1. Reduced VAT rates (Circular 32)

China currently has three VAT tax brackets: 17%, 11%, and 6%. The new measure will cut VAT rates from 17% to 16%, and from 11% to 10%, while the 6% bracket will remain unchanged. Export VAT refund rates will also be reduced from 17% and 11% to 16% and 10% respectively, with transitional rules applying until 31 July 2018.

Categories affected by the VAT cuts include:

• Manufacturing and sales/importation of goods: from 17% to 16% VAT rate
• Transportation, construction, telecommunication services and agricultural products: from 11% to 10%

Recommendations:

• Carry out a thorough analysis to decide whether/how to adjust your sales prices
• Review and update your systems, contracts, and other documents accordingly
• For trading companies: make sure that goods purchased at 17%/11% VAT rates are exported before 31 July in order to obtain a full VAT refund

2. New limits to qualify as “small-scale taxpayer” (Circular 33)

Small-scale VAT payers in China benefit from a simplified tax structure and lower VAT rate of 3%. Until now, the maximum annual sales to qualify as a small-scale taxpayer varied by industry. The new measure establishes a unified threshold: any business that sells up to RMB 5mn annually can enjoy small-scale VAT payer status.

Industries affected by the new thresholds include:

• Manufacturing: companies can now take in up to RMB 5mn in annual sales (up from RMB 500,000) to qualify as a small-scale VAT payer
• Trading: companies can now take in up to RMB 5mn (up from RMB 800,000) to qualify as a small-scale VAT payer

Recommendations :

• If your annual sales fall within the new limit, you can opt to convert from general to small-scale VAT payer status before December 31, 2018
• Consider all implications of changing your taxpayer status before taking a decision, e.g. small-scale VAT payers cannot issue/request “special VAT fapiaos”

Get in touch with Fiducia’s Tax Advisory Team to discuss further details about these tax updates and what they mean for your business.

The post China’s VAT updates take effect next week appeared first on Fiducia Strategy Advisory.

President Xi Jinping is placing anti-pollution high up on his agenda as he enters his second five-year term in office, echoing the intensity of his sweeping crackdown on corruption.

An environmental inspection round carried out by China’s central government up until September this year has had hard-felt effects across industries. Non-complying factories involved in highly polluting processes such as die-casting, metal-coating, polishing, printing, and dyeing, had to halt production, sending ripple effects all the way down the supply chain.

Background
After decades of unburdened economic growth taking its toll on China’s environment, the government stepped up its fight against pollution in 2015 when the revised Environmental Protection Law came into force. Since then, industrial companies have faced stricter environmental standards and closer monitoring by authorities. The law granted environmental officials a broad set of punishment powers including uncapped fines, factory shutdowns, and judicial prosecution.

Inspection Round No.4
Last month’s inspection drive is the fourth and final round of an effort launched by the central government in July 2016 to investigate the anti-pollution efforts of different provinces. Since round one, more than 18,000 companies have been punished. International businesses have been affected in three major ways:

• Shipment delays due to suppliers/sub-suppliers being shut down for non-compliance or voluntarily suspended production to avoid a risky inspection
• Price increases due to a fall in the supply of highly-polluting raw materials and processes
• Time invested in liaising with suppliers to prevent order interruptions

What comes next?
Although the fourth inspection round is officially the last one, its force has confirmed just how much of a priority anti-pollution has become for China’s central leadership. Local officials turning a blind eye on environmental problems have faced unprecedented public criticism and demotion. International businesses can expect:

• An ongoing and increasingly strict enforcement of environmental regulations
• The relocation of highly polluting activities to less-populated locations
• Industry consolidation, as smaller players who don’t have access to required permits, are pushed out
• Growing demand for energy saving and environmentally sustainable industrial products and systems

How to cope:
These measures can help you foresee and prevent setbacks in your China sourcing and production operations:

• Monitor developments in government policy and enforcement to evaluate current and potential impact
• Establish communication channels with on-site vendors and encourage them to report on developments proactively
• Discuss solutions with high-risk suppliers and search for alternative sources as necessary
• Communicate with clients to manage expectations regarding price and delivery times

Contact us to discuss how your China business might be affected by these regulations and how you can minimise delays, interruptions and losses along your supply chain.

The post China’s Green Push is Here to Stay appeared first on Fiducia Strategy Advisory.

