Structuring WFOEHow you structure your WFOE depends very much on what it is you want to do. Unlike Representative Offices, they are not a simple filing procedure, and attention to detail needs to be taken to the implications of setting up your China WFOE. Here we look at the various scenarios and the focal points of each:
- WFOE - manufacturing, processing, assembly - 100% export
If part or all of your components are being sourced from your own parent, it probably makes sense to site this in a "Free Trade Zone" (FTZ) — please refer to this section elsewhere in this issue. Essentially however, FTZ allow you to import component parts duty free, and add them to other China sourced components (on which VAT can be claimed back), then re-export the finished product overseas without any need to pay VAT or import duties. It’s a fairly simple operation without many tax or China profit implications as you are not making sales in China. The Government will also usually provide some other incentives for 100% export. Normal incentives to set up — which are levied against profits tax — apply, being 100% for first two years of profitability, and a further three at 50% — but as most of your profits are realized overseas then it's not such a big deal. Such entities are relatively easy to establish–location to China suppliers is probably the defining decision to make as to where to site the operation.
- WFOE - manufacturing, processing assembly - part export, part domestic sales
There are two portions to such a business - export, and domestic sales. It is important to recognize and clearly separate the two functions within the company to avoid operational and tax problems. As there are domestic sales there are tax liabilities in China as follows:
- Import Duty and VAT levied on imported components or goods
If sited in a Free Trade Zone, this may be avoided until the finished product leaves the zone and is en route to the customer. But records of imports and the domestic sale volume of these, to balance the books correctly, must be maintained. VAT and Import Duty will apply to any imported components as part of the finished product.
- VAT refunds on Exported Products
For Chinese components that have made up part of the finished product, you are entitled to refunds against the VAT you paid upon purchasing these if these components are subsequently exported as part of a finished product. It is important to provide clear administration to have these credited against the VAT / Import Duties you paid for imported products above, and to recognize the cash flow implications of the credit process. Ideally you be taking professional advise on this subject as it is complex and very detailed.
- Profits Tax / Profits Repatriation
As you now have domestic sales and are acquiring RMB, you need to be aware of profits tax issues. As a manufacturing operation, you are entitled to profits tax holidays, usually the first 2 years of profitability (not life of company) at 100%, and a further 3 years at 50%. However, when that benefit expires you then have an increased tax liability. To ensure you maintain your low tax exposure when the tax holiday expires, a neat method is to charge your own WFOE services from your parent. These can include: - Royalties for trademarks, patents
- Licencing fees, professional memberships
- Management expertise
- Group Sales & Marketing costs
- Group Research & Development costs
- Trading WFOE – import & export, buying and selling
It is now permissible to set up pure trading WFOE's and buy and sell on the domestic market. China liberalized this just recently, please see our specific article on this subject elsewhere in this issue for detailed explanations on what you can now do.
- Service Industry WFOE
It is now possible to set up as WFOE's in most — but not all — service sectors, good news for consultants, architects, and designers. Normally these will be sited in downtown locations in swanky offices rather than in Free Trade Zones. However, no tax holidays apply, and as you will bill in RMB you will have a profits repatriation issue. See above section for the efficient dealing with this. The required registered capital can be drawn down against operating costs. Please contact us if needing to ask about your specific service and whether or not, and when, this is likely to be opened up to WFOE investments.
Establishing WFOEsA major part of setting up a WFOE is the drafting of the Articles of Association — these are its operating rules. Be very careful here, and get in professional advise. Local Investment Bureau do often provide basic drafts and promises to finish the application 'in 5 days'. Basic drafts are just that, and are often geared to keeping as much taxable income in China as possible. Major issues that need to be addressed in articles are:
- Profits Repatriation.
It’s not as simple as just sending after-tax money back home - and in fact that is inefficient. Get advise over building in structures that allow your parent to charge your WFOE expenses - this can save up to 13% on your total tax bill - if you know how.
- Exit Strategy
What to do if it all goes horribly wrong, or an acquisition means the WFOE becomes redundant? Basic drafts put the onus on government approval to liquidate.
- Trading Rights
Manufacturing WFOEs can now, from 1st June, amend their articles to allow trading in other company products and import and sell these.
Operating and WFOE maintenanceThis is a bespoke issue and dependent upon the nature of your operation. However, good corporate documentation maintenance — many licenses need to be re-applied for annually — and timely tax filings are a must, as are annual audits. Take professional advice about your corporate governance and tax filing responsibilities.
Profits Tax - How Much?It’s dependent upon where you are sited.
| China's National Rate | 33% | | Municipal (City) Rate | 24% | Free Trade Zones
Special Economic Zones
Development Zones
| 15% |
|
