• A comprehensive and sophisticated manufacturing base;

• Well-established supply chain networks;

• Continuous infrastructure development; and

• An increasingly transparent and regulated business environment.

Against this backdrop, many foreign purchasers are considering or establishing onshore entities in China to facilitate local sourcing and improve operational efficiency.

1.Commercial Credibility with Domestic Suppliers

In practice, Chinese suppliers often face challenges in assessing the creditworthiness and background of offshore counterparties, due to limited familiarity with foreign disclosure systems and restricted access to reliable information.

By contrast, entities established in China are subject to public disclosure requirements under PRC law. Key corporate information, such as registered capital, administrative penalties, litigation records, and operational status, is accessible through government platforms (e.g., the National Enterprise Credit Information Publicity System).

While the scope and timeliness of such disclosures may vary, this level of transparency generally enhances trust and facilitates due diligence. As a result, domestic suppliers are often more comfortable transacting with locally established entities.

2.Payment Efficiency and RMB Settlement

Cross-border payments to Chinese suppliers, whether in foreign currency or RMB, are permitted under PRC foreign exchange regulations administered by the State Administration of Foreign Exchange and relevant policies of the People’s Bank of China.

However, in practice, many domestic suppliers, particularly small and medium-sized enterprises, may face operational challenges in handling cross-border payments. These may include:

• Documentation and compliance requirements imposed by banks;

• Foreign exchange conversion procedures; and

• Limited experience in managing foreign currency transactions.

These factors can result in administrative complexity, processing delays, and increased transaction costs.

By contrast, a locally incorporated entity in China can typically make payments directly in RMB, which may:

• Simplify transaction processes;

• Improve payment efficiency; and

• Reduce foreign exchange-related costs.

3.Local Presence and Operational Control

Effective sourcing often requires ongoing interaction with suppliers, including order management, quality control, and logistics coordination.

Without a legal presence in China, foreign companies are generally unable to directly employ PRC-based staff, and must instead rely on intermediary arrangements (such as labor dispatch agencies or representative office structures). These arrangements may:

• Increase employment costs;

• Limit management control; and

• Introduce additional compliance considerations.

By establishing a local entity, companies can directly recruit and manage employees, enabling:

• Greater operational flexibility;

• Improved responsiveness to supplier issues; and

• Stronger alignment of local teams with business objectives.

For companies with ongoing sourcing activities, this often results in a more efficient and scalable operating model.

4.Tax Efficiency and Export Tax Rebates

A commonly adopted structure involves a China entity procuring goods from domestic suppliers and exporting them to overseas affiliates or customers. Under this structure, the China entity may be eligible for export tax rebates, subject to compliance with applicable PRC tax regulations. In general:

• Domestic suppliers can issue VAT invoices (fapiao) to the China entity;

• The China entity may credit input VAT; and

• Upon export, the entity may apply for VAT rebate/refund.

This can significantly reduce the overall tax burden of the supply chain.

By contrast, where foreign purchasers procure goods directly from China without a local entity:

• They may not obtain VAT invoices suitable for rebate purposes;

• Input VAT may not be recoverable; and

• Export rebate treatment is generally unavailable.

However, it should be noted that:

• Export tax rebates are not automatic and require strict compliance with regulatory requirements;

• Tax authorities may assess whether the China entity has sufficient operational substance; and

• Related-party transactions may be subject to transfer pricing rules.

5.Conclusion

Establishing a local entity in China is not merely a structural decision, but a strategic one. For businesses with sustained or growing sourcing needs, an onshore presence can enhance operational control, improve commercial efficiency, and unlock potential tax benefits.

That said, the appropriateness of such a structure depends on the specific circumstances of each business, including transaction volume, operational complexity, and long-term strategic objectives. A careful legal and tax assessment is therefore recommended before implementation.