In a recent webinar, Mr. Pierre Wong imparted invaluable insights on navigating business expansion in China, understanding the intricate landscape of tax complexities, and executing effective strategies for profit repatriation.
In this article, we have summarized the key takeaways from the webinar.
As you consider your next steps in investing in China, be aware of the following trends in China:
With the maturity of online buying habits due to the effects of COVID-19, the ability to sell products online is crucial.
Consider expanding your market beyond the saturated markets of top-tier cities like Shanghai, Beijing, Guangzhou, and Shenzhen. The less crowded second, third, and even fourth-tier cities can offer new opportunities.
With the increasing popularity of live streaming, digital platforms, such as Douyin、Taobao, are a critical route to reach customers.
The Customer-to-Manufacturer model, which directly responds to customer demands, is on the rise.
Although Generation Z makes up 25% of the population, they drive 60% of the sales growth. Also, the rise of the middle class and Generation Z has led to a preference for individualistic, tailor-made products. These consumers prefer products that stand out and are not mass-produced.
A sharp increase in spending on health and wellness products shows a growing consumer focus on maintaining good health.
Lastly, Industries such as IoT, cloud computing, blockchain technologies, AI, 5G technology, and 3D printing are favored by the Chinese government. Investing in these sectors and those outlined in the 2022 edition of the Catalog of Industries Encouraging Foreign Investment could provide an advantage.
The unique challenges of entering the Chinese market often stem from a cultural disconnect. It is insufficient to replicate business models that have worked elsewhere; they need to be tailored specifically for the Chinese landscape. Equally important is recognizing the significance of Chinese shopping culture and digital platforms like WeChat, Douyin, and Xiaohongshu. Ignoring these elements can limit your business’s reach and growth.
Appropriate allocation of financial resources and time is critical for successful market entry. Inadequate investment can leave companies struggling in this highly competitive market.
Over-reliance on local partners presents another potential pitfall. While collaboration is beneficial, excessive dependence without a deep understanding of the market can lead to setbacks.
Moreover, compliance with local regulations – such as advertising, data control, and privacy protection – is crucial. Insufficient understanding of local laws and lack of engagement with the government can lead to bureaucratic hurdles, becoming significant roadblocks to success. It’s also necessary to stay updated with policy changes to ensure long-term viability in the Chinese market.
At Triide we are committed to working closely with foreign companies, guiding them through these challenges and helping them succeed in the Chinese market.
When entering China, you may want to test the waters to ensure that your product is marketable before committing to a legal entity. One option is to engage a local partner or distributor. This, however, poses control issues. How do you maintain oversight when you’re hours away? If your product performs well and becomes popular in China, the local partner might desire a larger share of the profits. Your bargaining power can be significantly limited in such a situation. To safeguard your interests, having a robust distributor agreement is paramount. This agreement will outline each party’s responsibilities, protection of interests, and an exit plan. There’s always a risk that your local partner may take your product, imitate it, and become a competitor. Thus, it’s crucial to consider these potential challenges.
Another approach is to find local Chinese individuals to assist with promotion and lobbying. Payments to these individuals are typically made from overseas, meaning you don’t have to pay any taxes for these individuals in China. However, this strategy comes with tax risks and doesn’t entirely facilitate selling products since you still don’t have a company in China. This person only supports you in marketing your business, and there might be a lack of loyalty and a sense of belonging without a real company in China.
A growing trend is to use an Employer of Record (EOR) – a local HR agency that can help hire the individuals you need. This agency takes care of all the salary payments and social benefits that are required in China, ensuring the employee’s rights are protected. This solution is usually temporary, used while waiting for your own company to be established.
If you decide to set up a company in China, there are three primary business structures available to foreign investors: the Representative Office (RO), the Wholly Foreign-Owned Enterprise (WFOE), and the Joint Venture (JV). Each of these types comes with its own set of benefits, limitations, and best-use cases.
The choice between these types of entities largely depends on the business’s nature, the strategic goals, and the extent of control the foreign company wishes to maintain over its Chinese operations. It is highly recommended to seek legal and professional advice when making this decision.
