doing business in china · 2012-04-22 · doing business in china for mgi mediterranean circle...

Beijing 北京北京北京北京 Shanghai 上海上海上海上海 Shenzhen 深圳深圳深圳深圳 Guangzhou 广州广州广州广州 Tianjin 天津天津天津天津 Hong Kong 香港香港香港香港 Macau (Assoc)

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Doing Business in ChinaFor MGI Mediterranean Circle meeting

March 4 2012

Dickson Leung

Senior Partner, LehmanBrown

International Accountants


Contents

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1. Where is your market

2. Setup considerations

3. Statutory social security contribution

4. Tax environment

5. Business risk areas in China

6. The Accounting system

7. Foreign currency repatriation

8. LehmanBrown Introduction


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Contents

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4. Tax environment






Regulations In House

Business Regulation

Accounting Regulations

Taxation Regulations

FOREX Regulations

Internal Control and Review

Taxation Reviews

Rules and Regulations

Accounting Policies

Choosing and maintaining the right structure involves……………….

???

Corporate Considerations………


Industries are split into the following categories:

1) Prohibited –no foreign investment allowed. e.g. Media, Oil and Gas field ownership. In such

industries it is common for foreign investors to establish entities that can provide services to

Chinese owners, or to have companies under nominee shareholding.

2) Restricted – Joint Venture only e.g. Recruitment (no more than 49% or 50% depending on specific industries). A foreign firm wishing to have 100% ownership may consider the use of nominee.

3) Encouraged – Can be WFOE or JV, and tax concessions can be obtained.

4) Permitted – Can be WFOE or JV, but no or limited local tax concessions would be granted.

There are no laws in relation to nominees and their application, therefore though provided above, it

actually just refers to someone which owns shares on behalf of foreign investors with a contractual

relationship in place in this regard.

Industry Segmentation


Setting Up Right in China

Considerations

1. Forms of Formation in China

- Prohibited / Restricted / Encouraged / Permitted

- Legal Entity � CJV? EJV? WFOE? FICE ?

- OR, Representative Office.

- Registered capital / investment loan / thin cap rules (investment and tax)

2. Investment Holding Structure Determination

- Direct Holding v.s. Offshore Holding


Setting Up Right in China

Considerations

3. Place of incorporation – Utilize zone / region specific incentives

- Free Trade Zones

- High Technology Park/Zones

- Processing Zones

- Logistics Park

- Go West Policy: Western Region of China

- Go Central Policy: Central and North East Region

- Bin Hai New Area - Tianjin

- Pudong New Area – Shanghai

4. Business Model Selection:

- Toll Manufacturing v.s. Contract Manufacturing

- Branch v.s. Subsidiaries

- Regional Headquarters

- Licenses and nominee structures

- Transfer pricing


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Contents




4. Tax environment






Statutory Social Security Contribution

• Statutory Social Security Contribution

– FIEs are required to make various social security contributions for its Chinese employees. The rates

of social security contributions vary depending on the local labor regulations in different locations.

– Take Beijing and Shanghai as an example, the major statutory benefits and contribution bases/rates

include:

� The above calculation base mostly capped at 300% of average monthly salary

� In 2009 the average monthly salary in Beijing, Shanghai are: RMB 4,037 and RMB 3,566

Employer’s Contribution Employees’

Contribution

Beijing Shanghai Beijing Shanghai

Pension 20% 22% 8% 8%

Unemployment insurance 1% 2% 0.5% 1%

Medical insurance 10% 12% 2% 2%

Maternity Insurance 0.8% 0.5% 0% 0%

Housing fund 12% 8%-12% 7% 7%

Work injury insurance 0.2%-3% (vary

based on

industry)

0.5% 0% 0%

ER’s contribution: around 40% of the nominal salary


Statutory Social Security Contribution

� The employee’s social security contributions are tax deducible for the employee’s IIT purpose

� The employer’s social security contributions are tax deductible for the Company

� Besides the above social security contributions, the employer can also deduct the following provisions in Corporate Income tax (“CIT”) computation:

� Employee education fund: 2.5% of the employee’s gross salary

� Labor union fee: 2% of the employees’ gross salary (should there be a labor union in the entity)

� Employee welfare fund: actual expenses form employees’ welfare, up to 14% of the employees’

gross salary

� Currently FIEs are not required to make Chinese welfare contributions for its expatriate employees,

whose social benefits are normally provided in their home countries. However, it may change upon the

new Social Insurance Law taking effective in July 2011.

� Additional Commercial Insurance Purchase:

� Taxable to individual for IIT

� Generally not deductible for CIT purpose

� Additional Pension insurance and medical issuance are allowed to be deducted with up to 5% of

employees’ gross salary respectively


Contents

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4. Tax environment






Tax rate Applicable Enterprises

25% All tax resident enterprises other than those mentioned below (transitional treatment to 2012 for existing tax holidays)

15% Qualified high-new tech enterprises, regardless of the location of the enterprises in China

20% Small and thin-profit enterprise, including:

� Manufacturing enterprise: yearly taxable income not exceeding RMB 300,000, employee not exceeding 100, total assets not exceeding RMB 30m

� Other enterprise: yearly taxable income not exceeding RMB 300,000, employee not exceeding 80, total assets not exceeding RMB 10m

Summary of New Corporate Income

Tax (“CIT”) Law


� Withholding tax on dividends: 10% or less per Double Tax Agreement (DTA)

� Concept of Effective Management Organisation

� Tax exemption treatment for specific industries such as Agriculture, Forestry, Animal, and Fish

industry

� Tax incentive for infrastructure, environment protection, water saving and high technology

industry (3year tax free + 3 year 50% of tax rate)

� High-new tech enterprises (15%) and located in 6 SEZ’s - 2 year free + 3 year 50% of tax rate

� The Research & Development expense for new technology, new product can have 50%

additional deduction, e.g. 150% of R&D expense is deductible

� The salaries of disabled employees have 100% additional deduction, e.g. 200% is deductible

� Transfer income of “Qualified” technology – tax exemption for maximum of 5M with remaining

levied at 50% of applicable tax rate

� The qualifying Technologically Advanced Service Companies enjoy reduced tax rate of 15% from

January 1, 2010 to December 31, 2013.

