Introduction to Wholly Foreign Owned Enterprises in China
July 24th, 2006 by Kenneth Wong
We have heard earlier from Gabriel Yong from NUS@Shanghai on doing business in China. Continuing on the business in China series, Kenneth Wong, president of SHEN, introduces us to the concept of wholly foreign owned enterprises in China, and offers the guidelines and rules for a foreign entrepreneur to set up their business in China.
Wholly Foreign Owned Enterprises (WFOEs) have become the investment vehicle of choice for the international investor wishing to manufacture, process, or assemble in China. It negates the need for a Chinese partner and does not require large amounts of registered capital to fund. Although WFOEs are in essence to be used for facilities involving production lines, they have under certain conditions also proved suitable for service industries albeit with some restrictions over location. Manufacturing WFOE’s, with an eye on total export of their China manufactured product, may also enjoy significant tax and other incentives if based in Free Trade or Export Processing Zones.
Legal Status & Limited Liability Definition
WFOE’s are limited liability companies established under Chinese Company Law. The shareholders are 100% foreign, usually an international business who would own the company 100%. Limited Liability is recognized by the amount of registered capital injected into the business. Although this may in fact be a combination of two assets, cash injection and equipment, the total value of these also represents the extent of the WFOE’s liability. This affects situations involving insolvency as the assets may depreciate and the cash is legally allowed to be used as operational capital. Under these quite normal circumstances then it is wise just to bear in mind that in the event of bankruptcy the parent would be expected to make up, via injection, the difference between the registered capital amount and the actual value of cash and equipment in order to satisfy creditors.
Reduced Capital requirements
The lure of huge market potential coupled with the promise of tax holidays, tax incentives and financial rebates has helped China attract foreign direct investment (FDI) and to become the biggest recipient and utilizer of FRI in the world. A significant factor contributing to that is the reduced minimum paid-up registered capital requirement for the formation of WFOEs.
Previous Requirements
- Consulting/IT/Design/Manufacturing WFOE – USD 140,000
- Retailing WFOE – Not Permitted
- Trading WFOE- USD 200,000 permitted to be incorporated only in the Waigaoqiao Free Trade Zone (WGQ FTZ) and not eligible for Import/Export (I/X) License.
In the past, only large multinationals and medium-sized corporations were able to afford the above-mentioned registered capital requirements and were willing to take greater risks when venturing into China. However, their subsequent success then created a ‘ripple’ effect on their supplier/service providers outside of China, including the smaller companies. This then initiated the next phase necessary to sustain the influx of FDI into China.
Following the amendment of the Company Law and the Administrative regulations for the Registration of companies, it is now possible to incorporate WFOEs with the following paid-up registered capital
- Consulting/IT/Design WFOE – RMB 100,000
- Retailing WFOE – RMB 300,000
- Trading WFOE inside WGQ FTZ- RMB 500,000 for “small-scale tax payer†and RMB 1 million if 17% Value-Added tax (VAT) status is required. Import/Export License can now be issued
Domestic Trading (i.e. buying and selling of goods within China) can now be added into the business scope of a trading WFOE. To differentiate this newly-approved structure, the term Foreign-Invested Commercial Enterprise (FICE) has been introduced. Minimum paid up registered capital is RMB 500,000 for “small-scale taxpayers†and RMB 5 million if 17% VAT status is required but certain districts may allow application with RMB 3 million paid-up registered capital.
- Manufacturing WFOE – RMB 500,000 and not subjected to additional paid-up registered capital in order to apply for 17% VAT status.
As an added incentive, the regulations for the administration of the registration of companies’ paid-up registered capital were amended to allow a longer period of capitalization as follows:
- First 3 months- 20% of paid-up capital subject to a minimum of RMB 30,000
- Within 24 months - remaining 80% of paid-up capital.
As part of this significant reduction in the paid-up registered capital requirement for WFOEs, there are now several far-reaching implications for changes in regulations.
1. The Representative Office (RO) has become more or less a redundant structure due to its inherent weakness, which includes the following:
- Not a legal entity licensed to conduct business in China
- Cannot receive revenue in China nor issue official tax invoices (fapiao)
- Cannot hire local staff directly unless through government agencies
- Chief Representative (CR) full salary will be taxed according to the number of days spent in China. Monthly tax submission will still have to be filed even if the CR does not enter China during that calendar year.
- All expenses incurred by the RO (including staff salary and rental) will be taxed at 9.82%.
2. A local company formed with two local PRC nationals acting as nominee shareholders is not only severely risky but also unnecessary.
- A foreign beneficial owner bears a tremendous amount of risk in such arrangements because the so-called “contract†signed between the foreigner and the locals is not recognized by the courts in China and there is no nominee law to protect the investment of the foreigner.
- Dividend are taxed at 20% as opposed to zero for a WFOE
A local company or an RO is popularly used for carrying out market studies, as a liaison office for customers and suppliers or die to either a lack funds to risk USD 140,000-200,000 before a final investment decision is made. Nonetheless, under the new law, a foreign investor can set up a WFOE with a minimum paid-up registered capital of RMB 100,000-500,000 even for this sole purpose and yet avoid the inherent weaknesses outlined above.
The only exceptions are industries closed to foreigners where only an RO structure is permitted e.g. banks, securities companies and law firms.
3. Trading WFOEs and FICEs with Import/Export License
- Need not be restricted in setting up within WGQ FTZ. Establishment in all other districts in Shanghai is now possible.
- Can conduct both domestic and international trading, including importing and exporting.
- Need not pay 1-5% on sales value to use the license of a local Import/Export company for importing/exporting.
- Need not take receipts of payments for goods sold through a third-party local I/X company.
- Customers of trading WFOEs deal directly with the company and will not know the supplier or Original Equipment
- Manufacturer (OEM) through import-export document trail or through bank account details
4. Retail WFOEs can be owned 100% by foreigners
- Need not form a joint venture nor require two PRC nationals to hold shares under a local company
About Kenneth Wong: Kenneth was formerly the President of SHEN, the Shanghai House of Entrepreneurs. He can be contacted at gryeon@gmail.com. (Updated on 31 Jan 2008)
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Thanks for the very good introduction. The are some regulation that I was not aware.
A word of caution for those reading this introduction like they are reading ACRA FAQ. IT IS NOT.
What appears on paper and what happens when you do it can be very different. Take the term “it depends” very seriously.
I am using the local partner alternative. May be I can write an article on why there are advantage to that.
Also for companies thinking of setting up in China, do not forget the administrative and compliance cost. It can be very high and one reason why firms, like the one Kenneth is work for, is growing so rapidly.
Since this is an entrepreneur blog, I personally think that none of the schemes are friendly to startup that are bootstrapping. They are more for companies that are stable and growing and ready to invest in China.
Keeping in mind that China has a large pool of entrepreneur that they like to nuture. So they will not be as welcoming as schemes in Singapore inviting foreign entrepreneurs.
Tips for those still studying, make friend with or include one of the PRC students (that you love to hate) as your partner.