If you have a HK company, you will need to take these actions by March 30, 2018:

1. Identifying the Significant Controller(s)

This can be:

• a natural person
• a legal entity (corporate shareholder of the Hong Kong company)

that has any of the below:

• more than 25% of company’s issued shares OR voting rights
• the right to appoint or remove company’s directors
• the right to exercise significant influence over the company OR over the activities of a trust

2. Appointing a Designated Representative

Each company has to appoint one person as its representative to provide assistance relating to the SCR. Designated representative must be one of the following:

• shareholder, director or employee of the company who is a natural person resident in Hong Kong; OR
• licensed company service provider, Hong Kong registered solicitor or accountant

3. Creating the SCR:

This record contains the significant controller’s particulars, and must be maintained accurately.

Please note the consequences for non-compliance of the above are:

• the company and every responsible person are liable to a fine of HKD25,000
• in case of continuing offence, a daily fine of HKD700.

Fiducia’s Hong Kong Corporate Services Team can assist you with handling these changes. Please contact us so that we may share further details.

The post New Obligation for Hong Kong Companies appeared first on Fiducia Strategy Advisory.

1. How is M&A activity by German and European companies in China developing in recent years?

Within our client base, which consists mostly of European mid-sized companies, there is growing interest in acquiring Chinese firms. Over the last two years, this trend has been overshadowed by the more dramatic ups and downs of China’s outbound M&A. Nevertheless, we see clear indicators of moderate but steady growth in inbound acquisitions.

2. What is driving this development?

The main driver is what we call “China 2.0”. The Chinese economy is maturing and so are local businesses, while foreign companies are entering a next stage of more moderate growth. On the demand side, the consequence is that European firms are finding it harder to reach growth targets organically, so more of them are looking into M&A.

On the supply side, “China 2.0” means a growing pool of attractive targets: mature Chinese businesses whose product quality and business performance are more on-par with European standards. The quality and transparency of their accounting documentation and corporate governance is also improving, especially for those going public.

What keeps inbound M&A from growing even faster is the lack of “push factors” motivating domestic companies to sell. In general, Chinese companies have easy access to capital and vast space for organic growth in the domestic market, so why should they sell to a foreign investor? One interesting answer that we’re increasingly coming across is: generational change. Chinese family-owned businesses are willing to be acquired when they have no succession plan, which is a frequent scenario in today’s China. Founder-run businesses contribute more than half of China’s GDP according to estimates, so the M&A potential in this area is significant.

3. Which are the “hottest” sectors for inbound M&A activity in China?

Within our client base, there are two main sectors where we see continued activity. In both cases, growth is moderate and valuations are reasonable – unlike tech sectors, where M&A activity is hotter and valuations loftier.

One sector consists of consumer-driven industries such as sporting goods and packaging. There is huge potential in China’s growing and increasingly consumerist middle class, so foreign companies are trying to secure their stake in the market quickly. Government policy is also encouraging investment in these industries, as the country tries to shift away from heavy industry and exports, towards consumption-based growth.

The second branch is on the manufacturing side. Here, the driver is “Made in China 2025” – a government plan to upgrade China’s manufacturing industry beyond low-end, mass production. Under “Made in China 2025”, the government is encouraging the use of domestic components and machinery. Many of our industrial clients are considering M&A to be able to fulfill these localisation requirements.

4. When does it make more sense for a German business to acquire a company in China rather than set up a joint venture or an own subsidiary?

The main scenarios we deal with are the following, from most to least common:

• Fastest route-to-market: Most of our clients pursue M&A as a way of growing their market share quickly by acquiring a local competitor. Nearly two thirds of inbound deals in China in 2016 were cases of horizontal integration.
• Diversification: A common situation facing European industrial companies in China is that, once they are well-established in the high-end segment, there is limited space for growth. One option is to acquire Chinese brands to grow into the mid-end segment.
• Localisation requirements: Some foreign firms pursue M&A to gain access to regulatory and commercial advantages reserved uniquely for domestic companies. This is the case in med-tech, for example. Some hospitals have to source a certain percentage of their equipment domestically, which makes it difficult for foreign players to win or even participate in tenders.
• Vertical integration: In “China 2.0”, foreign companies who have relied on third parties in China in the past, are now ready to step up their commitment to the market and bring more of their business in-house. Some of our clients are focusing on upstream integration, buying their suppliers, while others are integrating downstream, acquiring their distributors.

