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Under the strategic context of the times to “open the door to the world” in recent years, the ability of transnational operations of Chinese Enterprises is growing, and has contributed to the economic prosperity of the world. Overseas Investments are influenced by many factors, and the choice of framework is one of the most important considerations and steps. Various frameworks differ at resources input, level of control and risk taking, which influence the oversea company management and control, and their own investment performance. Therefore, understanding the enterprise’s own characteristic, their investment needs and demand, as well as advantages and disadvantages of various investment, and making the right decision in investment choices based on deliberate considerations and balances of the impact of various factors are important pre-requisite to ensure the business success for the oversea investments.
Hwuason Law Firm with its tax expertise and experience helps their customers to understand the overall tax burdens and impacts on the different commercial entities of different nature and structure, and different rules made by foreign tax authorities on their withholding tax, capital gains tax on transfer of shares and other treatments, to help the enterprises develop programs of investment infrastructures according to their investment objectives, investors’ own circumstances, requirements of investment risk and control and other factors as appropriate, to achieve their development strategies, thus to enhance the company’s overall value and rate of return on the oversea investments.
Commonly used form of Foreign Investments
The type of Chinese oversea investment includes many types of new projects (also known as “Green Land Investment”) and the initial investment of expansion and renovation projects, re-investment etc, and also including acquisition, merger, shares acquisitions, increase their investment and other equity investments. Besides, it can also provide guarantees to overseas investments.
The choice of investment structures
Direct investment structure Indirect investment structure
Between subsidiary company and the branch office:
The subsidiary company is a separate legal person, it needs to retain standard records of financial accounting in the host countries, and usually pay the tax in the host country by way of calculating the actual profits by incomes minus costs. Losses in the subsidiary company cannot be credited from the mother’s company tax accounting. When the subsidiary company remits the after tax profits as dividends to the parent company, usually it is subject to withholding taxes of the host country, but according to tax treaties signed between China (or the country where intermediate holding company located) and the respective host country, withholding tax on dividends remission will usually get certain relief.
Chinese mother company still needs to pay the corporate income tax in china on obtained overseas subsidiary company’s distribution of dividends, but for the dividend tax already paid in the host country, there are certain tax credits.
A branch office is not a separate legal person, it’s just an business entity of a China enterprise in the host country, which is commonly known on the international income tax as “Permanent Establishment”, and go with simpler financial accounting and tax requirements. Under most circumstances the income multiplied by the authority determined profit rate is the profit margin, and then after go in accordance with the applicable tax rates in the host country to pay income taxes. Many countries also allow the calculation of actual profits by incomes minus costs for their income tax. The losses of branch office can be credited to the mother’s company income tax, Thereby reducing the overall tax burden. The branch office remitting the profit back to the headquarter company after the tax profit repatriation are usually not subject to tax withholding.
The after tax profit obtained by the Chinese oversea company, still need to calculate and pay income tax in China, but the tax profits already paid abroad can be credited to a certain limit.