I graduated from UC Berkeley, came to China to teach English the first year, and the last 3 years I started a small export business. The company (we have an RO office) has grown to 18 people, with 8 foreigners in the company. Earlier this year half of our staff was on business visas and the other half were on work visas. Our attorney told us that we would have no problem converting the other foreigners to work visas.

However, the post Olympic reality is that the Shenzhen government’s labor department has put a restriction on all RO’s to 2 or 3 foreign employees per RO office. The problem is that our company depends on our foreign staff to get the orders, and the Chinese staff to follow up with the factory. I understand that the Chinese government wants to encourage firms to hire local Chinese, however it is impossible for local Chinese to be as effective as taking orders and dealing with certain Q & C issues.

Basically our company has close to a 1 to 1 ratio when it comes to Chinese and foreigners. We had plan on growing the company to about 40 people in 2009 and maintaining the same 1 to 1 ratio. However, with this new law, I devised a way that our company could function with around 8 foreigners supported by around 32 Chinese staff.

However, as it relates to ROs in Shenzhen, the Shenzhen government seems to be sticking to there limit of 2 to 3 work visas per RO no matter how many Chinese we plan on hiring.

We have heard that under a WFOE that there is some flexibility in the amount of work visas that we could acquire. However, we are being told that we need a registered capital of around 10,000,000 RMB to even consider getting around 10 foreign work visas.

We are a small company, so we would not be comfortable with anything more than 500,000 RMB in registered capital. Do we have any options to convincing the labor bureau to issue us 8 to 10 work visas, without starting a WFOE with 10,000,000 RMB in capital?

Thanks

We set-up a Mauritius off-shore holding company to own 100% of the WFOE in Suzhou.

The Mauritius company is owned by 2 USA companies. These 2 companies have a TermSheet Contract in 1/2003 between the 2 of us which governs the management of both Mauritius and Suzhou companies — Mauritius just a shell holding company.

We found out that AoA of Suzhou has slight contradiction to the terms of management we agreed upon in our Termsheet 1/2003 contract. Is there any precedent for which Agreement takes precedence — from our perspective, the AoA is basically irrelevant in how we manage the operation. The area of contention is NOT with Chinese government but our USA partner is interpreting contradiction as way to cancel part of Termsheet.

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!

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

I will send you an email again with regards to your water treatment project.

Best Regards,
Kenneth

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
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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
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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.

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