5 Main reasons you should invest in China.
Today, China’s economy is best known for its manufacturing sector, which surpassed the United States as the largest in the world in 2010.
While the communist country maintains many state-owned enterprises, overall it has shifted to a free-market policy, which has encouraged a large amount of foreign investment.
Now, China faces a new challenge: to transition to a more sustainable consumer-driven economy.
Throughout 2020, the Covid-19 pandemic affected China’s economy in much the same way as the rest of the world. It saw a massive decline. However, that year aside, the general trend was one of increased growth. The country’s 2019 economic statistics included:
- Gross Domestic Product (PPP): $23.4 Trillion
- GDP Real Growth Rate: 6.14%
- GDP per Capita: $8,04
- Unemployment Rate: 3.64%
- Inflation Rate (CPI): 2.8%
Due to COVID 19 travel restriction, Australia’s borders are closed. There is a ban on all overseas travel, unless travelling to New Zealand or if an exemption has been granted.
Note: The outwards travel ban from Australia remains in place with an exemption being made for travel to and from New Zealand.
If you are thinking to invest or set a business subsidiary in China, how do you go about it?
How do you set up a company in China without being physically present in the country?
That’s almost near impossible to do so.
Even one day COVID 19 is over, there are things that you still need to prepare at your home country eg finding a local agent in China for filing and lodging required documents, evaluating the proposal and matters to consider before deciding how to invest in China.
Like most of the Australian companies, the biggest challenge is how do you find a good and reliable local agent can do the best service and the most competitive price?
What reliance can you place to their service?
There are international companies with presence in many countries that can help you. A lot of times, you are paying top dollars for the same service we could offer.
Our company has the right fit for your business.
Locally in Australia, we are Public Practice Certified Practicing Accountants, a Registered Tax Agent and ASIC Agent.
In China, we have liaison office that can help you incorporate your business.
- Our key success and difference is you do not need to be present in the China to incorporate your business in China.
- You do not also need a local Chinese mobile number;
- Neither you are required to be present locally to open a local Chinese bank account.
Our liaison office will also help you to file and lodge all statutory reporting to the local and federal government agency.
Did you know as a local China company, you also need to prepare local accounting, invoicing, payroll, etc for your local team?
There are 15 things you need to know about setting company in China.
Registering a Foreign Invested Enterprise (FIE) is the first step in your journey of doing business in China.
Did you know how the FIE is formed will determined what businesses is allowed and the taxes you pay?
There are 3 main types of Foreign Invested Enterprise in China, each with their own characteristics and intended purpose.
- Wholly Foreign-Owned Enterprise (WFOE)
- Joint Ventures (JVs)
- Representative Office (RO)
Wholly Foreign-Owned Enterprise (WFOE) –
Is the most common legal entity type for foreign investment in China and is suitable for most forms of business ventures. WFOEs can hire local and expatriate employees and engage in commercial business activities in accordance with their business scope.
Joint Ventures (JVs) –
Are legal entities with shared ownership between two or more parties. Equity Joint Ventures (EJV) share risk and return equal to an investor’s share of ownership.
Co-operative Joint Ventures (CJV) share risk and reward according to the terms of a contract – allowing for more structural flexibility over an equity joint venture. EJVs can sometimes provide foreign investors access to industries restricted for foreign investment.
Representative Office (RO) –
Are not considered legal entities in China but instead as an extension of oversea entities.
Their intended purpose is to liaise with local parties and coordinate promotional activities in China on behalf of their overseas head offices and therefore cannot engage in commercial businesses in China.
They can hire employees using a third-party HR agent and are taxed based on their costs – as opposed to revenue.
Business activities in China are classified as either “Prohibited”, “Restricted” or “Encouraged” according to the “FI Encouraged List”, “FI Negative List”, and the “MA Negative List”.
Encouraged industries are often eligible for preferential treatment and tax incentives whereas restricted industries are subject to special conditions such as shareholding limits as well as special approvals by the government.
Prohibited industries are entirely off-limits for foreign investment. Industries that do not appear on any of these lists grant equal market access to foreign investment as domestic investment
When registering a business in China, there are mandatory legal positions that must be filled –
There are
- Legal Representative
- Executive Director
- Financial Responsible Person
- Supervisor
Registered capital
The amount of registered capital – together with the total investment – is defined on the Articles of Association submitted by the investors during the business license application process.
It is the primary source of funding for the company to meet its financial obligations before it is self-sustaining.
For most business types, there are no minimum required capital requirements, unless otherwise specifically set out in laws, regulations, or State Council decisions currently in effect.
Investors are not required to inject the full amount of registered capital upon registering the company – nor is the registered capital required to stay in the bank account.
Company (Chinese) Name –
It needs to contain four elements: the unique business name, industry description, location, and legal form.
