Sino Corp CPA Limited

"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 Organization (WTO), relevant policies against international competition and domestic sales market liberalization 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, Sino Corp 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