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SOME TAX BREAKS FOR BUSINESSES
EXPANDING INTO CHINA SET TO END

Companies planning to set up a production business in China are running out of time to take advantage of tax breaks offered by the Chinese government, according to Chun Li, Partner of BDO McCabe Lo & Co, the Hong Kong member firm of BDO International, the world?s fifth largest accountancy network.

In recent years many types of foreign enterprises have benefited from tax incentives given by the Chinese Government to help fuel the dramatic development of its Eastern seaboard. These incentives have included a two-year exemption from tax on the income of a production-orientated enterprise followed by three years at half the usual tax rate. They also include preferential tax rates in designated zones in post-tax holiday periods. Moreover, the exemptions begin in the first year of profit so businesses also benefit from a further tax-free period if they have incurred losses when they first set up. With standard (non-discounted) rate tax for enterprises running at 33 per cent, these tax incentives give new entrants to the Chinese market a major boost. However, the tax laws applying to enterprises with foreign ownership and those that apply to locally-owned enterprises are soon to be unified into a single income tax law, with the result that the current incentives specific to companies with foreign ownership will disappear. This could happen as early as January 2007.

Chun Li comments: ?We expect European businesses that have already set up production operations in China and those that enter the Chinese market before the new law is introduced to benefit from what are known as ?grand-fathering provisions?. These special legal provisions will enable such businesses to benefit from a gradual phasing-out of the current tax breaks for an extended period, giving them an advantage over any company that enters the market after the new laws are introduced which will not receive the tax breaks. Once the new law is introduced we expect foreign companies entering the market to be paying around 24 or 25 per cent tax. Some industrial-specific tax incentives will remain or be introduced but the details are not yet known.?

Chun Li was speaking yesterday at a ?Thinking of Doing Business in China?? seminar at the Courthouse Hotel Kempinski in London, hosted by UK accountancy firm BDO Stoy Hayward (the UK member of BDO International) and law firm DLA Piper Rudnick Gray Cary. The seminar was part of a series of seminars on China being hosted around the UK.

Speakers at the London event included Ian Cheshire, Chief Executive Officer of B&Q UK, Horace Wenn, Partner of DLA Piper Rudnick Gray Cary, Daniel Sale, Associate Director on the China Affairs Desk of HSBC Holdings plc, and Charles Webb, Managing Director of Penumbra Partners Limited.

Julian Frost, China Liaison Partner for BDO Stoy Hayward, who advises UK businesses planning to enter China, said: ?It is commonly accepted that the huge potential of the Chinese market place is ignored at your peril. Many UK businesses are currently considering expansion into China. However, the market is complex and it pays to do careful homework. Companies that have been successful in this market are those that have carefully researched their market place, local business partners, location and structure.?

Julian Frost gives the following advice to businesses planning expansion into China:

?- Whilst it is comforting to staff up with expatriots to run the local China office in the early days, this approach will hurt your profits in the medium term. Although China salaries in the cities are catching up with the West, there is still a big differential between expatriate and local salaries where the typical earnings for a professional are around US$3,000-5,000 a year.

- You need to decide on your ownership structure in China. The main choices are a joint venture with a local Chinese company or a wholly owned foreign company. Both have their advantages and disadvantages. You have to choose between finding a trusted local company that you can work or finding trustworthy employees to hire. Seek local advice in making your choices.

- If you are choosing a joint venture don?t think that by taking a 90 per cent equity stake you will necessarily have control. The local partner can still have the upper hand with only 10 per cent equity since they have the advantage of local knowledge, contacts and influence. Therefore, open up negotiations with three or four companies and keep negotiations going in tandem until you make your choice. The element of competition will help you get the best deal with a trusted partner.?

The partners are extremely pleased with these new additions as having secured the continuous dedication and contribution of two highly capable individuals and also as testimony to a firm culture and environment that have provided and continue to provide both personal and career development opportunities for our people. The firm strongly believes in the convergence of the aspirations of our valued people and those of the firm and is dedicated to a programme of continuous enhancement where our people are the source of our strength, growth and continuous rejuvenation.