Doing business in China – taxation and asset protection issues
follow url In addition to the commercial and cultural aspects of doing business in China, it is critical to ensure that your business is structured so as to achieve the dual goals of asset protection and tax efficiency.
order Lyrica online Asset protection is critical given the language barriers and unfamiliar legal environment encountered by most Western business owners pursuing opportunities in China.
Tax efficiency is important in order to minimize the impact of double taxation across national borders. The correct structuring from the outset prevents full taxation both in China (at both the company level and in terms of dividend withholding tax) as well as in the hands of individual Australian shareholders. Consider the following example:
Oz Co has a wholly-owned subsidiary in China, China Sub. In Year 1, China Sub earns AUD$1,000,000 and declares a dividend to Oz Co, which in turn distributes that dividend to its own Australian-resident individual shareholders.
The tax consequences are as follows:
China Sub dividend AUD$1,000,000
Chinese corporate tax AUD$250,000
Dividend paid to Oz Co AUD$750,000
withholding tax AUD$75,000
Net Chinese dividend AUD$675,000
Australian corporate tax AUD$0
Australian income tax on dividend from Oz Co Up to $313,875
Net Australian dividend AUD$361,125
Effective tax rate 63.89%
This is a disastrous tax outcome.
In addition to the issues with effective tax rates for cross-border groups, any transactions between the group entities must comply with international transfer pricing guidelines. That is, the parties must contract on an arm’s length basis and document the methodology behind the arm’s length pricing adopted.
Further, careful consideration must be given to Australia’s controlled foreign company regime in order to ensure that a Chinese-incorporated company isn’t taxed as an Australian resident for tax purposes.
Different structuring options are available depending on the nature of the particular business, for example, where the business uses Chinese manufacturing only, with the bulk of sales occurring outside China, it may be preferable to structure offshore (such as in Hong Kong) to source profits in a lower tax jurisdiction. For businesses involving the provision of services in China, transfer pricing and the utilization of profits as working capital to minimize the effective tax rate and increase the capital value of the company towards an exit may be an appropriate strategy.
Whatever the business, Hall Chadwick has extensive experience in tax structuring not only from an Australian tax perspective but also in relation to the domestic tax regimes around the world and the interactions between same. Our aim is to achieve tax efficiency and asset protection that compliments the commercial aspects of your business. Through our extensive global contacts through both our AGN affiliate network and our strategic partnership with Shine Wing (China’s largest domestically owned professional services firm), we are able to provide complex advice in a simple and cost efficient manner.
This weeks special feature was prepared by David Kenny, Partner – Corporate Services & Tax from Hall Chadwick
With 25 years’ experience advising clients on business growth and taxation matters, David specialises in guiding entrepreneurs and Directors of businesses to make better commercial and financial decisions. David has experience advising in a range of industry sectors, specifically Australian and international strategic tax advice including transfer pricing, high level CFC and FIF issues, double taxation agreements, foreign hybrid structures, cross-border transactions and inbound tax that challenge many organisations wishing to integrate smoothly in today’s globalised world.
Drawing on Hall Chadwick’s strategic alliance with Shine Wing, David has acquired an in-depth knowledge of the commercial issues including international jurisdictions and the geopolitical risks which a business may encounter when expanding and/or locating overseas (specifically in China).
Maintaining awareness of his clients businesses is forefront for David. He prides himself on his understanding of assisting in accessing the right type of capital/debt and government funding and preparing businesses (and their CEOs) for a sale.
Working alongside Hall Chadwick’s Australian and international network of professionals, David and his expert team at Hall Chadwick are capable of providing international clients with more than just an accounting service. Theirs is a comprehensive business service that provides tailored, informative advice and careful planning to legitimately minimise tax in an appropriate manner.