[…] Kenneth Wong made a very good introduction to WFOE (or is it WOFE?) at SGentrepreneurs. […]
Hi Ken,
Thank you for your comments. It’s good that you are using the local partner alternative although it does have its risks ( on paper and from what I heard).However, I’m interested to learn more about another way of doing things. Are you currently in a joint venture with a local partner? Since we’re both in Shanghai, maybe we could meet up together with Gabriel one day.
Cheers,
Kenneth
Thks a lot for your interesting info.
I was wondering does this new regulation on retail, is now just official or really in operation?
Is it possible as well with a WFOE and a registered capital of RMB 300,000 to open different stores in Shanghai,or for each districit, it is mandatory to open a new WFOE?
Cheers
Yes, it is an official regulation in operation since mid-2005.However, it is to be noted that RMB 300,000 is a minimum requirement, the actual registered capital you may pump in may be more than the minimum. For example, if your retail store is located around the Huai Hai Zhong Road/Shanxi Nan Road belt ( the orchard road of Shanghai) and your store uses lavish, expensive european furnishings, one would definitely have to pump in more money.
To set up another store in a different district does not entail the set up of another WFOE but rather a BRANCH. The branch pays the same enterprise income tax as the main WFOE. For example, one would enjoy paying only an Enterprise Income tax of 15% if one is located in Pudong ( instead of 33% if located in Puxi) and the subsequent branch in Puxi would also pay the same EIT as one would do in Pudong. Similarly, if one first sets up a WFOE in Shanghai, then another office in Beijing would be classified under a Branch.
thks a lot Kenneth for your prompt reply
kind regards
Just a note for would be entrepreneurs in Shanghai. I have some office space to share, ready in the next 2 months.
Get in touch if you are interested.
[…] If you have read our guest contributor, Kenneth Wong’s earlier article on wholly foreign owned enterprises (WFOEs) in China, here is some additional information on how it might be advantageous to register a Hong Kong company and how it can help you to expand your enterprise into China. […]
Hi Shen,
Just wondering if you know the legalities of tranferring an existing WOFE located in one city to another. I don’t mean setting up a branch. I have heard that if the recipient city is accepting then a WOFE can be transferred to another city and the name can be changed.
Do you have any knowledge of this?
One more question: Do you think the laws and stipulations for setting up WOFE’s are the same throughout China? i.e. Is every province the same?
Very interested to hear your response to both these questions.
Cheers,
JK
Dear Jason
To answer your queries
1)I haven’t heard anything about “transferring WFOE” from province to province. Usually, what we would advise is the following
a) Deregister the existing WFOE in the province as mentioned then start a new one in the new province. The name can then be changed when you start the new WFOE.
b) Set up a branch WFOE in the other province and shift your assets from the main to the branch WFOE. Thereafter deregister the original one. In this way, the name can’t be changed. However, you may sidestep this by using another foreign company name you may own as the name. In china, only the chinese name is of consequence and the English name is up to the owner’s discretion.
2)The laws and the tax rates for setting up WFOEs in the different provinces is definitely different as each provincial government controls their own tax rates and laws. However, the major guidelines for each province follows what is set out by the central government, thus the procedures viewed holistically are similar throughout every province.
Hope this answers your queries. You may contact me at kenneth.wong@willsonn.com if you may have other queries
Kenneth,
the information is helpful indeed. Could you please also clarify these points:
1) what province of China with its taxes and regulations is the most favourable for import/export WFOE?
2) is there any difference in whether the WFOE was incorporated by Hong Kong company or any other foreign company?
3) what are the terms of obtaining IE license? what is the validity term?
I would appreciate your point of view
To answer your queries
1) Different provinces offer different tax benefits. Pudong,Shanghai with its current 15% Enterprise Income Tax incentive would be a good, convenient place to consider setting up an import/export WFOE.
2) There is no difference, except you pay less taxes in Hong Kong compared to other countries ( e.g America,Australia). The setting-up process for a HK company is also comparatively shorter
3) Approval for I/E license will be granted by the relvant bureau pending on the type of items imported/exported. Remember,minimum registered capital for FICE (Trading) is RMB 1 million with 17% VAT status.
I/E License is valid for 5 years, whereby there will be a yearly review and inspection for compliance.
Hope this answers your query, if you have further questions please email me at kenneth.wong@willsonn.com
Kenneth,
1. I want to set up small Export trading company in China with export licence.
2. I want to set it up with as less capital as possible to start with.
3. Please advise the costs and the procedure to do it.
Hi PJ,
Thank you for your query
In China, a small export trading company with export licence has a minimum registered capital of RMB 500,000 or RMB 1 million if 17% Value-Added tax (VAT) status is required.
I will follow up with an email to you on this.
Kenneth
Good article, Kenneth. SMEs have unique opportunity in China, if able to provide “product fit”. More at my blog: http://beijingman.blogspot.com
Greetings,
i believe that the reduced registered capital only applies in shanghai. However, I am interested in establishing a plant in Guangzhou, dongguan but the minimum registered capital is US$1 million (manufacturing industry whether it is sino-foriegn or wholly forign) and has to be injected into China with 18 months and a minimum of US$400,000 to be rendered within 3 months. I do not wish to transfer such an amount so soon to China as yet.
I hope to know whether there are ways around it in such that I were to establish a WFOE in shanghai and then start a branch wfoe in dongguan so as to obtain a valid licence in dongguan, guangzhou.
please advise
Hi Ben,
I just checked with my Guangzhou contact, the reduced registered capital also applies in Dongguan, Guangzhou, where the minimum registered capital is RMB 500,000. However, as this is the minimum registered capital, the full amount will have to be rendered within 3 months.
Also please note that the company can apply for general tax payer, 17% VAT status, once they have reached annual sales in excess of RMB 1.8 million or have a minimum registered capital of RMB 1 million.
Hope this helps.
Kenneth
I just came across the sgentrepreneurs website and read the Introduction to Wholly Foreign Owned Enterprise.
I am a Singaporean based in Shaoxing, Zhejiang.
I want to establish a Trading Company with VAT Status and import export licences.
When I approached the authorities in Shaoxing County, they refused. According to them, it’s not allowed.
I would like to know if the rules are different in different parts of China? Or, maybe the local government staff don’t have full knowledge.
Also which website should I visit to join this blog?
Hi Chandru,
The rules are legislated differently for different provinces in China, however there is a general guideline & rules instituted by the central authorities e.g on registered capital and withholding tax payable, local provincial governments are free to determine their own amounts. For example, setting up a WFOE(Manufacturing) in Shanghai has minimum registered capital of 500,000 RMB but for Dongguan, as in the previous query, I had found it out later to be USD 700,000.
As for establishing a WFOE(Trading) in Shaoxing, Zhejiang, I will find out more from my Shaoxing Contacts and will write back to you on this again.
Kenneth
Hi Kenneth,
I am an Australian, but was original from Shanghai. I am going to run a shop (retail)in China with friend who is a Chinese.
