Mainland China

1 Speaker Name: Tony Shao Title: Audit partner CompanyChina Regal CPAs Co. Ltd. Tel: Mobile:

2 Case study US company (consumer business) is doing business in China The ultimate owner of the US company is an US individual The China business operations create a net result of US$ 7 mio and after deduction of an at arm’s length US license fee for the use of the brand name (US$ 2 mio) a profit before tax remains of US$ 5 mio. The US company can set-up a (1) corporation or a (2) limited partnership in China What are the tax consequences? What opportunities exist to mitigate the tax due?

OR - License fee - Dividend 3 Introduction: application of tax treaty China/US US company sets-up a branch office in China: The US company is considered to do business in China. The taxing rights to tax the profits realized in China are allocated to China based on the tax treaty. The US should provide an exemption for the US profits allocated to China. US sets-up a company in China: The China company is a separate China tax payer of which the US is the shareholder. The US cannot tax the profits of this company. The US are able to tax dividend or royalty income paid by China corporation the US as income. Based on the tax treaty the withholding taxes withheld by China on dividends or royalty payments can be reduced.(not mentioned in the treaty) US company Corporation US individual US China PE

- License fee - Dividend 100% 4 Re 1: Tax consequences corporation Corporate income tax (CIT) due in China: Net resultUS$ 7,000,000 License feeUS$ 2,000,000 – Profit before taxUS$ 5,000,000 China CIT (25%)US$ 1,250,000 – if License fee not deductable US$ 1,750,000 – Profit after taxUS$ 3,750,000 if License fee not deductableUS$ 3,250,000 Withholding tax (WHT) on license fee: 10% WHT is levied on license fee by China Dividend withholding tax (DWT) on dividend: 10% DWT paid by Corporation on behalf of the US company when payment incurred US company Corporation US individual US China 100%

0.01% 100% 99.99% - License fee - Dividend 100% 5 Re 2: Tax consequences partnership (subject to tax in China) Corporate income tax (CIT) due in China: Similar like corporation (profit after tax US$ 3,750k or $3,250k if license fee not deductable) Withholding tax (WHT) on license fee: 10% WHT is levied by China Dividend withholding tax (DWT) on dividend: 10% DWT paid by Corporation on behalf of the US company when payment incurred US company Partnership US individual US China US LLC

6 Tax opportunity 1: transfer pricing  Reduce functions and risks of the China business as much as possible;  Determine the required tax result through a benchmark analysis;  In case of a sales entity the profit can be commission based (a percentage of sales);  The excess income can be transferred to a related low taxed group entity(eg. HK).

7 Tax opportunity 2: debt financing  Finance the China activities with debt as much as possible Legally speaking, tax deductable loan interest rate can be the highest of a loan interest rate from a commercial bank, but normally 20%, some 30% or even 50% in specific areas like Wenzhou.

8 Visualization structure: deferral structure Corporate income tax (CIT) due in China: The taxable income is reduced with interest expense Withholding tax (WHT) on license fee: 5%($100k) WHT is reduced from 10%($200k) Dividend withholding tax (DWT) on dividend: 5% DWT paid by Corporation on behalf of the HK company when payment incurred and reduced at least 5%($162.5k) of DWT US company US individual US HK HK company Corporation China