5. How is China’s regulatory landscape developing in regard to inbound M&A?

In 2017 the government took some important steps to liberalise previously off-limit sectors. The updated Foreign Investment Catalogue, for instance, reduced the number of “restricted” and “prohibited” items by one third (from 93 to 63), including high tech and green tech sectors. Even more importantly, the government is expanding the “negative list” system beyond Free Trade Zones to the whole country, which will reduce scrutiny on inbound investments that fall outside of the negative list.

There are several reasons to believe that this liberalisation trend will continue. Firstly, China’s cost competitiveness is fading, causing FDI to dip in the first half of 2017. Secondly, China is feeling the need to balance their capital account, following last year’s record outbound investments. And last but not least, China knows it has to soften the attitude of policy-makers overseas who accuse China of allowing only one-way traffic when it comes to acquisitions.

However, at the same time, we are seeing an increase in what some people refer to as “selective protectionism”. Under “Made in China 2025”, the government is not only encouraging but also protecting high-tech sectors, putting up restrictions to buy time for domestic players to catch up with their global peers.

6. What measures can foreign M&A investors take in order to find the right target company and avoid risks?

The first thing to be aware of is that spotting red flags in Chinese M&A deals requires a trained eye. Someone who is not deeply familiar with local market structures, cultural nuances, and the inner-workings of local businesses will overlook clear warning signs. At the same time, the professionals you work with must understand European companies and culture, of course, to be able to identify a true fit.

More specifically, these key aspects should be considered at each stage of the process:

• Target search: in most cases, a target search should have a strong market analysis element. Companies must understand the market before they can decide on the most suitable growth avenue. Which market segment has the highest CAGR? How can you buy into it? Does it make sense to acquire or is a strategic partnership more suitable?
• Negotiation: negotiation support takes on a very different meaning in China due to cultural and organisational differences. A situation we often encounter is that you have to dig deeper to find out who the true decision-makers are.
• Diligence: when carrying out legal, financial, and commercial due diligence in China, our guiding principle is to create long lasting value for the client. In China there are many variables that might make an acquisition unsustainable in the long term. If this is the case, we often advise clients to walk away and either look for other targets or go greenfield.

Learn more about how our China Consulting team can support your China M&A planshere, and reach out to us at contact@welcome-120cc8b.netsolhost.com if you have further questions.

The post China Inbound M&A: Trends, Drivers, and Key Considerations appeared first on Fiducia Strategy Advisory.

When?
The tax break was announced on December 28th 2017, but it is retroactive from the beginning of 2017, meaning foreign companies who are eligible for the tax exemption will be refunded.

Who pays WHT in China?
This tax is levied on non-resident foreign companies whenever they receive China-derived passive income, e.g. when obtaining dividends from their China subsidiary. China’s WHT rate on these transactions is usually 10 percent.

Who is eligible for the tax exemption?
Foreign companies must meet certain conditions in order for their WHT to be waived, including the following:

• The reinvested earnings must go into government encouraged sectors
• The reinvestment must be transferred directly into the recipient company

Why is China waiving withholding tax?
The move is designed to attract and retain foreign capital in China. China’s rising labour costs and slowing economic growth have been weighing on its ability to attract FDI. Now that the US is set to cut corporate taxes, the pressure is even higher. Foreign companies can expect China to continue trimming taxes and administrative burdens in 2018.

Do your activities qualify you for this tax exemption? How can you claim a tax refund on your 2017 reinvestments? Do you qualify for other tax breaks, such as the High-Tech Status? Our Tax Advisors will be happy to answer your questions and guide you through the application process.

The post China Offers Tax Break to Foreign Companies appeared first on Fiducia Strategy Advisory.

Here is a summary of other highlights that are relevant for our clients and partners.
>> Click here for a detailed analysis of the 2018-19 meaures

• The ceiling for the 75% profits tax deduction was raised from HKD 20k to HKD 30k
• The ‘Two-tier profit tax system’ – a bold proposal to reduce the corporate income tax for the first HKD 2m of profits – was announced officially in December 2017 and is expected to be approved shortly by the Legislative Council

• 75% reduction in salaries tax and tax under personal assessment up to a ceiling of HKD 30k
• Lower income tax payable for individuals assessed under progressive tax rates
• Child allowance was increased from HKD 200k to HKD 240k
• Disabled allowance was introduced

INDUSTRY-SPECIFIC MEASURES

300% tax deduction for the first HKD 2m of qualified R&D expenditure + 200% tax deduction for the remainder

Cap trade declaration charge at HKD 200 to boost HK’s competitiveness as a trading hub and develop high-value added logistics services

HKD 500m set aside to develop financial service industry and launch a Fast Payment System

Please feel free to get in touch with us if you wish to know more about these measures and their implications on your business.

