By Henry Tan, Nexia TS and Jean Dong, China Factor
Foreign companies investing in China, particularly the western provinces, may still be able to benefit from competitive tax rates despite recent changes to tax laws, says Henry Tan of Nexia TS.
Tax incentives for most foreign businesses have all but disappeared following the introduction of new enterprise income tax (EIT) laws in 2008. All businesses in China now pay EIT at a rate of 25%, with the exception of high-tech businesses or research and development centres eligible for reduced tax rates.
Most foreign companies rely on the size of the local market, as well as inexpensive labour and operation costs, to achieve their desired rates of return. However, the central Government's focus on developing China's western regions could see reduced tax rates play a part in improving investment returns for foreign businesses once again.
Foreign investment in western regions
An EIT tax rate of just 15% will be payable until the year 2020 where a business has been registered as an approved wholly foreign-owned enterprise or JV in one of China's western provinces and a capital investment of at least US$150,000 has been made. This tax rate only applies if 70% of annual revenues are derived from the company's primary business in the western province. Many local governments provide additional tax benefits, dramatically improving the return on investment for a successful business.
Industries that qualify for the 15% tax rate tend to be focused on agriculture, forestry, environmental services (especially water preservation and irrigation), high-tech, or high-end manufacturing, as well as infrastructure. Infrastructure-related operating costs are generally lower in the western provinces, compared to the eastern cities traditionally favoured for foreign investment.
Industries based on supporting tourism, such as construction and operation of tourist facilities, are also encouraged in many provinces, as is passenger transport.
Choosing your business structure
Foreign companies wishing to make direct investments in China have several options available to them, ranging from having a simple presence through a representative office, to establishing a wholly foreign-owned enterprise, to forming a JV with a Chinese partner company.
Each option has its own unique advantages and disadvantages, and each option has its own set of rules relating to set up. For example, completing the registration process to set up in a wholly foreign-owned enterprise usually takes about three to four months. The application process is as follows.
Nexia TS is an established mid-tier accounting firm in which Smith & Williamson has a significant ownership interest. The firm has offices in Singapore and Shanghai and is a fellow member of Nexia International.
Despite a recent slowdown, China's unprecedented economic growth makes it hard for exporters to resist, says Jean Dong of China Factor
Foreign direct investment in China has really gained momentum in the last ten years and is currently topping US$120bn per annum, with UK investment representing about 1% of the total.
China's current gross domestic product growth is just over 8%, the slowest pace since the beginning of the global financial crisis. Yet, despite the sluggish global economy, renewed uncertainty in Europe, and continued downward pressure locally, China's economy is expected to maintain comparatively rapid development and there is little doubt that China's economy and consumer markets will continue to grow.
Investment in China
The central Government is encouraging foreign investment in the country, while also promoting Chinese investment overseas. The opportunities for entrepreneurs are almost limitless. Investment in China certainly makes fiscal sense and the current tax incentives mean that investment in the country's western regions is becoming more attractive.
Long-term investment in China doesn't just make financial sense, it may become a necessity – especially for small and medium-sized enterprises (SMEs) with goods and services connected to those Fortune 500 companies embracing the growing Chinese market.
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British businesses looking to capitalise on the opportunities available in China need to be mindful of some of the key cultural differences to be successful.
A rapidly growing middle class in China with a taste for top western brands represents a huge market for exporters. The challenge is dealing with the fundamental differences in language, custom and culture. Here are some tips for businesses keen to overcome these differences and make their mark in China.
Define your goal – know what you want from China, whether it's selling your products or services, sourcing new suppliers or even finding a strategic investor. Set a realistic timeframe and budget.
Do your homework – specific regions act as hubs for specific industries, so don't just assume you need to go to Shanghai or Beijing. Talk to an expert with solid local connections and experience in your industry to determine the key macro/micro trends and latest policies. Next, find out which companies you should be talking to. How big are they? What are their objectives? What can you do for them? Find the key decision-maker in the company and don't waste time talking to a junior executive with no authority to commit the company, which is a particular danger in government-owned enterprises.
Go there – spend some time in China to explore potential opportunities. Note that the Chinese often don't want to book meetings more than a week in advance. While this can make scheduling difficult, on the other hand, it means you can be opportunistic and make the most of introductions when you are over there, e.g. have quick second meetings or meet contacts of contacts.
Role of Government – it is virtually impossible to operate in China without some level of support from the Government. Find out precisely what government permissions are required and when. Consider all the relevant layers of government, i.e. national, provincial and municipal and think of each of them as independent stakeholders. Understand their objectives and present your plans in a way that is relevant and helpful.
Make a little effort – nobody will expect you to arrive in China speaking fluent Mandarin, but a little effort can go a long way. The Chinese take personal relationships much more seriously than corporate ones. Have business cards printed with your name and details in Chinese on one side. Make sure you give and receive business cards using both hands and a suitable level of respect. Learn a few basic words and phrases. If you are meeting a potential partner, take them a gift of something they cannot get in China. Don't take them clocks, umbrellas or shoes since all of these have negative connotations in Chinese culture.
Negotiating – the Chinese like to bargain. When shopping in a street market, the standard tactic is to ask how much something costs, offer half that amount and, if not immediately accepted, walk off in disgust. The vendor will then call out offering to do a deal and a bargain will be struck somewhere in the middle. In a less crude form, this bargaining psychology also enters negotiations at a corporate level.
Reaching agreement – the Chinese use the word 'yes' in a slightly different way to westerners. Think of a Chinese 'yes' as the equivalent to 'Okay, I am interested in finding out more about this'. Define and agree the key elements of any deal verbally and on a single sheet of paper before getting into detailed legal agreements. Once the key commercial terms are established, get some advice from a law firm with experience in China. Note that the Chinese typically execute a contract with their company stamp. They attach little significance to personal signatures on the basis that companies are permanent fixtures but people may leave.
China Factor supports companies looking to enter the Chinese market.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.