An Introduction to Foreign-Invested Commercial Enterprises in China

Foreign-invested commercial enterprises, commonly known as FICE, are fast becoming an ideal way for foreign investors to enter China’s Mainland market. Previously, foreign companies could only form trading companies on their own if they registered in the country’s Free Trade Zones. However, as part of China’s WTO commitment to let foreign-invested enterprises exercise trading and distribution rights, starting from December 11, 2004, foreign investors have been allowed to set up FICE in the country to conduct wholesale, retail, and other permitted businesses.
 
Definition of FICE
 
A FICE refers to an enterprise with foreign investment that engages in the following business activities:
 

• Commission agency: Sales of goods as an agent, broker, auctioneer or sales of others’ goods as a wholesaler through collection of fees on a contractual basis; and the related ancillary services thereof.
• Wholesale: Sales of goods to retailers, consumers from industry, trade and organizations, or to other wholesalers; and the related ancillary services thereof.
• Retail: Sales of goods to individuals or groups in fixed places or through television, telephone, mail order, Internet, or vending machines; and the related ancillary services thereof.
• Franchising: Authorization of the use of its trademark, trade name and operational mode through signing of contracts for the purpose of getting remuneration or franchise fees.

 
“Given that the spotlight is really on the growth of the China consumer market at the moment, our experience is that in the last couple of years we’ve seeing a large influx of foreign investors investing via a FICE structure in China,” comments Cory Lam, senior business development associate at Dezan Shira & Associates. “This is particularly apparent around the Yangtze River Delta region where many companies are looking to bring their high-end Western brands to the growing retail markets of Shanghai, Hangzhou, and Suzhou.”
 
FICE: Pros and Cons
 
Establishing a FICE is one of the best ways for a foreign company to distribute its products in China. The pros and cons of a China FICE are listed below.
 
Pros

• Can sell in RMB to local Chinese customers and issue fapiaos 
• Ability to benefit from VAT rebates if exports are done through the FICE
• Can take control of the supply chain and expand the range of suppliers in China by purchasing in RMB
• Can establish and operate branch offices anywhere within China
• Can be 100 percent owned by a foreign entity
• Can hire directly
• Has no annual turnover or minimum asset requirements

 
FICE can also carry out a wide range of activities, including wholesale, retail and franchising trade activities in China.
 
Cons
 

• Requires registered capital to establish – usually at least RMB500,000 to become a General VAT Taxpayer
• Can take several months to set up (typically 4-6 months)
• Export and VAT issues can be complex
• Need to obtain permission from several bodies

 
The legal minimum capital under the law is RMB100,000 for a company with multiple shareholders, or RMB30,000 for a single-shareholder company. However, as the registered capital must reflect the needs of the business, it is usually far higher than the minimum requirement. Depending on the type of operation, typical minimum capital required for approval is between RMB500,000 and RMB1 million.
 
FICE: Tax Treatment
 
The major taxes which apply to a FICE are value-added tax (VAT) and corporate income tax (CIT). Other taxes, such as business tax, consumption taxes, tariffs, property taxes, stamp duties, or vehicle and vessel usage license taxes, may also be payable based on different situation.
 
Corporate Income Tax

The taxable income of an enterprise is the net income after deducting the relevant business costs, such as administration, marketing and financial expenses, taxes on sales and depreciation. The standard CIT rate for a China FICE is 25 percent, the same as for Chinese-owned companies since 2008.
 
Value-Added Tax

All enterprises and individuals engaged in the sale of goods, provision of processing, repairs and replacement services, or importation of goods within China shall pay VAT. Under that structure, there are two types of VAT payers:
 

• VAT general taxpayers
• VAT small-scale taxpayers

 
For the VAT general tax payers, the tax rate is generally 17 percent for most products. The tax payable shall be the balance of “output tax” for the current period after deducting the “input tax” for the current period. The formula for computing taxes payable is as follows:

• Tax Payable = Output Tax for the Current Period – Input Tax for the Current Period

 
For VAT small-scale taxpayers, the tax payable is:

• Tax Payable = Sales Amount x Applicable Tax Rate of 3 percent

 
“Most clients do not know that VAT registration will become a big part of the set up process,” comments Lam. “For FICEs, it is imperative to obtain the VAT general taxpayer status since without this they cannot deduct the VAT In from the VAT Out, and this will have a big impact on the margins.”
 
This article was first published on China Briefing.
 

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
For further details or to contact the firm, please email info@dezshira.com or visit www.dezshira.com.