We plan to run couple shops first then develop it as a franchise business.
Which way will be best for us to do this business, as a WFOE or Joint-venture?
Where can I find more information on setting up a small business in China?
Thanks in advance.
William Yuan
Hi William,
If you have a local partner, then you may consider a Joint Venture. However if all potential owners are foreigners and you would like to keep the ownership of the company and not incur possible costs of having a trusted local partner, then a WFOE set-up will be best.
I will follow up with you with an email with further information on setting up a small business in China.
Kenneth
Hi,
Can you help to point me relevant official websites where I can obtain information such as minimum paid-up capital required. I read Chinese so official chinese website is not a problem for me.
Lim
Hi Lim,
Please refer to the Shanghai State Administration of Industry and Commerce at http://www.sgs.gov.cn.
Please note that minimum paid-up capital may vary from place to place and certain minimums are usually instituted by the provincial governments themselves.
Kenneth
Dear kenneth,
It was real pleasant surprise to come across this site ,well i was really impressed .Till now i was also under the impression that foriegners cudnt open a WOFE in China.wat u say is really a relief ,cud you be kind enough to guide me to a good agent ,as i am interested in opening an office in Shaoxing.
Awaiting ur reply
with Rgds
kumar
Hi Kuma
I will follow up with you on this with an email.
Best Regards,
Kenneth
thank you very much for your help kenneth!
I am working for a french company which, for the last 10 years, has been buying goods in China to sell them back to France.
During the 10 years, the company was doing the sourcing and buying through a chinese agent who was paid thanks to the VAT refund process.
As the cooperation with the chinese agent experiences some difficulty and as the chinese goods’ demand is growing, the french company is thinking about setting up an import export company in China.
Apparently there are 3 choices:
- A FICE in Shanghai, but is it possible to get the TVA refund?
- A company in Hong Kong and a representative office in shanghai: but it’s not very legal and still have to pay VAT and some other taxes in China isnt it?
- A joint-venture with import-export licence in Shanghai, in this way would it be possible to get the VAT refund?
Could you please tell me what are the pros and cons of those 3 options?
Thank you very much
Best regards,
Chloé
Dear Kenneth,
First of all I would like to say that I am very glad to have come across your site. Thanks for the very interesting info!!
Together with a Dutch partner I’m trying to set up a software programming WFOE. We found out that it is possible to start a “IT Consultancy†company in China as foreigner. Our plan is to locate ourselves in Chengdu. Would you know the starting capital required (more or less)? We found many different articles varying from RMB 100.000 to registered capital based on the feasibility of a business plan. And which exact institution do we need for filing all the applications for a WFOE? We saw you replied that (for Shanghai) Shanghai State Administration of Industry and Commerce was the institution. Do you happen to know this for Chengdu as well?
Thanks in advance and good luck with your website.
Ewout
(The Netherlands)
Hi Ewout,
The registered capital will range from a minimum of RMB 100,000 and it will also depend on the start-up costs incurred in your set up phase. Please note that you may have to re-apply for the registered capital process if the initial capital declared is not enough, thus it will be wise to weigh the costs and reflect that on your feasibility report early. ( Please refer to my article on common mistakes in licence applications in China on this website:http://sgentrepreneurs.com/dummys-guide/2006/09/10/common-mistakes-in-starting-up-a-business-in-china-licence-applications-and-tax-issues/)
The filing for applications for Chengdu is the Chengdu administration for industry and commerce. The website is on http://www.cdgs.gov.cn
Glad to be of help!
Kenneth
Hi Chloe,
Company would be able to enjoy VAT refund so long as it has a valid “General VAT payer status”.Please refer to my article on tax issues on: http://sgentrepreneurs.com/dummys-guide/2006/09/10
/common-mistakes-in-starting-up-a-business-in-china-
licence-applications-and-tax-issues/ for more detail. This will depend on your registered capital as well as annual revenue Either option 1 or 3 are viable options, you may incur more costs in option 2 owing to the additional different filing costs and taxes you may incur setting up in HK and China.
I would think setting up a FICE in option 1 is the most feasbile as you mantain control over all aspects of the company. However, it should be noted that a JV may be required for certain goods sold in China, so it’ll depend on the nature of your goods sold. Thus option 1 or 3 are both viable, depending on what you sell.
Kenneth
Dear Kenneth,
Thank you very much for your prompt answer!!!!
Actually, the french company is more enclined to choose the FICE option, but one important part of their business is the printing of french school books in China to export them to France. They are also thinking about importing cheap french wine to China. Do those 2 goods require to set up a JV? a majoritary or minority one? Can you advise me a website with the list of the restricted goods for FICE to import or export.
Furthermore, thank you very much for your VAT refund article! I have one more question: Is the “general VAT payer status” accessible to trade JV and to FICE under the same conditions (registered capital or annual revenue)?
Thanks in advance!!!
Chloé
Hi Kenneth,
Thanks a lot for your fast reply!
Ewout
Hai kenneth,
first of all thank you very much to give these information on net.because when i go through these site,i am really interested to open an export compnay in china,so please contact me through by my mail
thanking you
jithuaa
Hi Jithuaa,
You might want to post your questions here and Kenneth will answer them so that more people will benefit?
Thank you.
Regards,
Gwen
Hi Kenneth,
1. We’d like to set up a WOFE at Tianjiin.
Biz scope:
i) International Trading & Import / Export License
ii) Agent / Distributor for Non-govt-controlled items, after-sales support, maintenance of these products sold
iii) Vehicle Maintenance, Vehicle spare parts sales and after-sales support
iv) Business Consultancy
v) Project Management for construction projects
vi) Facility Management
vii)Leasing & hire-purchasing of material handling equipments
2. We want to set it up with as less capital as possible to start with.
3. Could you pls advise the costs and the procedure to do it.
Tx in advance!
Hi Chloe,
The answer to your questions is as follows:
1. You can only set up a JV to do publications printing for the time being in China, and the foreign investor can only hold a minority share. Before applying for the Business License, the approval of Press and Publication Administration should be obtained
2. You can set up a FICE to do exporting and importing business of wine. But if you want to do retail in China, a relative strict procedure will be
conducted.
3. The general VAT is based on Monthly Revenue, It’s the same for trade company for the above two situations.
Kenneth
Hi Yin Fen,
I will follow up with an email to you on your query.
Best Regards,
Kenneth
Dear Kenneth,
I would like to setup a WOFE in China to do assembly and export of plasma and lcd TV.
Is it allow?
Can I enjoy the VAT refund?
Hope to hear from you soonest.
Best regards,
John
Hi John,
Company would be able to enjoy VAT refund so long as it has a valid “General VAT payer statusâ€.Please refer to my article on tax issues on: http://sgentrepreneurs.com/dummys-guide/2006/09/10
/common-mistakes-in-starting-up-a-business-in-china-
licence-applications-and-tax-issues/ for more details.
Glad to be of help!
