Foreign Investment in China and China Tax

Foreign Investment in China and
China Tax Regulation Updates
Agenda
1. Comparison of Main Investment Vehicles
2. Foreign Investment in Main Industries
3. Incorporation Procedures
4. New Tax Rules
5. Profit Repatriation
2
Comparison of Main
Investment Vehicles
3
Main Investment Vehicles in China
Company
Wholly Foreign Owed Enterprise (“WFOE”)
Foreign Invested Commercial Enterprise (“FICE”)
Sino-foreign Equity Joint Venture (“EJV”)
Sino-foreign Cooperative Joint Venture (“CJV”)
Representative
Office (“RO”)
RO
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Company
RO
Registered Capital
Minimum RMB 30,000 of registered
capital required for a limited liability
company.
Not applicable.
Operation Period
of Parent
Company
No requirements except for certain
special industries.
Parent company
established for
more than 2 years.
Function
Engage in direct business activities,
Market research
generate revenue, enter into contracts, and liaison
and issue invoices.
function only
Independent Legal
Person/Limited
Liability
Yes, in most cases.
Not applicable.
5
Company
RO
Hiring of Staff
Can employ own staff
Through qualified
recruitment agency
Lead Time to
Establishment
3 months, FICE likely to take a month
longer
2-3 months
6
Tax
Implication
Company
RO
- Value Added Tax (“VAT”) at the rate of 17% on
taxable product revenue
- Business Tax (“BT”) at the rate of 3% to 20%
on taxable service revenue
- Enterprise Income Tax (“EIT”) at the rate of
25% on taxable profit
- EIT preferential rates
• High technology enterprises (15%)
• Western regions (15%)
• Small profit enterprises (20%)
- Local Surcharges /Additional Taxes (“AT”)
including:
• Urban City Construction Tax at the rate
of 7%, 5% or 1% on turnover taxes
• Education Surcharge at the rate of 3%
on turnover taxes
• Local Education Surcharge at the rate of
2% on turnover taxes
- Stamp Duties (“SD”) at the rate of 0.05%, 0.3%
0.5%, 1% on dutiable contract
- Custom Duty (if there is importation), the tax
rate of which might be very different according
to the type of imports.
- BT at the rate of 5% on taxable revenue
- EIT at the rate of 25% on taxable profit
- AT including:
• Urban City Construction Tax at the rate of 1%, 5% or 7%
on turnover taxes
• Education Surcharge at the rate of 3% on turnover taxes
• Local Education Surcharge at the rate of 2% on turnover
taxes
• Others
- SD where applicable
- Tax assessment method:
• If the RO keeps proper books and records; and can accurately
account for the taxable income commensurate with its function
performed and risks assumed, the taxes can be calculated
according to its actual basis.
• Where actual basis cannot be used, taxes of RO is usually
assessed by using a cost-plus method with a deemed profit rate.
Total expenditure for current period
Gross income =
1 – 15% (deemed profit rate) – 5% (BT rate)
- EIT payable = gross income x 15% (deemed profit rate)x 25%
- BT payable = gross income x 5%
7
Tax Filing
Requirements
Company
RO
- VAT, BT and AT should be filed and paid
monthly
- EIT should be filed and prepaid quarterly
as well as assessed and adjusted annually
by end of May.
- SD is levied and should be filed when
certain documents are executed or used in
China.
- Custom duty should be paid when
importing goods from overseas.
- BT and AT should be filed quarterly
- EIT should be prepaid quarterly
and adjusted annually by end of
May.
8
WFOE
EJV
CJV
Industry
Restriction
Cannot set up WFOE in specific
industries
Leverage on Chinese partner’s licenses
which are not open to WFOEs
Equity Holding
Foreign investor(s) to contribute
100% of registered capital
At least one foreign investor and one
Chinese investor. Foreign investor to
contribute at least 25% of registered capital
Profit/
Responsibility
Full profit and responsibility
In proportion to their
respective
contributions to its
registered capital
In accordance with
the cooperative/JV
contract
Independent Legal
Person/Limited
Liability
Normally established as limited
liability companies. However,
subject to approval, may also be
established with other forms of
liability
Always formed as
limited liability
company
Can be limited
liability companies
as well as other
forms of companies
9
How to decide on the Investment Vehicle?
Business
model in
China
Business
model of
investor
company
Market access
limitation or preapproval of this
industry
Decide the
investment
vehicle
The catalogue for guidance on foreign
investments (“Catalogue”) (2011) is a legal
pronouncement by the Ministry of Commerce.
It specifies the types of investments that are:
(1)
(2)
(3)
(4)
Encouraged
Permitted
Restricted
Prohibited
If the industry is
classified under
restricted
investments or
prohibited
investments,
investor can choose
a Joint Venture
(“JV”) or RO to
develop the
business in China
10
Foreign Investments
based on Industries
11
Market Access Limitation or Pre-approval of some Industries
Pre-approval by Administration of Industry and Commerce is necessary.
WFOE: Investor established and engaged in advertisement for more
than three years.
Advertisement
JV: Investors established and engaged in advertisement for more than
two years.
Pharmaceutical Trading License is required.
Medicine
Classified into permitted industries since 2012.
Education
Only allowed to set up JV.
Human Resource
Agency
Human Resource Agency License is required.
WFOE: Only for HK and Macau Service Supplier, RC ≥ USD125,000.
JV: 49% ≥ Foreign Investment ≥ 25%, RC ≥ USD300,000.
Commercial Performance License is required.
Performance
Broker
WFOE: Only for HK and Macau Service Supplier (since 2008).
JV: 49% ≥ Foreign Investment ≥ 25%.
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Consulting Services
13
 The Chinese government encourages foreign investment in consulting
services in relation to international economy, technology, and environment
protection.
 Pre-approvals issued by relevant authorities are required for consulting
services in accounting, audit, law and tourism.
14
Wholesale and Retail
15
Special Commodities
 Foreign investors’ share cannot exceed 49% when the following
conditions are met:

