Common Tax Issues for Foreign Invested Companies in China

I – Advance repayment

When a subsidiary is in the process of being set up in China, its parent company will pay for some expenses on its behalf. After the subsidiary is set up, the parent company normally will ask the subsidiary to pay back the advance on the expenses. Current tax regulation requires the subsidiary to file an application with the Administration of Foreign Exchange and pay for the corresponding taxes when transferring money overseas. However, the advance paid in China are for actual expenses like remodeling, travel expenses, manufacturing plant and technical support, which is not operating income in China for the parent company. Thus, the subsidiary doesn’t need to pay taxes on behalf of the parent company for the money transferred overseas. A lot of foreign invested companies are not familiar with the regulations and operation, which causes the subsidiary to be unable to pay back the advance or pay for a huge amount of taxes.

When the subsidiary is being set up, the company should open a temporary bank account for the parent company to transfer the advance for organization costs. After the subsidiary is set up, the remaining money in the temporary account should be returned to the parent company. Then once the investment capital is received, the advance should be paid back through the temporary account by transferring the money from the capital account to the temporary account. With the advance paid off, the subsidiary can proceed to close the temporary bank account.

II – Company lease signing

Before the company is completely set up, the legal representative for the subsidiary in China can sign the company lease with the landlord and fapiao can be issued under the legal representative’s After the company is set up, the legal representative, the company and the landlord need to sign a tripartite arrangement to transfer the lease from the legal representative to the company. Another way to deal with the lease is for the parent company legal representative, the subsidiary company legal representative and the landlord to all sign the lease that will state the detailed payment terms. Then the lease will be filed with the tax bureau for record.

Dennis SHI, ORBIS China Finance Director