- Frequently Asked Questions]
using offshore company to invest in China.
business risk in China one step away from parent.
application and operation, information of investing company
has to be disclosed. This may lead to unnecessary disclosure
of shareholders and directors if China setup is holding directly.
using a bilingual speaking country (English & Chinese,
such as Hong Kong or Singapore) as the offshore, cost
saving can be realized in document translation and administration.
an intermediate investing company, profit from China venture
may have larger possibility of arrangement and tax saving, before
moving back to ultimate mother company.
will be easier to add or change shareholders and directors in
an offshore company than to do so in a China establishment.
are welcome to discuss whether you need an offshore company for your
China venture, both strategically and financially.
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using Hong Kong company as the "offshore investing company".
and politically close to China makes administrative and management
legal documents are already bi-lingual and saving cost and time
authority reluctant to issue registration for traditional offshore
company from BVI etc.
bank account in Hong Kong will be convenient for daily operation,
as banks in Hong Kong are the most active player in China, comparing
to banks from other countries.
tax haven company (i.e. BVI etc.) has growing difficulty
in opening bank accounts in view of growing money laundering
and terrible activities.
are no restriction in the shareholding and directorship in Hong
Kong company. Every nationality is welcome.
cost of maintaining a Hong Kong company is comparatively low.
are welcome to discuss whether you need a Hong Kong for your China
venture, both strategically and financially.
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is "profit maximization and repatriation" for a China investment
appropriate license validate your legal presence in China, and this
draws everybody's attention. However, it does not help to protect
all your interest financially. If certain clauses are not put in
the Articles of Association of your China presence, you may not
be able to maximize and effectively repatriate your profit out of
different areas of consideration that need to be put into the Articles
and get prior approval of the Government at application stage:
In China, there
are items that need to be calculated and presented in the accounts
as mandatory fund contribution before your annual audit and
tax settlement can be finalized. These include amounts to the
companies "enterprise expansion fund", the "reserve
fund" and "staff & workers welfare and bonus fund".
The amounts allocated to each will be specified in the company
Articles of Association. Interestingly, although it is mandatory
for the company to provide a percentage of turnover to these
three funds, no minimum level of contribution has in fact been
identified. Negotiations at the application stage with the local
authorities are therefore important.
Above the bottom-line distributions are expenses
charged to your China operations, usually by the foreign parent
directly. They are legitimate fees, for which an invoice is
presented to the China business as part of its normal operational
procedure. These can include:
Royalty charges for trademarks or patents owned by the parent;
"Foreign Management Expertise" - full expenses
and pay for any head office overseas personnel visiting China,
even if just for a short period;
Royalty fees for technology transfers;
Interest on loans, including penalties for late payment.
These need to be agreed upon and identified in the Articles
prior to submission to the authorities for your China operation's
business license approval. When levying such charges onto your
China business, you need to be aware that such payments are
subject to withholding tax (amounts vary dependent upon the
service), prior to your China entity being able to remit back
to the foreign parent.
Pay Prices and Expenses must be charged within a group at rates
similar to those charged or paid in transactions between independent
enterprises". If the local tax bureau believe this not
to be the case, they can re-adjust charges by reference to normal
charge rates or prices suiting the profitability of the China
business. In other words - don't be excessively greedy. It may
be an idea to pre-identify the real administration costs in
conducting sales between your foreign parent and your China
operations, as these are a real cost - it will help if you are
able to demonstrate immediately these operational expenses if
asked by the tax bureau to justify your transfer pricing strategy.
In China, interest paid on borrowings is tax-deductible.
This is useful as part of an overall, longer term financing
strategy for your China operations as it means you may identify
the intended distribution of any profit, then re-lend back to
your China operation with interest.
incentives are applicable when your profit remains in China.
Thus you can't repatriate the money then re-invest. Re-investment
must also remain in the business for five years. Incentives
available include tax refunds on taxes paid (if you are in a
tax holiday situation you should wait until this has expired,
as there would be no refund to make), and can be as high as
40% of the total Foreign Enterprise Income Tax paid, and under
some circumstances (Hi-Tech, Total Export, or Special Treatment
Operations) to 100% of profits tax paid. Such refund mechanisms
need to be built into your Articles of association (you don't
have to commit to re-investments, but you should have the necessary
structure in place in the Articles to allow you to do so and
obtain the benefits if you wish to follow this course at a later
are welcome to discuss what area we can serve your China venture,
both strategically and financially.
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