China: the ideal market for small businesses

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Meet The Members – Asia-Pacific and The Middle East & Africa

China is much friendlier to small businesses than it once was – here’s what has changed:

No minimum capital requirement

China cancelled the minimum capital requirement for setting up an entity some years ago, eliminating a major hurdle for start-ups.

Theoretically, a foreign investor can set up a company in China with USD 1.00 in capital, but in practice, foreign investors typically choose to inject more capital into their Chinese subsidiary due to foreign exchange controls.

Streamlined set-up

Procedures for setting up a business have also been greatly simplified. Generally, the business license, the official document evidencing the legal establishment of an entity, will be granted in 3 to 5 working days after the setup application is provided to the local government. Previously, several other certificates such as a project approval certificate and a tax registration certificate had to be obtained before the entity could operate. Now, none of these certificates are required.

VAT reductions and exemptions

The standard rates of value-added tax (VAT) are 13% on sales of goods, and 6% on provision of services. But, if an entity qualifies as a small-scale VAT payer, the standard rate is 3%.

Newly-established entities typically have low revenue and small profit. To support startups, China grants VAT exemption if an entity’s monthly turnover is no more than RMB 100,000 or quarterly revenue is no more than RMB 300,000.

Moreover, VAT is levied at the reduced rate of 1% if the monthly or quarterly revenue crosses over the exemption threshold but the annual revenue does not exceed RMB 5,000,000.

It is important to know that exporting eligible services qualifies a business
for VAT exemption regardless of the business’ size. For example, most supply
chain and sales services provided to an overseas entity are VAT-free.

“Theoretically, a foreign investor can set up a company in China with USD 1.00 in capital.”

Further tax benefits

The standard rate of corporate income tax is 25%. The corporate income tax rate for small-and-thin profit businesses (STPBs) is currently 5%.

STBPs refer to those with annual taxable income of no more than RMB 3 million, up to 300 staff and total assets of no more than RMB 50 million. In addition to tax exemptions and reductions, further tax benefits are available, usually in the form of tax rebates. The most common tax rebates are those provided by local governments, usually ranging from 30% to 80% of a taxpayer’s contribution to the local government’s treasury.

It should be noted here that larger entities can obtain more rebates if they are in a better position to bargain with local governments.

Liquidation and divestment

Similar to the significant easing-up of market entry, leaving the country is not a difficult process anymore. It used to be the case that Foreign investors didn’t feel confident enough to divest and leave the Chinese market because of prolonged exit tax audits or tax investigations.

Now the standard procedure is that tax officials will accept the application of tax liquidation of an entity based on the entity’s own assessment of its tax compliance. Nowadays, tax liquidation can be completed in a few days.

In short, China is becoming a very attractive jurisdiction for small businesses, because of its special tax regime for small businesses,

“To support startups, China grants VAT exemption if an entity’s monthly turnover is no more than RMB 100,000.”

Foreign-sourced income exemption regime in Hong Kong

From 1 January 2023, income from a foreign source derived by a member of a multinational enterprise (MNE) group trading in Hong Kong is subject to a tax on profits when such income is received in Hong Kong.

For the purposes of the new law, income derived from a foreign source includes:

  • Interest
  • Dividends
  • Disposal gains
  • IP income.

The tax on profits on non-IP foreign-sourced income (i.e. interest, dividends or disposal gains) may be exempt as long as a taxpayer can conduct substantial economic activities.

For dividends and disposal gains, a taxpayer is considered a pure equity holding company and cannot meet economic substance requirements. However, if the taxpayer can satisfy the conditions of participation exemption, the Profits Tax on dividends or disposal gains is exempted.

In the case that the tax on foreign-sourced income is paid in other jurisdictions with a Comprehensive Double Taxation Agreement with Hong Kong or not, the bilateral or unilateral tax credit on that foreign-sourced income will be granted to the taxpayers accordingly, in order to avoid double taxation.

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