How To Do Business in China Without Owning A Local Company
How To Do Business in China Without Owning A Local Company
This article has been prepared by our partners from MS Advisory
The rules and regulations for foreign companies to do business in China can be considered as strict and in some industries even as restrictive. However, it certainly remains possible for foreign companies to do business in China without a WOFE or another type of local entity. Foreign companies can sell their services in China, sell and import their goods into China and have their products produced in China, all without owning a local entity.
We can categorize these type of companies, whose management is not based in China, according to their business activities, which are:
1. Trading in China without local entity
Foreign companies can import their products in China via a distributor or via their client whom has the relevant certification to import the specific category of products into China. The distributor or client can exchange RMB to foreign currency to pay for the delivered goods and when importing the goods into China must act as the withholding agent for any taxes due on this transaction. Value Added Tax on Goods is mostly charged at 17%, however the VAT rate of 11% for specific category products is also possible. Customs duty would also need to be paid by the withholding agent and varies accordingly to the relevant HS Code for the products in China. For luxury goods or goods harmful for health of the consumers, additional Consumption Tax may be due.
2. Manufacturing in China without local entity
In this case, foreign companies would source the products from their manufacturing supplier in China. The produced goods according to the standards of the foreign company would then be exported, by the Chinese company whom is licensed to export goods, to the country of the foreign company. On most exports no export VAT is levied and taxes and customs duty would be paid by the importing company in the country of the destination. It also important to realize that on these exports could be eligible for tax rebates from the Chinese tax authorities. This is especially true for Chinese companies which are focused on export industry. In addition, when goods are sold from China to foreign country and a Hong Kong company is used in between this transaction, there might be tax benefits possible within this structure.
3. Sell Services in China without local entity
When selling services to companies in China, it is important to realize that on these transactions VAT needs to be paid. VAT is 6% for General VAT Tax Payers and 3% for Small Scale Tax Payer. Furthermore, surtaxes of 12-13%, calculated on the total VAT, amount might need to be paid. Even corporate income tax is levied if the foreign enterprise is deemed as having a permanent establishment. The corporate income tax is calculated based on the profit rate on this transaction, which is judged by the tax bureau. This amount is then subject to 25% corporate income tax in China. The client in China would act as the withholding agent to pay the taxes in China. Unfortunately this procedure can become quite time-consuming and complicated. Based on our experience we have noticed that Chinese clients are not always willing to undergo these procedures.
Considerations for doing business in China without a WOFE.
As you can read above, it is certainly possible for foreign companies to do business in China without a WOFE. However, there are various issues and considerations you should take into account, which can make doing business in China more complicated. We have listed main issues and considerations hereby below:
(A) Only local entity can issue ‘fapiao’
In China, local companies should when selling services and goods issue to their client an official Chinese invoice, which is called ‘fapiao’. Only with this document, local companies would be able to deduct these expenses for CIT calculation and when companies are General VAT Tax Payer, can deduct their input VAT from their output VAT. Foreign companies cannot issue this fapiao to their local client.
(B) Only local entity can hire employees directly in China
Expatriates and the local Chinese citizens are only allowed to work for local company registered in China. However, local employees can be directly hired via labor dispatch agencies in China (such as FESCO-Adecco and others) and perform for limited period of time activities in China on behalf of the foreign entity. In this case, a service fee is paid to the labor dispatch agency, and following the agency pays the salary to the employee, and files according the individual income tax and social security on behalf of the individual.
(C) Strict foreign exchange controls in China can make it difficult to receive payments from the client without a local entity
All Foreign Exchange in China is administered by the State Administration of Foreign Exchange (SAFE) and which has imposed strict regulations on inbound and outbound transactions. Transactions above USD 50,000 or equivalent amount are required to obtain additional tax certificate from the Tax Bureau before this amount can be remitted overseas. Also, since December 2016, amounts above USD 5 million could be required to apply for additional approvals from government authorities. As of this reason and particularly from non-trade payments to overseas (i.e. services), it can be difficult to receive payments directly from the Chinese customer.
Doing Business in China with a owning a local entity
When having considerable business activities in China, but the above is creating too many problems for your business dealings in China, then it might be a good idea to consider to set up a local entity in China. At this moment, you could consider to set up a Limited Liability Company in China in the form of a Wholly Owned Foreign Enterprise (WOFE) or Joint Venture (JV) or could consider to set up a Representative Office in China. The advantage of the latter is that no registered capital contribution is required, however the scope of activities is only limited to Marketing and Research and would essentially not solve most problems as described above.
There are several ways of doing business in-and with China. However, the type of modus to opt for depends on the specific company, clients, the market and the level of engagement in China. Therefore, it is important to have professionals advice you how to do business in China and when is the right moment to consider to set up local entity in China.
This article has been prepared by our partners at MS Advisory. MS Advisory is a Shanghai based consultancy firm offering full range of financial services to foreign enterprises active in China and Hong Kong. To visit the original article and get in contact with MS Advisory, please visit the article here.
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What happened in the year 1421?
From 1421 to 1423, during the Ming Dynasty of China under Emperor Zhu Di (朱棣) the fleets of Admiral Zheng He (鄭和), commanded by the Chinese captains, discovered Australia, New Zealand, the Americas, Antarctica, the Northeast Passage; and circumnavigated Greenland.
Due to this endeavour we can conclude that “1421 is the year that the Chinese discover the world”.