I have been wondering for a while, how practically can WFOE company in China operating cross-border e-commerce platform takes advantage of the bonded warehouses and direct shipping through Free Trade Zones in selected Chinese cities to lower tax and customs levied on the imported products.
There are these main options for China WFOE to import goods to China:
1. Direct import to mainland warehouse
2. Direct shipping from supplier to the final customer in China
3. Import through a bonded warehouse in FTZ (Free Trade Zone) （保税仓－备货）
4. Direct shipping through Free Trade Zone (保税仓－跨境直邮）
5. Shipping through Hong Kong warehouse using Hong Kong Post (香港邮政) or Business Express Delivery (商业快件）
I will explain all these models of import and its impact on duty and taxes paid by WFOE in China.
1. Direct import to mainland warehouse
This is the traditional way of importing goods to China. Foreigners will use their WFOE located on the mainland and import goods directly to the mainland warehouse of their choosing. WFOE will need to obtain an import license (进出口权）or employ specialized import agency to handle customs clearance with The General Administration of Customs PRC (海关). This is the most costly option regarding duties and taxes, as you will need to pay import duty according to the imported product category and 17% VAT.
+ Relatively easy to handle
+ Possibility to use cheaper mainland warehouse
– Highest tax and duty burden on the imported product
2. Direct shipping from a foreign merchant to the final customer in China
This option is still used by many smaller cross-border marketplaces operated by foreign companies in China. The supplier can directly ship products from abroad to its final customer in mainland China using EMS or express shipping like DHL or TNT. This option is in the grey zone and will become gradually more hard to operate. Currently, customs will randomly choose shipments for inspection and eventually require the duty to be paid by the receiver. The likelihood of the shipment is lower with EMS (only 5-10% shipments checked) than with the express shipping options. The % of checked shipments is supposed to gradually increase in the next months as this mode of import is not favored by the Chinese authorities.
Another issue with direct mailing is that if you try to handle payments through your mainland WFOE, it will be nearly impossible to pay your suppliers abroad. The SAFE (State Administration of Foreign Exchange) will not approve your international payments unless import documents and contracts are submitted, which is impossible as it is basically “grey” import. Therefore, a most platform using this mode will use foreign entity (very often Hong Kong company) to handle all transactions. Customers would usually pay online using Alipay Global directly to the oversea company. The foreign company can then easily settle payments with its suppliers worldwide.
+ No duty or tax paid unless package is randomly checked by the customs
+ Easy to handle for foreign merchants
– Poor service for customer as some of them will need to deal with customs and pay duty
– Unstable delivery time and frequent difficulties with last-mile delivery in China
– Problems with payments to your suppliers abroad
3. Import through a bonded warehouse in FTZ (Free Trade Zone) （保税仓－备货）
This is currently option used by majority cross-border e-commerce platforms in China including Little Red Book（小红书） and Jumei (聚美优品). Importer ships the goods in bulk to port or airport in China which is then picked up by specialized forwarder registered in the Free Trade Zone. Goods are transported to the bonded warehouse within the FTZ and registered with the customs. Goods are then split into individual orders for final customers in mainland China and shipped individually from the bonded warehouse using mainland China shipping services like SF Express or EMS. The Entire process including document examination and tax burdens is conducted online through integration between all three parties involved (Cross-border e-commerce platform – Bonded warehouse based forwarder – Customs). This needs your programmer’s time at the time of setup but brings increase efficiency in the later stages. Duty (in this case, so-called 综合税）is deducted directly from the c-commerce platform account.
Based on the latest policy the duty paid on the goods released from the bonded warehouse is a so-called comprehensive tax (综合税), which replaces previous parcel tax. It is a unified rate paid on all goods instead of paying duty and VAT on the traditional imports (as in option 1). The comprehensive tax rate is 11.9% on clothes, food & food supplements, electronic appliances, and watches. For beauty products, the 32.9% rate is applied. The rate differs for each product category.
Besides the forwarder, you will also need cross-border payment company (跨境支付机构) to help you handle cross-border settlements with your suppliers. There are only seven companies in China that are entitled to handle cross-border settlements for cross-border e-commerce platforms and you will need to choose one of them and pay an additional processing fee.
The goods can be delivered in 2-3 days from the bonded warehouse to the final customer, which is comparable with the domestic shipping speed.
The cost for the bonded warehouse starts from around 150RMB/sqm. Processing and packing fees for each order are around 5-8RMB based on monthly order quantity. The shipping fee from the bonded warehouse is comparable to the domestic shipping fee and differs based on the selected domestic shipping company.
+ Fastest and convenient service for the final customer
– Requires more expensive bonded warehouse
– Requires e-commerce platform to keep stocks in the FTZ
4. Direct shipping through Free Trade Zone (保税仓－跨境直邮）
This model is used for instance by Ymatou.com (洋码头). This model is very flexible and allows the e-commerce platform to scale very quickly as they do not need to keep stock. Once the order is placed, products are direct mailed to the FTZ, the customs clearance and document check are processed electronically and then ship to the final customer in Mainland China. The same tax rates apply as in option 3. The delivery time will depend on your shipping method and can be around 7-15 days (or longer).
+ No stocks held by the e-commerce platform in the bonded warehouse
+ Stable and predictable service for the customer
– Highest shipping and processing cost
– Longer delivery times
5. Shipping through Hong Kong warehouse using Hong Kong Post (香港邮政) or Business Express Delivery (商业快件)
This is the last option and it can be especially useful if you choose to use Hong Kong company to operate your cross-border e-commerce platform. Hong Kong has a lower corporate tax than China (16.5% compared to 25%). On the other hand, your servers can not be in China unless you operate your platform through mainland China company, which means low speed and poor user experience for mainland customers.
You can use direct mail with Hong Kong Post to ship to China, which will cost you around 60HKD (+10HKD for each additional Kg). Currently, 5-7% packages will be checked by the China customs, and the duty will have to be paid by the receiver. It will take 5-7 days to deliver from the Hong Kong warehouse to your customers in the mainland.
The last option is to use the Business Express (商业快件). In this case, the goods will be taken from the Hong Kong warehouse to the warehouse on the border with Shenzhen, China. The shipping will be then handled for the Free Trade Zone. The delivery cost will be around 22RMB (+10RMB for each additional kg) for the shipping from the warehouse in FTZ to the customer in Mainland and will take 2-3 days. Another tax rate applies for this mode of import (flat 30%, so-called 行邮税) and a copy of the ID of each final customer in China will be required from the Customs.
The processing fee for one shipment in the Hong Kong warehouse is around 6HKD/shipment.
+ Lowest initial set-up cos
+ Possibility to settle payments through Hong Kong company
– Not suitable for larger-scale operations, because the % of checked packages will increase and the tax is relatively high for the Business Express.
Conclusion
As you may know, I run a cross-border e-commerce startup in China (www.whoolala.com) operated by WFOE in Shanghai FTZ. We are still at a very early stage, so we were using Option 2 up to this moment. As we scale, we can not guarantee a high level of service anymore, because we face issues with an increasing amount of orders delayed at the customs and other delivery problems. We plan to implement Option 5 in the short-term and then Option 4 in the medium-term. We can not afford to keep stock at the moment to be able to scale quickly with minimum capital, which rules out the remaining options. Options 3 and 4 are the most favored by the Chinese government so they are most likely to be promoted in the long run. Therefore, I would suggest focusing on them and developing strong competencies in this area.
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