The industry description, location, and legal form are determined by the nature of the company and cannot be freely decided upon.
The unique business name is up to the discretion of investors. It’s important to remember that the business name is printed on official VAT invoices and engraved on the company’s seal.
So it’s generally a good idea to choose something which is simple.
Bank Accounts –
All businesses in China are required to have at least two bank accounts; the capital account, for depositing the registered capital, and the RMB basic account for day-to-day business operations.
Foreign businesses might also require foreign currency accounts which are separate accounts.
Registered Address –
In order to complete the company registration process, businesses must have a valid rental contract to which their business is registered.
Some districts allow multiple addresses business to a single address, we will help you to contact us check whether the district you wish to register is allowed before deciding to rent a shared office space.
Common Mistakes
One of the common mistakes investors make when registering their FIE in China is selecting a business scope that is not suitable for their planned business activities.
For some industries, business scope that is too broad may prevent the FIE from obtaining preferential policies or tax incentives.
On the other hand, a scope which is too narrow can prevent the business from issuing VAT invoices for specific product or service categories
How The Chinese Tax System And Administration Works?
As China becomes part of the global economy and domestic demand for foreign products and expertise continues to grow, more and more businesses are deciding to establish a presence in China.
In order to achieve an overall greater return on investment and minimize risks, investors need to fully understand the Chinese (People’s Republic of China (PRC) ) tax system and the associated costs before making a final investment decision.
Please note, the information provided does not cover taxes levied in Hong Kong and Macau
– which are special administrative regions of the PRC. Hong Kong and Macau retain their own tax systems and the taxes applicable in Mainland China do not apply in Hong Kong and Macau.
Tax Categories
The major taxes applicable to foreigners, foreign enterprises (FE), and foreign investment
enterprises (FIE) doing business in China are as follows:
- Value-added tax (VAT)
- Customs duty
- Consumption tax
- Corporate Income Tax (CIT)
- Individual Income Tax (IIT)
Value-added tax (VAT) –
The sales or importation of goods, provision of services, sales of intangible assets or real estate, are subject to VAT.
VAT rates depend on the business scope; sale of goods (13%), special sectors (9% – 10%), and services (6%).
Businesses can also register as a small-scale VAT taxpayer and apply a flat VAT rate (3%) levied on total revenue but prohibit the use of input VAT deductions.
Customs duty –
Applies to imported goods and is based on the value of the transaction or specific duty (e.g. RMB 80 per unit or kg).
The applicable duty rates depend on the category of goods and the country of origin.
Consumption tax –
is levied on manufacturers and importers of specific consumer goods such as alcohol, tobacco, cosmetics, jewelry, fireworks, gasoline, automobiles, luxury watch, etc.
The tax liability is computed based on the sales amount and/or the sales volume depending on the goods concerned. Consumption tax is imposed in addition to applicable Customs duty and VAT.
Corporate Income Tax (CIT) –
Is levied on the net profit of the company. Generally, the CIT rate is 25%.
The qualified new/high tech enterprises are able to apply for a reduced CIT rate of 15%.
For “Micro and Small-sized Enterprises” (MSE), CIT rates range from 5%-25% depending on the total revenue and profits.
Individual Income Tax (IIT) –
China uses a progressive IIT rates ranging from 3% – 45% for individuals’ comprehensive income, 5% – 35% for individual’s income from operations
(e.g. income derived by private industrial and commercial activity, sole proprietorship, etc.), and a fixed rate of 20% for other incomes (e.g. interest, dividend, incidental income, etc.).
For comprehensive income, such as wages and salaries, China’s IIT law provides a standard annual deduction of RMB 60,000 and additional itemized deductions available to all individuals.
Other taxes:
Resource tax, real estate tax, stamp tax, deed tax, urban construction and maintenance tax, educational surcharge, etc.
– are a series of taxes or surcharges levied on specific types of transactions and business activities.
Tax Filing Requirements
Businesses in China all have to meet monthly, quarterly, and annual statutory filing requirements.
Reporting and tax declaration are mostly done online, through an online tax portal for the local municipality to which your business pays taxes to.
VAT – Value added tax is filed and collected monthly for general VAT taxpayers and quarterly for small-scale VAT taxpayers
– due before the 15th day of the following month or following the end of the quarter. Special circumstances may require VAT to be paid upon issuing the tax invoice (fapiao).
CIT – Corporate Income Tax is filed and collected quarterly for all businesses
Due before the 15th day following the end of the quarter. An annual CIT reconciliation return is filed once per year, due before the 31st of May of the following year.
Businesses should pay the tax shortage or claim back any overpaid taxes during their annual return.
Any tax losses may be carried forward for a period of up to five years, subsequent to the year of the loss.
