Author Archives: China Briefing

Understanding China’s Youth Today

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Interview with Kevin Lee, COO – China Youthology

China Youthology offers provocative insights about Chinese youth and facilitate the use of insights to spark actions, to help brands be part of youth culture, to be relevant and meaningful to today’s individual and society.

Please tell us a bit about China Youthology and what it does.

China Youthology is a consumer insight agency and one of the top quality research companies in China. Youths in China today are really striving to find meaning and we believe brands have a role to play in that. We focus on digging very deep into youth culture, understanding youth and their changing values, including their lifestyles, behaviors, what they say, what decisions they make, what they buy, etc. We take all that information and we help brands understand and bring them closer to young people today. Continue reading…

Internationalizing Your China WFOE

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Transferring WFOE Equity Ownership To Hong Kong or Singapore Companies Provides Far More Trade Flexibility

Op-Ed Commentary: Chris Devonshire-Ellis

In the rush to get into China over the past decade, many foreign investors established WFOEs – either as trading and services companies, or as manufacturing entities in their own right. For many, this is a policy that has worked very well – the legal and regulatory structures are well defined and understood. Today though, as foreign investors start to eye other markets in Asia, the China WFOE is starting to prove awkward as a base from which to launch into Asia. There are a number of reasons for this:

  • China WFOEs are geographically limited in their trading scope as the RMB is not an internationally traded currency, meaning treasury issues arise with funding essentially restricted to China only;
  • It can be extremely difficult if not impossible to establish overseas subsidiaries of a China WFOE, despite the fact it is a limited liability company in its own right. Continue reading…

An Overview of China’s Retail Industry

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By Eunice Ku, Dezan Shira & Associates

The following is an excerpt from the April 2014 edition of China Briefing Magazine, titled “China Retail Industry Report 2014.”

Changing Consumer Market

Moving towards a consumption – and service – focused economic model

Underpinned by the steady rise of household income, China’s retail market has become one of the most lucrative and rapidly growing in the world. China is currently the world’s second largest retail market, and Asia’s largest. It is expected to surpass the U.S. to become the world’s largest retail market by 2016. After years of accelerated growth and annual expansion rates of 10 percent or more, China’s growth in 2013 slowed down to 7.7 percent – level with the figure for 2012. This slowdown in growth is consistent with China’s effort to carry out a major overhaul aimed at weaning its economy off its decades-long reliance on heavy industry, export-oriented manufacturing, state-driven investment, as well as investment in infrastructure. Meanwhile, to rebalance the nation’s economy, policymakers are attempting to shift towards a more consumption- and service-driven model, hoping to foster and sustain more productive growth over the next decade and beyond. Continue reading…

China Announces Preferential Policies for Three Development Zones

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GUANGZHOU – On March 27, the Ministry of Finance and State Administration of Taxation jointly released a “Circular on Preferential Corporate Income Tax (CIT) Policies and Preferential Catalog for Hengqin New Area, Pingtan Comprehensive Pilot Zone (PCPZ) in Fujian Province and Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (Caishui [2014] No.26 hereinafter referred to as the ‘Circular’)”. The Circular is effective from January 1, 2014 to December 31, 2020.

Based on the Circular, eligible enterprises in Hengqin, Pingtan and Qianhai will be taxed at a reduced 15 percent CIT rate. Continue reading…

Key Aspects of Business Establishment for FIEs in China

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In this China Briefing exclusive interview, Jenny Liao of Dezan Shira & Associates discusses the key aspects of business establishment in China for foreign invested enterprises, including capital requirements, the importance of internal controls and dividend repatriation strategies.

What are the key considerations for company establishment in China?

A key factor for companies just getting established in China is the ability to accurately evaluate their capital requirements. As a rule of thumb, the capital for a wholly foreign-owned enterprise (WFOE) should cover its pre-operation expenses for one year, until the WFOE is able to generate sufficient profit to run its own operations.

If a foreign-invested enterprise (FIE) injects an insufficient amount of capital to cover its initial operations, the company may encounter problems retrieving additional capital, on account of China’s stringent foreign exchange regulations on capital transfers. For FIEs to inject money beyond the capital amount, it is necessary to communicate with various governmental departments and undergo tedious procedures, such as obtaining a capital verification report. Needless to say, delays in obtaining additional capital would negatively impact company operations.

With the promulgation of the Company Law at the end of 2013, the requirement for registered capital to establish a company has been removed. At this stage, however, the Company Law amendment has greater impact for domestic companies than for FIEs, as the former can specify any amount of capital as long as it is approved by the AIC. Meanwhile, for FIEs, since foreign exchange rules have not yet been modified, they still need to obtain verification and approval to increase capital.

What are the important internal control issues for foreign invested enterprises operating in China?

Many foreign-invested SMEs require support from their internal management. Frequently, when setting up a company in China, they will dispatch only one foreign employee from their head office to China, i.e., the GM. Finance departments in China usually consist of two basic roles – a cashier and an accountant. Since the CFO remains overseas with the parent company, supervision and control tends to be weak and problematic methodologies may be used. They therefore need to hire professional firms to help with regular accounting and tax filing, as well as provide advice regarding their internal financial management and internal control in order to prevent potential losses.

For example, inventory management is calculated based on the quantity of items sold, but inventory record keeping may use the inventory’s monetary values instead. Because of this, when an external firm conducts a year-end audit, they may find a mismatch between figures, by which time much effort is required to remedy the situation. This is a problem faced by many trading companies.

They can prevent this scenario by setting up a good inventory system initially, including appropriate software and a strong internal management system.

