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With the liberalization of China's trading and distribution-related services for foreign participation, there will be increasing demand for quality freight forwarding service providers. The freight forwarding industry is an area under the agenda for opening up following China's accession to the WTO.
Update on regulation - a relaxation on foreign investments
In the past, foreign investors were only allowed to establish minority-owned China International Freight Forwarding ("CIFF") Enterprises in China in the form of Sino-foreign joint venture ("JV"). Recently, the State Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") increased the maximum percentage of foreign equity interest in CIFF Enterprises to 75%. In addition, the foreign majority-owned JV would be able to obtain a CIFF license (or sometimes known as "Class A license").
Despite the relaxation, a full-fledged CIFF Enterprise would generally be required to obtain various approval/licenses from the Ministry of Communications, CAAC and Customs, etc.
Opportunities for foreign freight forwarders in China
Foreign investors may have already established representative offices, wholly foreign owned enterprises in free-trade zones or 50/50 Sino-foreign JV before the relaxation. In light of the recent relaxation, many foreign investors have started to revisit their investment strategies to capture the new opportunities:-
- Enhance operation in China by setting up majority-owned CIFF Enterprises.
- Increase the foreign equity interests in the existing CIFF JVs.
- Acquire controlling stakes in existing domestic CIFF enterprises.
- Restructure the current investment structure in China so as to rectify any regulatory non-compliance.
- Obtain a CIFF license and necessary approvals/licenses from other Chinese authorities.
- Review the existing and any contemplated operations and investment structure in China to mitigate any China tax risks and achieve overall tax efficiency.
Other specific tax issues & tax planning opportunities to be considered
- Foreign invested transportation enterprises may be considered as "production enterprises" and qualify for certain tax preferential treatments and tax holiday, subject to the Chinese tax authorities' approval.
- A 3% business tax ("BT") is applicable to income derived from transportation-related services, whereas a 5% BT is applicable for other agency or warehousing services. Proper categorization of income may therefore achieve saving in BT.
- Multiple BT is a common tax inefficiency. Proper planning of sub-contracting fee payments could mitigate such a tax exposure.
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