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 (zt) Chinese Holding Companies viable for investors |
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phoenix
头衔: 海归少校
加入时间: 2004/09/06
文章: 114
海归分: 11330
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作者：phoenix 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
Reform makes Chinese Holding Companies viable for investors
By Bill Seto, Partner, China Tax & Business Advisory, Ernst & Young, Shanghai
A Chinese Investment company, also known as a Chinese holding company (CHC), is an investment vehicle for multinational companies that wish to hold investments in subsidiaries in China by way of a Chinese company. Due to the limitations imposed on foreign-invested enterprises (FIEs) operating in China, for many years the CHC regime could not be exploited in a meaningful way. In addition, with a minimum required investment of $30 million, it was an expensive way to demonstrate an investor's commitment to China. Beginning four years ago with the issuing of Ministry of Foreign Trade and Economic Cooperation (MOFTEC) Circular Number 3, the Chinese government started to allow CHCs to perform additional functions. Although a CHC is still not allowed to engage in manufacturing activities or commercial activities (including retail and providing services to unrelated third parties), the operating space for CHCs has been broadened over the past four years. Genuine reform continues to take place to make the CHC a more viable operating vehicle for multinational investors.
LEGAL STATUS
Corporate form
A CHC is a limited liability company with minimum paid-in capital (registered) of $30 million. A CHC may be a wholly foreign-owned enterprise (WFOE) or a joint venture. It may invest in second-tier subsidiaries in China. It may also be registered as a joint stock company, in which case it may issue registered shares to its shareholders instead of registered capital.
Under the Chinese foreign investment regulations, a CHC that invests in second-tier subsidiaries is considered a foreign investor for the purposes of determining the FIE status of the second-tier subsidiaries. A Chinese company with at least 25% ownership interest held by a foreign investor is considered an FIE. This is important because income tax holidays and other benefits are available only to companies attaining FIE status. Non-FIE entities are generally subject to higher income tax rates, as well as not being eligible for income tax holidays.
Permitted business scope
The Provisional Regulations for the Establishment of Chinese Holding Companies (as amended) and the supplemental rules effective from April 7 2003 provide for the following standard business scope of a CHC:
To invest in activities permitted for foreign investors.
Following unanimous approval by the board of directors of an investee enterprise (subsidiary), a CHC may be contracted, through a written agreement, to assist or act as an agent on behalf of the subsidiary in purchasing in China or from overseas for use by the subsidiary, machinery, office equipment, raw materials, components and parts for production purposes, as well as to sell, both in China and overseas, products produced by subsidiaries, and to provide after sales services.
To balance foreign exchange among the subsidiaries with the consent and under the supervision of the relevant foreign exchange authorities.
To provide subsidiaries with technical assistance in production, sales and marketing, employee training and human resource management.
To assist subsidiaries in obtaining financing and to provide guarantees.
Upon the approval of the People's Bank of China, to establish a finance company to provide financial support services to the invested enterprises.
To establish a research and development centre or department, conduct research and development of new products and advanced technology, transfer developed technology, and provide related technical services.
To provide consulting services to the CHC's shareholders, and provide market information and investment policies to affiliated entities in connection with their investments.
A CHC is also permitted to perform other activities as provided by supplemental regulations specifically issued by the Ministry of Commerce (previously the Ministry of Foreign Trade and Economic Cooperation).
CAPITAL STRUCTURE
A minimum registered capital of $30 million is required to establish a CHC. The amount must be contributed in foreign currency and in cash. A CHC with registered capital of less than $100 million may borrow up to four times its actually contributed capital. If the CHC's registered capital is $100 million or more, it is eligible to borrow up to six times its actually contributed capital.
FUNCTIONS
Starting in 1999, the Chinese government has issued several supplemental regulations allowing CHCs to perform additional functions. The most significant of these are described below.
Operational activities
A CHC is permitted to conduct the following operational activities:
To procure finished goods for export either by itself or by a stand-alone sourcing subsidiary that it owns.
To engage in system integration supply in China and overseas. The CHC, in the course of carrying on the aforesaid business, may buy, both in China and from overseas, incidental goods and components to the extent that the total amount does not exceed 50% of the value of the system integration supply.
