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Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
WWW.LEHMANBROWN.COM
Doing business in China
Russell Brown FCMA
Managing Partner, LehmanBrown
International Accountants
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
• China is a vast country, though its population is 1.3billion, each province is in a different state of development. Therefore disposable income is different and consequently the market for products.
• Taiwan is part of China, one country two systems.
• Hong Kong and Macau are Special Administrative Regions (SARs).
• Tibet is an Autonomous Region.
• China has 29 provinces, special regions and municipal cities.
• China has many different minorities, the largest being Han.
Geograhpical region of People’s Republic of
China
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Know Your Government Agencies
NDRC-National Development and Reform Commission
CSRC-China Securities Regulatory Commission
MOFCOM-Ministry of Commerce
SAFE-State Administration of Foreign Exchange
SAIC-State Administration for Industry and Commerce (also known as AIC)
SASAC-State Asset Supervision and Administration Commission
SAT-State Administration of Taxation
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
China Holding Company (“CHC”):
• Min. asset value US$30m within 2 years, total investment within 5 years
• Can make strategic RMB investments into subsidiaries.
• Can carry out HQ functions and oncharge to subsidiaries
• If CHC has RHQ status, can provide leasing or financing on own account
Wholly Foreign Owned Enterprise (“WFOE”) or Foreign Invested Commercial Enterprise (“FICE”):
• 100% shares owned by foreign parties, offshore or holding companies. Different industries have different registered capital (equity and investment requirements)
Equity Joint Venture (“EJV”):
• E.g. 70% equity, 70% profit.
Cooperative Joint Venture (“CJV”):
• E.g. 50% equity, 80% profit. Contract can include many things, therefore flexible.
Representative Office (“RO”):
• Like an overseas branch, although not allowed to conduct business, only allowed to provide sales, marketing and support services.
Types of legal entity available to foreign enterprises in China:
There are a number of different operating
structures in China, depending on business
strategy and capital
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Manufacturing Contract:
• Can incorporate into contract conditions, e.g. quality checks, intellectual property.
• Is registered under Chinese law and therefore enforceable.
• Does not require any capital investment
• Can have contract specify requirement for adhoc independent audit
Cooperation Agreement:
• Establish cooperation with Chinese entity
• Set up bank account under their name, with independent control by accounting firm
• Does not require any capital investment, not tied to partner firm if things do not work out
An alternative to establishing own entity is to establish a relationship via contract
Contact manufacturing
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Industries are split into the following categories:
1) Prohibited – this means no foreign investor 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, or piggy back someone's license.
2) Restricted – Joint Venture only. E.g. Recruitment (maximum foreign ownership is 49%). If a foreign firm wishes to have 100% ownership and control then use of nominees.
3) Encouraged – Can be WFOE or JV, and tax concessions can be obtained.
4) Conventional – Can be WFOE or JV, but no or limited local tax concessions.
For tax concessions, an entity must be classified as a Foreign Invested Enterprise (FIE). To be classified as an FIE the foreign investment much be 25% or greater.
The are no laws in relation to nominees and use of, therefore though provided above, this actually just refers to someone or something owns shares on behalf of foreign investor and there being a contractual relationship in place in this regards.
Industry segmentation
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Main Forms of Business Establishment
Wholly Foreign Owned
Enterprises (WFOE)
Joint VenturesCompanies
Foreign InvestmentCompanies
Limited by Shares
Purchase of sharesin Chinese
Share Companies
Equity JV Companies (EJV)
Contractual JV Companies (CJV)
Market entry as supplier/contractor
RepresentativeOffice (RO)
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Regulations In House
Transfer Pricing - docs
Accounting Regulations
Taxation Regulations
Service Contracts - Offshore
FOREX Regulations
Transfer Pricing Reviews
Internal Control and Review
Taxation Reviews
Rules and Regulations
Accounting Policies
Choosing and maintaining the right structure involves……………….
???
Corporate considerations…………..
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Companies should review their operating
structure and strategies in light of the
industry regulations
• Manufacturers:
Impact of reduced customs duty on imported raw material (sourcing opportunities)
Need to change holding company (WHT implications on dividends, interest etc)
Buying out Chinese partners in existing JV’s
• Traders:
Ability to set up 100% owned trading companies from Dec 2004
Lowering of equity thresholds from US$150k-US$200k to RMB500k
Can establish anywhere in the country, not just in a trade zone
• Service Providers:
WFOE structures possible? Upgrading Rep Offices to WFOE?
