How to Declare Corporate Income Tax under the WFOE and Branch Office Model in China
1. What is the WFOE and branch office model
The WFOE (“Wholly Foreign Owned Enterprise”) and branch office model means after WFOE was established in China, then it could open its branch offices in different regions of China, and the WFOE will become the head office for those branch offices.
The process of setting up a branch office is easier and less expensive than setting up a new WFOE. Besides, the branch does not require for the registered capital, while the head office needs the capital contribution. Since a branch office has its own business license and seal, it could sign off business contracts on its own behalf, and hire employees The profit and loss of a branch office could be consolidated at the head office level. Hence, this model could be a good choice to expand business throughout China rapidly and easily.
However, there are disadvantages for branch office model as well, such as its business scope is limited to the head office’s business scope, it cannot export or import on its own, and the head office is liable for activities performed by the branch office, as the branch office is not an independent legal entity.
2. Tax Administration for the branch office
A new branch office must be registered with the local tax bureau within 30 days after obtaining the business license and report its head office’s information as well, then the branch office will have a tax ID and could issue invoices to its customers. The branch office needs to to declare Value Added Tax (“VAT”) locally on a monthly or quarterly basis which is similar to a WFOE does. Actually, for most of the taxes, for example, individual income tax, and stamp duty etc., the same tax declaration requirements are applied to branch office, except for the Corporate Income Tax (“CIT”).
3. How to pay the CIT under the WFOE and branch office model
China CIT is taxed on each legal entity purpose, so head office and branches need to calculate CIT on a consolidated basis. which means the loss and profit of head office and branches are calculated together to reach a tax payable amount.
According to the PRC Tax Regulation, SAT [2012] Bulletin 57, the WFOE and its branch offices located in different regions should pay CIT to the local tax authorities respectively in their own registered locations via the following allocation method:
a) The head office will first consolidate and calculate the taxable profit and CIT payable of itself and its branches as a whole for both quarterly and annual filing purpose;
b) For each quarterly filing, 50% of the tax payable will be allocated to the branches and 50% to the head office. The allocation proportion amongst the branches was calculated based on three factors of the previous year, i.e. operating revenue, total assets and employee remuneration, with the weighting index at 0.35, 0.3 and 0.35 respectively.
Ø Proportion of tax payment allocated to a single branch=0.35*（amount of operating revenue of a branch/amount of total operating revenue of all branches）+0.35*(amount of employee remuneration of the branch/ amount of total employee remuneration of all branches)+0.3*(total assets of the branch/total assets of all branches)
Ø Tax payment amount for a branch = total tax payable of the company*50%* Proportion of tax payment allocated to this single branch
c) For CIT annual settlement before May 31 the next year, the head office and the branches shall pay their own under-paid CIT or claim for CIT refund/offsetting for over-paid CIT with its respective in charge tax bureau based on the above consolidation calculation and allocation method.
Nevertheless, the following types of branch office could be exempted from making CIT payment locally under the WFOE and branch office model:
a) Branch offices that only have auxiliary function (e.g. after-sales services, internal research and development, warehousing)
b) The first year of a newly established branch
c) The head office is recognized as a small-scale enterprise in the previous year
d) The wound-up branch offices after the tax de-registration formalities are duly completed;
Takeaways
þ The WFOE and branch office model may be an easier way to expand business in China, but there are also other options, such as setting up new WFOEs, or representative office etc. each structure has its own Pros and Cons, so foreign investors may plan carefully ahead to find out the appropriate and tax-effective structure for their business.
þ A branch office may be an efficient vehicle to hold part of the functions of a company at a specific location to meet the business development needs in future.
þ The CIT allocation method is quite complex and the branch offices might deal with different local tax practices in different regions. It is suggested to well understand the related tax regulations and local practices before the CIT declaration or seek the help from tax professionals.
þ It is important to calculate the allocation proportion correctly, because it will affect all the CIT payments among branches.
