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Improve Profitability in China: Tax Incentives

May 23, 2017

 

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In the ongoing struggle to stay profitable in China, tax incentives are often overlooked.  It is true that during the initial period when companies are developing their China entry strategy, tax incentives play a key, if not pivotal role in determining where a facility is going to be located. 

The Business Landscape in China is Always Changing

Those initial tax incentives are traditionally considered “investment incentives” and they sunset anywhere from three to five years after the business has been set up.  Once they expire, not much thought is given to other potential tax incentives.  Leaders review their tax structure and incentives on a periodic basis. This is especially important in China where the landscape is constantly changing. 

In recent months we’ve seen a reduction in Foreign Direct Investment (FDI) in China.  While that’s viewed as a negative indicator from a global economic perspective, this can be a positive here in China.  Simple laws of supply and demand apply.

Regional and local governments’ performance is based off of the level of FDI, and economic growth.  With supply squeezed, local governments are competing for FDI, and growth, like never before.  Tax incentives are their number one tactic for closing deals. 

For companies who have been in China a while, here are three main types of tax incentives to look into

New and High-Tech

You might argue that your business isn’t necessarily new or high-tech.  That doesn’t necessarily matter. At the end of the day, the criteria for New and High-Tech are based on a broad spectrum of  business Key Performance Indicators (KPIs), including revenue, revenue growth, profitability, percent of R&D invested, percentage of employees with secondary or post-secondary education…just to name a few.  To participate, an application is required, and typically no substantial additional investment is required.

Regional Headquarters (RHQ)

The requirements for RHQ incentives are a little more difficult to meet and require a more substantially sized business.  Business who are multi-site are often candidates.  Sometimes restructuring is required, like setting up a holding company and having the bulk of the revenue flow through that company.   RHQ incentives are worth looking into because the incentives can be attractive – yielding annual rebates making them economically worthwhile. To participate, an application is required, and specific criteria must be met, typically not a substantial additional investment is required.

Increased Investment

This incentive may apply to you if you’re increasing production, putting in a new production line, invest in new equipment, R&D, IT, infrastructure, etc.  To take advantage of these incentives, companies must negotiate with local governments in detail, in comparison with #1 and #2 where an application is required.  Typically companies will be asked to increase their registered capital in order to participate.

Periodically review. Things change fast.

With any of these, governments are increasingly interested in negotiating with companies to keep money flowing in their region.  So even if you are already in an advantageous tax position, we recommend doing a periodic review of options available to you.  With RHQ and New and High-Tech, it’s not an either/or.  There are companies stacking many incentives at once.

In China’s top-down model, things change fast and so can your upside opportunity.  

Want to hear four more ways to pump up profitability in China?  Get the infographic…

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Topics: Operations