When a company is looking to enter a new market through a Foreign-Invested Enterprise (FIE), the location in which to set up the new entity is a key decision point. After all, you don’t want to establish in a location that is too far away from your supply chain, customers or partners.
If you are looking to establish an FIE presence in China, this decision has an additional component. It is not just a question of which city to choose, but of which ‘district’ within that city. This may seem like an unnecessary distinction, but the implications can be significant in respect of future operations, compliance or other aspects of the business.
Shanghai and Beijing, for instance, are administratively equal to a province and each is divided into 16 county-level administrative districts, while Shenzhen holds sub-provincial administrative status within Guangdong Province and comprises nine administrative districts.
It is best to think about city districts in China as ‘mini-cities’ because their population sizes and GDP can be substantial. In Shanghai, for example, the ‘core’ city comprises seven districts, of which four – Xuhui, Jing’an, Putuo and Yangpu – have populations of over a million, while Hongkou has over 850,000 and Xuhui and Changning both have nearly 700,000.
Each district of a city has its own Administration for Industry and Commerce (AIC), as well as local tax (perhaps the most significant) and other government bureaus. Whereas policy is generally uniform, implementation can vary. Certain districts can be more business–friendly to FIEs than others.
Why it matters which district you choose …
- Moving offices – If you establish in one district, it is very straightforward to move your company within that district because the administrative bureaus do not change. Relocating to another district is the same as moving to another city. In most cases, a company will be required to de-register and then re-register in the new district. An alternative would be to maintain an existing company registration and set up a branch office in the new district. This is not recommended, however, because it results in higher long-term costs due to the need to file taxes in both districts. In the event that a company decides to exit the market, this will also complicate the de-registration process.
- Paying taxes – Entities in China are required by law to file taxes in the district in which they are registered, even if the entity has no business activities there. There is no exception to this and great care should be taken to ensure that taxes are always paid to the correct district. Companies are sometimes wrongly advised by accounting services providers that it is possible to obtain a tax rebate by filing taxes in a different district. In such cases, the district in which taxes were paid will refuse to return the tax payment because a rebate has already been issued, but taxes will still be due in the district in which the company is registered.
In summary, it is essential that FIEs should take time to select the most appropriate district in which to establish an entity and be sure to file/pay their taxes ONLY to the tax bureau of that district. FIEs should also be very cautious about where they obtain advice. If something seems too good to be true, it probably is.