The Blog:

New China WFOE Taxes 1/19/2011

China Currency - WFOE TaxBeginning on December 1st 2010, all Wholly Foreign Owned Enterprises (WFOEs) in China will now be taxed the exact same as all other Chinese businesses. The two taxes that were formerly only charged to Chinese businesses, are now being added onto the tax bill of all WFOEs.

The two new taxes for WFOEs are:

1.       The Urban Maintenance and Construction Tax

2.       The Educational Surcharge Tax

This is the result of the so-called “national treatment” movement, which is a direct result of China joining the World Trade Organization (WTO).  One of the requirements for the WTO is to give all foreign and domestic businesses the same fair treatment.

In China, however, this means that the advantages and privileges that had initially been given to the WFOEs will no longer apply.

When China started to open its doors to foreign investment, both the central and local governments instituted a multitude of incentives to attract foreign capital. Such incentives included the “duty free for 3 years” program and certain tax reductions were given for five years to some companies. They also set up different kinds of incentives based on the city and provincial regulations in which WFOEs could utilize additional incentives.

It would not be a stretch to say that some of the WFOEs came to China specifically for these privileges. Even for the companies who had to invest in the Asian market, the incentives were most likely among the top things to consider when decided where to set up shop, because the saved money trickles down to additional profit.

Everybody who moved to China for the incentives knew that they wouldn’t last forever. The incentives began disappearing about five years ago as the 3 year free tax and 5 year tax reduction policies vanished. They first disappeared from the provincial development areas and now you would be hard pressed to find certain incentives even in the big development areas.

In addition, as part of China’s “green movement,” they are now introducing more incentives for the development of sustainable, eco-friendly companies and industries. This also means however, that the more labor-intensive industries will not be able to set up companies as easily, especially those who put off large amounts of pollution as a byproduct of production. China is now favoring the high tech industries and R&D enterprises that will bring forward thinking individuals with high levels of education into the country.

The “National Treatment” movement and the additional taxes have brought some negative sentiment among businesspeople towards their bottom lines. The additional taxes will actually not be much for most businesses, however this does indicate that China is changing, and moving towards the high tech industries and those focusing on green innovation.

This shift suggests a change in paradigm for China; when the former plan was to get as many companies to invest as possible, to the new idea of encouraging fewer companies of higher quality to invest. Don’t get me wrong, there are still plenty of incentives available out there, however you should not only focus on where you can find the best investment incentives but how you are going to compete in a strengthening marketplace with strong quality products at competitive prices.

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New China Rep Office Regulations for 2011 1/12/2011

Attention companies and business owners with Rep Offices in China (and those thinking about setting one up)…China’s State Council recently announced the new regulations for their representative office structure. The regulations were put in place to “strengthen” the structure of foreign owned ROs. However, the regulations are tightening down on activities that ROs are allowed do and enforcing more strict penalties. But don’t worry, Rep Offices aren’t for everyone and a lot of companies benefit from converting to a WFOE or FICE  because of the greater flexibility that they offer.

Below is a breakdown of the new regulations for ROs:

Main Points:

  • Representative Offices (ROs) will now need to provide audited accounting information twice a year.
  • ROs cannot conduct profit activities. Enforcements of this rule will increase with the penalties clearly defined. Possible penalties include fines up to five times the amount owed and possible jail time for amounts above 10,000 RMB.
  • The tax structuring has changed:
    – ROs are now liable for deemed profit rates of a variable 15 to 30%  (up from a fixed 10%)
    – ROs cannot apply for tax exemption (could do this occasionally in the past)

Who this affects:

  • ROs currently established in China
  • Future ROs to be established

When it comes into effect:

  • March 1, 2011

Bottom Line- A Rep Office is not for you if your business needs to be able to:

  • Directly buy and sell
  • Have your own import/export license and
  • Legitimately trade in China

If you fall into the above scenario, you will need to convert to a Wholly Foreign Owned Enterprise (WFOE) or Foreign Invested Commercial Enterprise (FICE), depending on what type of business your are running. A great description of what it takes to set up a WFOE and FICE can be found here at our partner site, Understand-China.com.

Converting to a FICE or WFOE will require you to close the RO (if you already have one established) but portions of the closing process can be combined with opening the new structure when properly planned out.

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