Professional services firm KPMG has issued a health warning to companies contemplating trade in emerging markets such as China. It says that changes to the tax regime in China earlier this year mean that getting the right structure for a business venture in place from the outset is essential.
Tony Antonius, partner at KPMG’s Bristol office, said: “It’s a tempting prospect, particularly for businesses in the environmental, technology and outsourcing sectors, as the Chinese government is encouraging these industries to enter by introducing tax incentives.”
But, he warns, businesses need to be aware of the pitfalls and consider the differences between the Chinese and domestic business environments. For example, while a company can take two to three days to set up in Hong Kong, it can take as long as six months in China, while setting up a representative office (RO) – the usual route which businesses take to gain a foothold in China – is governed by strict rules.
Karmen Yeung, China tax partner at KPMG, who recently visited the Bristol office to meet a number of the firm’s local clients said: “An RO can be used to help businesses assist their home offices by conducting market research, business liaison and exploring further investment in China. However, these ROs must not be revenue generating and the Chinese government is putting them under the microscope following compliance requirements being tightened up earlier this year.”
Taking initial steps in China with an RO now requires foreign businesses to have at least two years’ operational history and no more than four expatriate individuals can be appointed as representatives. Once established, the RO must produce an annual report providing details for the foreign enterprise’s continuity, business situation, audited revenue and expenses annually. And if activities begin to extend beyond the RO being purely a liaison office, even if it is not revenue generating, the business will need to change its structure, usually to a wholly-owned subsidiary.
Karmen Yeung continues: “It’s essential to keep a track of the activity being carried out by the RO as the recent changes introduced a financial penalty, or even confiscation of the business registration certificate if they start to engage in income generating activities which includes sourcing.
“The bottom line is while there are opportunities for some businesses in China, to make the venture as successful as possible, time and effort is required to ensure they do not fall foul of the regulations.”