To import finished goods from its parent company for distribution in China provided that the goods are identical or similar to the goods being produced by the invested companies in China.
To provide technical training services to distributors and sales agents for the goods produced by the invested companies.
To provide technical training services to enterprises that have signed technology transfer agreements with the CHC or its parent company.
To supply production machinery and office equipment to the invested companies under operating lease.
To provide after-sales services for goods produced by the CHC's parent company.
To undertake projects outside China for qualifying domestic Chinese enterprises.
The most significant addition to the list of permitted activities is that the CHC may now effectively function as a true shared services centre to its subsidiaries. A CHC may provide services to its subsidiaries in China. It may charge the subsidiaries a service fee, enabling them to deduct the payments for tax purposes.
Financial activities
Ever since the introduction of the CHC regime, investors have hoped that a CHC could be used to manage a subsidiaries' financial resources to suit the needs of the investors' overall Chinese objective. It has always been difficult in China for an investor to use the excess funds of one subsidiary to assist another subsidiary financially.
With the advent of a permitted arrangement called an entrustment loan, the deployment of cash within a group of companies is finally possible. Under an entrustment loan arrangement, one subsidiary deposits interest-earning funds into a bank, which then lends the same amount to another intended affiliate at the same interest rate. The People's Bank of China's recent authorization of a CHC to act as the bank in an arrangement similar to an entrustment loan involving yuan is the latest sign that a CHC may become a real centralized treasury function.
It is now proposed that permission be granted to significant groups of companies, such as a CHC and it subsidiaries, to enter into entrustment loan arrangements involving foreign currency. This will further enhance the CHC's ability to provide treasury services to its subsidiaries.
TAX CONSIDERATIONS
A CHC is not a manufacturing FIE. No laws grant tax holidays or tax benefits to a CHC. A CHC may not take advantage of reduced tax rates accorded to manufacturing FIEs that are located in coastal open cities (where corporate income tax rates are either 15% or 27%). Unless a CHC is located in a jurisdiction that specifically grants reduced tax rates to CHCs, the general corporate income tax rate applicable to a CHC is 33%. However, it is often possible to find a jurisdiction willing to offer local financial incentives to attract CHCs to the area.
Dividend income received by a CHC from its subsidiaries is not taxable to the CHC.
Since the promulgation of CHC legislation in China, there has been continuous criticism from foreign investors that have used the vehicle to hold investments in China. The biggest complaint has been that this holding vehicle has no value for commercial purposes, other than its ability to invest in lower-tier subsidiaries. The inability to file consolidated tax returns continues to make CHCs less useful to foreign investors from a tax perspective.
Until recently, no clear guidance existed regarding how a CHC should be taxed on various activities related to providing services to its subsidiaries. The most contentious issue had been whether a CHC should be subject to tax on payments received from subsidiaries for services provided and on reimbursements for costs incurred with respect to the management of its subsidiaries. The State Authority of Taxation (SAT), the overall national tax administrative body of China, issued State Tax Statute No 128 (2002) on September 28 2002, providing guidance on how a CHC is taxed on services provided to its subsidiaries. It clarified many issues often raised by foreign investors that have established CHCs.
Revenue from services rendered to subsidiaries
A CHC that enters into agreements with its subsidiaries for the services it renders should calculate the fees based on arm's-length principles. If fees for services are not based on specific amounts chargeable to each individual subsidiary with respect to each type of service, a CHC may use the cost-plus method to determine the amount of deemed service revenue.
Revenue, either the amount actually charged or an amount based on a cost-plus method, from services rendered by a CHC to its subsidiaries is subject to business tax, which is levied at a rate of 5%. A deemed profit rate of 5% is provided as a safe-harbour rate.
Cost-plus method to determine deemed service revenue
Revenue for services a CHC provides to its Chinese subsidiaries may be calculated based on a cost-plus method using the following formula:
Deemed service revenue = identified actual costs / (1 - business tax rate - deemed profits rate) or deemed service revenue = identified actual costs / 0.9
Identified actual costs are collective costs incurred and specifically attributable to a group of subsidiaries if a CHC chooses not to identify separately the costs incurred with respect to each individual subsidiary.
Third-party service charges may be excluded from identified actual costs.
