Deciding Where to Best Setup Your Business in China for Taxes with Fabian Knopf

Thank you Fabian for coming on the show – a lot of people ask where in China they should set up their company.

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Thank you so much Fabian! Tell our audience how to best reach out to you.

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“So you really need to understand where the market is, where does your staff come from.”

Welcome to the Global From Asia podcast where the daunting process of running an international business is broken down into straight up actionable advice and now your host, Michael Michelini.

Mike: Okay, guys! globalfromasia.com/episode172. Hope everybody is doing great. I am recovering from amazing 2nd Annual Cross Border Summit 2017. In addition, it was off the hook. It was really crazy after party. Played birthday party so, I’ll make intro short today. Thank you everybody being out there. Also, the online ticket holders. We’re editing all the videos and the PowerPoint and other from Asian those that got the online ticket. It was attended conference private membership site. So, stay tuned for that. And now this week’s show, we have Fabian, a friend of mine and he is expert on company formation in China and got some insights in China. Sometimes, you asked me you know set up company but there’s free trade zone there’s course different parts of China you can choose structure in Hong Kong we’re getting into deep into some corporate stuff here which is something to covering Global From Asia. I hope you guys enjoy and let’s get into in!

Mike: Alright! Thank you, everybody. That’s Saturday morning. We make this interview in China and we have an old friend of mine, Fabian Knopf. Thank you for being here, Fabian.

Fabian: Thanks for having me, Mike.

Mike: Sure. Yeah, we know each other when we’re down here in Shenzhen for quite a few years and you moved out to Beijing. How long have you moved now? I can’t remember you know, when was that?

Fabian: It’s been year and half now.

Mike: Yeah, we’re saying for recording. Yeah, life is going fast man. My kids getting, I guess it’s easier for me, kids ages enough, life moves fast and listeners, keep that in mind. So, you got a wealth of experience and knowledge about China business and corporate structures and everything maybe we could dive into all that, can you introduce yourself for our listeners, Fabian?

Fabian: Yeah, thanks, Mike. I’m a German national I’ve been in China now for, it’s been over 7 years and I was been 2 years in Shenzhen where we met before that I’ve spent some time in Beijing and Shanghai Soju as well and I’m back in Beijing. As you mentioned this working with the legal and tax advice before for foreign companies. Which I’m still doing now.

Mike: That’s very cool. So, yeah. I mean, this always a popular question sure you asked, we already asked a lot of guests, how did you get over to China the beginning?

Fabian: Yeah, that’s a long one.

Mike: I guess it will be the whole show, right?

Fabian: I’ll keep it short. I came here during my, it was about national studies program that I was in Germany and that was 2 years of courses basically in Germany and then, everything else could have been done outside of Germany and like a big China because I had a few Chinese language in Germany and I just want to do gives a language to try and I studied in here and did internship in Beijing and wrote my thesis while I was working in Shanghai and Soju area and yeah, that’s really how I come to China and it just the most interesting place. It was then the most interesting place to me and a really.

Mike: Yeah, it’s true. I was just talking to a friend this morning in the US and does want to come back. At least check it out over here there’s so much stuff happening and it’s just really hyperactive things going on. I think you guys action, China setbacks but you know it teaches your patience as well.

Fabian: Right, and that’s something we’ve probably be there.

Mike: Yes, so congratulations this a month now since your position as commercial manager as, how’s that going?

Fabian: It’s been really exciting. It’s really a different working environment that I’m in, much larger company. So, I’m just, you know, getting into the whole process and yeah diving right in. I have any down time at all. I’m really diving using a lot of people getting to work the firm and working with that already.

Mike: Very good. That’s great! So then, you know, let’s talk about foreign taxation and compliance. So, yeah I’m excited about this topic. Is there, I’ve legally talk to people like want to make sure complying in China, maybe other, and also in their home country, is there any tips on this really?

Fabian: I seem to start education. I think, you know, foreign companies whatever does business here and is you know subject to taxation should educate themselves about how the system works when taxes applicable to them. And the problem there’s obviously a lot of difference tax officer, account potentially you might have you know a friend you might have service providers and might have there’s you know a platform of sources really. And so within you have to figure out or a lost what is the written tax somewhere else to that certainly where to start but then there are local interpretation of those laws and in those where business is being done. And then you know tax officers apply that law in certain ways. I think education I think is really the start. And then working with people who you know internal accounting or external social writers who know what they’re doing consistently. I think that’s, I want to say that’s the key really to figure things out. Because you know things change but you can’t just, do educate yourself once and then that’s come and go for 2 to 3 years but that’s just not got to happen things move too fast.

Mike: Just getting even more, I think you would agree, even more complicated nowadays even in China internationally there’s just more regulation I feel.

