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© 2016 Grant Thornton UK LLP. All rights reserved.
Briefing Paper: China - Business, Tax
& Cultural considerations for Higher
Education Institutions
The breadth and depth of educational and commercial opportunities for British universities in China
is vast. However, the differences between China and the UK in terms of the business environment,
regulation and culture can present a range of challenges. This briefing paper is intended to highlight
just a few of the issues that universities need to consider.
What's the issue
China is a large and diverse country with many regional
differences both in terms of business, tax regulation and
culture. Chinese taxes can be significant, the application of
legislation can vary from region to region and the risk of non-
compliance can be substantial. Accordingly, any UK HE
Institution seeking to break into the Chinese market needs to
understand the complexity of the issues it will face.
Issues range from choosing the type of activity to be
undertaken to the most appropriate operating vehicle and
method of delivery. Once these decisions are made, there are
then Chinese regulatory, tax and cultural issues to consider.
Potential activities in China
The type of activity to be undertaken in China will broadly
dictate the operating model to be used and the tax treatment
that follows. Typical activities include (but are not limited to):
 China based marketing and recruitment of students
 collaborative delivery of education in China
 establishment of formal joint schools or education
programmes in partnership with a Chinese university
 establishment of a Chinese campus of the UK
university (through joint venture)
 the provision of non-educational services (such as
consultancy or research services)
In each scenario, the degree of 'presence' required in China is
likely to be different. The most appropriate operating vehicle
for undertaking these activities will, to a large extent, be
dependent on the specific plans, the functions that need to be
fulfilled and the amount of time that will be spent in China.
Operating models
There are many ways to deliver these activities in China. The
most common operating models with commentary on their
associated tax treatment are as follows:
Direct interaction
For short-term activities that do not require considerable visits,
or boots on the ground, it is possible that there will be no need
to create a formal presence in China. Such activities may be
outside Enterprise Income Tax and Individual Income Tax,
although VAT and withholding taxes may apply.
Permanent establishment
There are strict rules governing what activities overseas
organisations can undertake in China without forming a taxable
presence. If the permitted scope is breached, a 'permanent
establishment' is created and a UK university will be required to
pay tax in China. Under the UK / China double tax treaty, a
permanent establishment can be created by:
 having a fixed place of business in China
 having dependent agents in China or
 furnishing services for a total of more than 183 days in
a 12 month period.
If a permanent establishment is created there are registration
and administrative requirements as well as tax obligations to
comply with. Chinese Enterprise Income Tax will be due on
profits attributed to the Chinese permanent establishment, and
staff may become subject to Individual Income Tax.
"Launchpad" services
"Launchpad" is a quick and simple start-up service under which
Chinese staff are employed by the China-Britain Business
Council. This allows a foreign institution to defer many of the
administrative requirements of establishing its own presence in
the country. There are restrictions on the activities that can be
undertaken so careful attention is required depending on the
exact nature of the functions to be carried out.
Representative office
Setting up a representative office allows UK universities to
employ staff based in China. However, the scope of required
activities will need careful attention as a representative office is

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restricted to liaison, market research, exhibition or promotional
activities and is not allowed to undertake income generation.
Although they do not generate income, representative offices
are still usually taxed on a 'deemed profit' basis whereby a
deemed profit is applied to expenses incurred and the assumed
profit is taxed at the Enterprise Income Tax rate (25%).
Chinese subsidiary
A Chinese subsidiary is permitted to generate its own income. It
can take three-six months to set up a subsidiary (known as a
Wholly Foreign Owned Enterprise) but it does offer a more
flexible platform for undertaking activities in China. The most
important stage in the process is the acquisition of the business
license which defines the scope of the permitted activities. It is
important to ensure that any future activities of the subsidiary
are covered in the license as it can be difficult to amend the
scope after the license has been granted. It should also be noted
that certain educational activities are not permitted.
Joint ventures
There are broadly two forms of joint venture – equity and
contractual. Equity joint ventures involve the establishment of a
company with both parties as shareholders. Contractual joint
ventures entail operating as distinct entities under the terms of a
contract, many universities enter into contractual joint ventures
with partner institutions, though some contractual
arrangements can be taxable in their own right. In most cases,
joint ventures will be subject to Enterprise Income Tax and
VAT either directly or indirectly.
Chinese Taxes
There are a range of taxes that will affect operations in China.
The combination of direct corporation tax, indirect taxes and
withholding taxes can mean that China is a relatively high tax
jurisdiction.
Enterprise Income Tax
Enterprise Income Tax is China's equivalent of UK
Corporation Tax and is charged on profits at a flat rate of 25%
(profits are either actual profits – where the correct form of
accounting records are kept – or 'deemed' profits where they
are not).
Withholding taxes
Withholding taxes can be charged on gross cross-border
payments for services, royalties, interest and dividends. Where
due, the Chinese party remitting money out of the country will
be expected to retain the appropriate tax and pass it to the
Chinese authorities.
VAT
China has recently undertaken a phased transition from
Business Tax (a flat transaction tax) to a VAT system. In broad
terms, a VAT rate of 17% is chargeable on supplies of goods
while 6% is chargeable on services. In addition, local surtaxes
(which vary by location) are also added as a percentage of the
indirect tax.
Individual Income Tax
China's main employment tax - Individual Income Tax - is
charged at a progressive rate based on salary bands from 3% to
45% of salary. Broadly, this will apply to all Chinese employees
and to UK university employees for the time that they spend in
China to perform work for a permanent establishment or, if no
permanent establishment exists, if they spend more than 183
days in a 12 month period in the country on working visits.
Cultural considerations
As with any venture, not only is it important for undertakings
to take note of the 'local' regulatory and fiscal regimes but it is
equally important in China to understand the cultural
environment. Building relationships (or 'guanxi') is a very
important aspect of doing business in China and applies to
interactions with partner institutions, government bodies,
agents and intermediaries alike.
Having a fluent Chinese speaker as part of the project team can
be invaluable in facilitating communications with Chinese
organisations and officials. Having bi-lingual marketing
materials and business cards ready to exchange are useful as
well.
Understanding meeting etiquette and respecting local culture
will assist with the process of establishing relationships, out of
which will hopefully come fruitful cooperative arrangements.
Further information
Please feel free to get in contact if you would like further
information.
Karen Robb
VAT Partner
T 020 7728 2556
E karen.robb@uk.gt.com
Duncan Levesley
China Britain Services Group
T +44 (0)20 7728 3239
E duncan.levesley@uk.gt.com