Kenneth
Hello Kenneth,
I’m the Dutch partner that Ewout mentions in one of the replies above. I would like to thank you for your absolute gems of information.
My latest-and-greatest concern involves Hong Kong and bank accounts. Performed research has told me that using Hong Kong as ‘a gateway to china’ from a financial point of view seems to be a good idea. As far as I understand you:
1. Create an empty company shell in Hong Kong
2. Create the actual company in China
3. You send invoices with the lowest possible profit from the China company to the HK empty shell
4. You send invoices with the largest possible profit from the HK empty shell to your client.
Benefits you gain are that income taxes in HK are 15% compared to 33% (?) in mainland China, which obviously saves you money.
My questions:
1. Is this a good idea?
2. What would be the benefit if you’re situated in a High-Tech zone in China which I think has a 15% income tax as well?
3. What bank in China and Hong Kong would you recommend for such a setup? (I guess English speaking employees would be nice :-))
4. I’m not entirely sure how the stakeholders fit into this picture, would they be working for the HK empty shell or the China company or maybe both?
Hopefully you have a default link for these kind of questions, so you don’t have to type the entire explanation :).
Nevertheless, thank you very much in advance. If you have any questions regarding this reply, I am sure you have my email.
Kind regards,
Erik
Hi Erik,
To answer your query
1) Yes, your facts are correct. HK enjoys one of the lowest corporate tax rates in the world. In fact many of the clients I worked with had used HK companies as parent companies to eastablish their businesses in China. Please refer to my other post on HK companies: http://sgentrepreneurs.com/contributors-corner/2006/08/02/hong-kong-companies-wfoes/
for more info.
2)If the Entreprise income tax rate is similar, there is no benefit. However it must be noted that the Enterprise Income tax rate is subject to periodic changes, meaning that it might change e.g some rumours say Pudong’s Enterprise Income Tax rate may be subject to raise in 2008/2009.
3)Standard Chartered Bank or HSBC: Strong presence in both China and HK, most english speaking as well.
4)They will be working for both. In essence the holding company owns the China WFOE and the shareholders who own the holding company will be shareholders for the China WFOE.
Please do not hesistate to contact me if you have further queries.
Kenneth
Hello Kenneth,
I happen to come across your website via search engine and see that you have provided many good advices to people at large. Likewise, I would like to get some advice from you - I am considering of setting up a representative office in Dongguan, China . The reason for doing so is to monitor our sub-contractor on quality issues and timely delivery to US.
However, as per my understanding, to set-up a Rep. Office in China, we need to engage FESCO to do the registration and recrutiment on our behalf as the Rep. Office is not recognised as an entity. Please advise if this is correct ?
I would be very appreciated that you can assist me with some contact in Dongguan so that I can touch base with them to set up the Representative office up and running as soon as possible.
Your immediate attention in this matter is deeply appreciated.
Thank you.
Regards,
Philip Koh
Hi Philip,
Traditionally that has been the case: it used to be compulsory that FESCO do the registration and recruitment for Rep offices. However, rules may have changed relative to the provinces in China regarding the above matter, FESCO no longer has the monopoly over HR issues in China in some parts of China.
I will ask a contact from Guangzhou to follow up on your matter.
Kenneth
Hi kenneth,
Im thinking about opening up a restaurant in Shanghai.Me and my partners are all foreigners.It will be in small scale.Capital about RMB100,000.Can i sill register as a WFOE? The legal procedures seems complicating,Is it possible to process it myself without engaging an agent?If it possible,do you know any useful site which will give guidances through the proceduces.
Thank you for your help!!
Hi Gin,
You would have to consider if rmb 100k is enough for your restaurant’s cashflow: with the current cost of items in Shanghai,100k may not be enough.Moreover if you pledge a lower registered capital first, you may have to re-register for the entire capital registration process thereafter if you would want to increase your capital when cashflow is insufficient.
It is difficult to process without an agent as the process normally takes between 3-4 months. If you were to do it yourself, it means that you may have to stay in Shanghai for close to 4 months and in worse cases, up to 6 months. Usually, that time cost spent would be more than the benefit you would gain.You may like to check out http://www.china-briefing.com for some details on the wfoe incorporation process.
Kenneth
dear kenneth,
My name is karatnoot juntree. jimlim is my nickname.
iam from bangkok, thailand.
iam a student from Mahidol international university college.iam about to graduate and iam finding a place to do internship before i graduate.
my major is business management focusing on tourism and hospitality.
i have searched on the internet and i am very interested in doing import and export internship.could you please give me advice or if you know anywhere which provide import and export internship, i’ d interested to know. also, could you please classify more information of how i can do internship at your company?
thank you so much and i hope to hear from you soon
karatnoot juntree
email:slimjimbkk@yahoo.com
Hi Karatnoot,
I will put you in touch with my company, perhaps you can email your resume/CV to kenneth.wong@willsonn.com
Kenneth
Kenneth,
Thanks for the trove of useful information here!
I’m an American living in Xi’an, and I’d like to set up a small scale hotel in Shaanxi province.
My local friend/partner just pulled out of the project, so all of my Joint Venture research just became moot.
I assume that WFOE is the way to go now..
Is there anything useful that you can think of that I might need to know?…
such as..
Does Retail WFOE include hospitality businesses?
Incorporating in HK vs Shaanxi?
.. really anything that isn’t redundant… because you seem to be “the man” on the internet about stuff like this :-)
thanks
Hi Mark,
According to the investment policy of China, only a top grade hotel can be permitted to be incorporated as a WFOE. Thus, at present, a small-scale hotel can not be wholly owned by a foreign investor.
If you have to set up a company in Shaanxi and you have no parent company, then the steps to set up your WFOE in china is as stated by Erik above
1. Create an empty company shell in Hong Kong
2. Create the actual company in Shaanxi
3. You send invoices with the lowest possible profit from the China company to the HK empty shell
4. You send invoices with the largest possible profit from the HK empty shell to your client.
Benefits you gain are that income taxes in HK are 15% compared to 33% in mainland China, which obviously saves you money.
Kenneth
Dear Kenneth,
I have a few ideas for a start up business in China.
My enquiry is 3 fold: a)to start up a small (business)training organisation in Hubei, do I need PRC partners and if so, if they are not injecting capital, just working for the organisation, what percentage of any profit are they eligible for b) which government department/s do I have to contact to organize the legalities of opening a business and to whom do I pay the 100,000rmb c) how much tax am I responsible for?
Thanks,
Rosalind
dear Kenneth,
It sounds like i am not the first one impressed by this website.
I was wondering if you could give me some tips. I am currently on a project to open a restaurant in Beijing. It seems to be pretty easy for a foreigner to own his restaurant in shanghai but I don’t know what is the legislation for Beijing.
Could you help me clarify some points:
- Does restaurant can be open under a WFOE?
- What are te requirement: licences, money investing
-Who do I have to contact for the procedure?
-Do you advise me to use a consulting company or can I do it by myself?
