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January 25, 2012

Tax Concessions on WFOEs, Joint Ventures in Shanghai

The tax concessions that WFOEs, Joint Ventures could enjoy are reflected now mainly in tax refunds. Since the Enterprise Income Tax Law of the People’s Republic of China came into effective on January 1, 2008, all foreign invested enterprises are subject to the same tax rate to Chinese domestic companies, with exception of manufacturing companies that continue to enjoy the preferential taxation policy of “2 years free and 3 years half.” (See endnote for more details.)

As a result, the tax concessions that WFOEs, Joint Ventures could enjoy are reflected now mainly in tax refunds, i.e. part of the tax those companies paid in advance will be refunded to the company. As to how much, in what way the tax will be refunded, varies from urban districts, suburban districts and districts between the former two.

The highest: Chong Ming district.

Chong Ming as an island enjoyed a preferential taxation policy as the only district that is not subject to Shanghai government’s taxation. All companies registered in this area enjoyed the most amount of tax refund.

Value-added Tax: 7% >
Sales Tax: 40%>
Income Tax:16%>

The middle: Jing Shan district, Feng Xian district, Min Hang district.

Local financial authorities give more taxation benefits as incentives to attract foreign investors.

Value-added Tax: 5-7%
Sales Tax: 15-30%
Income Tax: 10-18%

The lowest: Huang Pu, Jing An, Xu Hui and other districts in downtown.

Most foreign investors are not familiar with the tax concession policies by choosing to register in downtown area, not knowing the downtown areas refund the lowest tax to taxpayers.

Value-added Tax: 1.5-4%
Sales Tax: 6-15%
Income Tax: 2.4–6%

Note: The tax refund rate is based on the taxation amount realized by the taxpayer.

Can I register my business in districts that enjoy higher tax refund but running the office in lower tax refund area?

In accordance with relevant laws and regulations, two places shall be the same. There are companies successfully registered their businesses in districts that enjoy high tax refund but have their offices located in downtown area. The office districts’ authorities would rarely investigate the company and if they did, you could apply for a branch office business license without changing your taxation business license.

Moreover, you don’t have to worry that you may sustain much inconvenience to handle the taxation procedures. Most suburban districts maintain taxation offices in downtown areas.

How is the tax refund realized?

Tax refunds are usually carried out by Development Area (also referred as Industrial Zones) authorities. The tax will be collected first, and then returned 3-12 months later to the taxpayer. They tax refund will be go into the company’s basic account directly.

Notes
“2 years free and 3 years half” Policy: Any enterprise with foreign investment of a production nature scheduled to operate for a period of not less than 10 years shall, from the year beginning to make profit, be exempted from income tax in the 1st and 2nd years and allowed a 50% reduction in the 3rd to 5th years.

January 25, 2012