Weblog with daily updates of the news on a frugal, fair and beautiful China, from the perspective of internet entrepreneur, new media advisor and president of the China Speakers Bureau Fons Tuinstra
About 90 percent of the China expats have left, estimates China lawyer Mark Schaub in his latest China Chitchat. And while new people are slowly coming back, those who left are struggling to sell their business, he says. What are the challenges they are facing, Schaub summarizes in the first part.
Mark Schaub:
Much more challenging is selling a business in which you have invested your lifeblood and passion for a long time. There is a combination of guilt (selling and leaving the employees behind) and fear (will those employees, the buyer, bank, authorities screw me over on the way out).
No entrepreneur I have met so far seems happy about the prospect – compounding this is that most are not so young (sorry guys – if I know you and you fall in this category and you are reading this then rest assured I did not mean you – I consider you to be very young) so this sale also impacts their future financial security.
The seller really needs to think in detail about what they want and weigh up differences but also think about how things will turn out for your specific business (i.e. special challenges or leverage or weaknesses you may have).
The common challenges with such sales are 1) certainty of obtaining purchase price overseas; 2) dealing with potential Chinese buyers and selecting the right one; 3) dealing with the transition (i.e. period in which you remain a minority shareholder and still be employed by the target); and 4) securing that the second sale (i.e. the minority shareholding) is secured in respect of timing, certainty and value.
Another challenge is to run the project quickly and smoothly. For almost all entrepreneurs selling a company in China is a new experience. It is common and sensible to be apprehensive and cautious, but a slow process is not in your interest as the seller.
Accordingly, to optimize the process you need to: 1) have a clear strategy, 2) understand what is possible, 3) have game played in your head all possible scenarios, 4) have a trusted group of advisors, 5) everyone is well briefed about your business and interests, and 6) carefully select the buyer (this is NOT just the highest price but also integrity and capability to implement).
Foreigners have left China in large numbers, but the most important reasons were other than COVID-19, argues intercultural coach and consultant Gabor Holch in his video. Already before the coronacrisis, the exodus was taking place because economic growth was dropping, career opportunities for expats were diminishing and the expat community was already severely hit before the lockdowns, he argues.
The reform of the income tax in China will drive many expats out of the country as it will kick in by 2021, as foreign and local taxpayers will fall under the same taxation rules, says financial expert Paul Gillis on his weblog. Especially the equal treatment for housing and education costs will become too costly for expats, or their companies.
Paul Gillis:
Tax reform will lower the tax burden on lower- and middle-income people, while leaving the top rates intact. China has a progressive tax system with rates topping out at 45% on income over 960,000 RMB (US$143,000).
Foreigners used to get special treatment. While China taxes its own people on worldwide income, expatriates were only taxed on worldwide income after they had been resident for five years. The five-year period could be restarted by leaving China for 30 consecutive days or 90 days in a year. The 30 day “tax break” was the most popular tax provision in the world. Initial proposals would have revoked this rule, but the final version makes it even better. It retains the 30-day tax break but requires it only every six years. The 90 days in a year provision is gone.
More important for expatriates was the allowance of special exclusions from income for housing, education and home leave expenses. These expenses are very high in China. A home in the Yosemite development near the international schools rents for 55,000 RMB per month ($98,500 per year) and tuition for two kids at the International School of Beijing (ISB) runs 600,000 RMB ($89,500 per year). Local nationals did not get to exclude these costs.
The new law treats locals and expatriates the same. Both will obtain deductions for housing and education, but the benefit for rent is limited to 18,000 RMB (US$ $2,700) a year, far below what most expatriates pay. Education is limited to 12,000RMB (US$1,800) per child.
That will be a tax cut for locals, and a big tax increase for many expatriates. While it may be fair to treat foreigners and locals the same, fairness is in the eyes of the beholder.
Expatriates can stay under the old system through December 31, 2021. After that some expatriates will see staggering increases in tax. The expatriate living in Yosemite with two kids at ISB will see taxes increase as much as $82,000. Since most expatriates at that level are also tax equalized, the total cost increase to their companies is likely to be as much as $149,000. That will force many companies to reconsider whether they can keep these expatriates in China.
