are properly advised of the best model before making the decision.
Unfortunately there is no such thing as one structure fits all in China.
The Chinese rules and regulations are always changing so rapidly that leaves business executives no option but to constantly re-examine the legitimacy of their operational and business structures in China from regulatory compliance and tax efficiency perspectives.
It is not uncommon to see many foreign investors still adopt traditional / obsolete business models in China nowadays for various reasons including lack of understanding of the latest tax and regulatory rules. We have successfully assisted many clients in reviewing and re-structuring their business in China and as a result, achieving tax compliance and better business efficiency by conducting a carefully designed “health check” for their Chinese operations.
You will need to seek professional advice in assessing possible risks and designing an optimal investment strategy in China to facilitate business growth.
China imposes a wide range of taxes, including income taxes, turnover taxes, taxes on real estates and other taxes.
The current Corporate Income Tax (CIT) law took effect from January 1, 2008. Tax resident enterprises (TRE) are subject to 25% CIT on worldwide income. Foreign enterprise, which has an effective management and control in China, will also be regarded as TRE. Non-TRE deriving passive income from the PRC will generally be subject to 20% withholding income tax (which may be reduced to a lower rate or exempted under the tax treaty, if applicable).
Several industry based tax incentives may be available to reduce or exempt CIT such as the high and new technology enterprise. In addition, certain geographical based tax incentives are also available such as in the Western China region.
The tax year in China follows the calendar year. Subject to local practice, provisional CIT returns should be filed on a monthly or quarterly basis, with the tax payments be made normally within 15 days following the end of the month/quarter. Annual tax return should also be filed on or before May 31 following the end of a tax year.
China tax authorities have recently stepped up its enforcement on taxation of foreign resident and anti-avoidance measures to track down business transactions carried out with the main purpose of reduction, exemption or deferral of tax payments. There are many high profile tax audit cases being conducted in China on taxpayers conducting business in certain specific sectors. It is of vital importance for foreign investors to carefully consider these provisions and the tax implications when structuring their intended business or transactions in China.
This article is published for general reference only. Readers shall obtain specific tax advice on the subjected matter before taking any actions.