Investing In China: Expatriate China Investing 

Expatriates on Business Trips to China

If you are sent to China by your company, your salary is paid outside of China, and you spend less than 183 days in China in a calendar year, than you must pay Chinese China Investing based on the days of the year you spend in China (note that "China" for the purposes of this article excludes Hong Kong, Macau, and Taiwan). If you spend more than 183 days in China in any given calendar year, you will have to pay taxes on all China-source income (income related to work performed in China). This 183-day threshold is reduced to 90 for nationals of countries that have no tax treaty with China.

Foreigners Working for Chinese Enterprises in China (including joint ventures, wholly foreign owned enterprises and representative offices)

If you hold a position such as Chief Representative of a representative office or General Manager of a Chinese LLC, wholly foreign owned enterprise or Sino-foreign joint venture, your China Investing liability begins to accrue on the minute you step off the plane in China. If you hold such a position, even if you do not visit China during the entire calendar year you will still have to file a tax return reporting zero China-source income (note that even though your salary in this case would be in exchange for China-related work, it was not performed within Chinese borders and thus is not considered China-source income).

According to the law you should declare the full salary for the position and pay China Investing accordingly. In practice, however, it is common to see foreigners declaring an "arranged" fixed salary for their China position (with the rest being paid off-shore) and pay taxes accordingly. This practice is illegal, and while it has been common practice in the past, it also puts the employer at risk. Fines of several million RMB have been assessed against foreign invested enterprises for tolerating such practices, and the risk of being caught is increasing.

Foreigners Holding Concurrent Posts in China and Overseas.

In this case you should arrive in China on a business visa, and you will be subject to China Investing based on the number of days physically present in China. This is based on the total salary you are claiming from your local position and from your employer abroad. The Chinese tax bureau may want to see proof of earnings from your overseas employer (tax slips, payment vouchers, etc). At the end of each month your China employer must take copies of your passport and pay taxes based upon the number of days you were physically present in China. The tax bureau will issue a receipt, and this amount can be credited against the tax paid in your resident location (ie: you won't have to pay tax both in China and your resident location for the time spent in China as long as your country has a tax treaty with China).

Chinese Residency and Taxation of Your Worldwide Income

If you are deemed a "tax resident" by the Chinese government (possible if you have stayed in China for more than 5 years without residing outside the PRC for more than a total of 90 days each calendar year or 30 consecutive days within a calendar year), you will have to pay China Investing on your worldwide income. Fortunately, taxes paid overseas can be deducted from taxes payable to the Chinese tax authorities. It is whispered that this rule is rarely if ever enforced, however.

Work Permits

Expatriates based in China must obtain a work visa, work permit, and residence card. You and your family will also have to register with the local police station. You will need to take a medical exam at a designated local hospital in order to obtain these documents (this takes a couple of hours and results are usually issued on the same day or the day following).

Tax Rates

Chinese China Investing rates are more steeply graduated than in many nations, particularly the United States. Of course this is good news if you have a relatively low income, but for those who come to China on lucrative expatriate salaries it might mean higher taxes. Employees are required to withhold China Investing from their employees' paychecks.

More serious penalties for employers in case of intentional, systematic or repeated violations include cancellation of business licenses and seizure of assets.

Note: Local tax bureaus apply formal and informal standards as to what constitutes a "reasonable salary" in a given industry. Factors include position, education, and country of origin. If they believe you are underreporting your income they can unilaterally raise your declared income to the standard and tax you accordingly.

The first RMB 4,000 of salary is tax-free Total tax liability can be calculated with the following formula:

(Total Salary - RMB 4,000 X Graduated Tax Rate) - Standard Deductible = China Investing Liability

Up to RMB20,000 = 20% RMB20,001-40,000 = 25% RMB40,001-64,000 = 30% RMB60,001-80,000 = 35% RMB80,001-100,000 = 40% Over RMB100,000 = 45%

Note: The standard deductible has been omitted from the above. It graduates from a minimum of RMB 375 to a maximum of RMB 15,375. At the time of this writing, the exchange rate is approximately RMB8 = US$1.

Perks and Benefits

Many common expat perks and benefits are nontaxable.

In general, expenses that you pay yourself (in exchange for local official invoices) with cash allowances provided by your employer are taxable. Expenses that your employer pays on your behalf (housing, etc.) are generally considered non-taxable.

Fixed housing allowances, hardship allowances, and fixed expenses paid in cash are generally taxable, while provided housing at cost, free use of a vehicle, home leave allowances, educational allowances for dependents, and reimbursed expenditures are generally nontaxable as long as the amounts are considered "reasonable".

Penalties

Penalties for late payment, non-payment and other violations are often up to five times the amount due (plus the overdue amount).

David A. Carnes is a California attorney working for California Industrial City in Zhengzhou, China. His website, {a href= http://www.chinacompanystartupguide.com/31.html }Start a Company in China, offers free, step-by-step information on establishing a business presence in China.

Investing In China: The "china Fallacy"?

China has long been an entrepreneur's daydream - "If I could sell one pair of underwear each to a billion Chinese...". Now, after almost 25 years of opening its gates to the outside world, how well are things working?

In practice, there have always been two clearly separate strategies for taking advantage of China's 1.3 billion people - (1) to use China's low labor costs to produce cheaply and then export to more affluent markets for a higher mark-up, and (2) to sell products to Chinese people. There is no debate over the fact that up until now, strategy (1) has worked better - over most of the last 25 years the average Chinese consumer hasn't had enough disposable income to buy Western products in any significant quantities. But all that is changing. China's emerging middle class is now estimated to be larger than the entire population of the United States (although their purchasing power is nowhere near that of the American middle class). So are foreign investors raking in their long dreamed-of windfall products by selling their products to the middle class? Well, not exactly...

Information on corporate profits broken down for affiliates in China is surprisingly hard to come by, and thus opinions are divided on this issue. While almost everyone in the know agrees that corporate profits from China operations have been on the upswing in recent years, the pessimists insist that overall profitability lags far behind that of some of America's less-acclaimed trading partners like Mexico, and even further behind if you measure on a per capita basis rather than total population. The optimists (using different sources of data) maintain that profitability in China has been consistently high and point out that the proper comparison between the profitability of investments in different nations is not between China's 1.3 billion people and the population of some smaller trading partner, but between the amount of investment in each country - the US, for example, has invested nearly twice as much money in Mexico as it has in China. Both sides agree on two things, though: (1) foreign investment in China (particularly from the US) is not nearly as much as has been supposed, and (2) corporate profits in China look to increase over the near to medium term due to the increase in disposable income among China's middle class.

In light of this, what would a good strategy be for a prospective foreign investor? The current conventional wisdom seems to be to hedge your bets - produce partly for export and partly for the domestic market, leaving some flexibility in your plans to allow for the unexpected. It would also be a good idea to factor in the likelihood that sales in the China market are likely to increase over time. Of course, that's what people have been saying for the last 25 years, but there is a growing chorus of voices predicting that now it's different, that the timing is right, that the China profit train is poised to finally take off. I for one believe them.

David A. Carnes is a California attorney currently working as a legal advisor for California Industrial City (Zhengzhou) Development Co., Ltd. in Zhengzhou, China. His website is Start a Company in China.

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