Meaning
Multinational technology providers execute a regional commercial activity when a wholly foreign-owned enterprise transfers, installs, and validates software licenses within the domestic market. This onshore WFOE software delivery allows foreign developers to sell their products locally through a domestic subsidiary, simplifying the transaction process for onshore buyers. This commercial structure changes the tax profile of the transaction from an import of services to a domestic sale.
Invoicing Execution
The wholly foreign-owned enterprise issues local value added tax invoices to the buyer, which allows the buyer to claim input tax deductions. This invoicing process is managed through the national computerized tax system, which tracks each transaction in real-time. The ability to issue these local invoices is a key advantage of utilizing a domestic subsidiary for software sales.
Tax Classification
Tax bureaus evaluate the delivery to determine whether it should be classified as a sale of goods or a provision of service. This classification affects the applicable value added tax rates and the company’s eligibility for certain tax incentives. Software delivered via physical media may be treated differently from software delivered electronically.
If the delivery involves both a license and ongoing software maintenance, the tax bureau may require the contract to separate these elements to prevent the application of a single high tax rate on the entire value of the transaction.
Operational Benefit
Selling software through an onshore subsidiary reduces the administrative burden on domestic buyers. This operational convenience accelerates the sales cycle.
