China Law and Practice The most tax-efficient way to set up a company | Page 2

The China Question: Setting up a Company the Most Tax Efficient Way

I am looking to expand my business into China. I have been told
that the kind of company I set up will have a big effect on how
much tax I pay, especially when taking money out of China. What
advice do you have?
The Domestic Perspective

China. LLPs are non-EIT taxable entities of which the taxable income is directly passed through to the
partners and taxed at their level.

Tax efficiency can be achieved by sound planning and careful consideration of the investment
structure, business form and location of the business vehicle.

Generally, investment funds, such as PEs or VCs, are inclined to adopt the LLP structure for tax
optimisation. Entities engaged in active business operations are likely to choose the WFOE or EJV form.

Investment structure
Location and incentives
Foreign companies may develop an optimal investment structure, such as deploying an offshore
holding company in a tax-friendly jurisdiction with favourable tax treaty terms with China, to ensure

Like business demands, tax treatment and incentives are of keen interest to foreign investors

future profit repatriation is entitled to favourable withholding tax or even tax exemption under the

when selecting the location to set up a company. While the national tax policy sets out statutory tax

treaty provision.

incentives, there are various types of economic zones that provide preferential tax treatment for
qualified projects. Certain local governments also provide local incentives, such as financial subsidies,

Notably, China has anti-avoidance rules and the offshore holding company requires sufficient

to attract foreign investment.

economic substance to qualify as the beneficial owner, in order to enjoy tax treaty benefits.
Tax incentives, such as a reduced tax rate at 15% or tax holiday, may be available for companies

Business form

established in the western region of China. Moreover, special zones like Pudong (Shanghai) and
Qianhai (Shenzhen) provide financial subsidies for encouraged projects. Companies engaged in import/

The business forms include wholly foreign-owned enterprises (WFOEs), equity joint ventures (EJVs),

export trading or processing may consider registering in bonded zones in China, for instance in the

and limited liability partnerships (LLPs).

bonded logistics park or free trade zone.

WFOEs and EJVs are independent taxable entities which are subject to enterprise income tax (EIT) in

Tony Dong, Head of Tax, King & Wood Mallesons, Beijing
Copyright: All material subject to strictly enforced copyright laws. © 2014 China Law & Practice

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