Are your sights set on China? - Kanada

By Claire Laplante and Véronique Jetté

Is your company interested in taking advantage of China's opening market opportunities, perhaps to set up a factory to benefit from both the lower cost of labour and the large numbers of qualified workers? Alternatively, given the vast pool of Chinese consumers, do you want to export your products there? In either case, questions regarding the Chinese tax system will arise.

Are corporate tax rates low in China?
At first glance, it appears that the tax rate applied to foreign companies in China is comparable to Canadian tax rates, since Chinese law states that revenues earned by a foreign company are, in principle, taxed at a combined rate of 33% (30% federally and 3% locally). However, the reality is different since most foreign companies, including joint ventures with Chinese partners and Chinese companies owned by non-residents, benefit from tax holidays and other forms of tax relief that considerably reduce their tax burden. According to a recent study by the Chinese Academy of Social Sciences, foreign companies doing business in China pay a real average tax rate closer to 13%.

Can my company benefit from tax incentives?
The Chinese government's creativity in attracting foreign investors is evident in the proliferation of various forms of tax incentives.

For instance:

·                         Companies that set up in special economic zones benefit from a reduced income tax rate ranging from 15% to 24%

·                         There are tax holidays ranging from two to five years for foreign companies that invest sufficient capital in particular sectors of the economy, including manufacturing and high tech

·                         Once tax holidays or tax reductions have expired, foreign export companies can benefit from a 50% reduction in taxes on the condition that at least 70% of their total production is intended for export. However, the tax rate will never fall below the 10% minimum threshold

·                         Foreign companies that reinvest profits generated by their Chinese activities can obtain a tax refund ranging from 40% to 100% of the tax paid on the reinvested amount, depending on the type of company

Are the tax incentives here to stay?
It is important for an entrepreneur attempting to do business in China to know that a major tax reform is expected to take effect on January 1, 2007. According to this reform, foreign companies will henceforth be taxed at the same rate as Chinese companies (24% to 28%), tax holidays will be eliminated, and preferential tax rates for companies investing in specific economic zones will be abolished. However, it is likely that a tax system favouring certain industries or regions will be introduced.

Are there taxes to pay when repatriating profits to Canada?
Canadian entrepreneurs will want to invest in China and earn profits if they can eventually recover these amounts without having to pay too much tax. From this point of view, China is a very attractive option because there is no tax on dividends paid to foreign shareholders of a Chinese company owned by non-residents. Therefore, Canadian shareholders can repatriate the net profits earned in China without paying Chinese taxes.

Foreign investors should also be aware that, when selling shares of a Chinese company owned by non-residents, the Chinese government normally levies a 20% tax on the realized profit. However, this tax can be reduced through proper tax planning. There is a broad network of over 75 tax treaties in China that can be used for this purpose.

What other taxes might affect my business in China?
The Chinese tax system has a value added tax applicable to the sale of certain goods. If your company intends to sell a product on the Chinese market, you must charge a tax varying between 6% and 17%, depending on the type of product sold and the size of your business. However, because the tax burden is ultimately borne by the consumer, your company can claim credits for the tax that it paid on its purchases. As a general rule, no tax is applied to the export of goods manufactured in China.

If your company intends to offer services in China, you should be aware that a 3% to 6% business tax must be collected and paid to the Chinese tax authorities.

To Canadian businesses that plan to use China as a low-cost manufacturing centre or to penetrate the Chinese market, we would say: "Remember that tax considerations are a major part of business strategy. Doing business in China requires tax planning!"