When considering expansion into any new market, it is crucial to carry out appropriate due diligence and to gain a proper understanding of the local business environment. China is no different in this regard.
The following article was contributed by Kevin (Yishu) Tang, International Business Director, Zhong Xing Hua CPAs. It was first published in our January 2019 issue of International Client.
Below are some frequently asked questions about doing business in China.
What is the ‘business geography’ like?
China is a vast country with a population of 1.4 billion, and cannot be treated as a single homogenous market.
China is divided into 34 separate regions, which includes 23 provinces, four municipalities, five autonomous regions and two Special Administrative Regions (Hong Kong and Macau).
Municipalities are under the direct control of the Chinese central government. Autonomous regions are specific areas associated with one or more ethnic minorities. Hong Kong and Macau are self-governing sub-nations of China that have their own separate tax and commercial laws.
There are three “mega-urban” regions, surrounding Beijing, Shanghai and the Pearl River Delta (which encompasses Guangdong, Hong Kong and Macau) respectively. All three regions are situated on the east and south coasts of China. Combined, they represent approximately 40% of China’s GDP and can therefore offer significant business opportunities. However, more inland locations such as Hubei and Chongqing offer other advantages such as cheaper labour and/or faster rates of growth.
What language is business conducted in?
Mandarin. The majority of Chinese do not speak English. A translator is highly recommended when working in China. All official documents are submitted in Chinese.
How can I structure my business in China?
Overseas businesses commonly set up a wholly owned foreign enterprise (WOFE), which is a company.
Enterprises that do not want to set up a legal entity can establish a branch (permanent establishment (PE)) or a representative office (RO). ROs are limited to liaison and marketing activities.
Other forms of business entity are also available.
The Catalogue for the Guidance of Foreign Investment Industries contains lists of industry sectors where investments are not permitted, restricted, permitted or encouraged.
Is it necessary to have China-based directors and a physical office?
There are generally no restrictions on age, nationality or residency of directors under Chinese company law.
A company must have a physical office as its registered place of business. The office should not be a virtual office. The Chinese authorities can make unannounced office site visits to ensure compliance, or to audit company records.
What are Free Trade Zones (FTZs)?
There are 12 FTZs across China – in Shanghai, Fujian, Guangzhou, Tianjin, Henan, Hubei, Liaoning, Shaanxi, Sichuan, Zhejiang, Chongqing and Hainan. These have been established for the purpose of attracting trade.
Each FTZ offers different incentives. These may include simplified company registration processes and filing requirements, tax rebates, and exemptions from customs duties and import taxes for transferring goods between FTZs and overseas destinations.
What are the mandatory obligations of employers in China?
Employment contracts must be issued to employees. If an employment contract is not signed with an employee within one month of the employee starting work for the employer, the employee is entitled to 200% of their wage.
How easy is it in China to terminate employment?
Employers may only terminate an employee’s contract on statutory grounds. Employers are required to pay the employee a severance payment of one month’s average wages for each year of service with the company, subject to statutory caps.
It is relatively easy for employees to terminate the contract by providing 30 days written notice (or three days during the probationary period).
In the case of a labour dispute, labour arbitrations are mandatory before the dispute will be heard in court. There is a one-year statutory limit for raising claims for labour disputes. Generally, employers bear the burden of proof.
What are the statutory filing obligations for financial statements?
The company’s fiscal year must follow the calendar year to 31 December.
Company accounts should be prepared in accordance with PRC GAAP. They must be audited annually by a certified public accounting firm registered in China, regardless of turnover or assets.
WOFEs are required to file their financial statements with government bodies, including the Ministry of Commerce and the State Administration for Industry and Commerce.
Companies must also prepare annual and interim reports to the National Enterprise Credit Information registry.
What are the rates of corporate tax and withholding tax for a company?
Tax resident businesses (including WOFEs and PEs) pay Enterprise Income Tax (EIT) on their worldwide profits at 25%, unless a reduced rate or special exemption applies. EIT is the equivalent of corporation tax.
Depending on the type of business activity, ROs may also be liable to EIT.
A 10% withholding tax (WHT) applies to dividends paid to a non-resident company, although the rate may be reduced under the provisions of an applicable double tax treaty (DTT).
A 10% WHT also applies to interest or royalties paid to a non-resident company (subject to an applicable DTT).
When is EIT due?
EIT is generally pre-paid to the tax authorities, within 15 days of the end of each month or quarter. Tax returns are due by the same deadlines.
What are the personal tax rates in China and is social security payable?
Personal income tax is levied at progressive rates of between 3% and 45%.
A 20% WHT applies to dividends paid to non-resident individuals (subject to an applicable DTT).
Employers must pay social security contributions of up to 40% of the employee’s base salary, which includes statutory pension contributions. Employees are also liable to social security contributions, which are collected by employers on their behalf.
What are the main indirect taxes in China?
VAT is the main indirect tax, and is levied at rates of 16%, 10% and 6%. Lower rates may apply to different sectors or activities. There is also a consumption tax (1% to 56%), a land appreciation tax (30% to 60% of gain), customs duties, stamp duty, and environmental taxes.
Other useful information
- Protection of intellectual property: China operates a first to file system for trademark and patent registrations. It is therefore important to consider such registrations early on.
- UK hosted websites: Websites hosted in the UK can be slow or difficult for Chinese consumers to access. Common European plugins are blocked (eg Facebook, Twitter etc).
- China-hosted websites: All websites hosted in China must have a Bei’an (or filing) licence, otherwise the website cannot be hosted. Companies may need further licences for their websites depending on the sector and if the website accepts payments.
If you are interested in setting up in China, please speak to your Saffery Champness contact, who will put you in touch with one of our international tax specialists.