Having your scope of business written correctly can attract tax and customs treatment benefits
Op-Ed Commentary: Chris Devonshire-Ellis
Mar. 20 – Establishing a business in China does not necessarily mean you can engage in any kind of business activity, as is the case in most Western countries. Companies can only operate within a business scope approved by the registration and licensing authorities, and if you breach these, your company can either be fined, or in serious cases, have its license withdrawn. Accordingly, it is vital to determine what you want to do right from the start.
Generally speaking, “normal” business activities are fairly easily defined in China and you’re unlikely to find problems. However, certain activities are linked to an increase in the registered capital requirements, and even to the specific qualifications and numbers of employees you have. In certain fields, the business itself must prove that it has the required professional experience prior to a business scope being granted in the desired industry.
The scope of business must in fact be well defined, and leave no large room for interpretation. Lazy, or deliberately disingenuous, business scopes – such as only using the phrase “production of (product)” – will not even necessarily qualify you as a production company in the eyes of China’s regulations, even though it apparently suggests you are. This is because registering a business in China involves several government departments. A clerk who doesn’t spot a cheeky scope of business, and issues the license anyway, doesn’t mean you are home free. Indeed, we have encountered numerous problems of this nature, all requiring a scope of business change on the license. The issue here is that businesses involved in manufacturing require different tax treatments than say a consulting business, and this is why there is usually a link between the scope of business and finance. In fact the most common challenge to dubious scopes of business generally comes from the local Chinese tax bureau. If they are not satisfied with the scope of business written on your new business license, they can refuse to process your tax registration – a vitally important document when going through the complete licensing process in China – which will leave you hanging, unable to operate.
The tax bureaus in China are often far sharper and pay greater attention to the implications of your scope of business than the business license issuing departments. You do need to satisfy the tax bureau‘s inspection, and this means ensuring your business scope is accurate. Attempts to fool the tax bureau into thinking you are one thing, while in fact you are another – even if you can get it past the approvals process – will inevitably end in failure. Play the game the right way and say what it is you are really doing. If not, you are only saving up trouble for later.
Writing your scope of business in China usually requires assistance from a professional firm familiar with China’s business laws and, for foreign investors, the “Foreign Investment Catalogue.” This document, which is usually redrafted every four years, outlines exactly what investors in China may and may not do, which areas require additional licenses or permission, and the circumstances surrounding these. Accuracy is the watchword here. We provided readers with a download of the current catalogue here.
But attention to detail by your advisors isn’t just about ensuring your scope of business is accurate. There can be positive aspects to this too, as in certain encouraged industries tax treatment towards companies in your defined scope of business can improve, and this is obviously good news. An example is the recent announcement by Chinese customs that grants tax exemptions to foreign investors in encouraged industries. Of course, this advantage needs to be applied for – and it too is cross referenced with your scope of business on the business license, as well as your tax bureau registration to ensure your company qualifies.
That said, businesses of course evolve and mature, and at a later stage you may wish to increase your scope of business to include other activities. Often, but not always, this can mean an additional investment into the business is required in terms of registered capital status, however in all cases an application to amend the business license can be made with your original licensing authorities. The procedure involves submission of the original license, redrafting of the desired scope, and proof of any additional requirements that may need to be met. If completed properly, an enhanced scope of business – and the license to go with it – can be issued within four to six weeks.
The lessons over writing a scope of business in China are simple: Be honest, and be accurate. It is advisable to take professional advice and use a firm with a strong China presence that knows what it’s doing. Their advice might not just help you write a good scope of business, but may also help you obtain other benefits that China often provides to foreign investors in select areas or industries. For instance, having the correct scope of business not only clears away uncertainties, but may also help you obtain better and improved tax and customs treatments.
Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates, establishing the practice in 1992. The firm now has twelve offices across China, five offices in India, two in Vietnam, one in Hong Kong and Singapore, and a liaison office in the United States. For assistance with establishing business, or for advice concerning applicable scopes of business in China, please contact the firm at china@dezshira,.com, visit the practice at www.dezshira.com or download the firms’ brochure here.
Setting Up Representative Offices in China (Fourth Edition)
This is an essential, practical guide for any foreign enterprise or business-minded individual to understand the rules, regulations and management issues regarding establishing representative offices in China. This updated edition also includes detailed descriptions of the 2010 regulatory updates which have impacted on ROs.
Setting Up Wholly Foreign Owned Enterprises in China (Third Edition)
This guide provides a practical overview for any business-minded individual to understand the rules, regulations and management issues regarding establishing and running a WFOE in China.