China tax - Ownership structures & tax efficient funding

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Foreign investors wishing to penetrate the China market may be asking questions like:

  • Would a representative office ("RO") be good enough for their current purpose?
  • Should they establish a Foreign Investment Enterprise ("FIE") in China?
  • Would there be any restrictions on the proposed project?
  • Would there be any investment and tax incentives?
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 analyzed 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?

  • To interpose a suitable intermediate holding vehicle to hold the subsidiaries in China to benefit from tax treaty protections on returns on investment and to facilitate tax efficient reorganization.
  • To set up intermediate holding vehicles in jurisdictions other than BVI, Cayman Islands, etc. in light of the overall tax efficiency and controlled corporation rules at the home countries.
  • To use a company in a suitable location to finance the China investments.

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.