How to arrange WFOE tax planning

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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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How does WFOE tax work?

Types of WFOE tax

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.

If corporate profits are transferred back to overseas investors, how to operate WFOE tax?

Wholly foreign-owned enterprises are allowed to return funds to overseas shareholding entities, so it is essential to know that only when the recipient company is a shareholder of a wholly foreign-owned enterprise can funds be returned using loans or dividends.

For example, in the United States, according to the DTA existing between China and the United States, WFOE headquartered in China returns profits to a company in the United States through dividends, a 10% withholding tax (WHT) will be levied. WHT paid in China may be referred to as a foreign tax credit in the United States to ease the income tax burden of joint-stock companies.

It is important to remember that not all profits can be repatriated. Some requirements must be met before dividends can be distributed. A small percentage of profits (not less than 10% for a WFOE) should be deposited in the WFOE’s reserve fund account until the holding of the reserve reaches 50% of the WFOE’s registered capital.

A wholly foreign-owned enterprise can also remit undistributed profits to a US joint-stock company by providing loans to its overseas shareholders. The interest income of a wholly foreign-owned enterprise will be subject to 25% corporate income tax (CIT) and 5% business tax. However, corporate income tax paid in China in the future may be used to offset any U.S. income tax liability under the China-US DTA clause.

Wholly foreign-owned enterprises can also return the funds to the service agreement between them and the foreign company in writing as a service fee. Then, his service fee will be levied a 6% value-added tax (VAT) and related surcharges, and may also pay CIT (about 3.75 to 12.5%), depending on whether there is a “permanent establishment (PE)”.

Why a wholly foreign-owned enterprise needs to be registered as a general taxpayer?

All investors in wholly foreign-owned enterprises in China must choose the official investor shareholder of a company. The shareholder can be the ultimate beneficiary of all Chinese companies, or it can be just an intermediary agency, usually called a holding company, which is set up outside China in most cases. By using the holding company as a formal investor shareholder of a wholly foreign-owned enterprise, you can obtain more tax benefits through the holding company as an intermediary holding structure. Then, by selecting the holding company in an area with favorable tax treaties with China, investors will enjoy preferential tax treatment.

Traditionally, investors may obtain certain benefits by ensuring that the location of their holding structure is in a legal jurisdiction that has signed a thoughtful tax treaty with China. Hong Kong is a good example. Although this continues to be the basis for using holding companies when establishing wholly foreign-owned enterprises in China, the analysis may no longer be as simple as it used to be. Countries like the Netherlands, the United Kingdom and Ireland, which are accustomed to foreign investor residence, have managed to negotiate reasonable tax treaties with China, thus eliminating the need to locate their holding companies in countries such as Hong Kong. In fact, the ability to obtain preferential tax benefits has become more difficult.

Another simple reason about the importance of setting up a holding company is that if investors may wish to change WFOE’s shareholders at any later stage (mainly during an asset divestiture or reorganization), then it becomes easier when going outside. Performing this operation in China usually requires tax clearance, a potential formal assessment of the WFOE, and a formal update of the WFOE registration records to the relevant Chinese government agency. In theory, this can easily delay months and generate a large amount of tax liabilities-which needs to be liquidated before the next step, and any changes in shareholders may be prevented by the Chinese government. However, in some jurisdictions, this can be done within a few days.

Annual compliance procedures

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 audit

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.

Annual inspection

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.

What are the wfoe tax benefits

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.

Regional investment WFOE 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%.

  1. # 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%.

  1. # 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%.

  1. # 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.

Productive investment WFOE tax incentives :

  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.

  1. 2. Preferential investment in agriculture, forestry and animal husbandry production. Foreign-invested enterprises engaged in agriculture, forestry and animal husbandry, and foreign-invested enterprises located in remote areas with underdeveloped economy, shall enjoy tax exemption and tax reduction according to law. After the expiry of the preferential tax treatment, upon the application of the enterprise and the approval of the taxation department of the State Council, within the next 10 years, the enterprise income tax may be reduced by 15-30% of the taxable amount.

Conclusion

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.

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