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1. Introduction

Architectural Design Company A has a local subsidiary B in China, and Company B has to repatriate the profits back.  But subsidiary B finds itself challenged by the big tax burden.

Company B has 2 main types of operating models:

1) Business model 1: Overseas headquarters directly tender and sign contracts with the local owners

2) Business model 2: Local owners enter in full contract with the subsidiary B and subsidiary B subcontracts to the overseas headquarters.  At the same time, the local owners need the subsidiary B to issue the local taxpayer invoices and require the payments to be made directly to the domestic subsidiary.

2. RTF Solutions

The lowest tax can be paid in the following ways:

1) Model 1

- Prerequisite: Local owners accept the HQ invoices.

- Solution: If the local owners can’t pay directly to the HQ foreign bank account, a tripartite can be signed, where the subsidiary will collect the payments on behalf of the HQ.  At the same time, the contract must be signed in RMB.  Also, at the time of receiving and making payments, the subsidiary can treat them as other receivables and other payables.

- Remarks: Company B cannot provide local tax payers’ invoices to the owners and it should confirm with the bank about the payments.

2) For Model 2

- Prerequisite: Owners cannot accept HQ invoices.

- Solution:

•  The local owners sign a full contract with subsidiary B and remit the whole design consulting payments to the subsidiary.  Subsidiary B issues the official invoice to the local owners and confirms the revenue.

•  Subsidiary B enters into a subcontract with the overseas HQ, either in RMB or overseas currency. At the time of payment, subsidiary B recognizes the costs and can deduct the tax.

- Tip: Most companies will adopt the Model 2 solution option.

3. RTF Main Operational Points

1) Draft the contract templates and scrutinize the correct wording in the contract, whereby, getting rid of words, like technology and copyright. In this way, the contract will not be determined by the tax office as a royalty or technology type of contract.

2) Confirm the contract time, validity date, revenue amount and other issues.

3) Distinguish between domestic and foreign services and liaise with the tax office regarding the contract and taxation issues.

4) Help companies to obtain tax saving.

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