China Taxes 2011

Solutions for China Entry & Growth

PRC Taxes

The JLJ Group All Rights Reserved - July 22, 2010

Investment Vehicle Options

2

Hold Co

Option 2

Parent Co

Option 1

WFOE

Overseas

PRC

Parent Co

WFOE

• Buffer between Parent and China Operations

• Tax Optimization / Profit Repatriation

• Future sale or investment/ restructuring simplified

• Modern legal structure and mature rule of lawOverseas

PRC


Investment Vehicle Options IISubstance Over Form

3

Hold Co

Option 2

Parent Co

WFOE

• Effective Management Rule: If State Administration of Taxation (SAT) deems the offshore company’s day to day management occurs within Mainland China, the offshore company may be subject to corporate income tax in Mainland China

• Reduced Tax Rate Exclusions: Offshore holding companies with no substantive business activities may not qualify for reduced withholding tax rates as per tax treaties between the jurisdiction it is located and Mainland China

• Indirect Transfer of Assets: an investor that has structured its equity interest in a Mainland China enterprise through an offshore holding company could be subject to an additional tax burden within China, in the event that the investor sells interests in the offshore company

Overseas

PRC

Don’t Forget to Consider Benefits Between the Hold Co and the Parent Company


Withholding Tax on Dividends

4

Tax Treatment Countries Notes

0% Georgia

• Applicable for investments of 50% with a total investment of EUR200 million

5%

Kuwait, Mongolia, Mauritius, Slovenia, Jamaica, Yugoslavia, Sudan, Laos, South Africa, Croatia, Macedonia, Seychelles, Barbados, Oman, Bahrain, Saudi Arabia

5% Luxemburg, Korea, Ukraine, Armenia, Iceland,

Lithuania, Latvia, Estonia, Ireland, Moldova, Cuba, Trinidad and Tobago, Hong Kong, Singapore

• Must hold at least 25% of the investment

7% Austria• Must hold at least 25% of the

investment

8% Egypt, Tunis, Mexico

10% Most other Countries

5The JLJ Group All Rights Reserved - July 22, 2010

Hong Kong Holding Company

• Tax rate: 16.5% income tax• No VAT, Capital Gains, or Sales tax• No withholding tax on dividends and interest • Low country risk and strong rule of law• Ease of disposal, acquisition and restructuring

The #1 source of FDI for China (32% YOY Growth)

Jurisdiction FDI 2009 (Billion)

Hong Kong US$54

Taiwan 6.6

Japan 4.1

Singapore 3.9

United States 3.6


Tax Categories

6

Category Description

Corporate Income Tax (CIT) • Applies to income derived from production, business operations, etc.

Business Tax (BT)• Turnover tax on revenue from professional services provided, transfer of

intangible assets, sales of immovable properties.• Tax rate varies according to type of industry.

Value-Added Tax (VAT)Customs Duty/TariffsConsumption Tax

• Trade related taxes.

Withholding Tax

• 5% to 20% tax applying to income derived by a non-resident enterprise. Eg. interest receipts, dividends, rentals received, royalties, capital gains, etc.

• Reduced rates available in countries with tax treaties signed, eg. Hong Kong, Singapore, Mauritius, Barbados, etc

Other Taxes

• Stamp Duty• Real Estate Tax• Vehicle Tax • Surcharges: Education (3%), River maintenance (1% Shanghai Only), and

City Construction (7%)


Tax Compliance Timeline

Rep. Office LLC

Tax Registration Within 30 Day after License Issuance

Corporate Income Tax (CIT) Quarterly Quarterly

Business Tax (BT) Quarterly Monthly

VAT & Consumption Tax N/A Monthly

Annual Audit & Tax Clearance End of May

Annual Examination End of June


Rep. Office Restrictions

8

Prior to January 2010 New RO Current RO

Foreign Representatives

No Limit No more than 4 allowed May maintain current Representatives but not additional Reps.