New CIT Regulations


New Business Tax (BT) Regulations – effective since 2009

� As per new BT Rules, "the territory within the PRC" means the unit or individual provides or

accepts taxable services in the territory of China

� For services performed outside China to the Chinese recipient, the income will subject to BT in

China from 1January 2009. Typically, those services included design, engineering, consulting,

and technical services performed outside China

� From July 1, 2010 to December 31, 2013, any company engaging in offshore service outsourcing

business and registered in 21 model cities are eligible for BT exemption

New Value Added Tax regulations – effective since 2009

� General VAT taxpayers are subject to 17% and VAT rate for small scale taxpayer is 3%

� Input VAT on purchases of fixed assets can be credited against the output VAT

Exceptions: Cars, motorcycles and yacht, which subject to Consumption Tax and used by taxpayer themselves.

New BT and VAT regulations


� Transfer Pricing (TP) documentation requirement

� Effective since 2010.

� Exempt from preparing contemporaneous documentation:

� Purchases and sales with volume of less than RMB 200 million

� Other related-party transactions with volume of less than RMB 40 million

� Guoshuihan [2009] No.363 states: “entities with ‘limited functions and risks’ should maintain a

reasonable level of profit even during a recession period pursuant to the principle of matching profits to

the function and risk profile. If such entities make a loss, contemporaneous documentation will be

provided for the loss-making year.

� China Advance Pricing Arrangement Annual Report (2009) (“APA Report)

� Provides a survey on the APA development in China from 2005 to year of 2009.

� The majority of the APAs concluded is related to purchase and sales of tangible assets as of the end of

2009. The application of APA involving intangible assets and services is increasing.

� The TNMM (transaction net margin method) is the most popular method adopted which accounts for

60% of the signed APA cases. Cost-plus is the second popular method.

Transfer Pricing Update


Contents

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4. Tax environment






Keys areas:

- Market Risk – Competition, innovations, price

- Human Risk – Stealing, fraud, unions

- Economic Risk – Government Policy changes, economics, investigations

- Management Risk – Incompetence, nepotism and influences.

- Business Risk – Internal controls, suppliers, logistics.

- Legal Risk – Ownership, scope of business, asset ownership, IP.

Each business’s risk can be broken down into the above areas

Areas of risk for investors in China


• Political instability

• Currency risk

• Cultural barriers

• Constitutional Documents,

Government Approvals and

Operating Licenses

• Company Structure

• 2 to 4 sets of Accounting books

• Source: LehmanBrown

Risks and barriers of market-entry

in China (in % of high risk)

2325

10 10

18

7

15

32

0

5

10

15

20

25

30

35

Language

Culture

Market Know-how

Politicalinstability

Currency

Tax Exposure

Off-Book

Areas of risk for investors in China


Contents

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4. Tax environment






StandardsConcepts

Definitions

Presentation

Transparency

Comprehensive

Reporting FrameworkNew Accounting System

Prudence

Consistency

Completeness

� The “New System” defines certain accounting fundamentals such as consistency, timeliness,

understandability, accrual basis, matching, materiality. etc.

� China is moving towards adopting International Standards for accounting and reporting.

� Has 39 new regulations effective from 2007, bringing in line with HK GAAP (basically IFRS)

The Chinese accounting system is also going through huge ideological changes at the moment

PRC Accounting System


Contents

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4. Tax environment






� Foreign Exchange (Forex) is strictly regulated in China by SAFE regulations

� Capital account nature transaction such as stock investment, loan etc. is prohibited or restricted

� Conversion of the foreign currency exceeding USD200,000 is required to obtain the prior approval from the SAFE authorities

� Outward remittance below US$30,000 is allowed without tax authorities’ approval upon the remittance

� Foreign companies can make outward remittance from operation in China with proper documentation

� For foreign companies not located in China but needing to receive fund in RMB, escrow services can be used; Escrow service provider will arrange remittance deducting applicable taxes.

� There is a trend of relaxing the foreign exchange control by the China government

Foreign Exchange Repatriation


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4. Tax environment






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Company IntroductionCompany IntroductionCompany IntroductionCompany IntroductionCompany IntroductionCompany IntroductionCompany IntroductionCompany Introduction


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�Hong Kong

�Beijing

�Shanghai

�Shenzhen

�Tianjin

�Guangzhou

�Macau


LehmanBrown has worked with a range

of companies across diverse industries,

including …


Dickson Leung

FCCA ACA FCPA (Aust.)

HK FCPA (Practising)

Beijing

Tel: +86 10 8532 1720

Fax: +86 10 6532 3270

[email protected]@lehmanbrown.com

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Any Questions?