Deemed service revenue may be allocated with reference to the following factors of each subsidiary:
total investments;
registered capital;
sales; and
assets.
Subsidiaries are allowed to deduct the allocated service fee payment for tax purposes.
Allocation arrangements must be set out in agreements between the CHC and its subsidiaries. After the allocation arrangement is established, it may not be changed without the approval of the in-charge tax authorities of the CHC.
Non-deductible investment expenses
A CHC is not subject to income tax or other taxes on dividends received from its subsidiaries. Business income, defined as "income other than dividends", earned by the CHC is subject to tax, including income tax, business tax and VAT.
GuoShuiFa No 128 (2002) provides that investment expenses and losses related to investment activities are not deductible against business income when determining taxable income. Furthermore, CHCs may not allocate investment expenses and losses from investments to lower-tier subsidiaries. A CHC is required to segregate accurately investment expenses incurred; the amount may not be less than a prescribed minimum amount, calculated according to the formula below.
Investment expenses = total expenses of CHC x (dividends / (5 x business revenue + dividends))
Business revenue is defined as an amount not including dividends. Interest income earned by a CHC is considered neither investment income nor business income.
Under the above formula, the more investment income the CHC has, the more allocated investment expenses it has. Therefore, it increases the taxable income of the CHC from income generated from other activities including trading and services. Many CHC taxpayers have approached the SAT lobbying for the abolition of this provision. According to SAT officials, a taxpayer may seek relief on a case-by-case basis if it can demonstrate that adhering to this provision would result in a significant increase in the CHC's tax liability.
Reimbursement of third-party service charges incurred on behalf of the subsidiaries of a CHC
If a CHC, on behalf of its subsidiaries, contracts services to be provided by a third party, it can allocate the service charges to the particular subsidiaries by using the allocation formula set out in the method described above for the allocation of deemed service revenue. This reimbursement is not considered revenue for business tax purposes. The circular indicated that the allocation and its method must be agreed with the subsidiaries via written agreements. It is reasonable to assume that such expenses as common promotion and advertising costs, and professional expenses are within the category of third-party service charges.
Management fees
A CHC may not charge management fees to its subsidiaries.
The regulations do not explain what is considered a management fee. From a layman's perspective, many types of services provided to subsidiaries could be considered management-related.
Similar to other FIEs, a CHC is eligible for a refund of taxes on reinvestment of earnings from its subsidiaries.
REGIONAL HEADQUARTERS (SHANGHAI)
The regional headquarters (RHQ) regime is a locally-driven initiative, used as a means for Shanghai to induce additional multinational companies to locate key functions in the Shanghai area.
A growing number of investors have registered with RHQ status.
A CHC may apply for the RHQ status. Alternatively, a single non-manufacturing company (a management company) may be established to obtain the RHQ status.
Minimum investment
No additional registered capital is required for a CHC to qualify as an RHQ. The minimum registered capital of a management company RHQ is $2 million. Previously contributed capital does not count towards the minimum requirement.
Business scope
The business scope of the regional headquarters of a CHC is similar to that of the CHC, except that RHQs may provide services to affiliated enterprises in China and abroad. Without RHQ status, CHCs are permitted to provide services only to subsidiary enterprises in China.
Limitations
A management company RHQ does not enjoy as broad a business scope as a holding company RHQ. For example, a CHC is allowed to trade products manufactured by its subsidiaries, as well as procuring goods to be exported or sold to subsidiaries in China. A management RHQ may only provide services to its affiliates.
Tax issues
The Shanghai government does provide tax rebates in the form of financial subsidies to either CHC RHQs or management company RHQs. In theory, a rebate of individual income tax is also available.
Practical considerations
Proposed regulations are being considered to allow an RHQ to perform treasury functions similar to those mentioned above. This would allow the RHQ to perform shared service activities, making the RHQ a meaningful structure for investors.
The RHQ concept is the centerpiece of the Shanghai government's effort to attract substantial companies to locate their regional headquarters in Shanghai. It is expected that the Shanghai government would look favourably on those companies that choose to establish RHQs in Shanghai.
作者：phoenix 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
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 (zt) Chinese Holding Companies viable for investors -- phoenix - (15866 Byte) 2004-9-22 周三, 08:15 (1108 reads)
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