Effective Tax Rate 8.8% ~10.9% ~10.9%

Duration of entity 3 years Annual examination

requiredRenewal upon current

license expiration

Registration Complexity

COI AuthenticatedCOI + Bank Statement

AuthenticatedN/A

Renewal Complexity

N/A COI Authenticated COI Authenticated

Parent Company Qualification

Must be a legal entity in home country

Must exist for at least 2 years in home country

N/A


Taxation of Rep. Offices

Formulas:Presumed Income Amount = Operations Expense / [1 – Pres. Profit Rate 15% – Business Tax Rate]Business Tax Payable = Income Amount x Business Tax Rate 5%Corp. Tax Payable = Income Amount x Presumed Profit Rate 15% x Corp. Tax Rate 25%

A B C D E F G H

Operations Expenses

Presumed Profit Rate

Business Tax Rate

CIT Tax Rate

Income Amount

A/(1-B-C)

Business Tax

PayableE x C

CIT Payable

E x B x D

Total Tax Payable

F + G

8,000 15% 5% 25% 10,000 500 375 875

For Most Rep. Office the Effective Tax Rate will be 10.9%


Business Tax

10

Revenue Source Tax Rate

Professional Service

s

• Communications & Transportations• Construction• Posts & Telecommunications• Culture & Sports

3%

• Finance & Insurance• Hotels & Travel Agencies• Restaurants• Consulting

5%

Entertainment Related Businesses 5% to 20%

Transfer of intangible assets 5%

Sales of immovable property 5%

Tax Payable = Business Turnover x Applicable Tax Rate


Value-Added Tax

General Taxpayer

Small-Scale Taxpayer

Preferential Rate: 7 to 13%

Regular Rate: 17%

Unified Rate: 3%

This category includes special goods such as certain staples, books and publications, certain gases and agricultural goods and domestic logistics

Companies with revenues exceeding RMB 500k (production, service) or RMB 800k (wholesale, retail)

GTP Tax Payable = Current Output VAT – Current Input VAT


Incentive Programs

• 2009 economic downturn spurred many local governments to provide additional incentives for establishing your FIE within their jurisdiction Recognizing encouraged statuses before official approval Reduced rates for local portion of tax 2/3 Tax Holidays Reduced fees for land-use rights Subsidized rentals and expat housing

• Local incentive programs, once secured, may be tenuous at best

Special Incentives should not be the only priority in choosing a location


Preferential Tax Treatment

Industries / Projects Tax Rate

High-Tech, New-Tech, Clean-Tech Enterprises 15% CIT

Small-scale Enterprises with low profitability 20% CIT

Income Derived from Certain Industries• Agriculture, forestry, animal husbandry or fishery projects• Investment in or operation of certain public infrastructure projects• Qualified environmental protection and conservation projects• Technology transfer projects

Tax Exemption or Reduction

3+3 Tax Holidays

Enterprises located within certain ethnic autonomous regions (subject to approval from the People’s government of the relevant regions)

Tax Exemption or Reduction

Encouraging High-tech, New-tech, Clean-Tech and Offshore Outsourcing services

PERSONAL INCOME TAX

• Full tax amount deducted from employee’s salary

• Employer submits the amount to tax bureau

• For Local EmployeesIIT = [Gross Salary – Social Benefits – 3,500 RMB] x Tax Rate – Quick Deduction

• For Foreigners liable to tax contributionsIIT = [Gross Salary – Allowances – 4,800 RMB] x Tax Rate – Quick Deduction

• Reasonable Allowances (for Tax Exemption) Housing, Meals and Laundry One-off Relocation costs Business trip both inside and outside of PRC Expatriate’s language training, Children’s education Home leave for expatriate

Employer Must Pay IIT On Behalf of Employees

PERSONAL INCOME TAX

Taxable Amount Tax

RateQuick

Deduction

Less than 500 5% 0

501 – 2,000 10% 25

2,001 – 5000 15% 125

5,001 – 20,000 20% 375

20,001 – 40,000 25% 1,375

40,001 – 60,000 30% 3,375

60,001 – 80,000 35% 6,375

80,001 – 100,000 40% 10,375

Over 100,000 45% 15,375

Employees with a salary of 38,600 will see an increase in taxes

Taxable Amount Tax

RateQuick

Deduction

Less than 1,500 3% 0

1,501 – 4,500 10% 105

4,501 – 9,000 20% 555

9,001 – 35,000 25% 1,005

35,001 – 55,000 30% 2,755

55,001 – 80,000 35% 5,505

Over 80,000 45% 5,505

New IIT Regime (Sept. 1st 2011) Current IIT Regime

General Tax Rule for Foreign Employees

• Criterion used to determine a foreign employee tax liability in China is the duration of stay and the employee’s position.

• Foreign employees who have resided in China for 5 years are taxed on their worldwide income

China Taxes 2011

Documents

Transcript of China Taxes 2011