VAT refunds for FICEs stall in Hangzhou

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By Andy Scott

HANGZHOU, Aug. 24 – Foreign invested commercial enterprises best look elsewhere when considering a place to set up, at least that is the consensus we are getting from Hangzhou, where the authorities are making it very difficult for FICEs to receive their VAT refunds on exported goods.

Since June 2004, China has permitted foreign direct investors to establish fully operation, 100 percent foreign-owned companies that can buy and sell in China, holding their own import-export licenses. Such companies have generally been inexpensive to establish and have become a popular vehicle for foreign investors to move into the China market. These FICEs are allowed to apply, at applicable rates, for a refund on VAT costs incurred on the export of products from China. Presently in Hangzhou however, FICEs are finding it very demanding to obtain this refund.

Sources at the Foreign Investment Bureau in Hangzhou tell us that Hangzhou tax bureau has set the qualifying standards to receive a refund so high as to essentially bar all FICEs from receiving such a refund. The problem lies in the national VAT tax policy adjustment that Beijing made in 2005 in which the State Administration of Taxation (SAT) and the local tax bureau divided the VAT refund – 92.5 percent for the SAT, 7.5 percent for the local bureau. The Hangzhou tax authorities were unhappy with this division of taxes and have since made it very difficult for FICEs to apply for VAT refunds. While they won’t put anything on paper, the authorities have been quietly telling potential investors that they will not qualify for their VAT refunds.

Because of this, FICEs are understandably looking to move to other jurisdictions in Zhejiang province when incorporating. Since the beginning of 2006, according to sources with the Foreign Investment Bureau, not a single FICE has been established in Hangzhou. If looking to set up a trading company, investors are encouraged to look to surrounding cities like Suzhou and Ningbo rather than Hangzhou.

For more information on FICEs, please check out the forthcoming September issue of China Briefing, which focuses all on FICEs, from the full application procedures, to structuring the company articles, to post-registrations procedures and registered capital requirements.