Doing Business in China

Transcription

1 Doing Business in China For MGI Mediterranean Circle meeting March Dickson Leung Senior Partner, LehmanBrown International Accountants

2 Contents 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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4 Contents 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

5 Corporate Considerations Choosing and maintaining the right structure involves. Regulations In House Business Regulation Accounting Regulations??? Internal Control and Review Rules and Regulations Taxation Regulations Taxation Reviews FOREX Regulations Accounting Policies

6 Industry Segmentation 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.

7 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

8 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

9 Contents 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

10 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: 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% ER s contributio n: around 40% of the nominal salary Work injury insurance 0.2%-3% (vary based on industry) 0.5% 0% 0% 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

11 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 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

12 Contents 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

13 Summary of New Corporate Income Tax ( CIT ) Law 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

14 New CIT Regulations 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.

15 New BT and VAT 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 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.

16 Transfer Pricing Update Transfer Pricing (TP) documentation requirement Effective since 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 The majority of the APAs concluded is related to purchase and sales of tangible assets as of the end of 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.

17 Contents 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

18 Areas of risk for investors in China 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

19 Areas of risk for investors in China Risks and barriers of market-entry in China (in % of high risk) Language Culture Political instability Currency risk Cultural barriers Constitutional Documents, Government Approvals and Operating Licenses Company Structure 2 to 4 sets of Accounting books Market Knowhow Political instability Currency Tax Exposure Off-Book Source: LehmanBrown

20 Contents 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

21 PRC Accounting System The Chinese accounting system is also going through huge ideological changes at the moment New Accounting System Comprehensive Reporting Framework Definitions Transparency Concepts Standards Prudence Consistency Presentation 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)

22 Contents 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

23 Foreign Exchange Repatriation 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

24 Contents 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

25 Company Introduction

26 Hong Kong Beijing Shanghai Shenzhen Tianjin Guangzhou Macau

27 LehmanBrown has worked with a range of companies across diverse industries, including

28 LehmanBrown has worked with a range of companies across diverse industries, including

29 LehmanBrown has worked with a range of companies across diverse industries, including

30 Any Questions? Dickson Leung FCCA ACA FCPA (Aust.) HK FCPA (Practising) Beijing Tel: Fax: