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3. TAXATION IN THE MAINLAND CHINA
3.1 SETTING UP BUSINESS IN PRC
The most direct way to enter the China market is to set up local presence. There are various forms of investment vehicles available to suit different business objectives and operations. Other than financial institutions, a foreign company still cannot set up a branch office in China at the moment. Setting up a representative office has been the simplest way to get into China and gain on-the-market experience. If your investment involves a Chinese partner, you should probably go for setting up either a Sino-foreign equity joint venture or a cooperative joint venture. Otherwise, a wholly foreign-owned enterprise will allow you greater management control and flexibility. The setting up of a foreign-invested shareholding company is another relatively new option.
Normally a foreign investment enterprise ("FIE") is set up for a specialized purpose with a specific business scope. Apart from the traditional production FIEs, foreign investors may now also set up trading FIEs, service FIEs, wholesale and retail FIEs, etc. If your group has already established a number of FIEs and is poised to make further investments in China, you may consider establishing China holding company to centralize management, provide shared services, consolidate the distribution of goods produced by your FIEs in China and pre-market certain imported products. Upon having paid up its registered capital according to the approved schedule, your FIE may also expand its geographical coverage by setting up branches.
FORMS OF BUSINESS SET UP IN PRC
1. IMPORT PROCESSING ARRANGEMENT (IPA)
- The HK business sold the raw materials to the Mainland entity, the latter processed the raw materials into the finished goods to HK business;
- There was no processing agreement between the HK business and Mainland entity.
2. OUTWARDS PROCESSING AGREEMENT (OPA)
- The HK company entered into a processing agreement with a Mainland entity. The mainland business provides factory premises, land, and labour.
- While HK business provides raw materials technical know-how, management, supervision, production skills, design and traning, etc, and
- The business will pay a processing fee to the PRC entity
3. FOREIGN INVESTMENT ENTERPRISES (FIEs)
- The foreign investment enterprises include the enterprises in which the foreign entity must at least holds 25% interests of the total equity interests;
- Can be sub-classified into joint venture forms such as co-operative operation, equity and as sets and then the wholly owned foreign enterprises.
4. SINO-FOREIGN COOPERATIVE OR EQUITY JOINT VENTURE (EJV OR CJV)
- has Chinese entity as the business partners;
- has different categories; distinguish from each other in terms of equity joint venture and co-operative joint venture forms;
5. WHOLLY OWNED FOREIGN ENTERPRISES (WOFE)
- is subject to business tax on 3% to 20% of the turnover;
- enterprise income tax by using 25% (a flat rate);
- has autonomy on the labour recruitment and general administration;
- has no any Chinese entity as business partner;
- has to meet the huge registered capital requirements and distribute the profits to various reserves.
6. REPRESENTATION OFFICE (R.O.)
Functions include:
- provide the business liaison;
- introduction of new production or promotional services;
- conducting market research and development; and
- technology information exchange.
All of above are related to non-direct business activities, R.O. is subject to both enterprise income tax (FEIT) and business tax (BT) respectively.
7. THE INDUSTRIAL AND COMMERCIAL INDIVIDUAL BUSINESS UNITS.
It is the business unit which is engaged in the scope of business including industries, construction, transportation and logistics, food and beverage and mechanical repairs and services rendered and so on.
The tax is calculated on annual basis, the tax payable is worked out when the annual turnover or total income of the business unit is deducted from the related costs and expenses incurred, and the losses brought forwards to get the assessable amount.
In the light of the foregoing, the IIT amount is calculated on annual basis and prepaid every month. The taxpayer has to pay each monthly tax prepayment within 7 days after the preceding month end.
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