Survey of China\'s tax environment

1. PRC Taxes
Solutions for China Entry & Growth

2. Investment Vehicle Options
Option 1 Option 2
• Buffer between
Parent Parent Parent and China
Co Co Operations
• Tax Optimization /
Profit Repatriation
• Future sale or
investment/
restructuring
Hold Co simplified
• Modern legal
structure and
Overseas Overseas mature rule of law
PRC PRC
WFOE WFOE
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3. Investment Vehicle Options II
Substance Over Form
Option 2
• Effective Management Rule: If State Administration
Parent of Taxation (SAT) deems the offshore company’s day to
Co 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
Hold Co
treaties between the jurisdiction it is located and
Mainland China
Overseas • Indirect Transfer of Assets: an investor that has
structured its equity interest in a Mainland China
PRC 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
WFOE
Don’t Forget to Consider Benefits Between the Hold Co and the Parent Company
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4. Withholding Tax on Dividends
Tax Treatment Countries Notes
• Applicable for investments of
0% Georgia 50% with a total investment of
EUR200 million
Kuwait, Mongolia, Mauritius, Slovenia, Jamaica,
Yugoslavia, Sudan, Laos, South Africa, Croatia,
5%
Macedonia, Seychelles, Barbados, Oman, Bahrain,
Saudi Arabia
Luxemburg, Korea, Ukraine, Armenia, Iceland,
• Must hold at least 25% of the
5% Lithuania, Latvia, Estonia, Ireland, Moldova, Cuba,
investment
Trinidad and Tobago, Hong Kong, Singapore
• Must hold at least 25% of the
7% Austria
investment
8% Egypt, Tunis, Mexico
10% Most other Countries
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5. 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
Jurisdiction FDI 2009 (Billion)
Hong Kong US$54
Taiwan 6.6
Japan 4.1
Singapore 3.9
United States 3.6
The #1 source of FDI for China (32% YOY Growth)
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6. Tax Categories
Category Description
Corporate Income Tax (CIT) • Applies to income derived from production, business operations, etc.
• Turnover tax on revenue from professional services provided, transfer of
Business Tax (BT) intangible assets, sales of immovable properties.
• Tax rate varies according to type of industry.
Value-Added Tax (VAT)
Customs Duty/Tariffs • Trade related taxes.
Consumption Tax
• 5% to 20% tax applying to income derived by a non-resident enterprise. Eg.
interest receipts, dividends, rentals received, royalties, capital gains, etc.
Withholding Tax
• Reduced rates available in countries with tax treaties signed, eg. Hong
Kong, Singapore, Mauritius, Barbados, etc
• Stamp Duty
• Real Estate Tax
Other Taxes • Vehicle Tax
• Surcharges: Education (3%), River maintenance (1% Shanghai Only), and
City Construction (7%)
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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
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8. Rep. Office Restrictions
Prior to January 2010 New RO Current RO
May maintain current
Foreign
No Limit No more than 4 allowed Representatives but not
Representatives
additional Reps.
Effective Tax Rate 8.8% ~10.9% ~10.9%
Annual examination Renewal upon current
Duration of entity 3 years
required license expiration
Registration COI + Bank Statement
COI Authenticated N/A
Complexity Authenticated
Renewal
N/A COI Authenticated COI Authenticated
Complexity
Parent Company Must be a legal entity in Must exist for at least 2
N/A
Qualification home country years in home country
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9. Taxation of Rep. Offices
A B C D E F G H
Operations Presumed Business CIT Tax Income Business CIT Total Tax
Expenses Profit Rate Tax Rate Rate Amount Tax Payable Payable
Payable
A/(1-B-C) ExC ExBxD F+G
8,000 15% 5% 25% 10,000 500 375 875
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%
For Most Rep. Office the Effective Tax Rate will be 10.9%
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10. Business Tax
Revenue Source Tax Rate
• Communications & Transportations
Professional Services
• Construction
3%
• Posts & Telecommunications
• Culture & Sports
• Finance & Insurance
• Hotels & Travel Agencies
5%
• Restaurants
• Consulting
Entertainment Related Businesses 5% to 20%
Transfer of intangible assets 5%
Sales of immovable property 5%
Tax Payable = Business Turnover x Applicable Tax Rate
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11. Value-Added Tax
Regular Rate:
17%
General
Taxpayer This category includes special goods
such as certain staples, books and
publications, certain gases and
Preferential agricultural goods and domestic
Rate: 7 to 13% logistics
Companies with
revenues exceeding
RMB 500k (production,
service) or RMB 800k
(wholesale, retail)
Small-Scale Unified Rate:
Taxpayer 3%
GTP Tax Payable = Current Output VAT – Current Input VAT
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12. 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
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13. 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
Tax Exemption
• Investment in or operation of certain public
or Reduction
infrastructure projects
3+3 Tax Holidays
• Qualified environmental protection and conservation
projects
• Technology transfer projects
Enterprises located within certain ethnic autonomous Tax Exemption
regions (subject to approval from the People’s
government of the relevant regions) or Reduction
Encouraging High-tech, New-tech, Clean-Tech and Offshore Outsourcing services
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14. PERSONAL INCOME TAX
• Full tax amount deducted from employee’s salary
• Employer submits the amount to tax bureau
• For Local Employees
IIT = [Gross Salary – Social Benefits – 3,500 RMB] x Tax Rate – Quick
Deduction
• For Foreigners liable to tax contributions
IIT = [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

15. PERSONAL INCOME TAX
Current IIT Regime New IIT Regime (Sept. 1st 2011)
Tax Quick Tax Quick
Taxable Amount Taxable Amount
Rate Deduction Rate Deduction
Less than 500 5% 0 Less than 1,500 3% 0
501 – 2,000 10% 25 1,501 – 4,500 10% 105
2,001 – 5000 15% 125 4,501 – 9,000 20% 555
5,001 – 20,000 20% 375 9,001 – 35,000 25% 1,005
20,001 – 40,000 25% 1,375 35,001 – 55,000 30% 2,755
40,001 – 60,000 30% 3,375 55,001 – 80,000 35% 5,505
60,001 – 80,000 35% 6,375 Over 80,000 45% 5,505
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

16. 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