Thanks very much for you help it is really appreciated
Maya
Hi Rosalind
1) I think the recent rules have relaxed to allow foreigners to own and conduct “training” firms, as long as you are providing a consulting service. For example, my firm provides accountancy courses at the present and we are registered as a business consultancy. Thus, I will say there is no need for a local partner. Nontheless, if you have a local partner who does not inject capital, you profit sharing scheme can be determined by yourself or the owner of the company.
2) You will have to incorporate through Hubei’s State administration investment corporation (gong shang ju). The 100k rmb investment is pumped into your company’s accounts through a foreign exchange account ( wai zi hu kou) which is set up towards the end of the wfoe incorporation process
3) I think Hubei’s Enterprise Income tax is between 15-20%
Hi Maya,
Glad to hear from you. To answer your query
1)Yes, restaurant can be a WFOE in Beijing.
2)Requirements are at least one director or chief representative. There are four licenses e.g fire,hygiene,safety and environmental compliance, to obtain in addition to the business license. The minimum reigstered capital for a WFOE restaurant in Beijing is USD 140,000.
3) You may consult certain business consultancies. I will advise you to engage a consultancy firm unless you are prepared to stay in China for at least three months to submit the documents on your own. For more information on the whole process, you may check out http://www.china-briefing.com.
I will be glad to answer other questions you may have, please email me at kenneth.wong@willsonn.com.
Kenneth
Dear Kenneth,
It’s great what you do; setting time aside to help other aspiring entrepenuers. Two thumbs up!
I plan to set up a WFOE in Beijing soon. Could you recommend a few consultancies, as well as accountants who ‘know their stuff’ and are trustworthy? Also, would you advise to go directly to Beijing Foreign Investment Service Center or would a consulting company provide better service (perhaps set up the articles of association in such a way that would allow profits to be taxed reasonably but legally?) My HK company was just incorporated on Jan 31 and the next step would be to get this China company set up process started asap.
Like you, I plan to set up a consultancy service company. Many thanks and looking forward to your tips and advise.
Hi,
I have got the same question as that asked by PJ Lal in Nov 06. Can you plz send me your suggestion to the following on my email id:
1. I want to set up small Export trading company in China with export licence.
2. I want to set it up with as less capital as possible to start with.
3. Please advise the costs and the procedure to do it.
dear kenneth,
i have a registered limited co. in hk, now what we do is that we tranfer all our usd receipts in hk to some agent in hk and he gives us rmb in my personal account in agricultural bank of china. pls clear the following points:
1. is it a risk to get huge amount of rmb in personal account.
2. if i make a WOFE in china and get the usd to my wofe a/c , how do i claim the deduction for the payments which we usually pay to small factories either in cash or by bamk transfer to their personal accounts , these small traders just give us order form and no receipt for payment. its a general phenomenon in markets like yiwu it goes all on trust between traders & us .
is this method of cash payments correct for claiming deduction of purchase for the tax purposes in china.
what easy methods should we apply to avoid lots of documentation & save ourself from chinese tax provisions.
3. pls advise some tax consultant in guangzhou who has indepth knowledge like u.
pls try to answer this on internet with detailed implications as this the way most people do trading business in china.
regards,
Hi A Teoh
plan to set up a WFOE in Beijing soon. Could you recommend a few consultancies, as well as accountants who ‘know their stuff’ and are trustworthy? Also, would you advise to go directly to Beijing Foreign Investment Service Center or would a consulting company provide better service (perhaps set up the articles of association in such a way that would allow profits to be taxed reasonably but legally?) My HK company was just incorporated on Jan 31 and the next step would be to get this China company set up process started asap.
Like you, I plan to set up a consultancy service company. Many thanks and looking forward to your tips and advise.
I would recommend Willsonn Partners, A CPA firm which caters to the needs of emerging entrepreneurs like yourself. This firm has successfully incorporated about 20 WFOEs in Beijing over the last 2 years and will take care of everything relating to your accounting needs for your new company. A consulting company will be better placed to help you with your tax needs e.g as you mentioned, adjusting the articles of association to allow profits to be taxed reasonably but legally. It will be difficult to go through a government body as they tend to advise in a manner that best suits their objectives (e.g collect more tax) and may not speak English.
A consultancy service company in Beijing can be easily set up in three months. Please write to kenneth.wong@willsonn.com with your specific query and I can redirect you to my contacts in Beijing.
regards,
Kenneth
Hi Yogesh,
I have sent you an email outlining costs and procedures of setting up a trading company in China.
Best,
Kenneth
Dear Kenneth,
Very impressed with info on the site. Keep it up!
I am considering setting up Internet Consulting/Startup firms in China, hopefully using WFOE.
I am considering one of the following area :
Guanzhou, Donguan, Shenzen, Shanghai, Hangzhou or SuZhou areas.
Qs:
1. Which is a better that have good resource supply ? Which place has the lowest tax rate for IT Consulting firm ?
2. Any of those city have incentives for Internet Consulting / Startups ?
3. What is the cost , procedures to incorp such a startup
4. any other advice wd be appreciated.
Rdgds
Wish
Dear all,
We are currently transiting to our newly set up forum (.com/forum) to allow for much better conversations amongst people. Would be awesome if you could start posting your questions on WFOE/China-related topics here:
http://www.sgentrepreneurs.com/forum/viewtopic.php?t=5
Be assured that your questions will still be answered by Kenneth Wong, our resident contributor and resident expert on business in China.
Regards,
SG Entrepreneurs
Dear Dong
To Answer your query, please see my reply below your questions
i have a registered limited co. in hk, now what we do is that we tranfer all our usd receipts in hk to some agent in hk and he gives us rmb in my personal account in agricultural bank of china. pls clear the following points:
1. is it a risk to get huge amount of rmb in personal account.
It depends on how huge the amount is. If the amount is huge (e.g 5 Million RMB), your account may be pursued by the State Administration of Tax, that is if you haven’t cleared your taxes. If the amount is below, it should be fine.
2. if i make a WOFE in china and get the usd to my wofe a/c , how do i claim the deduction for the payments which we usually pay to small factories either in cash or by bamk transfer to their personal accounts , these small traders just give us order form and no receipt for payment. its a general phenomenon in markets like yiwu it goes all on trust between traders & us.is this method of cash payments correct for claiming deduction of purchase for the tax purposes in china.
what easy methods should we apply to avoid lots of documentation & save ourself from chinese tax provisions.
Get the traders to write a receipt or use the order form and ask your accountant to recognise it as a receipt that would be classified as a deductible in your corporate account. Or else, you can always classify it as personal disbursement (if the company is yours). From what I know places like yiwu are beginning to issue receipts these days.
3. pls advise some tax consultant in guangzhou who has indepth knowledge like u
I will send you an email with the contact.
Best,
Kenneth
Dear Wish,
Please refer to my reply below your questions
Qs:
1. Which is a better that have good resource supply ? Which place has the lowest tax rate for IT Consulting firm ?
For IT, you would want to set up in Shanghai, which will have the technological infrastructure to aid your IT business. The Enterprise Income Tax rate in Pudong Shanghai is also the lowest amongst the cities you have mentioned.
