The A to Z: Costs of a WFOE in China

The Taxman

WFOEs are considered resident enterprises in China and, just as other domestic companies, their profits are subject to corporate income tax (CIT), which is generally 25 percent. Businesses generally also pay either business tax (BT) or value-added tax (VAT), depending on the nature of the business. Only in special circumstances are both taxes paid. BT is imposed on the provision of taxable services and sale of immovable property and intangible assets. Meanwhile, VAT is levied on the sale of goods, provision of repair and replacement services, and importation of goods into China. BT ranges from three to 20 percent, while VAT ranges from 0 to 17 percent. For both BT and VAT, certain exemptions apply.

With the commencement of the VAT pilot reform implemented August 1, 2013 that merges BT with VAT, companies that were previously subject to BT are now subject to VAT if they provide the following services:

  • Transportation services;
  • R&D and technology services;
  • IT services;
  • Cultural and creative services;
  • Logistics auxiliary services;
  • Tangible movable property leasing services;
  • Authentication and consulting services; and
  • Broadcasting, film and television services.

VAT taxpayers are categorized into general taxpayers and small-scale taxpayers. Businesses with annual sales exceeding a certain threshold are required to apply for general taxpayer status. The thresholds are RMB 500,000 (for manufacturing enterprises) and RMB 800,000 (for trading enterprises). For taxpayers providing services that fall under the VAT pilot reform, the annual sales value threshold is RMB 5 million derived from taxable services.

General and small-scale taxpayers are subject to different treatments. General taxpayers are subject to VAT ranging from zero to 17 percent, and are able to credit input VAT (levied while purchasing raw materials from suppliers and fixed assets) against output VAT (levied on selling of goods). The VAT rate for small-scale taxpayers is three percent, with no input tax deductions allowed. Distributors or customers tend to require the issuance of special VAT invoices in order to credit their VAT, and these invoices can only be issued by general taxpayers.
Consumption tax (CT) applies to the production, import and sales of certain products (e.g., tobacco, alcohol, vehicles and cosmetics) and the tax rates vary considerably with the product. Customs duties apply to the import and export of goods. Exporting enterprises are entitled to export tax rebates which refund them the indirect taxes paid in the production and distribution process in China.

WFOEs are also subject to urban construction and maintenance taxes (UCMT), an education surcharge (ES) and a local education surcharge (LES). UCMT rates are seven percent for urban areas, five percent for counties (towns), and one for other regions. The ES rate and LES rate are three and two percent, respectively, regardless of location.

The Talent

It usually takes eight to 16 weeks to find a suitable employee. As such, it is advisable to start the recruitment process once a formal decision has been made to set up an operation in China (assuming the planned start date of operation in China is within the next six months). In terms of salary expectations, candidates in first-tier cities will probably have higher salary expectations than in second-tier or third-tier cities. Since job titles are not used consistently across companies, the actual job content and responsibilities of a position should be the basis for the salary discussion.

UPDATE: The salaries are for Chinese nationals with working English knowledge in Beijing (this information was not published in the print version).

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The Guards

Social security (also called “social welfare” or “mandatory benefit”) payments are contributions to government-run funds for individuals in China. There are five such funds—pension, unemployment, medical, occupational and maternity—plus a mandatory housing fund for Chinese employees (which is considered separate, as it is not strictly considered a type of social welfare). Both employee and employer make mandatory contributions to these funds and generally the employer is responsible for withholding the contribution of the employee from gross salary each month and making their contributions together.

Exact calculations of social security payments are quite complicated (percentages are not technically based on the employee’s monthly salary, but rather of a theoretical “base” salary calculated based on a given formula) and required percentages for each fund vary by region. For an employer, social security payments typically add approximately between 30 and 45 percent of an employee’s salary each month.

The Lair

China’s first tier cities remain the most expensive markets for prime office rentals, with Beijing, Shanghai and Shenzhen topping the list, according to a survey conducted by DTZ, a global property services provider. Meanwhile, prime rental prices in China’s second and third-tier cities remain susceptible to local and national economic pressures. Average rental prices for prime office spaces during the second quarter of 2013 can be found below.

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Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email prd@dezshira.com or visit www.dezshira.com.

Category The Know How