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When foreign investors wish to penetrate into the China market, they may have already probed into issues like - would a representative office ("RO") good enough for current purpose? Does it deserve to 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 consideration in respect of two equally important aspects, namely, ownership structures and funding arrangements.
Good holding structure could not only streamline the businesses of a group but also pave the way for future restructuring at low or even no tax costs. On the other hand, overly complicated structures may be hard and costly to administer, and may also reduce the amount of distributable profits. 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 the 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 in advance. Also, funding arrangements are not necessarily confined to shareholder loans and shared services centre arrangements. There could be "bonus funding" available in China to finance the subsidiaries in China.
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 the tax treaty protections in receiving returns on investment and to facilitate tax efficient reorganization (e.g. intra-group equity transfer, spin-off of subsidiaries, listing of particular sub-group).
- 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.
- For those investor with a trading company in the bonded zone, to use the trading company to register new liaison offices and de-register those present ROs in order to save the China tax costs levied on deemed income basis.
- To apply for tax refund on reinvestment of distributable profits in an FIE to obtain bonus funds.
- To purchase locally the domestic machinery and apply for bonus fundings by way of Value Added Tax refund and credit against the Enterprise Income Tax payable.
Ownership structures and funding arrangements should be brought into consideration as early as possible when things 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. |
