What You Should Know About WFOE and RO in China (Shanghai)

What Should You Know About WFOE and RO in China?
What Are Your Options With WFOE and RO?

This Article Will Teach You:

What Are Your Options With WFOE and RO?
What are the Pros/Cons of WFOE and RO?
How Are Shareholders Affected?
Are Tax Rates Different between WFOE and RO? How?
What Are the Average Operation Periods for them?
What are Tax Rates like for Income Tax, Personal, and Corporate Taxes?
What Does This Mean For Your Business?

What Are Your Options With WFOE and RO?
WFOE

RO

Pros ·Foreign investor has full equity control and management ·No capital requirement
·Lower risk with initial market testing
Cons ·Cannot set up WFOE in specific industries ·Cannot engage in direct business activities or enter into contracts·Must engage local agent to hire local staff
Shareholding ·Foreign investor(s) contribute 100% of registered capital ·Not applicable
Governance ·One Managing Director or Board of Directors (BOD) of at least three directors ·Chief Representative
Tax ·Exposed to : Company income tax , VAT, Business tax, individual income tax ·Taxation on expenses on a deemed income basis, mainly on company income tax, business tax and individual income tax
Reporting and Compliance ·Monthly tax report, Quarterly tax report, Annual Audit report, Annual Inspection ·Monthly Tax Report, Quarterly tax report, Annual Audit
Time For Set-up ·2-3 Months(upon submission of required documents)·Foreign Investment Commercial Enterprise, set-up will take Protected content ·2-3 months(upon submission of required documents)
Operation Period ·Business license valid at least 20 years·Required for annual taxation and inspection, audit from government ·Business license valid for one year·Require verified business license fromholding company every year forextension
·Required for annual taxation andinspection, audit from government
Taxes With WFOE/RO
What Does It All Mean For Your Business?

RO WFOE
Corporate Taxes
Assume the total expenses of a RO and a WFOE are both RMB 85,000 per month.

The tax costs for them are shown as follows:

Income 85,000/ (1 – 15%) = 100,000 Gross profit – 85,000= ? (could be 0)
15% is the business tax rate adopted to regress the RMB 85 expense to a deemed revenue of RMB 100. income tax for WFOE is based on gross profit=sale price – purchase price, if you don’t have benefit or less benefit on this , income tax could be 0
Business tax 100,000 * 5% = 5,000 normally trading company don’t have unless your business cope including commission agency
Taxable Profit 100,000 * 10% = 10,000 Could be 0
Income tax 10 ,000* 25% = 2,500 Could be 0
Income tax rate is 25%
Total Tax Costs 5, Protected content = 7,500 Could be 0
Individual income tax Because an RO’s corporate taxes are normally calculated based on a deemed profit and deemed revenue method, the remuneration for expatriate personnel is treated as payment from China. Therefore, they cannot enjoy the 90/ Protected content tax exemption. No tax treaties with China) and Protected content .
(Expatriate personnel from countries with tax treaties with China) within 12 months or Protected content , the remuneration paid by overseas employers are exempt from individual income tax.
Combined Tax rate RO’s Tax rate would be around 11.65% based on all business expense and employee salary + individual tax payment WFOE’s Tax rate is 3-6% business tax, Protected content % tax on business tax and 25% company income tax. The lowest combined tax rate could be less than 4% of sales.
What Does This Mean For Your Business?
The above comparison shows that a WFOE in the consulting (or only export) field (especially one that serves only the parent entity) enjoys more benefits than an RO.

Case Study

Tax now including two parts, tax for RO and VAT paid through trading agency.

If you transfer RO to WOFE you will have tax benefit as following:

1. Very few company income taxes
2. Company don’t need to pay tax on employee’s salary as RO as to pay including company expense.
3. No agency fee for export
4. Get tax draw back by yourself, less risk (since Feb. first Protected content , tax drawback for textile and clothes is raised again to 15%)

Interested in learning more?
Contact Protected content to learn more about your opportunities in China.
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