2. Any of those city have incentives for Internet Consulting / Startups ?
As mentioned, Pudong still has a low enterprise income tax rate and the best infrastructure for IT consulting startups. Other places mentioned such as Dongguan, Guangzhou,Shenzhen,Hangzhou and Suzhou should be pursued if you intend to do a manufacturing or trading business
3. What is the cost , procedures to incorp such a startup
The cost is relatively cheap, if need be I can send you a list of procedures and costs by email. It will take about 3 months to set up such a IT start-up
Best,
Kenneth
Dear Readers,
Singapore Entrepreneurs is moving towards a forum-style discussion portal. Thank you for your support over the last 7 months for this article and website. We will be transiting to the forum at the address as follows:
http://www.sgentrepreneurs.com/forum/viewtopic.php?t=5
This new forum will require you to register (won’t take a minute) and you may continue to post your queries on the forum. I would try my best to answer any questions that you may have.
Best Regards,
Kenneth
[…] Venture Capital Funding in Singapore ~ Wholly Foreign Owned Enterprises in China: […]
Hi Kenneth,
I have a few questions (some of which may be repetitive as I have not read through your blog entirely - sorry!) :
1) My company already has a Beijing Rep Office. Is it possible to use this entity to hire operators based in Shanghai?
2) If we were to set up an IT/Design WFOE in Shanghai WGQ FTZ - can our WFOE bill our clients (also registered in WGQ) in US$ and remit this funds to Singapore?
3) Alternatively, is it possible for our Singapore company to bill our clients in WGQ and use our WFOE as a cost centre?
4) To register IT/Design WFOE in WGQ, must we lease a premise within WGQ itself?
5) If we set up the IT/Design WFOE outside WGQ FTZ, what restrictions are there with regard to the use of hard currencies?
6) Does the VAT system work similarly to the Singapore GST system? ie. need to VAT status before we can charge/claim VAT? Is the filing done every quarter?
7) For recruitment in Shanghai, can you refer any website for us to refer to ie similar to Singapore’s “MOM”?
thanks & regards,
June
Kenneth,
Kindly send me the outlining costs and procedures of setting up a trading company in China. Your opinion, is it best to set up the parent company in HK first?
Thanks & Regards,
SK Lee
Hi Sanrong,
It depends if you already have a parent company.
If you already have a parent company in Asia-Pacific e.g Singapore, setting up a parent company in HK gives about the same benefits. A better choice would be to set up in tax havens like the British Virgin Islands, where you pay no tax on remitted revenues.
I will send you an email regarding the costs of setting up a WFOE(Trading) in China.
Kenneth
Hi June,
To answer your questions
1) My company already has a Beijing Rep Office. Is it possible to use this entity to hire operators based in Shanghai?
No, you can only hire in Beijing.To hire in Shanghai you need a Shanghai rep office.
2) If we were to set up an IT/Design WFOE in Shanghai WGQ FTZ - can our WFOE bill our clients (also registered in WGQ) in US$ and remit this funds to Singapore?
Yes,you can
3) Alternatively, is it possible for our Singapore company to bill our clients in WGQ and use our WFOE as a cost centre?
Yes, it is possible, where the SG Company acts as the parent company
4) To register IT/Design WFOE in WGQ, must we lease a premise within WGQ itself?
Yes, you must lease a premise within WGQ to register in WGQ.
5) If we set up the IT/Design WFOE outside WGQ FTZ, what restrictions are there with regard to the use of hard currencies?
Main restriction would be to remit the money out of China. Otherwise, investing capital is easy through setting up a foreign bank account
6) Does the VAT system work similarly to the Singapore GST system? ie. need to VAT status before we can charge/claim VAT? Is the filing done every quarter?
Yes, it is similar. You must have VAT status to claim VAT. Check my posts to similar queries above.
7) For recruitment in Shanghai, can you refer any website for us to refer to ie similar to Singapore’s “MOM�
You may find China’s version of MOM on http://www.fesco.com.cn
Dear Kenneth
Actually my company intends to set up a WFOE in China. May I know what are the requirements to set up a WFOE in China.
Secondly does it has any specific forms to fill up when appointment of Directors or the officers of the Company and in accordance to which Articles?
hi Kenneth,
thanks for your article. Very clear and informative. I live in Shanghai. I was planning to set up a JV with a Chinese partner he being 10% me being 90% whom i trust and can bring valuable contacts and technical skills to my future company, but when I went to 2 govt offices they said that I can not have a Chinese partner, I can only set up a WOFE or take an other business as a partner not an individual. They said that My partner would have to have an existing business for a year and then could sell his business to me and be a small percentage share holder. Can you tell me if there is any loophole to get around this if it is in fact true?
Hi Kenneth,
This site is so helpful and our company is early stage of planning to open a WFOE in china.
Can you kindly send me what you have sent to Yogesh (as per below)?
Your kindest and prompt reply will be greatly appreciates.
Thank you.
Fernando T. Viray
Hi Yogesh,
I have sent you an email outlining costs and procedures of setting up a trading company in China.
Best,
Kenneth
Hi Kenneth
Thanks for your vey useful information. Would you also be able to send me the information you sent to Yogesh, and also some information about your consulting firm? We have a rep office in Beijing but need to expand into Shanghai and possibly Guanzhou, and are considering establishing a WFOE. We may also be doing M&A on other Chinese companies in the future and are interesting in establising a corporate vehicle that might enable us to move in this direction.
Many thanks
Alex
Hi Kenneth,
Thanks for a very interesting blog on doing business in China. Can you tell me of any rule whereby you would need to disburse the capital within n days of remittance into China?
Kind Regards
Hi Kenneth,
I was thinking of applying for a consultancy WFOE and was wondering bout the mimimun capital requirements. I believe it is 100rmb. My question is does this money get held as a deposit and I cannot use it for a certain amout of time or do I just need to show the amount in my bank account and once I get approved for the WFOE the money will be released to me and I can use it for setup and start up costs?
Kind regards,
Wesley
Paula: WFOE can be entirely owned on your own. No need for Chinese Partner or reselling/distribution of shares of a local company.
Fernando and Alex: You may like to email sonny.khoong@willsonn.com if you have further enquiries of setting up a WFOE in China. He should be able to help you with the costs and procedures of setting up a WFOE, if not similar to the above.
Robin: If I don’t remember wrongly, once the accounts are set up, the disbursement of capital should take up to 21 days. Of course, in certain cases, the time period is much shorter, you will have to check.
Wesley: The 100k RMB is your start-up capital, yes it can be used for setup and startup costs.
If you would have any further queries on the setting up a WFOE, please email sonny.khoong@willsonn.com
Dear Readers,
I am currently looking for a job in the area of investment management/banking or consulting. Please let me know if you will have any opportunities for jobs in those areas and are willing to help!