Expansion of current approved business scope
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. WTO accession and tax concessions available
5. Areas of risk doing business in China
6. The state of financial records
7. The Accounting system
8. Transfer pricing
9. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
China is a Civil Law country:
Rules are codified
Judges cannot set rules or principles
Lower courts not bound by higher court decisions
Taxation rules:
Set by State Administration of Taxation (“SAT”) – power of a ministry
Governed by State Council (“SC”) which is under the National People’s Congress( “NPC”)
State Tax Bureau:
Responsible for collection of state tax
Local Tax Bureau
Responsible for collecting provincial tax
Reports to the SAT
The current tax system in China is regulated
by the SAT, but taxes are still collected at
both state and local levels
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
China’s tax system experiences great changes in 1994, governing at boosting the country’s economic
development and encouraging foreign investment.
Rapid economic development has created a necessity for the tax system to grow and adapt.
New laws are continually being implemented to replace outdated laws.
According to Commissioner of the State Administration of Taxation, one of the main tasks for the 11th
five-year plan is to carry out further and continued reform on the tax system.
China’s accession to WTO required changes in areas such as import duties. These changes are driving
other changes in order to maintain revenue balance.
Improved collection and management systems are being implemented
Taxation and WTO accession
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
• Under WTO, import duties are declining, therefore revenue to be received.
• The Government is therefore panicking a little as they need $$$’s. Olympics, Beijing infrastructure enhancement, country development etc.
• New directive by Government to bureaus:
Continue to crack down on fraud, using police and justice departments for assistance.
Clamp down on IIT avoidance (annual E’ee filing now required).
Taxing branches at rate in location of operation (.e.g Shanghai 15% tax, but branch in Beijing 33% tax)
• Two groups targeted:
1. Foreign companies
2. Wealthy Chinese individuals and expatriates
Tightening of tax collection and crackdown
on fraud
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Tax exemption/reduction
• Production-oriented - exempt from corporate income tax for 2 years and 3 years at 50% tax rate, from time of cumulative profit.
Industry based incentives
• Export-oriented enterprises - If the export value of an FIE is more than 70% of its output, a
50% reduction is available in calculating the tax payable.
• Encourage industries and Advanced technology enterprises taxed at the rate of 15%.
Geographical based incentives
• Special Economic Zones (“SEZs”) - All FIEs in SEZs should pay tax at the rate of 15%.
• Coastal Open Economic Zones (“COEZs”) - FIEs established in the COEZs may pay tax at the rate of 24%.
Tax concessions provided to foreign
companies (up to 31st December 2007)
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
• The new regulation has been approved, the interpretation for implementation is currently taking place, and is still to be finalised.
• Current country wide tax (excluding economic zones is 33%. This will reduce to 25%.
• Some special zones will remain at 15%.
• Some industries will remain at 15%.
• Tax holidays will be grandfathered for a period of time.
• New tax holidays will be granted to encouraged industries, with a catelog of these updated annually.
Taxation from 1st January 2008
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
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
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
• 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-howPoliticalinstabilityCurrency
Tax Exposure
Off-Book
Transactions
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Reasons behind the business fraud environment in the PRC:
• Corporate Governance is often poor
• Lack of internal controls
• The Chinese legal system has significant grey areas which can be exploited
• China currently has large amounts of speculative capital flowing around the country,
particularly related to booming property investment
• The ‘get rich quick’ attitude has emerged with booming economic growth
• Low salary earned by employees. I “disserve” a better treatment. Steeling from a
company is not like steeling an individual. Companies have money!
• Language barrier big problem for foreign enterprises. Very often the CFO or the
“auditor” must rely on the translation of the person who does the fraud.
• Respect of the authority level, NEVER challenge the boss about what he’s doing…
Business Fraud
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Typical reviews of companies involve financial due diligence.
Weaknesses in developing economy:
- There are usually more than one set of books.
- Financial information does not take into account accuracy of future
projections.
- Non-financial information is just as important, such as competency of
management.
Investors should perform business due diligence addressing all areas
of risk as well as financial (audit)
Business Due Diligence
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
State Owned Enterprises require audit:
- Usually report cannot be trusted.
- Focus areas of due diligence are related party transactions.
- Purchaser should consider asset purchase with selective employee transfer
Domestic Companies normally do not require auditing, unless they are loss making or listed:
- Financials prepared for Taxation Bureau and Annual Inspection
- Domestic company accounting rules and tax rules different, forcing two sets of books
- Therefore, reconstruction of books needs before due diligence
- Purchaser could consider purchase of company
- Post purchase, need immediate internal and financial controls
Poor transparency and unreliable
financial information
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
StandardsConcepts
Definitions
Presentation
Transparency
Comprehensive Reporting Framework
New Accounting System
Prudence
Consistency
Completeness
• The “New System” defines certain accounting fundamentals such as consistency, timeliness,
understandability, accrual basis, matching, materiality … etc.
