Overview of the Chinese Tea Drink Industry's Overseas Expansion, Financial and Tax Analysis
I. Research and Analysis of the Chinese Tea Drink Brand Industry
In China, freshly-made tea drinks have always been popular among young consumers. However, due to the low barriers to entry in terms of industry and capital, the competitive landscape is highly fragmented. The market for freshly-made tea drinks is fiercely competitive, with a multitude of brands but relatively low concentration. As of 2024, there were over 390,000 freshly-made tea drink stores nationwide. The top 5 brands (measured by the number of stores) had a market share of about 16.8%, while the top 10 brands accounted for approximately 23.2%. From a global perspective, the per capita consumption of freshly-made drinks in China is only 22 cups per year, compared to the developed countries' level of 170 cups per year, indicating a growth potential of more than 8 times.
This gap not only highlights the potential of the domestic market but also provides a vast space for the overseas expansion strategy of freshly-made drink brands. The Southeast Asian market also shows tremendous growth potential, with a per capita consumption of freshly-made drinks at only 16 cups per year, which is more than 10 times lower than that of developed countries. Currently, mainstream tea drink brands have all opened franchising. Under the franchise model, stores can expand rapidly and have considerable profitability. Different brands have different positioning and strategies:
- Mixue Ice Cream: Positioned as affordable with prices under ten yuan, it has the largest store network nationwide.
- Guming: Positioned in the mid-range price segment of several tens of yuan, it focuses on regional saturation and has leading cold chain capabilities.
- Bawang Tea Princess: Positioned mainly on original leaf light milk tea, with prominent flagship products and high product concentration.
- Chabaidao: Positioned in the mid-range, with a wide coverage of store locations.
The main overseas markets for new tea drink brands are Southeast Asia, Japan and Korea, and Europe and America, forming a typical "overseas path." This path has become the industry's default "upgrading route" not by accident but due to a combination of factors such as cultural compatibility, labor and operating costs, and the difficulty of obtaining raw materials. The US stock market has a higher acceptance of companies with "high growth + cultural premium."
II. Comparative Study of Financial Data of Listed Companies in the Freshly-Made Tea Drink Sector
How do tea drink brands make money?
Analyzing Mixue Ice Cream's financial report, out of nearly 25 billion yuan in revenue last year, over 24 billion yuan came from sales of equipment and materials to franchisees. In simple terms, Mixue Ice Cream's real business is selling syrups, lemons, ice cream base, and machinery to franchisees to help them run their stores. In Guming's 8.7 billion yuan of revenue last year, the vast majority was from franchise fees and sales of raw materials and equipment. Chabaidao has a franchisee ratio of over 99%, and Bawang Tea Princess is slightly lower at 97%—as is well known in the business world, selling shovels to gold prospectors is often the most profitable.
Choosing to list on the Hong Kong Stock Exchange or the US Stock Exchange?
Bawang Tea Princess chose to list on the NASDAQ in the US, while the Hong Kong Stock Exchange already has brands like Mixue Ice Cream, Nai's Tea, and Chabaidao, making the sector crowded. Mixue Ice Cream dominates with its extreme cost-effectiveness and scale advantage. If Bawang Tea Princess had chosen the Hong Kong Stock Exchange, it might have faced a valuation discount. The US consumer stock market has a sales-to-price ratio of about 3 times. Bawang Tea Princess had a year-on-year revenue growth of 167% in 2024, with a net profit margin of 20.3%, higher than Starbucks' 12.7%. US investors recognize its growth potential more. Bawang Tea Princess, with a market value of 5.1 billion US dollars compared to 1.7 billion US dollars in revenue, fits within the US valuation range. Additionally, the US stock market allows dual-class share structures. Founder Zhang Junjie retains 89% of the voting rights through Class B shares, avoiding dilution of control, which is difficult to achieve with the Hong Kong Stock Exchange's one-share-one-vote rule. Bawang Tea Princess's cornerstone investors are mostly US dollar funds, and listing in the US aligns better with their exit strategies. The international capital liquidity in the US is stronger, facilitating subsequent financing and mergers and acquisitions. Overall, the choice of listing destination and path is a complex issue that requires a comprehensive analysis and evaluation based on business scenarios as well as legal and tax implications. When necessary, companies should seek advice from lawyers, accountants, and tax consultants.
