Shanghai Free-Trade Zone, officially China Pilot Free-Trade Zone, is a free-trade zone in Shanghai. On 22/8/2013, the State Council approved the establishment of the zone. Officially launched on 29/9/2013 with the backing of Chinese Premier Li Keqiang, it is the first free-trade zone in mainland China and covers an area of 240.2 square kilometers. Shanghai FTZ integrates four existing bonded zones in the district of Pudong—Waigaoqiao Free Trade Zone, Waigaoqiao Free Trade Logistics Park, Yangshan Free Trade Port Area and Pudong Airport Comprehensive Free Trade Zone. The FTZ focuses on system innovation and is designed to creating an internationalized and legalized business environment.
The benefits of China’s latest innovation in encouraging Foreign Investment are clear. It is now possible for foreign entities to open a Limited Company in the FTZ with no real capital requirements, making the FTZ a gateway for an easy, low-risk and fast entrance into the Chinese market. Some advantages are:
Should you have any enquires about Shanghai Pilot Free Trade Zone, please feel free to contact our consultants.
ABC Trading Group is international trading company collectively owned by Australian and Swedish shareholders. The have a production and packaging base in China, to take advantage of the low labor cost in China. Now with Shanghai FTZ’s zero tariff as long as the goods do not enter the rest of China, they plan to move the base to the FTZ to benefit their international trading. Meanwhile, they need to decide how the JV in the FTZ is structured. LiBrighten has advise the client to utilize Hong Kong company as a holding entity. With or without the Hong Kong company can lead to a difference in withholding tax and international business convenience. The following two diagrams demonstrate the difference in workflow and tax implications.
1. Re-export (A-B), importing the goods to the FTZ and then exporting (normally after some simple repackaging, sorting, selecting, etc., but no remanufacturing or processing), in which process there is no Customs Duty or VAT.
2. Import (A-C), buying products from overseas and selling to China. There will be Customs Duty of 10% and VAT of 17%. The VAT paid for the import will be a part deductible from the VAT to be paid upon sales.
3. Export (D-B), buying from China and selling to overseas. VAT refund is available for this type of export just like any other export companies in China. The VAT refund is normally 15% for timber produces.
4. Domestic trading (D-C), for this process the JV in FTZ works the same as other trading companies in China. VAT is the same but there is no Customs Duty.
i. The profit tax of a company in FTZ or Nantong is 25%; if the annual profit is under CNY100,000, the profit tax is 10%.
ii. If the net profit is repatriated from China to Australian or Swedish shareholders, there is a withholding tax of 10% in China; this is a deductible part for the tax to be paid in Australia and Sweden for these investment gains as China has double taxation avoidance treaties with both countries.
1. Re-export, this process becomes E-F, in which the HK company buys from overseas suppliers and directly sells to an overseas buyer. The goods can either be shipped directly from your supplier to your buyer, or can be via the FTZ if some repackaging, sorting, selecting, etc. if those are needed there. Your concerned tax will be just the profit tax (16.5%) in HK as there is no VAT or Customs Duty in HK, and since there is no real HK facility involved, the profit is eligible for offshore income exemption.
2. Import, most commonly this is still done by A-C model. However, E-G-C is also workable, in which the HK company increases the price a little to keep partial profit there, thus increasing the purchase cost and the WOFE pays less profit tax in China; however, higher purchase cost means higher Customs Duty, making this less beneficial meanwhile with more complexity involving the HK company.
3. Export, D to B will become D-H-F. The WOFE sells to the HK company first with exactly the same VAT refund it would enjoy if it had sold directly to the overseas buyer. The selling price can be lower so that HK company will make part of the profit while it sells to the overseas buyer. Tax in China is lower due to lower profit; tax in HK is 16.5% of profit or none once we have approval of offshore income exemption. This is the most common use of a HK company.
i. In Point 1 & 3, the HK company is keeping most of the profit; the WOFE is making less profit while paying more expenses, so it will be not very necessary to repatriate profit from China to HK.
ii. Profit repatriation will mostly be from HK to Australia/Sweden. From our research they don’t have similar double taxation avoidance treaties with HK, so full amount of taxes need to be paid to each shareholder’s country for these investment gains (note that what you pay for this here is still the same as Scenario 1; only difference is Scenario 1 splits the tax between China and Australia/Sweden).
iii. Extra benefits of having the HK company relates to the shares of the WOFE which are directly controlled by the HK company. Transfer of the WOFE’s shares can be done through transferring the HK company, rather than directly transferring the WOFE’s shares as that procedure in China is much more complicated and costly; Using the HK company to set up a WOFE in China shows a consolidated group of companies and give people the feeling that your business has reached a considerable scale, and it’s much more common.
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For better administration and service to our clients, effectively from 1/10/2021, LiBrighten will be renamed as WOS UNION and our updates of website are still underway. Our email domain will be updated accordingly but you may still contact us with the old email domain (and you will receive our reply under the new email domain).