WFOE Tax Liabilities

This China WFOE Tax Liabilities page was last updated on May 11, 2012


Know about your WFOE tax liabilities!


On this page of our China WFOE guide we take a look at

Taxes Involved in the Operation of Wholly Foreign-owned Enterprise


Common China WFOE tax liabilities covered in our Corporate Taxation Page:

Use the Quick-Jump navigation to fat forward to WFOE Tax Liability sub-sections

 

WFOE: Corporation Tax in China


Tax structure and liabilities of a Wholly Owned Foreign Enterprise

(I) Corporate Income tax rate is generally 25%


A wholly foreign owned enterprise with a stated operating period of more than 10 years is entitled to preferential dispensation: "exemption for the first two years and half rate reduction for the subsequent three years", commencing from the first profitable year.


After this initial period, the WFOE is further entitled to one half of corporate income tax payable on its annual products export value as audited, up to 70% or more of its annual sales value. Wholly Foreign Owned Enterprise’s operating in specified areas such as technology, or other advanced fields will be entitled to one half of the corporate income tax payable for another 3 years.


(I) Reinvestment


If a foreign investor wishes to reinvest the WFOE’s profits directly into the enterprise to increase the registered capital, or as capital investment to set up another enterprise with foreign investments, then this must be done within an operating period of more than 5 years. In return, the investor is entitled to a refund of 40% of the income tax paid on the reinvested portion, conditional on the approval of application and/or approval of tax authority. Those reinvesting in an export-oriented enterprise or technologically advanced enterprise will be entitled to a full refund of the corporation tax paid on the reinvestment.


The enterprise paying corporate income tax by means of approved collection can offset 40% of its investment in the purchase of home equipment, against the increment of the Corporation Tax payable in purchase of such equipment for the current year, and in excess of that of previous year.

Import Tariffs on self-purpose equipment


These include things like specialist manufacturing equipment essential for your Company operations in China. This excludes general imports such as goods for sale in China.

(I) Tariff, and Value-added Tax on Importation


The self-purpose equipment imported within the aggregate investment, together with the technology, components, and spare parts imported by contract are categorized as "encouraged". This primarily relates to the transfer of technology in the Catalogue for the Guidance of Foreign Investment Industries (Guidance Catalogue). In these specific instances the WFOE will be exempt from tariff and value-added tax on imports, except for the goods set out in the List of Import Commodities by Foreign Investment Projects Not to Be Exempt from Tax.


Imported equipment required for the production of export-oriented products, labeled "encouraged", will first be taxed, and then refunded, in terms of the tariff and associated Value Added Tax.


Technically:

  • All foreign capital investment enterprises, such as:
    foreign investment research & development centre, technologically advanced, and export-oriented enterprises that are sanctioned with "encouraged" status, and are already established: will be entitled to free import duty and value-added tax as provided by the Country on the productive self-purpose equipment and supporting technology, fittings and spare parts to be imported within their originally approved scope of production and business, which cannot be produced at all or in a manner of satisfactory to the demands in mainland China.
  • Further, Self-purpose equipment imported by the foreign government loans and international financial institution loans programs, and the non-priced import equipment supplied by the processing trade foreign merchant, except for goods set out in the List of Import Commodities by Foreign Investment Projects Not to Be Exempt from Tax, shall be exempt from tariff and value-added Tax.


Chinabiz21 intimately understand the above gobbledygook and will advise you in simple English accordingly.

Value Added Tax (VAT)


Other tax liabilities as applicable to a wholly owned foreign enterprise

(I) Value-added Tax, and Consumption Tax


The below is mainly quoted legalese, but important for your team to consider in great depth:


The WFOE being a general taxpayer is entitled to "Exemption, Credit and Tax Rebate" of taxation, or "Collection First and Refund Later" on the self-managed export, or export on consignment, of its self-produced goods, where:

  • "Exemption" from taxation means exemption from the value-added tax on exports and sales of the enterprise;
  • "Credit" tax means the enterprise can credit its value-added tax on the purchase of domestic raw materials against its value added tax payable on domestic sales of goods;
  • "Tax Rebate" of tax means the refund of the remainder, after crediting, of the value-added tax creditable on purchase in excess of the value-added tax payable on domestic sales, in the current month.
  • "Collection First and Refund Later" means the exported goods are subject to taxation at the rate of taxation first and refund of tax later, at the rate of refund placed upon exported goods.
  • The Wholly Foreign Owned Enterprise will be exempt from tariff and value-added tax on importation and consumption tax payable on the goods imported by the trade method of processing materials supplied by customers, and processing imported materials, and exempt from the value-added tax on production and consumption tax on the exported goods produced by it.
  • The foreign capital investment enterprise categorized as "encouraged" is entitled to a full refund of the value-added tax payable on the qualifying home equipment as falling within the scope of the Exemption Catalogue, and purchased within its aggregate investment.


Your team and that of Chinabiz21 will work closely together to ensure you end up with the best solution and schedule for forming your own Wholly Foreign Owned Enterprise in China.

Foreign Employee Personal Tax

(I) Tariff, and Value-added Tax on Importation


Foreign nationals are entitled to a monthly exemption of RMB 4,800.00, with the remainder subject to individual income tax graduated from 5% to 45%.


Foreign nationals are also exempt from individual income tax payable on the interests from saving deposits with financial institutions.

(II) Staff Social Security (Social Security)


The enterprise will make certain social security contributions for its foreign employees at a percentage of the employee’s monthly salary. The basic figure and proportion are calculated differently, due to the diversity of living standards in different regions.


Chinabiz21 will of course examine tax liabilities for your proposed WFOE in detail and liaise with your accountants as necessary.

  • With Corporation Tax exemption for the first two years and half rate reduction for the subsequent three years, your WFOE gains an immediate advantage that helps boost your business star-up.


What can you tell be about Set-up Costs and Time?

Time-frame and Money are discussed in detail on the next page of our China WFOE section

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