Transformation of

Transformation of "Processing & Assembly" Companies

"Processing & Assembly" refers to the processing materials supplied by customer, processing according to customer's samples, assembling parts supplied by customer and compensation trade. "Processing & Assembly" is signed as a cooperative contract between a Chinese business entity and a foreign enterprise, and is registered in the name of the Chinese partner. This factory is neither a foreign investment enterprise, nor a domestic investment corporate enterprise; in fact, it is a domestic investment non-corporate enterprise.

With respect to operation, generally the "Processing & Assembly" company is not allowed to market the products within China, and all products manufactured shall be exported; with respect to management, the "Processing & Assembly" corporation is generally operated and managed by the foreign enterprise directly, while the Chinese partner shall only provide assistance; and both parties will finally collect the processing fee as agreed.

Transformation of "Processing & Assembly" Companies

After China's accession to the World Trade Organisation (WTO), relevant policies against international competition and domestic sales market liberalisation are going to be perfected. In such case, processing materials supplied by customers no longer have the advantage while their disadvantages are increasingly obvious. Coupled with the outbreak of the financial crisis and the changes in exchange rates, processing and export enterprises with low added value are struggling to survive in an increasingly limited opportunity. The shift of export to domestic sales offers business opportunities amid the increasingly unfavourable business environment, so that needs for enterprises to transform are forthcoming.

The following is the comparison between the establishment of Wholly Foreign-owned Enterprise and "Processing & Assembly" company in respect of legal status, establishment and taxation:

Differences between "Wholly Foreign-owned Enterprise" and "Processing & Assembly" Company
No. Aspect Wholly Foreign-owned Enterprise "Processing & Assembly" Company
1 Applicable laws and regulations The Law on Enterprises with Foreign Investment Protected only by local policies which are relatively unstable
2 Legal status Legal entity Incompetent for a legal entity, however, being domestic investment non-corporate enterprise
3 Legal liability Liability limited by the capital contribution Unlimited liability, and, in case of insolvency, joint and several liability of the material supplier (foreign enterprise)
4 Legal rights Able to procure land, entitled to land use right, disposition on the corporate property, and entitled to application for trademark and patent right Unable to have land use right, or property disposition; unable to have trademark and patent right in capacity of entity
5 Registered capital RMB1 million Not required
6 Shareholders Can be composed of foreign corporations or persons Being the Chinese partner, while the foreign partner being the consignor legally
7 Operating period Generally 10-30 years, not exceeding 50 years Generally below 10 years
8 Scope of business Basically unlimited Confined to the cooperative contract for processing materials supplied by customer
9 Procedure of incorporation Relatively complicated Relatively simple
10 Accounting and bookkeeping Account book is required Account book is not required
11 Sales Both domestic and export sales Simply 100% export sales (domestic sales being not impossible but rather complicated in formalities and procedures), only to the consignor that is the foreign cooperative enterprise for processing materials supplied by customer
12 Purchases With strict requirement for inventory management, distinguish between domestic and foreign purchase, and keeping separate accounts Only quantity or quality is required to be recorded
13 Settlement of payment for goods Direct settlement is usable Unable to settle the payment for goods in the name of the enterprise, which shall be settled by the foreign partner offshore
14 Value-added tax Can apply for general taxpayer rate at 17%, or small-scale taxpayer rate at 3% Can apply for exemption from value-added tax on processing charge, and if involving value-added tax item, the taxation rate shall be 3% without crediting Input Tax paid on purchase
15 Corporate income tax Generally, the tax rate is 25% Calculated as verified by the Revenue Department, and currently calculated as per the expenses and outgoings in aggregate
16 Tax preferences New and High-tech enterprise enjoys a preference tax rate of 15%,while value-added tax enjoys free export and refund nil
17 Offshore fund remittance in the Country No government charge Government charge in proportion to 18% to 25% of inward remittance amount
18 Governmental charge Less items More (such as various handling charge, financial expense, and payment location charge)
19 Exchange control Can verify and write off in full or by difference as per the reasonable prices of materials and finished products; can hold foreign exchange as per the quota, with the difference settled at the rate, and implementation of full collection and payment or use of collection to offset expense Only write off the processing charge after verification; convert foreign exchange into RMB as required by the local government; cannot hold foreign exchange
20 Customs contract

 

processing materials supplied by clients or processing imported materials; it is required to verify and write off when the contract for processing materials supplied by clients and processing imported materials expires

required to verify and write off when the contract for processing materials supplied by clients and processing imported materials expires
21 Customs Management fee Exemption Management fee is charged at 0.15% and 0.3% on imported materials and parts respectively
22 Control on importation of equipment Entitled or not entitled to free import as per the domestic sales of products, and equipment new or old conditions, while tax exemption shall be handled in the method of "collection first and refund later" Duty free importation of equipment under the control of the customs, and after the equipment expires, the control can be released after approval of application
23 Tax planning Can carry out reasonable and lawful tax planning Not easy to arrange tax planning. HK enterprises who have processing materials in China are entitled to 50% Profits Tax exemption in HK tax declaration
24 Annual renewal Required Not required
25 Audit Appoint a Chinese CPA to carry out auditing Not required

Mode of Transformation

  • At present, the transformation of a "Processing & Assembly" company is usually in the following order. Firstly, setting up a wholly foreign-owned enterprise, applying for production contract and handling of import and export business in the name of such wholly foreign-owned enterprise. Secondly, transferring the remaining production equipment to the wholly foreign-owned enterprise in parts or in full. Lastly, deregistration of the "Processing & Assembly" company. By doing so, current production will not be affected. Moreover, the "Processing & Assembly" company can also be transformed into a foreign investment enterprise stably.
  • Whether the equipment and materials exceeding the customs control period in resale is most often involved in the transformation of "Processing & Assembly" companies. In transferring the equipment or materials, the proper handling of related tariff and value-added tax and other issues are of concern. In this regard, by virtue of its knowledge and rich experience of China policies, Conpak can solve all kinds of difficulties in the transformation of enterprises so by checking on and convoying the companies in order to safe transition to wholly foreign-owned enterprises.

Our Services Include:

  • Handling brokerage of industrial & commercial, tax, customs, foreign exchange and transfer of equipment and materials, and other procedures
  • Assessment for the enterprise whether it is suitable to transform by virtue of knowledge of relevant financial, processing contract, customs declaration, equipment control, inventory and write-off after verification, flow of production and other conditions
  • Provision of consulting services in respect of problems in transformation
  • The project, articles of association, and feasibility study report for setting up a wholly foreign-owned enterprise

Required Time

About 180 days

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