• China moving towards adopting International Standards for accounting and reporting.
• Has 39 new regulations effect from 2007, bringing in line with HK GAAP (basically IFRS)
The Chinese accounting system is
also going through huge ideological
changes at the moment
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
• Quarterly for profit and loss, balance sheet and cashflow to Tax
Bureau.
• Monthly to Ministry of Statistics in some locations and for some industries.
• Annual Audit accounts to be registered with:
- Tax bureau
- Administration of Industry and Commerce (for biz license renew)
- Ministry of Commerce
It is not possible to obtain a copy of filed reports from Government
Statutory filing in China for foreign
companies
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Why engage in Transfer Pricing in China?
Profit Repatriation
Ipso Facto sale of goods
Allocation of corporate costs
Group Profits
Tax Efficiencies
Transfer Pricing Business Sense
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Regular Transfer Pricing Reviews
• Tax authority has the right to make reasonable adjustments to the pricing of any transactions deemed not
to be conducted at “arms length”
• Transfer pricing review will be targeting companies with:
Continuing losses (greater than 2 years)
Marginal profits or losses with expanded operations
Erratic Profits
Lower than average profit margins
Payment of unreasonable fees
Sudden drop in profits after tax holiday
• Circular 49 – Companies with interco transactions greater than US$12k in a year
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Sales of productsSales of products
Consulting agreementsConsulting agreements
Purchase of raw materials
Purchase of raw materials
Services provided offshore on behalf
of onshore
Services provided offshore on behalf
of onshore
Intellectual propertyIntellectual propertySubsidiary to holding company
Subsidiary to holding company
Transfer PricingTransfer Pricing
Purchase of productsPurchase of products
Royalties agreementsRoyalties agreementsServices provided
onshore on behalf of offshore
Services provided onshore on behalf
of offshore
Types of Transfer Pricing Arrangements
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
1. Types of legal entities and operations in China
2. Corporate considerations
3. Tax environment
4. Areas of risk doing business in China
5. The state of financial records
6. The Accounting system
7. Transfer pricing
8. Foreign currency repatriation
Contents
WWW.LEHMANBROWN.COM
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
• Foreign Exchange (Forex) is strictly regulated in China by SAFE regulations.
• Transactions up to US$200k without prior approval from SAFE okay, and below US$50k without tax bureau approval at time of payment (need to obtain later)
• Foreign companies can transfer out for product purchase and services, just need the correct paperwork
• It is easier than before to get money out of country
• For companies not in China but needing to receive revenue in RMB, can use escrow services.
• Escrow provider will arrange transfer less applicable taxes.
Foreign Exchange Repatriation
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
• All transfers from China overseas need tax approval / clearance.
• Contract needs to be clear for services, whether provided offshore, or both.
• If service contracts not clear, Tax Bureau assumes 60% onshore.
• Onshore services transfer abroad subject to 5% biz tax, unless project over 183 days, then can also be subject to 10% withholding tax (or can be classified as PR, therefore taxed on deemed profit).
• Royalties are subject to 5% business tax followed by 10% withholding tax, total 14.5%, 9.5% credit can be obtained in home country.
• WHT can be claimed back in home country where tax treaty in place
• Generally no tax on dividends, and can declare at any time
• China has tax treaties with over 70 countries and is an observer member of Organisation for Economic Co-Operation and Development (OECD)
Importance of documentation and tax
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Russell Brown FCMA
Beijing
Tel: +86 10 8532 1720
Fax: +86 10 6532 3270
[email protected]@lehmanbrown.com
Harby Janagol FCMA
London
Tel: 020 8755 5829
Fax: 0871 221 6102
[email protected]@lehmanbrown.com
WWW.LEHMANBROWN.COM
Any questions?
Beijing 北京 Shanghai 上海 Shenzhen 深圳 Guangzhou 广州 Tianjin 天津 Hong Kong 香港 Mongolia 蒙古
London (Sales) Macau (Assoc)
Russell Brown / Dickson Leung
Beijing
Tel: +86 10 8532 1720
Fax: +86 10 6532 3270
[email protected]@lehmanbrown.com
James Chang / Borys Priadko
Shanghai
Tel: +86 21 6288 1635
Fax: + 86 21 6288 1636
[email protected]@lehmanbrown.com
WWW.LEHMANBROWN.COM
Any questions?