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Friday, September 21, 2018

Counselling Aimed at Company Capital Transfers

In the past, the central Government had restricted the entry of foreign investors to the industrial sector, as it appeared firstly, the problem of reconciling the local setting and that of foreign services and, secondly because many service activities involved in a direct way very sensitive social and political spheres.

Only with the entry of China into the - World Trade Organization (WTO) - and then in 2001, was initiated a process of progressive liberalization of foreign companies in the Chinese domestic market. The tools that have marked the start of this process have been the access protocol to the WTO, as well as the - General Agreement on Trade in Services (GATS) - the contents of which provide for a gradual entry of foreign investors in many service sectors, also through foreign-capital based companies (wholly Foreign Owned Enterprise - WFOE).

The entry of China into the WTO has forced the revision of the rules governing the forms of exercise of business activities and their incentives and/or limitations. Thus were introduced - Regulations on Guiding the Direction of Foreign Investment -. These Laws, dated February 11, 2002, are supplemented by the - Catalogue for the Guidance of Foreign Investment Industries -. They represent the fundamental sources for understanding whether a particular corporate form is permissible or not in the Chinese System. The continuation of the work of revision and integration of commercial and tax Law of China, with particular attention to foreign capital-based companies, has come to standardize the regulation of commercial involvement in foreign-owned companies to the existing one at the domestic level.

China represents a market that is increasingly expanding for foreign companies. The corporate structures most commonly used consist in the direct investment and in the establishment of a sub-holding company in Hong Kong. The latter having been a British colony, enjoys a stable economic and political environment and a strong propensity to free market principle. The direct investment in the PRC allows the application of certain tax rules regulated internationally by the treaty against double taxation based on the model – of the Organisation for Economic Co-Operation and Development.

The main ways in which foreign companies invest in China are mainly two:

  • The first is a direct investment trhough its own subsidiary.
  • The second through the establishment of a sub-holding, maybe in Hong Kong, which in turns holds investments in the Chinese subsidiary (i.e. foreign companies that, through investments in companies resident in Hong Kong, indirectly control Chinese companies).

It is a good idea to be assisted by experienced professionals as the feasible subtleties are the result of knowledge of regulations, treaties and procedural systems. In China, a mistake can be very costly, not only in economic terms. As a result of this latter point, our “Company” strongly discouraged to pursue transactions with the collage of news collected from diverse sources and not in relation to each other.

China has signed a number of treaties against double taxation, among which we mention Italy, Germany, Canada, Spain, France, Luxembourg, United Kingdom, Russia, Japan and Australia. These treaties provide essentially to determine a priori, that an income is taxable only in one of the two signatory Countries or to tax the income in both Country but with the obligation, to either one, to admit a deduction from the tax to pay in compliance with the internal regulations, and the tax paid in the other Country.

INTEREST ON OWN CAPITAL

The interests paid by the subsidiary of China home loans issued by the foreign parent are subject only to a withholding tax of 10%. These interest payments are also deductible for purposes of calculating the tax base for the income tax of the company.

The abuse of an operation of this kind is evident where a company resident in China wanted to transfer capitals abroad. For this reason, the Chinese law provides for additional requirements where, in a situation of loan between the parent and the subsidiary, the parent (the parent company in technical language is also called holding) is resident in a foreign Country. It is imposed a limit on the debt/ equity ratio of Chinese company which does not allow to deduct from taxable corporate aimed at the income tax the interests regarding the part of the debt exceeding that ratio.

In this regard, the scenarios are different and should be considered in each case, so it is advisable a counselling aimed at "Tax Planning". For information purposes, it is useful to refer to our section "Tax System in China” given the fact that Bright Business Consulting LLP can be the partner both in the preliminary procedure and also in the implementation, offering their expert advice made effective from synergies within the “Company”, ensuring “Warranty & Assistance” to the customers and to the purposes initially planned and programmed.

DIVIDENDS, CAPITAL GAIN, ROYALTIES

In the case of a direct investment in the People's Republic of China, it is necessary to take into account that from January 1st 2008, the Chinese law has been revolutionized. It was introduced a withholding tax of 10% on dividends paid abroad for useful products since 2008. According then to the seat of residence of the foreign company, there are cases of exemption from taxes.