Fabian: I think so. I think you’re right. So, China we just, last year now the completion essentially of those from business tax of VAT. So, business taxes is only being applied to few transactions now where as its been expanded to a lot more transactions of the VAT has been expanded to a lot more transactions. And so that has just been done. That was the I’m on a lie here but I’m just not that accurate but it’s been 5 years for that. I think got exactly what year started this transition. Was very important and I think we seen a lot of we seen the business has benefit from that because in China the Chinese government has actually received less tax revenue the savings to businesses should have come out and I think there’s. I think that’s truly significant. You are right, more focus on cross border taxation as well, we have larger purpose on , so this basic rows and profit shifting that something China is globally a very aggressive actor and it’s a really par with jurisdiction like Germany and Singapore and so that’s very impressive. The goal for China is very high and very aggressive and not…

Mike: Yeah. So, in this part of China is different tax like by province or city. There’s also a free trade zone popping up everywhere. So, it’s different everywhere you can’t really say like depends on what all kinds of different factors in China, right?

Fabian: Yeah, you raise an interesting point. I mean, what I mention in the business tax the VAT of business tax actually is tax, the provinces, the localities. Whereas, the VAT as national tax so that go straight to the national government and then they you know dealing to what each province made deserve. So this tax reform was also taken away an incredible amount of funding from the provinces. And so, we can talk about them and the difference that’s a big interesting political situation that affects the China a fantastic form. And did you ask, so that’s one part of that and then you ask the right, there are, the perception that different localities, different taxation. I want to say that is going away as well. And again we have the VAT which is the national tax that supply I think pretty much across the country, across the industries now. With the I’m sure there is, and brought the case they should already be the case we’re covering context that applies industries and there are differences here, there’s a high tech technologies established for example, where the corporate and context is 15% applies for specific industries and companies that qualify for that they have to meet the requirements in, spending the education of their staff and things like that. Another thing is I mentioned to you the free trade zone. Although it’s really funny because a lot of people there’s a free trade zone benefits, a lot don’t. In you like in Shenzhen Shanghai and which is part of the Guangdong free trade zone. In Shanghai does that provide tax benefit on a corporate level and on the level abilities. But within that, it’s you know, a free trade zone the one in Shanghai, the one in Shuchen, the one in Shenzhen those are not, they don’t a lot of them don’t have tax benefit and their benefit of free trade is really more in administrator and trying approaches market access for Chinese and foreign companies. So, tax reduction is not, come a lot more selective in giving those away. There’s still for example if you want to go in a western region then there’s also a 15% income tax. So that is significant reduction. So there are definitely still some exceptions but I would say, you know across the border, I think we come more, same system.

Mike: Okay, that’s interesting. Yeah, that’s a good one free trade zone they are all different. Oh! I want to, alot of, shanghai for their business enter popular place but a free trade zone there’s from what I understood it’s not very yeah there’s no tax benefit. But down here Shenzhen and Shanghai there’s a decent percentage of reduced tax. It’s always complicated it seems.

Fabian: Yes, it is.

Mike: Great! So, moving like on to staffing and dealing I think the main reason to open a company in China is for, of course legally selling and hiring, most likely the top reason. You know what are some difficulties with hiring in China, I think for a western company?

Fabian: Yeah, I agree. It’s you know, sometimes, especially in Shenzhen the question is, why would I set up a company in Shenzhen, I already have a company in Hong Kong. So, there’s well okay, I think it’s very important for a taxation and from staffing perspective to understand that they are separate legal jurisdictions and they, the taxation is different labor laws. Having a company in Hong Kong, for staff in Shenzhen is as good as company in Delaware. So, if you know from the legal perspective obviously proximity is the true to Hong Kong and Shenzhen and but that does not make any more legal having staff in Hong Kong sending them over to Shenzhen. And the other part is then or just you know more, I’ll go back to what I said about taxation, understand what the local laws are, and how they implemented locally, and how you know, maybe the smaller company there’s no a job person, but have sources that know how the system works. You know how employment relationships are developed and how they are executed, how staff rules apply, and what’s the company can order staff to do example what they can set up in order to put you guide their employment relationship and what can’t be done for example what are mandatories, social insurances for example as well. Things and so how they calculated. And that’s not significant, although again Shenzhen is a very good place to that. Because I think it has the lowest social insurance rates in all over China. And as a developed, fairly, it’s a very developed city within China. That’s a great benefactor to companies in China obviously and then I think the main issue was with China employee and dispute, right? And so you have all this compensation, several payment we need to be paid by companies and really understanding for a company. What they legally have to pay? Then there also the threat of arbitration is made very easy for employees in China. Which again you could talk about politically understand. It’s something that, I think doesn’t, it’s a pretty big in complex situation and again it’s very important I think for companies just go out continually educate about what is going on. This is true.

