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By Vincent Cheung from www.pathtochina.com

To those who are about to do trading business in China, the major advantage and purpose of setting up a Hong Kong company as the parent company and operating in the subsidiary trading company in mainland is tax avoidance. In Shanghai, there are a few company formation consulting conamies  that can help you establish a Hong Kong limited company and open Hong Kong bank account without having you fly to Hong Kong. It only takes three weeks and around 10,000 RMB to set up a Hong Kong company. It’s a very popular way for foreign investors to do trading business in Shanghai  and avoid tax by setting up a Parent Hong Kong company at the same time. Below is a detailed and practical introction about tax avoidance by employing formula.

Hong Kong adopts a territorial source principle of taxation. Only profits made in Hong Kong are taxable. Profits generated elsewhere are not subject to taxation. Different countries and areas follows different principles of taxation. For instance, in China, all of the profits, including those made overseas, are taxed by China government. In order to substantially lower the taxation burden, we can take advantage of the difference in taxation systems and policies in different places by using

Hong Kong companies to do entrepot Trade. The advantages of doing Import/export trade are as follows:

1)      Lower the cost of tax and accelerate the enterprises’ capital accumulation

2)      Avoid the loss incurred in the settlement of foreign exchange and lower the risk of exchange.

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By Vincent Cheung from www.pathtochina.com

Suppose that your trading WFOE is now established in Shanghai. You might will need to apply for the “General VAT Payer Status” (一般纳税人) in order to issue VAT invoice. Whether you should apply for general Vat payer status depends on your gross profit rate. VAT invoice is only use at the wholesale chain, between manufacturers and the wholesalers, or between manufacturers. Retailers selling goods directly to the final consumers don’t issue  VAT special invoices. Instead, state ordinary invoices inclusive of taxes at 4% to 6% are used. The benefit of issuing VAT license is that you can deduct input VAT from purchases when it pays the out VAT for sales, and get a VAT refund.  In order to be qualified to be a general VAT payer. You can start applying for it if your company meet any of following two requirements. 

 1.      You registered capital is over than 5 Million and the number of staff you hire is over  50.

2.      Your company ‘s annual turnover is more than 1.8 Million. You application will be approved If you can provide the sales contract or letter of intent proving that you will reach that target in a year. (more…)