III. Tax Guide for Franchise Fees of Freshly-Made Tea Drink Brands
The essence of a franchise fee is the charge levied by the brand owner for allowing the franchisee to use the franchisor's trademarks, patents, proprietary technologies, and other intellectual properties. The franchise model may involve the following tax matters.
Value-Added Tax (VAT)
According to the "Notice of the Ministry of Finance and the State Administration of Taxation on the Full Implementation of the Pilot Program for the Transformation of Business Tax to Value-Added Tax" (Finance and Tax [2016] No. 36) and its Annex 1 "Implementation Measures for the Pilot Program of Business Tax to Value-Added Tax," Article 2 of the "Explanations on the Sale of Services, Intangible Assets, and Real Estate" stipulates that the sale of intangible assets refers to the business activities of transferring the ownership or usage rights of intangible assets. Intangible assets are assets that do not have a physical form but can bring economic benefits, including technology, trademarks, copyrights, goodwill, natural resource usage rights, and other rights-based intangible assets. Other rights-based intangible assets include infrastructure asset operating rights, public utility franchise rights, quotas, operating rights (including franchise rights, chain operation rights, and other operating rights), distribution rights, agency rights, membership rights, seat rights, virtual props in online games, domain names, name rights, portrait rights, title rights, transfer fees, etc.
According to Finance and Tax [2016] No. 36, Annex 4, which stipulates the zero VAT rate and tax exemption policies for cross-border taxable behaviors, the following services provided by entities and individuals within the territory of the People's Republic of China to overseas entities and consumed entirely overseas are subject to a zero VAT rate: 1. Telecommunication services 2. Intellectual property services 3. Logistics auxiliary services (excluding warehousing services and collection and delivery services) 4. Authentication and consulting services 5. Professional technical services 6. Business auxiliary services 7. Advertising services with advertising placement locations overseas 8. Intangible assets. According to Article 39 of the "Implementation Measures for the Pilot Program of Business Tax to Value-Added Tax" in Finance and Tax [2016] No. 36, if a taxpayer concurrently operates the sale of goods, labor, services, intangible assets, or real estate, and different tax rates or collection rates apply, the taxpayer shall separately account for the sales amounts subject to different tax rates or collection rates; if they are not separately accounted for, the higher tax rate shall apply.
Time of tax liability occurrence: For taxpayers selling services, intangible assets, or real estate, if a written contract is signed and a payment date is determined, the day determined in the written contract as the payment date shall be the time of tax liability occurrence.
Extended consideration: In the franchise model, how should the raw materials and equipment sold by the brand owner to the franchisee be taxed?
Corporate Income Tax (CIT/EIT)
According to the "Implementation Regulations of the Enterprise Income Tax Law of the People's Republic of China," royalty income refers to the income obtained by an enterprise from providing the usage rights of patents, non-patented technologies, trademarks, copyrights, and other franchises. In addition to the above four common types of franchises, there are also other types of franchises, such as the franchise for chain store operations and brand management franchises.
Time of tax liability: Royalty income related to the provision of equipment and other tangible assets is recognized when the assets are delivered or the ownership of the assets is transferred; for initial and subsequent services provided, the income is recognized when the services are provided.
Stamp Duty
When a brand owner authorizes a franchisee to use its trademarks, brand, image, etc., it falls under the category of "property transfer documents" in the "Stamp Duty Tax Items and Rates Table" annexed to the "Stamp Duty Law," specifically "transfer documents for trademark exclusive rights, copyright, patent rights, and proprietary technology usage rights," and is subject to stamp duty at a rate of three ten-thousandths of the price.
Time of tax liability: The time of tax liability for stamp duty is the day when the taxpayer establishes a taxable voucher.
In accordance with Article 9 of the "Stamp Duty Law," if a taxable voucher contains two or more tax items with amounts separately listed, the tax payable shall be calculated separately according to the applicable tax rates for each item; if the amounts are not separately listed, the higher tax rate shall apply. According to the Notice of the State Taxation Administration on the Collection of Stamp Duty on Technology Contracts (No. 34 of 1989), a technology training contract is a technical contract concluded for one party to provide specific project technical guidance and professional training to designated professional and technical personnel of another party. Contracts concluded for various vocational training, cultural studies, and employee extracurricular education do not fall under technology training contracts and are not subject to stamp duty. "Catering technology training and guidance for store opening" is applicable to this provision and is not subject to stamp duty. Therefore, if the fees for "catering technology training and guidance for store opening" and "brand usage" are not separately agreed upon in the contract, the franchise fee shall be subject to stamp duty uniformly as "property transfer documents."
