Company Transformation Service
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Q:My Company is a "Processing & Assembly" Enterprise, and now is planning to transform into "Wholly Foreign-owned Enterprise"; we have the following questions:
1. How can we transform rapidly without affecting normal production?
2. Do we need to issue an invoice and how can we transfer the equipment purchased in China to Wholly Foreign-owned Enterprise?
3. How do we transact when "Processing & Assembly" Enterprise is assigning the equipment in custody?
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A: 1. "Processing & Assembly" Enterprise generally will not transform into Wholly Foreign-owned Enterprise, since doing this will cause the plant to stop production. Generally, the procedure is to set up Wholly Foreign-owned Enterprise first and deregister "Processing & Assembly" Enterprise later.
2. The equipment purchased in China can be freely transferred, but the transfer shall be invoiced for value-added tax as if it was sales.
3.The equipment in custody of customs to be assigned can be shipped to Hong Kong first and enter by means of importation of old electromechanical equipment or make good the tariff and value-added tax later, and be transferred to Foreign Investment Enterprise at last.
Q:What are the differences between "Processing" Enterprise and "Foreign Investment Enterprise" in terms of taxation and import/export?
A: In terms of import/export:
"Processing" Enterprise shall export all its goods after processing, so the enterprise can only earn the processing charge, and it can be free of value-added tax insofar as it meets the requirement.
The scope of business of Foreign Investment Enterprise includes domestic and export sales, and Foreign Investment Enterprise being in productive industry shall calculate tax payable as per the "Exemption, Credit and Tax Rebate" method. In addition, productive enterprise is entitled to the profits tax preference of "exemption for the first two years and half rate reduction for the subsequent three years" from the profit-making year.
In terms of import/export:
The raw materials and finished products of "Processing" Enterprise are bonded goods, and China practices deposit account system for goods in processing trade, so basic procedures of clearance include contract filing>goods importation>processing> re-export >settlement by cancellation after verification. The imported equipment of "Processing" Enterprise is free of tariff and value-added tax in import. "Processing" Enterprise doesn't have the power of import/export operation, so it is importation/exportation of goods shall be performed by commercial agency company.
"Foreign Investment Enterprise" can import self-purpose machinery equipment, material assets and materials for processing and production, and the enterprise falling into the "encouraged" category is entitled to reduction and exemption of tariff and VAT payable on imported equipment and other tax preference policies. Foreign Investment Enterprise is empowered to manage import/export.
Finally, processing materials supplied by customers is only a manner of bonded trade, so productive enterprises and Foreign Investment Enterprises in China can all be engaged in the trade of processing with customer's materials. See details in Transformation of "Processing & Assembly" Companies.
Q:How to deal with the equipment when the "Processing" Enterprise, whose equipment are partially purchased in China and partially from abroad, wants to transform into Wholly Foreign-owned Enterprise?
A: The imported equipment still in custody shall be returned to Hong Kong, and then imported by the way of importing old equipment, or making good tariff and VAT; the home equipment shall generally be treated as secondhand goods to be sold.
Q:We want to establish Wholly Foreign-owned Enterprise in the trade of "not encouraged" category in Dongguan. Can we import equipment free of tariff if we declare that our products are totally for export sales?
A: Foreign Investment Enterprise whose products are 100% for export, and falling in the "encouraged" category, is entitled to exemption of tariff and import VAT payable on imported equipment, but this preference is subject to the manner of "Collection First and Refund Later", that is, subject to tariff and VAT payable on imported equipment first and to refund by installment within five years later.
Q:How can this Company pay import tariff and VAT if either domestic or export sales of this Company account for half of total sales, and its raw materials are totally imported?
A: The raw materials used for domestic sales shall be taxed, and the raw materials used for export sales shall be free of tax. However, accounts for domestic and export sales must be kept separately.
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