Last week, we gave you an Introduction to Investing in China. In this article, we’d like to cover the PRC tax forms required when conducting business in China. Various types of business operations exist in China, such as a Company, Branch, or Representative Office, etc. Since income tax is one of the most important considerations for foreign investors in China, we will briefly discuss income tax requirements for the various types of business operation described below.

Company: In China, a Company is within the definition of “Enterprise,” and is governed by Corporate Income Tax Law of the People’s Republic of China. An enterprise shall be taxed on its taxable income on an annual basis; the current tax rate is 25 percent. The dividend distribution after tax shall be free if the recipient is another domestic enterprise; and there exists 10 percent withholding tax on the dividend distribution if the recipient is a foreign enterprise. The 10 percent withholding tax can be reduced if a tax treaty allows it.

Although the preferential taxation is more restricted, tax exemption or tax reduction may be granted to enterprises that meet the relevant rules of the State, such as high-technology enterprises, which enjoy a 15 percent preferential tax rate.

Branch: The branches of domestic enterprises are not independent tax payers, and their profit and loss shall be consolidated with that of the headquarters for the purpose of income tax levy. The Branches of foreign enterprises shall be levied as if they were Companies, and the withholding tax does not apply to the dividend distribution from the branches to the foreign headquarters. For this purpose, to the extent that a branch is legally permitted, it is more tax efficient than a company.

Representative Office: In legal, although the Representative Office could not operate any profit activities, such as sales, and services after sales, it shall be treated as an independent tax payer. The reason is that the services provided for the subsidiaries of the parent company by the Representative Office, even if it’s merely liaison services, shall be treated as the taxable services. Therefore, the most of the Representative Office shall be levied by using a deemed profit method.

According to the deemed profit method, the tax authorities shall calculate the total expenses and the total income of the Representative Office, which can calculate the deemed taxable income by using a formula. The tax rate applying to the deemed taxable income shall be 25 percent.

Partnership: According to the PRC Partnership Law, a partnership formed by an enterprise is tax transparent and the partnership income is taxed only in the hands of each enterprise partner. Under this general rule, in the case of a partnership with foreign enterprise partners, it is likely that the PRC tax authorities will require a foreign general partner to pay a 25 percent PRC enterprise income tax on its share of the partnership income. There is also a good chance that a foreign limited partner who is not involved in the daily management of the partnership might only need to pay 10 percent income tax on their share of the partnership income.

Trust: In China, a financial institution mainly uses the Trust as a structure to invest funds for private and enterprise investors. For example, trust companies often design and sell unit trusts and use the fund proceeds to invest in securities, real estate, leasing, financing, and other areas for the benefit of investors.

Although the unit trusts are very popular in China, there are no tax rules on unit trusts. The tax authority has started research on this issue, but we have no idea when the new rules will be promulgated.

VIE Structure: VIE Structure is helping Chinese enterprises in the Internet and advertising industries to be listed in foreign stock exchanges, as it can pass by the PRC regulatory restrictions on foreign ownership in these industries. In general, the parties shall sign a series of agreements, including intellectual property and service agreements. The listing company established outside of China shall control the business operation of the domestic enterprises from an account perspective. Although the listing company established outside of China does not own these domestic companies legally, all the income of the domestic companies shall transfer to the listing companies established outside of China.

From a Chinese tax perspective, the main tax problem on VIE Structure is how to define the transfer price.

There are more forms for doing business in the PRC these days. The tax implications of each form are different. Certain new forms offer distinctive tax benefits, but there are no specific rules on the taxation of such forms. Foreign investors should consider seeking professional assistance when structuring their future investments in the PRC.

Jessica Wang can be reached at chinashanghaiattorney@gmail.com | Phone: +86-15901811001 | Skype: gushanyancui