Tax and Legal Considerations when Doing Business in China

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1 International Tax Services Tax and Legal Considerations when Doing Business in China Rainer Hausmann Leader CHINA Competence Center Partner International Tax Services ITS

2 CHINA Competence Center - Website 2

3 CHINA Competence Center - Website 3

4 CHINA Competence Center - Contacts Rainer Hausmann Leader «China Center of Competence» Phone: rainer.hausmann@ch.ey.com Peter Bühler Leader «Entrepreneur Markets» Phone: peter.buehler@ch.ey.com Jvo Grundler Partner, Legal Services Phone: jvo.grundler@ch.ey.com Niklaus Gadient Partner, Legal Services Phone: niklaus.gadient@ch.ey.com Stephan Haagmans Partner, Transaction Advisory Services Phone: stephan.haagmans@ch.ey.com Kerstin Heidrich Head Swiss Desk Beijing Phone: kerstin.heidrich@cn.ey.com Cédric Bignens Senior Manager, International Tax Services Genf Phone: cedric.bignens@ch.ey.com Barbara Henzen Senior Manager, VAT and Customs Phone: barbara,henzen@ch.ey.com Andreas Tschannen Senior Manager, Human Capital Phone: andreas.tschannen@ch.ey.com Jale Erdogan Manager, Human Capital Phone: jale.erdogan@ch.ey.com 4

5 Ernst & Young in China Locations in China Ernst & Young Offices Employees: 6,000 Partners: 183 Branches: 10 (e.g.hong Kong, Beijing, Shanghai, Guangzhou, Shenzhen, Macau, Dailan, Chengdu, Suzhou, and Wuhan) Chengdu Wuhan Macau Suzhou Dalian Beijing Shanghai Guangzhou Shenzhen Hong Kong 5

6 2. Overview of the Chinese Tax System 6

7 2. Overview of the Chinese Tax System Common Tax issues Mitigation of Capital Gains Tax Employees Preferred Tax Location Tax Reform Reduction of Withholding Tax PE Restructuring of Chinese Investment Loss Carry forward Chinese Holding vs. Regional Headquarter R&D Center Tax Efficient Supply Chain Management Business Tax & VAT Trading Company Transfer Pricing Deduction of Management Fees Import Duties 7

8 2. Tax Rates Domestic Enterprises Foreign Investment Enterprises Foreign Enterprises Income Tax 30% 30% RepOffice 0% Permanent Est. 30% Local Tax 3% 3% 3% Reduction Coastal Regions 24% SEZ 15% PE in SEZ 15% Not uniform Tax Base Higher non-deductible Costs Tax Incentives Tax Incentives Average effective Tax Rate 13% Withholding Tax Dividends 0% Royalties, Capital Gains, Lease 10% 8

9 3. Legal Aspects Structuring of business activities 9

10 3. Legal Aspects Representation office No legal entity Low costs, set-up relartively quickly Only support activities Joint Venture (Equity Joint Venture, Contractual Joint Venture) Certain business activities only possible with Chinese Partners Use of contact and distribution network of Chinese Partner Split of the economical risk Technology and brand piracy Wholly Foreign Owned Enterprise (WFOE) Flexible management, better control of business Better IP protection Market entrance without local support 10

11 3. Which location should be chosen? Logistical factors: customers / suppliers Where can I find qualified personnel? Tax incentives Ernst & Young can give support to receive tax incentives 11

12 4. Tax Incentives 12

13 4. Tax Incentives Generell incentives Manufacturers: 2 year tax exemption followed by a 3 year 50% reduction of the tax rate, starting with the first profit making year Prolongation of the 50% tax rate reduction For further 3 years, if status technology is still excellent Further prolongation if share of export exceeds Further depending on location, business etc. 13

14 4. Tax Incentives Tax holiday 2+3 Lower tax rate in specific zones Exportoriented companies Companies with excellent technology Reinvestment of profits Business Tax exemption F&E center VAT reduction Tax refund 14

15 4. Tax Incentives Special zones with tax incentives in China Special Economical Zones (SEZ s) Economical and technical development zones und technische (ETDZ s) Open coastal regions (COEZ s) High-Tech Industrial Development Zones (HTIDZ s) Bonded Zones Export Processing Zones 15

16 4. Tax Incentives Tax Incentives in different zones Tax rate for Productions FIE Standard SEZ Pudong ETDZ COEZ FTZ EPZ Midwest Region 30% 15% 15% 24% 15% 15% Add. 3 years at 15% after Tax Holiday (15% until 2010 in designated western Zones) Local CIT 3% Exemption Possible exemption/ reduction Tax Holiday applicable for Productions- FIE Extension for Service-FIE exemption Applicable for Productions-FIE Possible exemption/ reduction SEZ Sondersteuerzone, ETDZ Economic & Technological Development Zones CEOZ Offene Küstenstädte, FTZ Free Trade Zones, EPZ Export Prozessing Zones 16

17 5. Chinese Tax Reform

18 5. Chinese Tax Reform 2008 Corporate Tax Uniform tax rate for all kind of enterprises (24-27%) Local tax incentives (e.g. 15% tax rate in the 5 Special Economical Zones ) will be abolished and replaced by industry specific promotion (high-tech, energy saving and environment friendly industry) Abolition of tax incentives for export oriented companies and abolition of tax holidays 18

19 5. Chinese Tax Reform 2008 Corporate income tax New incentives may exceed previous promotion Abolition of the Reinvestment Tax Refund Withholding tax for dividends: 10%? Tax consolidation possible? Introduction of detailed Transfer Pricing guidelines? 19

20 5. Chinese Tax Reform 2008 What companies should do: Companies which want to come to China should realize this as soon as possible Companies involved in the purchase and import of compositions should pre-draw such plans in order to still take advantage of potential exemption of import duties Consider change of location into one of the 5 Special Economical Zone 20

21 5. Chinese Tax Reform 2008 What companies should do: Take advantage of the Reinvestment Tax Refund until the tax reform has enteredintoforce Renewal of tax incentives Companies who consider to establish new productions sites or to create new compositions in China should pre-draw such plans in oder to still prolonge current of tax incentives 21

22 Thank you! 22

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