Common mistakes in starting up a business in China : Licence Applications and Tax Issues

Having dealt with the sticky issue of “guanxi“, or people relations in doing business in China and hearing his Introduction to Wholly Foreign Owned Enterprises in China, our resident contributor, Kenneth Wong of SHEN and the Shanghai Singapore Business Association, here shares with us the more legal and (gasp!) boring, yet essential aspects of starting up in China.

In the rush to get into China, many start-up businesses tend to get into trouble because of their naivety in handling their company’s incorporation process and not paying attention to details on tax and legal issues. This article will examine the common mistakes committed by entrepreneurs in their VAT refers to Value-Added Tax: It is a type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale. The amount of VAT that the user pays is the cost of the product less any of the costs of materials used in the product that have already been taxed.

Adhering to the said ‘minimum registered capital’ amount figure may cause additional problems when applying for “General VAT payer” status. The benefits of having a “General VAT payer” status is that it gives the VAT payer the right to issue VAT receipts to their clients, which allows them to deduct the input VAT from purchases when it pays the output VAT for sales.

For the FICE or WFOEs who deal with clients that need VAT receipts such as for industrial related produces, they certainly normally will require VAT General Tax Payer status but if the FICE is only engaged in trading consumable products to individual customers, this is probably not necessary. For larger operations with significant amounts of VAT invoicing likely in their books, in order to qualify from the outset of their operations for VAT General Tax Payer Status, the company has to meet the following additional requirements:

1. Minimum Registered Capital
   外高桥 FTZ = RMB 1,000,000
   浦东/浦西 = RMB 5,000,000
2. The total number of employees shall be over 50 (negotiable in some cities)

If the company cannot meet the above two requirements, then it can only apply for such status once they have reached annual sales in excess of RMB 1.8 million which is the next qualifying level. As all FICE are related to trading, usually a FICE needs to apply for VAT General Tax Payer status for the purpose of deduction of input VAT. Certain trading WFOEs also need to bear this figure in mind. Without bearing this figure in mind, it may cause the company to have cash flow problems. For example if the cost of one’s input/import goods unexpectedly go up, the initial 1.8 million sales threshold means that the deduction of input VAT is not permitted should the FICE or WFOE not meet the registered capital requirement.

Kenneth is currently the President of SHEN, the Kenneth@shentrepreneur.com or Kenneth.wong@willsonn.com or via Shanghai Mobile 86-21-13402065607