Even the profits coming from the sale of equity interests in subsidiaries are subject to Chinese withholding tax in China and later also taxable in the Country of residence of the foreign company except for the mechanism of the tax credit.

From the point of view of taxation, royalties are subject to China to various internal taxes such as Business Tax, equal to 5% of the value of such royalties and to local taxes, variable according to the district, from 7% to 13% of the Business Tax. In line with what governed under the Treaty against double taxation, they are subject to the payment of a withholding tax equal to 10% of their value.

These are just some general information regarding "Dividends, Capital Gains, Royalties" which respectively to the scenarios listed above are to be considered in light of your circumstances, therefore, in each case, also planning an ad-hoc “Tax Planning”. Bright Business Consulting LLP can be the partner both in the preliminary procedure and also in the implementation, offering their expert advice made effective from synergies within the “Company”, ensuring “Warranty & Assistance” to the customers and to the purposes initially planned and programmed.

TRANSITION FROM HONG KONG: THE ALTERNATIVE TO DIRECT INVESTMENT IN CHINA

As mentioned above, foreign companies often invest in China through sub-holding company in Hong Kong (or foreign companies that through investments in companies resident in Hong Kong, indirectly control Chinese companies). Hong Kong enjoys a separate jurisdiction from China, the taxation and financial system follow different rules and regulations, in line with the fundamental principles that can be found in the Anglo-Saxon system.

Hong Kong ranks first among the countries with the highest degree of economic freedom thus favouring the establishment of companies by foreign investors. The decision to locate the company in Hong Kong may depend on structural and operational reasons related to the business: through the settlement in the Asian market you will ensure your presence in a Country that, for the position, is a focal point for the expansion of its business. Companies doing business in Hong Kong are subject to tax on income earned in this area and are subject to a rate of 16.5%.

Due to the treaty against double taxation, a company paying taxes in China is given in Hong Kong a tax credit up to the amount equal to the respective tax which would subject the company in the area of Hong Kong.

In this chapter, we made a quick reference to "Switching from Hong Kong", the joints, as well as conveniences are varied, but the simplicity is to be excluded.

Tax advice aimed at a study useful to identify the most advantageous tax planning (selecting the mode of business, the company structures it is possible to decrease the tax burden), is what should be done to legitimize the profits. A customized study to specific areas of activity and according to different local tax laws is helpful in planning and to this purpose Bright Business Consulting LLP provides the necessary support to achieve this goal.

DIVIDENDS, CAPITAL GAIN AND ROYALTIES IN HONG KONG

In order to facilitate economic relations between China and Hong Kong, it was predicted that in the event of distribution of dividends from the Chinese subsidiary (controlled) to the parent headquarters in Hong Kong (in technical jargon also called holding), the withholding tax on dividends of 10% is reduced to 5%. The Hong Kong legislation does not provide withholding tax on dividend payments to non-residents.

Gains from the alienation of shares or any right in the capital of a company resident in China, will be taxed in China if you hold at least 25% of the capital for at least twelve months. Therefore, in compliance with the laws of China, the Capital Gain, i.e., capital gains will be taxed at a rate of 10%. With regard to royalties, the double tax treaty provides for a reduction of withholding tax to 7% if the royalties are used in Hong Kong.

It is good to notice that the Chinese authorities are becoming more and more stringent towards Hong Kong companies operating in China if these have been acquired with the main purpose of tax avoidance. Under the current Corporate Income Tax Law of China, a non-resident company can be regarded as a tax resident in the Republic of China according to the principle of the place where he really runs the administrative and financial management of the operations. In other words, foreign investors using a holding company in Hong Kong, but in fact running it from the Chinese territory, could be considered subject to Chinese corporate income tax in relation to the profits earned by the company even Hong Kong.

A Tax advice aimed at a study useful to identify the most advantageous tax planning (selecting the mode of business, the company structures it is possible to decrease the tax burden), is what should be done to legitimize the profits. A customized study to specific areas of activity and according to different local tax laws is helpful in planning and to this purpose Bright Business Consulting LLP provides the necessary support to achieve this goal.

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