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Such services rendered to a WFOE generally attract a 10-percent withholding tax rate. This means, if the income derived from the particular activity is $1,000, the WFOE must "withhold" $100 from this, submit the amount to the tax bureau, obtain a "tax paid" stamp against the parent company's invoice, and only then be allowed to remit $900 back. The procedure takes about 10 days.
However, this compares favorably against the "profit taxman" at the year-end. If the money is left in the company, profit tax will extract rates of either 15 percent (if in a free trade zone or in special economic zones such as Shenzhen), 24 percent (if in a municipality) and 33 percent if elsewhere (tax holidays excepted). That means payments in profit tax of $150 if in a free trade zone, or $240 or $330 if elsewhere, obviously being less competitive in tax treatments.
Accordingly, to take advantage of this, an enhanced profit repatriation structure needs to be built into the WFOE articles (they do not appear in normal drafts) and contracts agreed between the parent company and the WFOE, and registered with the tax authorities in China for assessment. This is of particular importance to foreign-invested commercial enterprises (FICEs) applications, as they do not have any tax holidays and are subject to profit tax from their first year. FICEs need to plan their profit tax treatment strategy carefully, or lose out big time on paying more profit taxes than is actually necessary. Again, this needs to be addressed at the planning stage when preparing your articles.
WFOE application checklist
Planning your investment:
· Scope of business implications
· Location issues, due diligence
· Type of WFOE/FICE structure needed
· Tax implications of this
Detailed budgeting:
· Cash flow needs
· Staff costs
· VAT and customs registration requirements
· Full registered and total investment capital requirements identified
· Profit repatriation clauses considered
· Articles considered and drafted
· All application administration documentation prepared and submitted
License issued:
· Registered capital injected
· Tax/customs registrations and bonds paid
· All other pertinent government agencies settled
· Cash flow commences--you're in business
Chris Devonshire-Ellis is the Senior Partner of Dezan Shira & Associates--www.dezshira.com | 
