Secrets for making "losses" in China

The above tax avoidance and evasion practices, to some extent, are a natural result of globalisation and cross boarder investments. But the income tax incentive policy provided by the Chinese government has been obviously applied in a much wider sense, leading to some chaos in the economy. On one hand, there are more than 60% foreign companies in China making losses totalling $17 billion per year, while a handful of foreign companies have registered astonishing profitability at the same time. And most loss making foreign companies can continue to operate steadily, many of which are even "the more we lose, the more we invest". From a capital flow perspective, China is now in a state of swallowing a large and continuous inflow of direct investments from both real and fake foreign companies. But from a ownership perspective, China is now facing problems such as foreign buyout of Chinese enterprises, capital flight, money laundering and massive registration of resident companies in offshore financial hubs.            

Those hugely profitable enterprises often correspond to a number of foreign enterprises making chronic or sudden losses in China. For example, the previously mentioned Taiwanese food group made spectacular profits in its new entities in China, but its old entities in the same business in China were collectively shrinking in both operations and profitability. Because of the support of highly profitable overseas parents or onshore affiliated entities, these loss making foreign companies can continue to survive in China. Furthermore, in order to obtain tax benefits from reinvestments in China, many foreign companies are willing to pour more money into the country. Some foreign companies are busy with setting up new entities, so that profits can be transferred to these new carriers from old entities with tax exemption period expired. This is why there is a strange phenomenon in China that as the accumulated losses mounting, investment scales of foreign companies are snowballing.

Fake foreigners: Chinese residents transformed into foreign shareholders

For local Chinese companies, the "two-year exemption and three-year half" policy has given birth to a lot of fake foreign investors. There are three types of fake foreign companies. One is Chinese-related companies with real operations in Hong Kong, Macao or overseas countries, and they return to China to open foreign-funded subsidiaries for development purposes. The second type is that for overseas capital rasing purposes, such as listing on HK Stock exchange, local Chinese companies incorporate holding companies offshore and return to China by acquiring their original entities in Mainland. The third type purely relates to local Chinese companies seeking regulatory arbitrage, by registering a shell entity overseas and changing its identity to "foreign company".