Purchase of grains; and wholesale, retail, and distribution of grains,
cotton, vegetable oil, sugar, tobacco, crude oil, agricultural chemicals,
agricultural plastic film, and fertilizers;

More than 30 chain stores have been opened; and

Selling products of different varieties and brands from multiple
suppliers.
 HK or Macau service supplier can establish WFOE to run the above
business.
16
Tax Implications for different Industries

Service company


Usually subjected to BT, EIT, AT, SD, etc.
Certain service companies in Shanghai should be subject to VAT rather
than BT with the implementation of VAT pilot rules.
 Trading company
 Usually subjected to VAT, EIT, AT, SD, Custom duty, etc.
 If the company imports cosmetics or alcoholic drinks, there might be
consumer tax - the tax rate of which depends on the type of goods imported.
17
Incorporation
procedures
18
Feasibility Study Report

Profit Forecast
The profit forecast for the next 5 years should
be practical and positive.

Registered Capital
Investment (“TI”)
(“RC”)
and
Total
The gap between RC and TI is the max amount
of foreign loan that the foreign invested
company can borrow in the future.
19
Registration Address

Validity of Registration Address

The landlord should be the owner of the property, or the one who is
allowed to sublet the property by the owner in writing;

The property should be used for commercial purpose; and

The registration address is available and valid in the AIC registration
system (i.e. the address has not been registered by any other
company).
20
RMB Direct Investments in China

RMB direct investments should be approved by the Commission of
Commerce and the State Administration of Foreign Exchange.

The registered capital in RMB should be injected into the RMB
Capital Special Account. The RMB Capital Account cannot collect
or pay cash directly.

To confirm with overseas and domestic banks if RMB can remitted
between them freely.

RMB investments depend on the RMB offshore market. There are
abundant RMB investments in HK, Southeast Asia, South America
and London, so the investors there can invest RMB directly.
21
Capital Injection
 Once or in stages (according to Articles of Association)
 Once - 90 days after issuing the temporary business license
 In stages - 20% (15%) or above of the registered capital should be
injected into the WFOE’s capital account within 90 days after the
issuance of the temporary business license; the remaining should be
injected within 2 (3) years.
Note: The party remitting the capital should be the direct shareholder of the
WFOE. If not, the capital cannot be accepted and credited into the account.
22
Payment on behalf of Pre-Operating Cost
 Specific requirements on payments on behalf
 Very limited type of payment on behalf could be remitted outside of
China. Examples include:
– salary cost including salaries, social securities, certain commercial
insurances for employees;
– expenditures of business trips outside China;
– allocated R&D costs and purchasing costs;
 Only qualified multinational corporations could remit payment on behalf
outside of China without pre-approval.
23
New Tax Rules
24
Tax Incentives for Foreign Investment

Foreign invested enterprises established after 16 March 2007 will no
longer enjoy the lower preferential enterprise income tax rates and
preferential tax policies, such as the “two-year exemption and threeyear half rate” policy.

However, local financial subsidy, namely local tax refund is still
applicable. The local tax refund rates vary depending on different
regions and different industries (2%-15% of tax contribution).
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VAT Pilot Rules

Introduction of pilot scheme to convert Business Tax
to VAT
关于印发《营业税改征增值税试点方案》的通知

财税 [2011] No.110 outlines the overall framework:




The pilot industry and effective time
Tax rate, calculation methods and tax basis
VAT on service import and export
Transitional policy during period of the pilot
reform
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VAT Pilot Rules
Certain modern services industry
Transportation industry
Land transportation
Water transportation
Air transportation
Pipeline transportation
Certain modern services
industry
R&D and technology services
Information technology services
Culture and creative services
Logistics auxiliary service
Movable property leasing
Authentication and consulting services
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VAT Pilot Rules
Applicable tax rate
General VAT
taxpayers
Movable property leasing
Transportation services
R&D and technology services
Information technology services
Culture and creative services
Logistics auxiliary services
Authentication and consulting services
17%
11%
6%
6%
6%
6%
6%
Small scale
VAT taxpayers
All VAT pilot services
3%
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Profit Repatriation
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Profit Repatriation
Methodology
Service fees
Comments
 Must be genuine services with substance rather
than general management services
 If service provider is considered to have a
permanent establishment in China,
EIT is
based on deemed profit
 If no permanent establishment , then apply for
EIT exemption
Royalties
 A charge for the use of software, patents,
trademarks, design, model, secret formula, etc
 The
royalty
acknowledged
authorities
arrangement
should
be
by certain governmental
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Profit Repatriation – cont’d
Methodology
Interest
Dividends
Comments

Foreign loan should be registered with the local
SAFE

Foreign loan quantum cannot exceed the
difference between total investment and the
registered capital

Thin capitalization rules apply. Debt to equity ratio
is 2 : 1

Dividends can only paid to direct parent

Dividends can only be paid out of after-tax profits
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offering assurance and tax services.
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business advisory and business support services
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Locations
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Contact Details
Chio Lim Stone Forest
8 Wilkie Road, # 03-08, Wilkie Edge, Singapore 228095
Tel: (65) 6533 7600
Fax: (65) 6538 7600
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12th Floor, Shartex Plaza No. 88 Zun Yi Rd (South), Shanghai 200336, PRC
Tel: (86) 21 6270 2215
Fax: (86) 21 6270 2275
Ms Tan Lee Lee
Tel: (86) 21 6270 2215
Email: [email protected]
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Thank You
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