Night view of The Bund in Shanghai

Guide - 03 July 2019

Guide to Master Business Maturity for CFO and GMs

Although 2018 was regarded as a negative turning point by some FDIs, 2019 is expected to be a year of growth. The changes of Foreign Investment Law and Individual Income Tax Reform can be a two-sided sword depending on the level of readiness of each taxpayer.

Author of article:

Fabio Stella

China Head of Sales & Business Development

China’s Economy Today

 

Current trends in terms of economic push to land a slower but stable GDP growth have forced authorities to make reforms in the past months targeting specific conundrums:

  • Foreign Investment Law

Are your JV Partners the best partners for growth in China? Most Foreign Invested Enterprise (FIEs) would consider a thorough understanding of the local law a one of the most important first steps before their entry. The new Foreign Investment Law was passed on March 15th, 2019, and will be officially effective on January 1st, 2020. The new law updated a list, the so-called “negative list”, to prevent some of the industries from investing or showing different kinds of restrictions in order for China to have control of most of the shares. Thus, FIEs should be careful when you plan your strategies.

  • Individual Income Tax Reform

The IIT reform introduces a new calculation method for the monthly taxable income and tax payable. The cumulative progressive method results in an increasing tax rate during the year, following the cumulated annual income. New guidelines from the Tax Bureau point out that monthly income in the form of wages shall be declared in the same period in which it is originated.

  • 2018-2019 VAT Cuts

Similar as the number of non-compliant taxpayers in terms of China’s IIT, this year VAT cuts will bring no shelter from an increase in the cost of doing business for small and non-compliant business owners here. Lowering rates for direct and indirect taxation appears as an ultimatum before eliminating all grey areas that were previously tolerated by the authorities.

  • Corporate Income Tax Cuts

The Chinese government announced a series of tax policies to ease the tax burden on SMEs for both domestic and foreign-invested (circular No.13). The new policy will be effective from January 1st to December 31st, 2021.

 

What Foreign Invested Enterprises for China?

 

The below chart shows historical data on incorporation proceedings from 1995 up until now. FDIs now enjoy shorter and more business-friendly procedures with enhanced flexibility on company's bylaws. However, mature FIEs in China are facing bottlenecks in terms of stable supply of a competitive work force.

 

FDI in China – 1995 vs. 2019

Topic

Yesterday

Today

Tomorrow

Timing

8-12 months;

2-3 months;

Few working days

Capital

Minimum of 100,000.00 EUR – 20% injected in the first 3 months, the rest in 2 years, Capital Verification Report by a CPA;

Up to the Company’s AoA, no particular restrictions to properly arranged business plans, FDI filing at the bank on arrival;

Nominal Value, bidding farewell to the borrowing gap and total investment method.

Business Scope

“Investment Catalogue” restricted for FIEs, JVs for key sectors

A “Negative List” approach only leaves few closed doors that seem to be about to be opened.

Market access barriers dictated by market and size criteria only

Registered Address

Dedicated commercial premises

Shared Offices, co-working spaces, FTZ virtual address

Operational Office not equal Registered Address

Corporate Licenses

1 License per authority (around 15)

“3,5,all” in one Business Licenses accessible via QR code

Online Database

Taxation

High (33%) and randomly collected among SOEs

Reduction for SMEs (private) and low incomes, indirect taxes cuts, collection and AA via big data.

Regional/Sectorial Divides reborn (Developed vs. Developing Areas/Sectors)

When the company plans its entry into the Chinese market, one of the biggest mistakes we often see is the underestimation of the registered capital and financial resources to be dedicated to the growth of the business. The knowledge of different financing methods and planning is crucial to guarantee an adequate amount of funds for daily operations and development.

Francesca Scortichini, Head of Account Management, Hawksford

 

The Financial Hand: Tools to Secure Your China Growth

 

Planning your current deposit is extremely important for your business presence in China. Whenever there is an internal structuring re-adjustment or new expansion/business lines being planned, make sure you plan your currency deposit as careful as you plan your business. With the assistance from banking institutions, fixed rate deposits can become a source of income as significant as your main business. Always consider bank loans as an additional financing tool for you to expand your business.

 

When the deposit reaches the bank’s benchmark, you should negotiate rates and inquire several banks for comparison. It is also practical to think in currency-terms and build a structured plan.

RMB (Current)

RMB (1Y)

USD (Current)

USD (1Y)

Bank of China

0.30%

1.75%

0.05%

0.70%

China Merchants Bank

0.30%

1.75%

0.05%

0.70%

Bank of Beijing

0.30%

1.75%

0.05%

0.80%

Bank of Shanghai

0.30%

1.95%

0.07%

0.80%

Depending on different needs and stages in the lifecycle of the company, there are several banking and non-banking solutions that can help to keep the cash flow healthy, such as capital increase, intercompany loan, credit line, bank loan, cash pooling. We always recommend our clients to pay attention to their cash flow analysis and planning knowing that in China the financial system is highly regulated, and a financing transaction can take time to be executed (from 2 weeks to 2 months)

 

Francesca Scortichini, Head of Account Management, Hawksford

 

Cashing out on China’s growth

 

Although Chinese government has already started to actively encourage FIEs to increase their profit re-investment in China by providing tax exemption policies, foreign investors related to the US market hesitate to increase its capital and exposure in the Chinese market. With the ever-increasing labor cost, China has become less attractive for manufacturers but it has found a more solid ground for its own products.

 

In order to encourage existing FDI projects to increase their presence in China, the Ministry of Finance released "the notice on the topic that foreign investors' direct investment via profit repatriation shall be tentatively exempt from withholding tax" Caishui [2017] 88 & 102-3 (“Circular 88 & 102-3”) on December 28th, 2017, together with the relevant interpretations providing foreign investors with a deferral incentive on withholding tax for profit reinvestments in China.

  • Increase of paid-in registered capital or capital reserves of China resident enterprises.
  • Setting up a new China resident enterprise or venture.
  • Acquisition of shares of resident enterprises in China from unrelated parties.
  • Any other ways specified by the Minister of Finance and State Administration of Taxation.
  • Investment into stock listed companies are not allowed unless deemed as ‘strategic’ (Belt and Road Initiative / Made in China 2025).

By providing grants for the usage of profits by China’s FIEs, authorities are setting up new decision processes to avoid the influence of decoupling on what is already in place here for successful ventures.

Conclusion

Given the special status of FIEs in China, exploring innovative products and regulations stands are the only way forward despite being in contrast with the usual attitude of navigating safe waters away from risks and dangers.

If market entry regulations were the main issues for FIEs in the past, China is re-adjusting to become market regulated by keeping a high level of competition between national companies. Credit tools from your banking partners together with professional advice by your financial consultants will guide you through successful journey into the biggest market in the world.

 

To discuss your business needs in China, contact our team today.

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