The post Hong Kong 2018-2019 Budget Highlights appeared first on Fiducia Strategy Advisory.

Products covered by China’s latest tariff cuts include:

• Food & beverage: certain types of cheese, nuts, dried fruits, and wine
• Baby products: infant formula and diapers will have no import tariff
• Sporting equipment: tariffs on skiing equipment will be cut from 14 to 7 percent
• Consumer electronics: various home appliances and personal care gadgets
• Cosmetics and personal hygiene: deodorants, hair styling products, and perfumes
• Pharmaceuticals: various antibiotics
• Clothing and accessories: certain types of shoes and scarves
• Click here for the full list

Why is China cutting tariffs?

• To bring overseas and cross-border spending by Chinese consumers back home
• To drive the broader goal of shifting the economy away from low-end manufacturing and exports, towards consumption-led growth
• To confirm its expressed commitment to trade liberalisation

Who wins?

• Foreign businesses already exporting to China or looking to enter the market, especially those selling to China via cross-border e-commerce
• Consumers in China, who will be able to buy imported goods at lower prices and gain better access to products that are not widely manufactured domestically

Who loses?

• Chinese consumer goods manufacturers, who will face stronger foreign competition
• Chinese shopping agents, known as  “daigou”, who shop overseas on behalf of Chinese clients for products that are either not available or more expensive in China
• Retailers overseas who profited from Chinese shopping tourists

What’s next?

In its bid to grow China’s domestic consumer market, we expect the government to continue introducing initiatives to facilitate market access for foreign consumer goods companies. One such measure is China’s first International Import Expo, organised by the Ministry of Commerce, which will take place in Shanghai in November, 2018.

Contact our experts at contact@welcome-120cc8b.netsolhost.com for advisory and implementation support if you are looking to tap into China’s growing consumer market.

The post China Cuts Tariffs on Consumer Goods appeared first on Fiducia Strategy Advisory.

President Xi Jinping is placing anti-pollution high up on his agenda as he enters his second five-year term in office, echoing the intensity of his sweeping crackdown on corruption.

An environmental inspection round carried out by China’s central government up until September this year has had hard-felt effects across industries. Non-complying factories involved in highly polluting processes such as die-casting, metal-coating, polishing, printing, and dyeing, had to halt production, sending ripple effects all the way down the supply chain.

Background

After decades of unburdened economic growth taking its toll on China’s environment, the government stepped up its fight against pollution in 2015 when the revised Environmental Protection Law came into force. Since then, industrial companies have faced stricter environmental standards and closer monitoring by authorities. The law granted environmental officials a broad set of punishment powers including uncapped fines, factory shutdowns, and judicial prosecution.

Inspection Round No.4

Last month’s inspection drive is the fourth and final round of an effort launched by the central government in July 2016 to investigate the anti-pollution efforts of different provinces. Since round one, more than 18,000 companies have been punished. International businesses have been affected in three major ways:

• Shipment delays due to suppliers/sub-suppliers being shut down for non-compliance or voluntarily suspended production to avoid a risky inspection
• Price increases due to a fall in the supply of highly-polluting raw materials and processes
• Time invested in liaising with suppliers to prevent order interruptions

What comes next?

Although the fourth inspection round is officially the last one, its force has confirmed just how much of a priority anti-pollution has become for China’s central leadership. Local officials turning a blind eye on environmental problems have faced unprecedented public criticism and demotion. International businesses can expect:

• An ongoing and increasingly strict enforcement of environmental regulations
• The relocation of highly polluting activities to less-populated locations
• Industry consolidation, as smaller players who don’t have access to required permits, are pushed out
• Growing demand for energy saving and environmentally sustainable industrial products and systems

How to cope:

These measures can help you foresee and prevent setbacks in your China sourcing and production operations:

• Monitor developments in government policy and enforcement to evaluate current and potential impact
• Establish communication channels with on-site vendors and encourage them to report on developments proactively
• Discuss solutions with high-risk suppliers and search for alternative sources as necessary
• Communicate with clients to manage expectations regarding price and delivery times

Contact us to discuss how your China business might be affected by these regulations and how you can minimise delays, interruptions and losses along your supply chain.