Mike: Yeah. I think it’s, I’ve had labor disputes in my own business over the years. Like you said definitely made easy sometimes for labor disputes and I think try the best way to prevent that is to make sure you’re following the rules of payment and taxes and insurance benefits and also documenting the process, I would say right? Like marking down, if you just fire somebody, but you don’t have written documentation of the reasons why. I know that’s a good tip or that something or what are the?

Fabian: You are absolutely right. The documentation is very important not even the point where you fire the person. But going it, having, this is really the employee understand handbook, I’m sure you are aware of which is something that is highly recommended. Or essentially you can lay down rules for the employment relationship. You can say, coming late 30 minutes or whatever it is that you deemed essentially within the legal, of course you can’t say anything that is wrong. But, you set rules and then you, there’s a consequence that a rule is broken and then there is escalation right on what happens, right? There’s 3 warning letters and that can be ground for termination for example. There’s legal path to punish. It would just not exact something that you want to focus on and this it is really not the staff handbook is focus on but is certainly a part of that those rules. And then really documenting everything. The labor arbitration has set an incredibly effective and in a way very productive institution because it is various country very law to employees and there’s no fees have to pay the arbitration committee in order to lodge a case. If they choose to be represented by a lawyer they don’t have to pay the lawyers the institution itself doesn’t demand fees on the employees. And I don’t think they do for the employer either. I’m not 100% sure about that at the moment. It’s something very easy way to engage and then there’s a timeline, don’t quote me there’s a numbers here but I think it’s 45 days the maximum 60 days within the arbitration committee then has to make a judgment. They kind of get out they are very effective and efficient on that. There was German law firm here in Beijing. The district where most of the foreign companies are registered. They found since 2014 I think it was when judges or at least the judges at the labor arbitration have to to publicize their judgments. I’m not sure but whether they have to publicize their explanations for the documents. But the judgment were public, legislation that require them to make it public. So they had data based and look on that they found no discrimination against foreign companies in those judgments. So we’re talking about 1 district in China and that were a foreign companies are registered. But, the perception that this is something that discriminates the foreign companies that was not found in that. So the perception and discrimination on the foreign countries as well that was not found an example. and they also went in being credible burden of the detailed that evidence would have to be presented in. So, and for that reason by itself you really need a lawyers that is familiar with such arbitration cases or somebody maybe not a lawyer but somebody who definitely understand this proceedings and how judges what they look at, what they don’t look what’s important to them. Just one example you say I have evidence in this email that this happened and I think that is evidence. You just can’t print out the email and put on the judge. And say look this is the evidence. That doesn’t work so you have to go to a notary public, like public notary and basically in front of them print out the email and then they notarized and say yes, this email came from that email account that the program that I saw and this is now evidence.

Mike: Got it.

Fabian: All this is at least there’s a public figure and public officials who regarded that as real like this piece, and that can be admitted into evidence here. So, that’s a level of, same thing goes for example for videos, pictures. Whatever it is, when you do documentation what you mentioned would think absolutely right is very important. And you still have to consider this and that even, if it got to be regarded as evidence by a court of law or a judge arbitration panel.

Mike: This is really amazing. Thank you for sharing so much insights here. I think, I mean, mostly the conclusion here is documenting even though you might not get notarized right away, I think it comes with the culture, right, Fabian? The trusting of the, in a west a lot of times you can just have a paper receipt instead official, got this stamp and chop. You really got to make sure what your evidence is, because this able be used as evidence. But I guess it’s true in the court in America or anywhere else to make sure that’s not forge, make sure not falsify something like that. So I mean, some of my own things to save my butt a couple of times was I’ve had staff signed up a paper to say that they quit and they have a date and I signed it and chop it too. Later, they are trying to get extra month salary out of me or something. And then I had the labor department call my office and ask about it because they are complaining about getting another month of salary. There was of course some conversation, but there was some discrepancy about how many months, so I had that to document with the stamp, his signature and my signature stating the date he left and all the different terms it was easy. I know there were business owners maybe foreigners, I think also Chinese I think do we say this is more difficult. I think it’s difficult for any employer whether Chinese or foreigner with labor?

Fabian: Yeah, you are absolutely right. I always focus on foreign companies. Chinese company says similar is similar, just a small business owners, similar challenges here. I think it might be, you know the employee might decide. So, I don’t know, I’m getting into conjecture here. You have to divide, because this is something that affects both the Chinese and foreign companies and you know I’m just more, I see obviously when it comes to foreign companies more than I do. And also, this is a great standard that I mean you can have getting something like that sign, that will not prevent the employee of lodging a case with the arbitration committee but, you basically did everything you possibly could to, you went a great very far in securing your right basically. This is perfectly legal in my opinion. To basically look this is a signed document right here. We’ve come to the agreement that this signature of my employee and so what is, does it change, this is great, is a good argument. In that case I think the leaning in the, your favor or the employee’s favor.