Best Regards,
Kenneth
Hello Kenneth,
Thanks for all the useful information on this site. I have tried to send you an email regarding some details that I have not seen mentioned here, but the email listed for you at the beginning of the article is not currently working. Do you have an alternate contact that I could use or, would you mind to contact me directly? Thanks very much. Greg
Hi Greg,
You may email me at gryeon@gmail.com
Best,
Kenneth
Ken
This is a brilliant blog and right on target as far as I am concerned. I have been working in Huzhou and Shanghai with a couple of manufacturers for the last 12 months. I have been living in Huzhou and I think that my visa is as some sort of technical specialist, although what I actually do is international trade while looking after the QC on the ground.
I have decided to set-up my own wholly owned factory in Nanxun or possibly Suzhou. I need to spend RMB1 million to setup anyway, so reading your blog I think that with that I would be entitled to VAT status. Do you know if I would also automatically be granted an import and export licence? Would I need to pay tax on the export value of the product?
Regards
Terry
Hi Terry,
Yes you should get VAT status and will have to pay tax on the export value of the product.
To all readers, a Happy CNY!
Best,
Kenneth
Hi,
This is a very resourceful website indeed. However, the link http://www.sgentrepreneurs.com/forum/viewtopic.php?t=5 doesn’t seem to be working. Can someone please advise? Thanks!
Adam
Hi Adam,
We have disabled the forum for the moment.
Regards,
Gwen
Dear Readers,
You may still leave your queries on the blog and I will try to answer it as soon as I can.
Best,
Kenneth
Hi Kenneth,
I have read your advice on this site and you have already answered a lot of questions I had about business in China.
Fortunately I still have some questions left. I hope you can answer them for me.
I’m a Dutch architect with an office in The Netherlands. After doing a small project (retail-design) in Beijing last year, I’m now interested in expanding my business in China.
Therefore I would like to setup an office in Beijing. A WFOE seems to be the most suitable.
The Beijing office should have two functions:
1. expanding capacity (backoffice for the existing office in The Netherlands).
2. possible cooperation with several Chinese architects on projects in China and/or Europe.
Is this kind of business encouraged/permitted, according to the ‘Catalogue of Guidence to Foreign Investments’?
Can this business be performed using a consultancy/service-WFOE?
If I’m correct the amount of registered capital should be at least RMB 100.000, but It seems that some people on this site have different experiences, depending on the location. Can you tell me something about the situation in Beijing?
Thanks in advance.
Kind regards,
Jan.
Hi Kenneth,
My company is based in Australia where i manufacture and import from China. I am looking to move my factory to China and set up a small manufacturing and import/export company in Foshan. I was wondering if you know what the requirements are for the city of Foshan? I currently import products from this area so I feel it will be easier to source the raw materials i require.
Kind Regards
Richard
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Hi Ken,
As per many of the above posts, very suprised to find this website - thank you!
I am an Australian working in a mining consultancy firm, currently setting up a WOFE in Beijing. Our company has engaged PwC Australia, HK and China to assist in this process. However, as I do not have any backround knowledge to this complex process, I have been trying to find assistance.
Could you please kindly assist with a few questions I have:
1. For a WOFE with the nature of the business being mining consultancy, are there any other provinces that will allow a better tax scheme than Beijing (Currently my understanding is 5%BT and 25%FEIT)?
2. If there is such an option, can a company be registered in a certain location but have its office in another state?
3. What tax implications am I looking at when I transfer profits out of China back to Australia via a HK company (holding company of the WOFE)?
Thank you very much for your assistance, it is greatly appreciated!
Leeanne
Hello Ken,
Thank you for providing a clear overview. Do you have any references to options for companies that *are* interested in bootstrapping, or is China simply unfriendly to these endeavors at the moment?
Thanks
Hi Leeanne,
I’m not associated to this website, but looking at your question I know of a company in Hong Kong that not only can answer your questions but also execute the very service you need. Check out http://www.tridenttrust.com and look for their HK office. I think their enquiry email is hongkong@tridenttrust.com. Give it a try and let us know how it goes!
I have heard good reports of this company which assists with the setting up of enterprises in Shanghai.
http://www.rhklegal.cn
Andy, thank you very much for your assistance, I will look at the website and post my thoughts later. Cheers
Thank you all for the efforts on WFOE introduction. I’ve just have my consulting company established with http://www.pathtochina.com in Beijing. It’s a small company with RMB 100,000 capital and it’s not that complicated like before.
Hi Kenneth,
Must say this is like finding a saviour-like guiding hand along the road to setting up a business in Shanghai. I am currently still in Singapore, with plans to move over to Shanghai by next year.
I plan to set up a studio for teaching young children music. Would like to confirm with you that this is grouped under service and the capital required is RMB100,000?
I would also greatly appreciate some pointers on renting a space for my studio, setting it up and on running a school as mentioned in Shanghai.
Regards,
Jazzed
Shauna: Yes the capital required should be about RMB 100,000 and is grouped under service. But do bear in mind that this is the minimal cost. Other considerations include rent/location of your company and renovation costs. Shanghai may also be expensive for an operation such as a school, as you may have to locate in high traffic areas where the rent is usually higher.
Dear Readers,
Thank you for reading and supporting this column.I am currently looking for a job after graduating from the National University of Singapore with an Honours Degree in Economics and Finance.
I am particularly interested in jobs in the areas of Investment/Business Analysis. I can also be an in-house consultant/China representative for your business needs in China. As you can see, I have assisted many on this column with their business/incorporation needs in China and possess three years of consulting experience with regards to China Business Set-up/Incorporation, working with companies such as Willsonn Partners and Chiolim Stoneforest. I had also previously wrote a winning business case, analyzing the Mergers and Acquisitions Market in China and generated close to RMB140,000 of business revenues for my previous companies via e-marketing.
Please give me a call at 96704750 or email me at gryeon@gmail.com if you would have any available job opportunities or would like to hear about what I could offer to your esteemed company. Thanks once again for supporting this column.
Best Regards,
Kenneth
Dear Readers,
I have started work at an Investment Management Firm Schroders PLC. You may contact me via email at kenneth.wong@schroders.com
Hi Kenneth
Glad to hear that you have gotten an offer. Hope you enjoy your work then.
We needed some advise for our water treatment project. We are in the mist of studying the best location for us to setup a WFOE in either Chengdu, Guangzhou, Hangzhou or Shanghai. Seeking your view.
We are Petrochemical engineering company in Singapore. Wonder if you could share with us the cost of rental, tax benefit and incentives, advantages and disadvantages to set up WFOE in Chengdu, Guangzhou, Hangzhou and Shanghai. Especially after the 2008 tax implications.
Looking forward to hearing from you.
Regards
Chia
Dear Readers
To reply to Chia’s query, here is some Information from Deloitte Quarterly October 2007
China’s Tax Reform 2008: Implications for foreign investors
For those companies with operations in China or contemplating investment in China, it is time to take action on re-evaluating their tax profile and grasp the tax planning opportunities following the key changes in China’s new EIT law.
