Structuring China Startups Presentation

1. 1
Structuring China-Focused Startups and Tax
Implications for U.S. Founders
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2. 2
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11. A Typical China-Based Startup Structure
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(R&D, Sales/Marketing) Offshore
Onshore
Control
Agreement
(R&D, Sales/Marketing, Manufacturing)
Founders
VC
Cayman
(IP)
US
WOFE
Chinese
Domestic
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IP ownership by Cayman (unless legally required
to be owned elsewhere)
Cayman reimburses U.S./Chinese subs for
services at cost plus a certain %
Proper documentation (intercompany agreements)
Proper accounting
Possible U.S. entity classification (“check-the-box”)
elections for Chinese subs
U.S. sub needs to file federal (including Form 5472
to report transactions with foreign affiliates) and
state tax returns. If conducting R&D, may qualify
for R&D credits in federal, CA and certain other
states.
Key Tax Considerations
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Sometimes IP needs to be owned by a Chinese
entity
HK or local country sub to conduct sales/marketing
for rest of the world (outside of China and U.S.)
No need for Chinese domestic entity if the Chinese
activities are allowed by the WOFE
No need for U.S. sub if no activities in the U.S.
Variations
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Subject to U.S. tax on worldwide income
May need to file Form 5471/8858 to report 10% or
more ownership (by vote or value; direct or
indirect) or being a director in foreign companies
May need to file FinCEN Form 114 (FBAR,
formerly TD F 90-22.1) to report ownership or
signature authority in foreign bank/financial
accounts ($10,000 or more)
May need to file Form 8938 to report foreign
financial assets ($50,000 or more)
May need to deal with Subpart F income or
passive foreign investment company (“PFIC”)
issues (U.S. VC’s and U.S. employees also care
about these)
FATCA
Penalties
Overseas Voluntary Disclosure Program
U.S. Tax Implications for U.S. Founders
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15. 15
Controlled foreign corporations (“CFC’s”) are
foreign corporations > 50% (by vote or value)
owned by U.S. shareholders each owning >10%
(by vote)
Passive and certain other income of CFC’s is
currently taxable to >10% U.S. shareholders (even
if not receiving dividends or selling stock)
Tax planning may reduce or eliminate Subpart F
income
Subpart F Income
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If a foreign corporation is not a CFC, or if a U.S.
person owns <10% (by vote), need to deal with
PFIC issues.
A foreign corporation is a PFIC if >75% of its gross
income is passive, or >50% of its assets is passive.
Qualified income fund (“QEF”) election is typically
recommended. With the election, income of the
foreign corporation is currently taxable (even if not
receiving dividends or selling stock), but gain on
the sale of stock remains capital gain.
Without the election, gain on the sale of stock
would be ordinary income, and there would also be
interest charge.
In either case, need to file Form 8621 to report
ownership of PFIC stock.
PFIC
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17. 17
Hai Tang, Director
415-764-2789 hai.tang@AndersenTax.com
Adam Steinberger, Managing Director
650-289-5705 adam.steinberger@AndersenTax.com
Yichen Shepard, Managing Director
415-764-2506 yichen.shepard@AndersenTax.com
Shaun Dublin, Director
415-764-2731 shaun.dublin@AndersenTax.com
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415-762-6314 melodie.tsai@AndersenTax.com
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