Mike: Okay, very cool. So, really appreciate your time on Saturday and getting close to the time. but I do want to kind of get to a question were, how do you advise a client which city or district or structure to form I guess based on where they want to be for their business or should they consider, I know we talked a little bit earlier kind of mentioned free trade zone and we mentioned basically trying to standardize but is there is some kind of formula or insights that you can share with maybe how, they should find out what’s the best place in China for them?

Fabian: I always go by, there should all be internal agreement. There should all be, by the external factors like . incentives or anything like that. It should be first and foremost, what is your business need? What do you want to do in China? Is this got to be, do you want to do production? You want to do services, you want to do trade, you want to as a, so that’s the very first thing and you need to think about, okay, so if any production workers you know, I’m not got to be in shanghai, I might be, is it this got to be high level manufacturing work. Is this engineering position, engineering something that is purely high up the value chain that probably want to be somewhere around Beijing to Shenzhen, the Beijing Shenzhen airport langfang just a suburb of Beijing. You might want to be somewhere between Nanjing and shanghai? You know, I think Dongguan is moving up the value chains there so there’s a lot of automotive manufactures moving down there and the supplier is moving down there now. And so, I’m not saying they are quite there but they’re developing, so that’s probably where you want to be might. You need to look at clusters of where your industry is and where you have access to labor. You need the right kind of labor for your, for whatever you want to do. And that is for services and if your financial services then maybe shanghai, Beijing, Shenzhen as well, those bigger good areas. So you really need to understand where the market is. Where does your staff come from? Or where is it, where you have access to staff. What about your customers, you know, do you, is it important for you to be closed to customers? What about suppliers? What do you need other than labor? Do you need raw materials? Do you need to be in a cluster and again South China is a great area for that. Do you need to have a great equal system around you that can support you with, is it a path, industry that you are in. Electronics, you can’t be, i’m going do to electronics, you got to be in Dongguan, in Shenzhen or Guangzhou. You got to be closed to know what is going on and better technology in screens, in this where, this is all I know.

Mike: This is great man.

Fabian: So, this is what you need. Just what I’m saying internal factors. And then you can look right to you, you might have shortlisted. 3, 4, 5 locations then you can look at, are you big multinational companies go to the investment bureaus, you’re looking at investment value, I don’t know how much, right? And does something that they interested in, could they help you with staffing with, I don’t know, finding suppliers in the region and introducing you things like that leveraging that something you haven’t such as brand name, in terms of investment capital that you are planning. So, then you also may be able to get tax benefits. So then I think, it should be internal factors first and then you can look at external factors that make that good. Don’t go to an area where, I’m sure you know the funniest place in Ampoi anywhere that they want any kind of foreign investment for example. But you what got to do out there. You limited in whatever the region gives you and if that doesn’t matter internal factors then there’s, right, doesn’t make any sense.

Mike: It’s true.

Fabian: So, I think that’s really important. So tax benefits is a really shining object, but I think it’s something whole lot on it, look at it when appropriate, when you’re internal factors are aligned and satisfied.

Mike: Awesome! Thanks so much, Fabian. This has been really valuable insights. So, how can people reach out to you and get more information maybe give you some business?

Fabian: Always.

Mike: Definitely, get you hook up here.

Fabian: Sure, I’m pretty active on LinkedIn, they can find me there under my name and I’m sure you put into the show notes.

Mike: Yeah, will put on the show notes.

Fabian: That’s probably the best way to find me. People can find me there and talk to me.

Mike: Okay, very good. Alright, thank you, Fabian. Thanks again and enjoy the rest of your Saturday.

Fabian: Thanks, Mike! You too.

Mike: Thank you, Fabian. We have to give you back down to Shenzhen. For the next year’s summit possible I’ll talk to you about that later. Just still recovering here and thank you again everybody, I just love what I do and I hope you guys enjoy what you do and we’re finding out our crossbordersummit.com/2018. It’ll be our 3rd annual and I still want to do out here in Shenzhen. I still get doing feedback if will do in Guangzhou, do it in Hong Kong, do it in Thailand, I don’t know. I’m still excited about Shenzhen. Yeah, I know you got to get China visa, let’s prepare. You got a whole year to prepare. So, I hope to see you guys there April 2018. And we have tons and tons of interview. I’ve got some some interviews here. I don’t even know it’s so amazing, I don’t even know when to put it next it’s like 10 or 12 interviews. We’ve got such an amazing people who would want to come to our show. And that’s were trying to do here the access to information and network here in Asia to do business globally, a lot of crazy stuff happening around the world in different countries. I’m on the side of you’re the business owners and that’s what we offer, taking care of ourselves and doing what is right for ourselves and our family. So everybody, have a great day and see you next week. Bye.

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