To set up a company in China, you need a unique Chinese company name, business scope, registered capital, and a unique registered address for commercial purposes. Lastly, identifying key personnel within your organization is critical. These individuals include the 1) Legal representative; 2) Executive director; 3) finance responsible person, often a CFO, internal finance manager, or service provider. 4) Supervisor.
Some of the critical positions to consider in your company include the legal representative (or director), who is held most liable for the company, the financially responsible person who takes care of your books and tax filings, and a supervisor who oversees the activities of the management.
These considerations provide a fundamental framework for setting up a company in China.
China employs a comprehensive Value-Added Tax (VAT) system that applies to both domestic and imported goods and services. The general VAT rates for trading and service companies typically stand at 13% and 6%, respectively. However, companies not operating on a large scale can choose to apply for a small-scale VAT status, which comes with a reduced rate of 3%. This option is available irrespective of whether you’re involved in the trading or service industry.
For small businesses that aren’t making a lot of sales throughout the year, opting for the small-scale VAT status can be beneficial. Despite the inability to offset with credits, from an administrative perspective, this status can reduce the burden of tax compliance. Small-scale VAT taxpayers are required to file VAT returns only on a quarterly basis, in contrast to general VAT taxpayers who must file more frequently.
Corporate tax for companies is 25%. However, there are certain enterprises that can avail of lower rates, provided they meet four criteria:
If you’re engaged in high technology industries such as research and development or creating new products, you can apply for a reduced income tax rate of 15% instead of 25%.
China’s Individual Income Tax (IIT) regime employs a progressive scale, with tax rates ranging from 5% to 45% based on income brackets. While it’s common to calculate this tax monthly, a cumulative annual calculation method can also be applied under specific circumstances. This means if you’re earning above a certain threshold annually (in this case, 200,000), your tax rate may increase. However, you may be entitled to subtract the taxes paid in previous months from your current tax liability.
Addition to the IIT, it’s worth noting that participation in China’s Social Insurance System is generally obligatory for all employees. This system comprises five different insurance types: pension, medical, unemployment, work-related injury, and maternity insurance. Additionally, employees typically contribute to a Housing Provident Fund. The rates vary depending on the province or city your company is registered in.
Repatriating profits from China to your home country can be facilitated via several methods including dividends, service fees, royalties, and interest payments on foreign loans. Here are some specifics to consider:
Dividends: Companies can distribute dividends to their foreign parent companies, but this is generally allowed only after the annual audit confirms profitable operations. A restriction to note is that 10% of the profits must be allocated to a statutory reserve fund until the fund reaches 50% of the registered capital.
Service Fees: If services are provided by the parent company to the Chinese subsidiary, these services can be invoiced and repatriated as service fees. However, it’s important to note that these transactions are subject to withholding taxes. Before processing payments, you should ensure that any service agreement is appropriately documented and registered with the relevant tax authority.
Royalties: If technologies developed overseas are used by the Chinese subsidiary, royalty payments can be another way to repatriate profits. Royalty agreements should be accompanied by detailed supporting evidence – including the rationale for determining the price.
Interest on Foreign Loans: Interest payments on loans provided by foreign parent companies can be repatriated, but there are strict regulations surrounding foreign debt that must be taken into consideration. The amount of foreign debt should be calculated carefully, either as the difference between the total investment and the registered capital or as twice the value of the audited net assets from the previous year.
Please consult a financial advisor or tax professional to understand the nuances and choose the most efficient method for repatriating your profits from China.
Disclaimer
The insights shared in the webinar are intended to provide a general understanding of the subject matter and should not be relied upon as definitive professional advice. Before making any decision or taking any action, you should consult an Triide professional.
Triide is a fast-growing and dynamic corporate services provider rooted in Asia. With a multidisciplinary team of experts operating across the Asia Pacific Region, Triide offers comprehensive services from company formation and legal compliance to accounting, tax management, and corporate governance.
Copyright © 2024 Triide | All rights reserved. Privacy Policy