Change in Tax rates
To level the playing field for DE and FIE, a unified income tax rate of 25 % has been established. Reduced rates of 15 % and 20 % are available for high-technology enterprise and qualified small and thin-profit enterprise, respectively. A 20 % withholding tax rate is adopted. However, it is not clear whether the current reduced withholding tax rate of 10 % would survive. (Currently, dividends repatriated to foreign investors by FIE with at least 25 % registered capital held by foreign shareholders are exempted as one of the tax incentives offered by the Chinese government.)
New Tax Incentive Policy
China is attempting to move up the value chain. Therefore, the development of technology-led sectors and high-value capabilities has become a key policy focus. Deviating from the geography-based tax incentives of the existing regime, the new law adopts a predominantly industry-oriented tax incentive policy. A series of tax breaks are introduced to promote high-technology, environmental protection and energy-saving industries.
Most tax incentives currently available only to FIE shall be gradually phased out over the next 5 years including:
“Two plus three” tax holiday for manufacturing FIE
Three-year tax holiday extension applicable to high-tech FIE;
Extended 50 % rate reduction for export oriented FIE
Preferential tax rates of 15 % and 24 % in certain regions. Tax refund on dividend reinvestment.
Grandfathering Arrangements
In order to buffer the reform’s impact and shift to the new regime smoothly, a five-year “grandfathering” period shall be granted for FIEs established before the promulgation of the EIT law, which was 16 March, 2007. (Shang Ban Fa Han [2007]No. 59, issued by the Ministry of Commerce on 23 April 2007, further defines the cut-off date as the date of approval of the set-up by the Ministry of Commerce.)
FIE enjoying the reduced tax rate of 15 % or 24 % under the existing law will be eligible for a five year transition period during which the tax rate will gradually phase up to the unified tax rate of 25 %.
Manufacturing FIE that have not yet used their five-year tax holiday will be allowed to continue to enjoy the holiday during the grandfather period. If the five-year tax holiday has not yet begun due to accumulated losses, the holiday will be deemed to commence upon the effective date of the EIT law (i.e. 1 January 2008).
Enhanced Anti-avoidance Rules
With a view to cracking down on tax arrangements designed primarily to avoid taxes, besides the existing transfer pricing rules, the EIT law introduces controlled foreign corporation rules (CFC), thin-capitalization rules and general “catch all” anti-tax avoidance rules, which give the tax authorities a stronger hand in assessing and collecting taxes. It signals an aggressive approach by the Chinese tax authorities to review currently implemented tax structures and provides the tax authorities with ample opportunities to make adjustments as they consider necessary in the absence of a reasonable business purpose.
All the new rules should have a sweeping impact on taxpayers in China.
Tax Resident
Following international practice, the new law introduces a concept of “management or control” in determining tax residency. Resident enterprise is defined as an enterprise which is established in China under PRC laws, or which has its place of effective management in China. Where a non-Chinese enterprise is managed or controlled in China, it may be deemed to be Chinese tax resident and hence will be subject to direct taxation on its worldwide income.
Impact on Foreign Investors
——————————————————–
The impact of the EIT law will differ depending on the type of industry and its location. That said, it will inevitably affect the privileged status and competitive advantage enjoyed by foreign investors in China in the past three decades.
FIE, especially those currently receiving tax incentives, will see an increase of their income tax burden in China. The time is ripe for them to review their tax profile and revisit their current tax planning structure to ensure effective tax rates in China are appropriately managed. Foreign investors contemplating entry into the Chinese market should consider the impact of the additional income tax burden on the project return in the course of the investment decision.
The withholding tax rate on passive income derived by non-resident enterprises from China stays at 20 % in the new EIT law. However, it is not clear whether the current withholding tax exemption on dividend remittance and reduced withholding tax rate of 10 % on other passive income will survive. This could significantly impact the after-tax return of foreign investors, especially financial institutions.
With the increased scrutiny of transfer pricing and increased income tax burden, foreign investors with operations in China should carefully evaluate and assess their transfer pricing to ensure compliance with the arm’s length principle, and appropriate planning strategies.
Given the announced abolition of tax holidays, acquiring an existing FIE to enter the Chinese market could be more appealing for foreign investors, compared with setting up a new FIE (a typical planning technique under the outgoing law to refresh the tax holiday entitlement). Under the grandfathering arrangement, the foreign investor may be able to inherit the favourable tax treatment by acquiring an existing FIE in a share deal.
The Challenges and Opportunities Ahead
——————————————————–
The overhaul of the Chinese income tax regime presents both challenges and opportunities for foreign investors. Companies that do business in China are urged to review the impact of the new law on their China operations and consider appropriate action as soon as possible. The following points may require immediate attention.
Tax resident: With the introduction of the “place of effective management” test in the new residency rules, foreign enterprises with a “substantive presence” inside China need to be careful of the potential risk to be deemed a PRC resident for tax purposes. For multinationals moving regional headquarters to China, particular attention should be paid to corporate governance arrangements.
Withholding tax: Due to the uncertainty as to the implementation of the new withholding tax rule, one might consider the repatriation of profit through dividend distribution prior to the re-imposition of the dividend withholding tax. Planning in dealing with passive income may be needed.
Dividend reinvestment refund: FIE need to speed up the dividend reinvestment refund claim process for those eligible FIE and make sure they can secure the benefit before the end of 2007, which may be the final year that this refund is available.
Tax incentives: Foreign investors should evaluate the new tax incentives under the EIT law and consider how to incorporate them into their operations in China. There is a clear focus on the activities involving high-tech and R&D.
Transfer pricing: Given the increased transfer pricing risk and the opportunity to use more sophisticated transfer pricing arrangements, such as advanced price agreements and cost sharing arrangements, it is advisable that FIE act immediately to review their transfer pricing policies and consider proper tax planning strategies.
Hi Chia,
I will send you an email again with regards to your water treatment project.
Best Regards,
Kenneth
Dear Kenneth,
CONGRATS ON YOUR NEW CONSULTANCY POSITION!! Thanks so much for your generosity and useful advice about doing business in China! I have particularly enjoyed your detailed blogs. You really know your stuff!
I am a brand new consultant, living my dream–to work in China for a few weeks. Although I work for a non-profit that lends microloans and provides business training and technical support, we will incorporate as a business. I have heard that the labor and tax laws are changing and that business is favorable for wholly owned enterprises. Could you please direct me to any people, sites, blogs, articles, and books about the process to incorporate and which laws apply to incorporation. Any information on current tax, labor, and commerce laws would be so appreciated.
Thanks so much, again, for your insight and time. Best wishes on your very exciting global career!
Nicole
Thought it was appropriate that I got the 100th comment on this blog :)
Nicole: Do continue reading this site for more! Or perform a google search! Most of my information comes from there. A good website to visit if you understand mandarin is at http://www.saic.gov.cn which is the state administration of industry and commerce in China.
Thanks for all your well wishes!