The post China’s Green Push is Here to Stay appeared first on Fiducia Strategy Advisory.

Both updates intend to attract and streamline foreign investment in specific industries at a time of rising uncertainty and falling cost-competitiveness in China. Several market access barriers remain in place, but businesses should closely analyse the recent reforms to identify new investment opportunities in liberalised sectors.

The FTZ Negative List

Ever since China’s first FTZ was established in Shanghai in 2013, a negative list created by the State Council regulates the industries where foreign investment is restricted or forbidden within these zones. In any industry that does not appear on the List, foreign companies should receive the same treatment as domestic ones.

This year’s update eliminated 27 out of the 122 restrictions contained in the 2015 version of the list. Positively affected sectors include high-end manufacturing, transportation, mining, IT, and financial and insurance services. These are some of the changes introduced this year across China’s 11 FTZs:

• Rail transport:
  – Equipment manufacturers are no longer required to enter into a joint venture (JV) with a domestic partner
  – Urban rail transit projects are no longer required to use a minimum of 70% locally made equipment
• Automotive: restrictions on branding and ownership of IP rights have been eased for new electric car manufacturers
• Shipbuilding and aeronautical manufacturing: JV equity caps have been removed for specific product types
• Pharmaceuticals: investing in the processing of Chinese herbal medicines is no longer prohibited

The Foreign Investment Catalogue

The National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) released a new version of the Catalogue regulating foreign investment on a national scale. The new Catalogue is important for two reasons:

1. It establishes the first nationwide negative list system. This means that only those industries mentioned in the list require pre-approval from MOFCOM, while the rest can proceed directly into the registration process. Previously, even projects that fell into the “encouraged” category could be subject to pre-approval. For foreign investors, the new system means more clarity and, in some cases, simpler procedures.
2. It reduces the number of “restricted” and “prohibited” items from 93 to 63 and adds new sectors to the “encouraged” category. Restrictions in high-tech and green-tech industries have been noticeably eased. This is an encouraging sign that the government acknowledges the role of foreign enterprises in helping China achieve the ambitious goals set forth in the “Made in China 2025” plan.

Positively affected industries include the following:

• Transport:
  – Foreign manufacturers of pure electric vehicles are now allowed to establish more than two equity JV enterprises in China
  – Equity ratio caps for JVs manufacturing motorcycles and electronic automotive devices have been removed
  – Restrictions on highway passenger transport services have been lifted
• Med-tech: The manufacturing of smart first aid medical equipment, and the re-manufacturing of key parts for medical imaging equipment, are now encouraged
• High-tech: The development and manufacturing of augmented and virtual reality devices and of 3D printing equipment components is now encouraged
• Entertainment: The construction and operation of large theme parks and golf courses is no longer prohibited

Get in touch with us at contact@welcome-120cc8b.netsolhost.com for more details about these reforms and their impact on your investment projects.

The post China’s New “Negative Lists” are Positive News for Foreign Investors appeared first on Fiducia Strategy Advisory.

Profit tax : What?

The proposal calls for the introduction of a two-tier profit tax system that would lower the tax burden for small and medium sized enterprises (SMEs) in Hong Kong.

The tax rate for the first HK$2 million of profits would be halved from the current 16.5 percent to 8.25 percent.

One enterprise group may only nominate one entity to benefit from the tax reduction. An additional proposal to grant a 300 percent tax deduction for the first $2 million in eligible R&D expenditure, and a 200 percent deduction for the remainder, was also announced.

Profit tax in Hong-Kong : When?

A bill containing both tax measures will be submitted to the Legislative Council and is likely to be passed by early 2018, at the latest.

HK profit tax rate: Why?

A tiered tax system is expected to attract new companies to set up in the city. It would particularly help advance the government’s plans to turn Hong Kong into a hub for innovation and high-tech start-ups.

The reform would help boost Hong Kong’s overall appeal and regional competitiveness as a business location by adding to the several advantages the city already offers.

Please get in touch with us at contact@welcome-120cc8b.netsolhost.com if you wish to receive updates on this initiative as it unfolds. Our consultants will be glad to discuss this and other administrative, financial, or strategic aspects of your Hong Kong business with you.

This News Brief, originally published in August, 2017, has been updated based on Chief Executive Carrie Lam’s announcement on October 11th, 2017.

The post Hong Kong Plans Two-Tier Profit Tax System appeared first on Fiducia Strategy Advisory.