How to arrange WFOE tax planning

With the continuous development of opening to the outside world, WFOE continues to increase in China. In order to protect national rights and interests and promote foreign economic and technological exchanges, China follows the principle of the lighter tax burden and preferential treatment.

In 1991, the Fourth Session of the Seventh National People’s Congress passed and promulgated the “Foreign Investment Enterprise and Foreign Enterprise Income Tax Law“, which clearly stated the WFOE tax. In this article, at the beginning, we first introduced what types of WFOE tax, then explained the operation of WFOE tax, and finally pointed out the preferential tax policies of WFOE in China.

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1、Business tax for consulting service companies. This is based on business turnover.

2、VAT applies to manufacturing and trading operations. This tax is based on the value-added portion of the product. It is 17% or 13% of certain utilities, food, books and other commodities.

3、Income tax includes the following taxes:

1. 1. Corporate income tax – applies if the enterprise partners are companies. This is based on the company’s profits and has been levelled to 25 %
2. 2. Individual income tax – This is personal taxes on wages/salaries. Ranging from 3 to 45%
3. 3. Corporate tax – this depends on the company’s industry and location. It ranges from 15 to 25%
4. 4. Consumption tax – Export goods are exempt from this tax. It’s typically 1 to 56% of the revenue derived from sales of goods.
5. 5. Stamp duty tax – Charged at 1%
6. 6. Land appreciation tax – 30 to 60% of gains on transfer.
7. 7. Resources tax –The tax rate depends on the material, ranging from1 to 20%
8. 8. Dividend tax – 20%
9. 9. Interest tax – 20%
10. 10. Royalties tax – 20%
11. 11. Deed tax – 3 to 5% (This is a transfer tax when buying or selling an asset such as land or premises and the percentage tax is 3 to 5% of the deed’s total worth).
12. 12. Social Security tax – 37%
13. 13. Real Estate tax – 12 % of rental value.

Understanding how WFOE taxes work will help you determine the deductible costs incurred during the setup process.

From the date when AIC confirms the company name or the establishment date on the business license, to the first time the company generates revenue, we must start to pay attention to the operation of good taxation.

If you provide a valid tax invoice, you can deduct part of the expenses before the operation in your income tax. These include wages, printing fees, training fees, registration fees, transportation fees and the purchase of non-fixed assets.

The annual compliance procedures include: annual audit, corporate income tax (CIT) reconciliation, foreign currency reconciliation, annual tax filing and annual inspection, plus other region-specific requirements.

Here is an illustration of the annual compliance timeline (subject to regional variance):

Annual audits ensure that WFOEs meet official Chinese financial and accounting standards.

Audit procedures take approximately 4 months. Certified Public Accounting CPA firms start preparing the reports in January, immediately after closing the previous year’s account, and complete it before the end of April to meet the tax filing deadline on May 31.

This is mandatory for all enterprises registered in China. Failing inspection would affect the company’s qualification for a business license. It starts from January to the end of June

The annual inspection involves completing the relevant information and submitting forms to: The Tax Bureau, the Foreign Investment Administration Department, the Economic Committee, the State Administration for Industry and Commerce, the State Administration of Foreign Exchange, the Finance Ministry and the Customs Bureau.

Many WFOEs will invest in the Mainland. So how are foreign investment regulated, and are there certain tax incentives for foreign-invested enterprises? At present, the preferential policies for WFOE income tax mainly include regional investment WFOE tax incentives, and productive investment tax incentives.

1. # WFOE Tax incentives for special economic zones:

WFEO located in the special economic zone only needs to levy corporate income tax at a rate of 15%.

2. # WFOE Tax incentives for open coastal cities (regions):

Productive foreign-invested enterprises located in coastal economic open areas and special economic zones are subject to a corporate income tax reduction of 24%.

3. # WFOE Tax incentives of the Economic and Technological Development Zone:

Productive foreign-invested enterprises located in the Economic and Technological Development Zone are subject to a reduced corporate income tax rate of 15%.

4. # WFOE Tax incentives for high-tech industrial development zones:

Foreign-invested enterprises located in high-tech industrial development zones and recognized as high-tech enterprises shall be subject to a 15% reduction in corporate income tax.

1. 1. Preferences for productive foreign-invested enterprises. For productive foreign-invested enterprises with an operating period of more than 10 years, “two exemptions and three halves” from the beginning of the profit-making year.

However, if it belongs to the exploitation of oil, natural gas, rare metals, precious metals and other resources, there are separate regulations by the State Council.

If the actual operating period of a foreign-invested enterprise is less than 10 years, the enterprise income tax that has been exempted or reduced by half shall be paid in addition to major losses caused by natural disasters and accidents.

Through this article, I believe you should understand the relevant tax knowledge of WFOE in China. It can help you further understand the development of WFOE in China. While stipulating WFOE taxation, China has also given many tax incentives to foreign-invested enterprises and foreign enterprises. And encourage WFOE to develop in China.