Individual Income Tax (IIT) –
All individuals are required to file and pay individual income taxes before the 15th day of the following month, either withheld by the withholding agents (e.g. the employers) or through self-declaration by the taxpayers.
Individual Chinese Tax residents (People Republic China Tax residents ) who meet specific criteria must also file an annual tax reconciliation return between 01st March and 30th June of the following year for their comprehensive income.
Profit Repatriation Strategies For China
China has long maintained strict foreign exchange controls over funds leaving the country, meaning foreign investors face a series of compliance challenges before they can successfully move funds out of the country.
With the current pace of regulatory changes and with the banks adopting different anti-money laundering procedures, foreign investors in China are naturally concerned about their ability to move funds and most importantly, repatriate profits to their home countries.
- Dividends
- Service Fees
- Royalties
- Foreign Loan Interest Payments
- Double Taxation Avoidance Agreements
Dividends
Dividends to shareholders are the most commonly utilized method for FIEs in China to repatriate profits to foreign entities – despite being a fairly costly method for repatriating profits.
Dividends can only be paid from after-tax earnings following the annual CIT reconciliation – i.e. the annual tax filing – typically in May of the following fiscal year.
The relevant tax authorities will confirm the total amount of profits which can be paid as dividend and whether all previous year’s losses have been made up.
Service Fees
Certain business functions may be carried out at the group company level or by a related party in exchange for a service fee.
Some examples include accounting, HR, information technology, marketing, and other supporting functions that can be administered at the group level.
For service fees paid to overseas, the China entity must withhold CIT, VAT and other local surtaxes on behalf of the overseas entity.
CIT is calculated based on the standard 25% CIT rate and a deemed profit ranging from 15% to 30% for revenue from project operations, design and consulting services, and 30% to 50% for revenue from management services.
Royalties
Royalties are fees paid to an entity concerning the use of intellectual property such as patents, copyrights, trademarks, or proprietary technologies.
When paying royalties to an overseas entity, the China entity is required to withhold CIT, VAT, and local surcharges before payment out of China can be made.
Royalty agreements must also be registered with the trademark bureau and detailed royalty agreements provided, including the rationale for calculating royalty fees.
Foreign Loan Interest Payments
FIEs in China are permitted to register foreign debt – up to the Foreign Debt Quota – on which they can pay interest to the issuer of the loan.
FIEs are permitted to pay interest at a rate not exceeding the official interest rate provided by the Bank of China – generally around 4%.
Furthermore, in order to utilize foreign loans, the business must specify a total investment which is greater than the registered capital on their Articles of Association and register the foreign loan with SAFE.
Double Taxation Avoidance Agreements
Double Taxation Avoidance Agreements (DTAA) signed between China and other countries provide relief from the double taxation of income, assets, or financial transactions.
They allow for tax credits to be claimed overseas up to the amount paid in tax in China – and vice versa.
When determining a profits repatriation strategy, investors are encouraged to carefully review DTAAs in place – if one exists – between China and the shareholding jurisdiction before making a final investment decision.
Transfer Pricing In China
Transfer Pricing is an accounting practice for establishing the price of goods or services exchanged between two related companies.
Transfer pricing is an important concept for multinationals as it allows companies to fairly distribute earnings amongst groups or related parties.
However, due to the potential for misuse and unfair pricing, the tax authorities will often carefully examine both parties involved in such transactions focusing in particular on;
• How each party benefited from the transaction;
• The necessity of services in question;
• The rationale for determining the price
– was it done in accordance with the Arm‘s Length Principle?;
• And in the case of royalties, how much value the company derived from the use of the intangible assets.
Marketing In China’s Non-Homogenous Market
When first entering the China market, many companies localize and adjust their content, creative designs and slogans specifically for Chinese customers.
However, foreign businesses should understand that China’s population of 1.4 billion is not a homogenous market, and demographics change from city to city, alongside average income and consumer habits.
Therefore, brands that conduct marketing in China should consider their target audience and realize that the ‘one size fits all’ model often does not work.
Instead, different campaigns should be developed for different customers.
Chinese City Tier System
One method of characterizing Chinese customers for marketing purposes is through the cities they live in. Cities in mainland China are often classified under an unofficial Chinese city tier system.
Although the city tier classifications are not published or recognized by the Chinese government, due to the rapid economic developments in China, the system has gained widespread popularity and use in industries such as marketing, commerce and transportation.
Oftentimes, the city classifications are used to distinguish differences in income levels, demographics and consumer behavior, preferences and trends.
Since the city tier system is not official, there is not one single version.
As such, the city classifications may vary depending on who is doing the classifying or on future developments.
That being said, generally speaking, four to six tiers are used for city classifications, with the higher tiered cities (tier 1 and 2) representing the more developed regions of the country that have a higher GDP and a more affluent population.
The highest tiered cities usually include Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin and Chongqing.