China, officially the People’s Republic of China (PRC), is a sovereign state in East Asia. It is the world’s second most populous country, with a population of over 1.4 billion. It is the world’s second largest economy, a global hub for manufacturing, and is the largest manufacturing economy in the world as well as the largest exporter of goods in the world. It is also the world’s fastest growing consumer market and second largest importer of goods in the world. The currency is the Renminbi (RMB).
Foreign companies are allowed to set up a Representative Office (RO) in China. The parent company must be established for more than 2 years. RO’s cannot be engaged in direct business operations. It can only be engaged in activities such as market research, quality control, business liaisons, products promotion and technological exchanges in China. The parent company of the RO is responsible for the activities of its representative office.
RO’s are taxed on cost plus method basis. The tax includes business tax and income tax. Business Tax is charged at a rate of 5% on the total gross amount of monthly expenses incurred by the RO. The business tax is paid on a monthly basis. Corporate Income tax is charged at a rate of 25% on the deemed income. The deemed income is assessed at a rate of 10% on the total gross amount of expenses incurred by the RO during the relevant period. The income tax is paid on a quarterly basis.
Wholly Owned Foreign Enterprise (WFOE) is a limited liability company which can engage itself in approved business activities in China. It is a corporation and a tax resident. The shareholders of WFOE should not be Chinese nationals, save for Hong Kong and Macao residents. A minimum of one shareholder is required who can either be a corporation or a natural person and who must not be a Chinese national. Capital must be of private nature, public offering of capital is not allowed. China adopts a registered capital system. All registered capital has to be paid up in cash, physical assets or intangible assets.
A board of directors is not always required. For a small company, the general manager can be the head of the company and shall be treated as having the power of the directors of the company. There is no residential requirement for the directors.
The income tax rate of a WFOE is 25%, which is same as for local companies. WFOE doing business in China are subject to Income Tax and Transaction Tax that includes VAT, Consumption tax and Business tax.
China has also entered into Double Taxation Agreements (DTA’s) with many countries. It has so far concluded DTA’s with over 90 countries including Hong Kong, Singapore, Taiwan, Germany, France, United Kingdom and USA.
