Setting up a Company
Hi All,
My partners and I want to set up a company here in China to localize a certain type of software into English that we can sell online in international markets. We are all experienced in this area and know exactly how to proceed on the operational end i.e. licensing from Chinese developers, doing the localization, setting up payment systems, servers, customer service, marketing, etc.Since we will need a small (perhaps 15 person) office, we need to set up a legal Chinese entity so that we can hire staff and conduct our business. Since we will not be “selling” anything in China (our revenues will be generated online from servers based offshore), our first thought was to set up an RO, with a Hong Kong Parent. We’ve spoken to consultants who told us that this was easy to do, although there is a fair amount of paperwork involved, and will take at least several weeks.
Two questions come to mind:
1) What are the advantages of an HK parent? Why not set up an LLC in the US for under $200 depending on the state, and be done with it? Others say that for tax reasons or parent should be in the BVI or other so called tax haven. I’m interested in hearing your opinions about a cheap and easy US based LLC as opposed to some of the other options mentioned.
2) Is an RO really the best type of company for us? ROs are subject to an absurd tax regime based on paying tax on company expenses (!) rather than profits. Since we won’t be profitable for about 9 months, and will incur fairly large expenses (like staff, rent, equipment, etc.) perhaps a WOFE is the way to go after all. Thoughts?
What originally seemed like such a simple idea - a small office to perform certain tasks all laid out in the business plan, is becoming bogged down in our thinking about how to create an appropriate legal entity. Any suggestions would be highly valued. Thank you in advance.
Jon
July 11th, 2008 at 12:50 pm
Hi Jon,
You ask the right questions. There is no real benefit to an RO if it has a Hong Kong companyas “parent” , except that sometimes it is easier to get the paperwork together for establishment.
Regarding RO vs. WFOE, this is not so easy to answer. Certainly a WFOE gives you more flexibility, especially if you consider invoicing in China. Moreover, you are right that RO’s are subject to considerable taxes. On the other hand, the set-up costs and required investments for a WFOE are higher, and you need to confirm whether a WFOE is allowed for your business. In my experience, everything “online” may be subject to further restrictions and/or licenses - some more research may be needed!
You will be receiving a lot of comments from others on this topic, but if you ever want to discuss, contact me at mjroos@wjnco.com.
July 13th, 2008 at 11:21 am
Hi Jon,
Maarten has given some good comments here and unless you plan to actively use the HK company for conducting the invoicing for transactions or business leads that the RO might be able to generate then you may not need the HK Company.
Most people we do this for actually DO use the HK company for conducting the actual transaction with Chinese parties that the RO has been able to “source”. The tax on HK sourced income is only 16.5% so its a resonable place to book business and might create a deferal if profits are ultimately being remitted somewhere else. There would be no further tax at the HK end after this profits tax has been deducted as HK does not impose any other taxes that would impact the business.
If you are going down the path of a WFOE (and remember these need capitalizing as well as being more expensive, and more complicated to establish), then the HK company makes a lot a lot of sense for three key reasons:
1) Your Holdco would be in a jurisdiction which is familiar and strong from a legal perspective. That in and of itself is a benefit. You can at least have a cut out in a common law jurisdiction if things go wrong in the PRC.
2) From a finance perspective, having the Holdco in HK gives you access to one of the top three banking and fincial centres in the worls.
3) In terms of taxes, you would still have a tax liability in China, but when remitting the funds out as a dividend, China would only levy 5% on the witholding tax to HK as opposed to between 10-15% if directly to North America. If dividends were being remited to the BVI then 10% witholding tax.
In addition, while use of the BVI as a holding jurisdiction is common (it is the second largest investing jurisdiction in China after HK), it is precisely this reason that has made the BVI a bit of a red flag for the Chinese tax authorities. Hong Kong does not have the same stigma attached to it.
Hope this helps and if you need any more guidance, feel free to touch base with me at gledboo1@yahoo.com.
Cheers
Daniel
July 13th, 2008 at 11:49 pm
Hi Jon,
I have a lot of experience in the software game both online as well as OEM and retail, if you want to discuss your BP, dorp me an email : rafalpotega@hotmail.com and I will be able to point you in the right direction.
Regards,
Rafal
July 16th, 2008 at 2:20 am
Hi,
I have a simple solution, why not sign a contract with me and leave all Chinese work to me?
July 16th, 2008 at 2:35 am
Hi Jon,
If you would like to have a partner of localizing the software, feel free to contact me at: jian.sheng@thebigword.com.
Cheers,
Sheng Jian
July 19th, 2008 at 12:04 pm
Thanks to all for your useful information. I will be pushing this venture forward over the next few months, and I will almost certainly be contacting some of you in the near future. Thanks again.
Jon
July 22nd, 2008 at 11:52 pm
Hi Jon, I’ve just sighted your latest post and reviewed the earlier comments. I have recently established an RO in one of the inland provinces. The only expenses you need worry about are those incurred in China. The only financial transactions you need to account are those involving the RO entity located in China. If you structure your business so you separate the China based financial transactions from those of the externally based parent, then the RO expenses should not be a concern. Feel free to contact me for more information.
July 23rd, 2008 at 3:49 am
Dear Jane :
I think it is a difficult job for you to set a company in China without friends’s help .Luckly so many sincerely people here help you a lot . Feel free to ask for more advice then will help you to get the main idea . software or any other business in China is available .hope you have a good luck in your business .
I am Lucy in South of China ,Dongguan province .Welcome to Dongguan . maybe I can help you more both in start a RO and sales .first of all I am glad to meet you .
my Skype account :caroline_lucy
msn :caroline_lucy@hotmail.com
July 23rd, 2008 at 3:58 am
Sorry ,Jon, I make a mistake in spelling .I am so sorry .~~~~~~HOHO .
I am Caroline Lucy ,you can call me Lucy for short .
I never forget you are Jon again .when you come to China I will drink three glasses of wine firt to appologize .Do you know the custom in China when people make mistake then to beg for one’s pardon?
Just do like me drink three glasses of wine first !
September 9th, 2008 at 12:47 pm
Jon,
Some people advised a HK Parent for withholding tax reason. Under current PRC laws, the dividends received from the foreign invested enterprises (“FIEs”) in China are tax imposed. Based on relevant Sino-US tax treaty, the applicable WHT rate on US investors will be 10%. This is lesser than 7% on those investors from HK.
A HK company can be used for transfer pricing purpose also. Like with your planned company, you may have a HK vehicle to collect money, and the WFOE in China does not make profit at all (or make some small money to operate the business).
It depends on you. If you like a US company better, that will be good also.
Now you see why.
I don’t have more detailed information. Based on my experiences and my understanding of PRC laws, you may want to consider the following options:
China WFOE, pay all taxes
This is perfectly in compliance of PRC laws, no transferring tax at all. Transferring pricing is not in compliance; Tax authorities can fix tax when they find it.
China WFOE + US LLC
These two separate from each other
Operation capital will be the registered capital and income in the future. Keep in mind a WFOE is not allowed to borrow money from investors freely for future operation purposes. We have limitations of so called “total investment’ and “registered capital”.
Two stages: above item 2 as first stage + above item 1 later
You may restructure the company later based on company finance situations in the future.
A good tax plan can save you a lot of money for the operations in the future. You’d better ask for professional advices, particularly you are to do software developing business.
Software developer WFOE is allowed in China. Besides, what you said on RO tax is right.
Hope above is helpful. I am new to this blog and not sure if I’l come back often. Feel free to write if you have further questions.
Good luck!
Jon Zhang
jonzhangchn@yahoo.com.cn