Foreign investments into the world’s second largest economy, China, slowed to an 18-year low  in late 2022, with economic and political woes spurring more exits and fewer new entries. Despite the current investment climate, marked by rising interest rates and increased scrutiny on security and risks, there remain long term opportunities in China.  

In this article, we will share the common pitfalls we have observed among foreign investors operating in China and provide insights on how to avoid or resolve them. 

1.    Initial entity setup in China

Having the right initial setup and meeting requirements in China can facilitate smooth cross-border fund transfers. There are several types of foreign-owned entities in China, such as a Wholly Foreign-Owned Enterprise (“WFOE”), Representative Office (“RO”), and Joint Venture (“JV”).

To determine the most suitable foreign-owned entity type for your business, the first question you need to answer is the nature of business you intend to set up in China and whether it is intended to be a short or long-term venture.

Based on your business requirements, if it generates revenues in China, a WFOE (which resembles a typical limited liability company) may be suitable, and any tax losses can generally be carried forward for a period of 5 years. Tax losses may be allowed to be carried forward for a period of 10 to 13 years for businesses in certain industries.

However, if your business is unlikely to generate revenue in China and is solely intended to facilitate the activities of the foreign company in China, such as assessing the viability of doing business or conducting market research, then an RO (which is an autonomous unit and an extension of the foreign company without independent legal personality) may be suitable. There is no requirement to inject capital into the RO, and it may serve as an efficient platform for foreign funds to enter China via the sponsoring company, which acts as the head office of the RO. However, operational challenges may arise as an RO may not be able to hire local staff directly. Additionally, ROs may not be the most tax-efficient, as they are normally taxed on their gross expenses with a deemed profit rate of no less than 15%, depending on the region and industry.

A JV with a Chinese partner is preferred when the foreign investor would like to (i) invest in a restricted industry sector where law permits foreign investment only through a JV with a Chinese partner or (ii) leverage on a Chinese partner’s local connections and network. 

Across all these setups (excluding the RO), a common key issue faced is setting the total investment amount and registered capital of the entity. A total investment amount that is higher than the registered capital of the entity will give the foreign parent company greater flexibility to provide short-term funding into the new Chinese set-up through means other than equity (for example, as a shareholder loan). However, there is a set statutory ratio between the registered capital and total investment amount:

  • If the total investment is less than US$3m, the registered capital must be at least 70% of the total investment (at least US$2.1m).            
  • If the total investment is between US$3m and US$10m (both thresholds included), the registered capital must be at least 50% of the total investment or US$2.1m; whichever is higher.
  • If the total investment is between US$10m and US$30m (both thresholds included), the registered capital must be at least 40% of the total investment or US$5m; whichever is higher.
  • If the total investment is above US$30m, the registered capital must be at least 1/3 of the total investment or US$12m; whichever is higher .


2.    Proper documentation and registration with the Chinese authorities

Insufficient documentation and registration with relevant Chinese authorities to justify foreign capital transactions may result in outgoing funds from China being subjected to remittance restrictions and increased tax exposure.

Maintaining proper records and registering documentation with the Chinese authorities for foreign capital transactions is imperative when attempting to repatriate funds out of China. Many companies face issues with repatriation of funds when documentation is less than satisfactory or non-existent. This includes situations where documents are not filed or are improperly filed with the Chinese authorities, such as the provincial government or the State Administration of Foreign Exchange.

Capital verification in China is conducted by certified public accounting firms. These firms will verify whether the amount injected aligns with the lodgement filed with the State Administration for Market Regulation. The remitting party’s records must also be consistent with the information on the business license. Verification can occur each time capital is injected or at a later date, provided the company can provide sufficient supporting documents, such as bank advices and business registration documents. A capital verification report (“CVR” or 验资报告) may be required when remitting offshore dividends and other offshore fund repatriations, and/or providing assurance to counterparts such as suppliers or potential buyers on the capital injected and participation in tenders. 

Hence, companies need to ensure that proper registration documents are filed with the relevant Chinese authorities so that the funds can be repatriated out via the same mode of entry without any inconveniences and potential tax consequences.


3.    Intercompany/related party transactions such as management fees

The use of “management fees” by offshore parent companies as a method for cost re-charge is discouraged as it may lead to the potential disallowance of expenses for the Chinese company. All payments to related parties need to be rationalised and justified through proper documentation, which is to be filed with the Chinese Tax Authorities.

Chinese companies must carefully consider the structuring of payments to offshore related entities, such as service fees, royalty payments, etc., as these could potentially give rise to withholding tax implications in China.

Transfer pricing requirements, from both a China and Singapore perspective, based on the arm’s length principle, would need to be considered in detail.  


4.    Considerations for effective deal structuring and Singapore tax implications

When it comes to the disposal of Chinese entities, numerous considerations come into play, but it all boils down to a well-balanced and efficient deal structuring. 

Some parameters that need to be considered are as follows: 

  • Can the transaction with the potential buyer be conducted offshore?
  • Is it an asset sale or equity sale?
  • Full disposal or partial disposal?
  • What are the key assets owned by the Chinese entities? Will the disposal of such assets draw scrutiny or attract potential tax exposure, such as capital gains tax?

In addition to the above, when a Singapore entity disposes of any moveable or immoveable property (includes shares) outside Singapore (China in this case), any gains received in Singapore may be subject to Singapore corporate income tax under the newly introduced Section 10L of the Singapore Income Tax Act. This provision will come into effect from 1 January 2024 unless such gains meet specified conditions. Therefore, Singapore tax implications would need to be addressed concurrently.    

5.    Internal group restructuring or reorganisation

Similar to the points above, further emphasis would need to be given on the following:

  • Whether the documentation requirements by the relevant Chinese authorities (in different provinces) are still valid?
  • What new documents need to be executed, and how should these documents be submitted?  

How can we help?

With our experienced team of professionals, along with colleagues based in various parts of China (Shanghai, Beijing, Suzhou, Shenzhen, Chengdu, Hangzhou), we assist foreign businesses in setting up in China and navigating its regulatory and business environment. Additionally, we have also helped many multinational clients resolve their commercial and tax issues when doing businesses in China. 


If you would like to speak to our specialists, please contact: 

Koh Puay Hoon
Partner & Head of Tax    
T +65 6594 7820  
[email protected]

Yeo Lee Soon
T +65 6594 7888
[email protected]