Ways to do Business in China – Go Local or Non-local?

Establishing local entity – WFOE/Representative Office/Joint Venture

WFOE enables a higher level of autonomy and independence, which has been the most popular market entry set-up in recent years.

RO does not require registration capital, but the business activities are limited to marketing and research.

Joint Ventures, compared to WFOE, would compromise the level of autonomy for the investor as a local business partner will be involved.

See this article here for a more detailed explanation of each entity establishment.

Operating without a local entity

How Foreign Businesses Could Operate in China (by industries)

– Consulting/Service firms

Selling service to Chinese companies entails paying:

1) VAT (6% for General Taxpayer; 3% for Small-scale Taxpayer; see here for an explanation of General and Small-scale Taxpayer); 2) 12-13% of surtaxes on the total VAT amount. Corporate Income Tax will be applicable if the foreign entity is deemed to have a Permanent Establishment in China. CIT is determined based on the Deemed Profit Rate of the transaction, which is at the Tax Bureau’s discretion (i.e. possibly 30%). Meanwhile, the client in China needs to act as the withholding agent to pay the taxes in China, which could be quite complicated and time-consuming. For such reason, not all Chinese clients, especially ones of larger sizes, usually prefer to deal with foreign investors through a local entity.

-Trading Firms

Foreign entities could collaborate with a distributor or a client with the product-relevant importing license to import foreign products into China. The distributor or the client will need to settle the payment in foreign currency upon importation and will act as the withholding agent for all taxes on the transaction. VAT applicable is typically 17% or occasional 11% depending on the category of the goods. Custom Duty and additional Consumption Tax (luxury goods, for instance) may apply as well.

–Manufacturing Firms

Without having a local entity, the foreign firm will need to source their products from a Chinese manufacturing supplier. The supplier will then export the finished goods, given it possesses the relevant product exporting license). Generally, no export VAT will apply. Customs and taxes will be payable by the importing firm of the destination. The local entity that conducts exportations will be eligible for tax rebates.

Considerations of doing business without a local entity

The only local entity can issue Fapiao

Fapiao is the official tax invoice, with which local firms can apply for deduction of their expenses on CIT calculation, as well as VAT input (only for General Taxpayers). Foreign firms have no means to issue Fapiaos to local clients.

Click here for a detailed explanation of Fapiao.

The only local entity is eligible to employ staffs directly

As only companies registered in China could employ ex-pats and local citizens, the recruitment process of foreign entities can only be performed through a labour dispatch agency. The agency will settle salary, file social security and manage income tax filing on behalf of the foreign entity.

Foreign exchange control creates complications for payments

The State Administration of Foreign Exchange (SAFE) impose strict regulations on both inbound and outbound foreign exchange transactions. Transactions with the amount more than USD50,000 or equivalent will require a tax certificate from the Tax Bureau before remittance. Additional approval from governmental authorities might be required on transactions above five million USD, which creates difficulties for non-trade payments sending overseas (services for instance).

For businesses expecting frequent transactions and business activities, operating as a foreign entity will be a headache for all the paperwork and approval required. Establishing a local entity might be a sensible option.

Having an operation in China and how to structure for better success is a holistic contemplation and decision. With a team of experts with an average of 10+ years, we will present all the options available and guide you through whichever path chosen. For more information or a chat on how to have a successful business in China, contact Nancy at nancy@www.star-acc.com.