The setting up of a headquarters operation is one of the most important decisions facing multinational corporations (MNCs) wanting to develop their activities in China. The Ministry of Foreign Trade and Economic Co-operation issued the first provisional regulations concerning Chinese investment holding companies in 1995. Since then, more than 200 MNCs have set up Chinese holding companies (CHCs) to provide headquarters functions for their investments in China. Beijing and Shanghai are the most popular locations for such operations.
With China's accession to the World Trade Organisation, MNCs have been shifting their Asia focus to the greater China region. Regional sales directors and chief financial officers are required to spend more time in China or even relocate there to closely monitor their company's operations. In addition, many MNCs have regional shared-service centres in their China head offices. These offices share functions such as capital management, finance, accounting, human resources and procurement.
Over the last five years, the Chinese government has been keen to improve on the 1995 regulations by allowing more headquarters functions to be carried out under the business license of the CHC (see table). However, this legislation seems to apply only to operations within China, and does offer any incentive for CHCs to operate non-China regional services (such as regional sales, procurement and treasury functions) for their affiliates outside China. Without proper regulation on this point, most MNCs have been reluctant to base their Asia- Pacific regional headquarters in China.
The Beijing municipal government issued a circular in 1999 to encourage MNCs to locate in the Chinese capital. However, the circular was not clear on the conditions attached to doing so. Nor did it offer specific guidelines on approved Beijing regional headquarters performing regional services outside China.
The Shanghai municipal government issued its own set of regulations in July 2002. These bring fresh hope to MNCs, spelling out precisely the conditions attached to setting up a headquarters operation in Shanghai:
the total assets of the parent company should not be less than US$400m
the amount of accumulated investment in China by the parent company should not be less than US$30m
at least three enterprises within or outside China must be invested by, or authorised to be managed by, the regional headquarters.
More important, the regulations allow regional headquarters to take the legal form of either a CHC with minimum registered capital of US$30m, or a management company with a minimum registered capital of only US$2m. This appears to offer an alternative corporate vehicle for MNCs that had previously been hindered by the huge capital commitment required by the CHC structure.
The Shanghai regulations specifically allow an approved headquarters operation to provide the following management and support services for MNC group companies within or outside China:
-decision-making on investment operations
-capital management and financial administration
-technical support and R&D
-employee training and administration.
They also approve a number of incentives.
The Shanghai government will offer support to establish global or regional procurement and logistics centres, with general import-export trading rights and possible VAT refunds on exports. Financial subsidies will be granted if headquarters operations offer training programmes for their employees in areas that are considered particularly important. No specific guidelines have yet been issued by the authorities but they are likely to refer to some management or other advanced techniques that are rarely acquired by local Chinese. Tax incentives will be granted for certain high-technology R&D activities. Regional headquarters located in the Pudong New Area will be offered financial subsidies equivalent to a portion of their income tax, VAT and business tax. The percentage depends on the type of industry.
It is also expected that new supporting regulations will be introduced in the areas of cash and treasury management.
However, as the Shanghai regulations became effective only on July 20, supporting regulations dealing with the incentives have yet to be finalised. It is not entirely clear at this stage how the incentives will work in practice. Nonetheless, MNCs intending to open a regional headquarters as their strategic gateway to China and the Asia-Pacific region should carefully review the new regulations when determining the right location for their base.
This article was written by Matthew Wong, a partner at PricewaterhouseCoopers Shanghai and China leader for the firm's tax management and process services.