RELATED: Setting Up a Wholly Foreign-Owned Enterprise in China

The government requires FIEs to undergo annual statutory audits. However, we suggest that internal control/review should ideally take place on a monthly or quarterly basis. After the first year, this can be reduced to twice a year, depending on the results of these reviews. A monthly/quarterly review, which usually takes three to five days, is a detailed process involving overall assessment from financial, business and administrative perspectives, thus is more in-depth and takes more time than a statutory audit. This type of review is mostly conducted on-site, as companies are required to provide numerous forms of documentation. For bigger companies, a review may take as long as two weeks.

What should foreign invested enterprises consider when repatriating dividends back to their home countries?

Companies repatriating dividends need to be aware of whether or not there is a double taxation avoidance agreement (DTAs) in place between China and their home country, which can reduce the 10 percent withholding tax on dividends to 8-5 percent.

When repatriating dividends, some companies opt to conduct profit repatriation by themselves in order to avoid fees charged by professional firms for doing the same. However, they are frequently unaware of tax reductions available under DTAs between their home country and China – something that tax authorities will not proactively remind them of.

The process of applying for DTA benefits is quite tedious – a preferential tax treatment form needs to be submitted and the parent company must obtain certain forms of documentation from the government of the DTA country/region in question. This is because many offshore share companies are set up in locations that have DTAs with China in place, but the actual investor may be, say, in the U.S. Since there is no reduced withholding tax rate under the U.S. and China DTA, setting up in HK allows them to benefit from the reduced rate of 5 percent dividends withholding rate under the HK-China DTA. To ensure that the HK presence is not merely a shell company, tax authorities need to know whether the company has actual operations and is paying taxes since DTA benefits only apply if it is a real company.

Dividends can be repatriated after annual filing has been completed – the tax authorities will confirm how much a company can repatriate based on the net profit percentage. If the company chooses to postpone repatriation to the following year because of cash flow concerns, banks will additionally require a special audit report.

Jenny Liao is a Senior Manager with Dezan Shira & Associates and oversees the corporate accounting services department of the Shanghai and Yangtze River Delta offices. She specializes in Chinese accounting, reporting and taxation systems. She holds a master’s degree in accounting from Shanghai Jiaotong University.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam in addition to alliances in Indonesia, Malaysia, Philippines and Thailand as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email china@dezshira.com, visit www.dezshira.com, or download our brochure.

You can stay up to date with the latest business and investment trends across Asia by subscribing to Asia Briefing’s complimentary update service featuring news, commentary, guides, and multimedia resources.

Related Reading

Annual Audit and Compliance in China
In this issue of China Briefing, we discuss annual compliance requirements for foreign-invested enterprises, including wholly-foreign owned enterprises, joint ventures and foreign-invested commercial enterprises, as well as the less demanding requirements for representative offices. We also highlight the most recent tax and legal changes that will significantly influence the way companies do business in China in 2014.

AB-Tax-Treaties-CoverAn Introduction to Tax Treaties Throughout Asia
In this issue of Asia Briefing Magazine, we take a look at the various types of trade and tax treaties that exist between Asian nations. These include bilateral investment treaties, double tax treaties and free trade agreements – all of which directly affect businesses operating in Asia.

Guide to the Shanghai Free Trade Zone
In this issue of China Briefing, we introduce the simplified company establishment procedure unique to the zone and the loosening of capital requirements to be applied nation wide this March. Further, we cover the requirements for setting up a business in the medical, e-commerce, value-added telecommunications, shipping, and banking & finance industries in the zone. We hope this will help you better gauge opportunities in the zone for your particular business.

Setting Up a Foreign-Invested Enterprise in Vietnam

Beijing Relaxes Foreign Invested Company Incorporation Rules

Establishing a Foreign-Invested Printing Enterprise in China

China Regulatory Brief: Business License Reform & Shanghai FTZ Customs Clearance

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China Implements New Version of the Business License

The State Administration of Industry and Commerce (SAIC) implemented a new version of the business license on March 1 in accordance with the new capital subscription system, furthering its goal to enhance the transparency of enterprise information and public supervision. The new business license includes a QR code, enabling the public to view all relevant details pertaining to the enterprise with one scan using a mobile device, including its registration number and business scope. All new versions of the business license will have a unified vertical format – the license will be A4 sized while its copy will be A3 in size. The old business licenses will remain effective, but enterprises are required to convert to the new version before February 28, 2015. If a company applies to make any changes to its business license before this date, a new business license will be issued.

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China Announces Preferential Income Tax Policies for Small Businesses

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BEIJING – On April 8, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) issued an “Announcement on Preferential Income Tax Policies for Small and Low-Profit Enterprises” (CaiShui [2014] No.34, hereinafter referred to as the “Announcement”).

Based on the Announcement, small and low-profit enterprises with a taxable income not exceeding RMB100,000 (US$16,130) should pay corporate income tax at the rate of 20 percent on only 50 percent of their taxable income. The preferential policy is effective from January 1, 2014 to December 31, 2016. Continue reading…

China’s Rare Earth Exchange Begins Trading Following WTO Ruling

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SHANGHAI – China’s first rare earth exchange, Baotou Rare Earth Products Exchange, announced in a statement last month the commencement of trading in three rare earth metals – europium oxide, praseodymium-neodymium oxide and cerium oxide.

Following an adverse ruling by the World Trade Organization (WTO) regarding China’s export regulations on rare earth metals, China’s Baotou Exchange is expected to regulate the country’s rare earth market while improving price formation and promoting industry development. Continue reading…