Foreign investors wishing to penetrate the China market may be asking questions like:
Somehow many foreign investors may have not spent enough time considering two equally important issues, namely, ownership structures and funding arrangements.
Good holding structure not only streamline the businesses of a group but could also pave the way for future restructuring at low or even no tax costs. On the other hand, overly complicated structures may be difficult and costly to administer. So how to draw the line in between? Indeed, there is no hard and fast rules for "the best" model. Each case should be analysed carefully under its own particular circumstances. In addition, ownership structures and funding arrangements could be inter-related; tax efficient funding ideas could be limited without a tailor-made holding structure.
Investors also have to consider the impact of the anti-tax avoidance measures in China's corporate income tax law. The major issues that have to be monitored include the thin-capitalisation rule which may disallow interest expense arising from excessive related-party loans and the general anti-tax avoidance rule which allows the China tax authority to adjust arrangements which are entered into for the main purpose of reducing, exempting or deferring tax.
What have been done by many of our clients?
Ownership structures and funding arrangements should be considered as early as possible when they are still flexible and easily modified. Regular and on-going reviews of existing structures in light of the latest tax and business environment are also important.