In accordance with Article 2, Item 2 of the Announcement No. 22 of 2022 by the Ministry of Finance and the State Taxation Administration on the Implementation of Policies for Several Matters of Stamp Duty, orders, purchase orders, and other documents that establish a sales relationship and clarify the rights and obligations of both parties in a sales transaction between enterprises, and no separate sales contract is concluded, shall be subject to stamp duty as stipulated. Therefore, orders related to material distribution should be subject to stamp duty as "sales contracts," calculated at three ten-thousandths of the actual transaction amount. It should be noted that according to the "Stamp Duty Tax Items and Rates Table" annexed to the "Stamp Duty Law of the People's Republic of China": the scope of taxation for sales contracts (movable property sales contracts) does not include sales contracts for movable property established by individuals, where individuals include sole proprietors. Therefore, if the franchisee is an individual or a sole proprietor, they are not subject to stamp duty on "sales contracts."
Withholding Tax
Withholding tax, also known as withholding tax or pre-deduction tax, refers to the income tax that is deducted in advance. It is not a separate type of tax but a customary term for the source deduction of income tax, which falls under the category of income tax.
Royalty refers to the usage fees charged by foreign enterprises for patents, proprietary technologies, trademarks, copyrights, and other rights used in China without establishing an institution or place of business in China. The usage fees for providing patents and proprietary technologies include fees related to drawings, technical service fees, personnel training fees, and other relevant expenses. Design fees included in the fees charged by foreign enterprises for providing proprietary technologies are part of the entire technology trade contract price. Unlike general design services, these fees are related to the transfer of usage rights and should be considered as royalties, subject to withholding tax.
Most countries in the world impose withholding tax on payments of dividends, interest, and royalties to non-residents abroad. If there is a tax treaty between the two countries, the treaty rate shall apply. Taking the franchise fee of Mixue Ice Cream in Malaysia as an example, if the tax treaty is not utilized, a withholding tax of 15% must be paid according to the local domestic law. However, if the fee is collected by the Chinese parent company and the China-Malaysia agreement is applied, the tax rate is reduced to 10%, and a franchise fee of 500,000 yuan per store can save 25,000 yuan in taxes. Bawang Tea Princess's Southeast Asian business is managed by the Singapore entity "CHAGEE HOLDINGS PTE. LTD.," which includes franchisee contracts, raw material transshipment, and brand licensing. Based on this, when Bawang Tea Princess collects fees from Malaysian franchisees through its Singapore headquarters, it is subject to a withholding tax of 10%.
Extended consideration: According to the domestic laws of various countries regarding "withholding tax" and the tax treaties signed between countries, tea drink companies going overseas may need to plan in advance for the brand/technology holder and subsequent franchise relationships based on their own business arrangements (such as overseas market distribution and supply chain arrangements) to optimize the overall tax burden of the group.
IV. Other Considerations
01 Focus on Cross-Border Related Party Transactions and Transfer Pricing Risks
Business dealings between an enterprise and its related parties should comply with the arm's length principle. The arm's length principle refers to the principle followed by transactions between parties without related interests, conducted at fair market prices and in accordance with normal business practices. When "going global" enterprises provide intangible assets such as goodwill, trademarks, proprietary technologies, and customer lists to overseas subsidiaries or related parties, it is considered the aforementioned related party transaction. If no usage fees are charged or the pricing is unreasonable, there is a suspicion of transfer pricing tax avoidance, which may lead to the risk of special tax adjustments. "Going global" enterprises should pay close attention to whether cross-border related party transactions comply with the arm's length principle, fully consider the transfer pricing regulations of the countries (regions) where the related parties of the transactions are located and the results of the Base Erosion and Profit Shifting (BEPS) action plan, reasonably determine the pricing principles and calculation methods for related party transactions, and guard against the risk of special tax adjustments.
02 Focus on Permanent Establishment Risks
A permanent establishment is a relatively fixed place of business, characterized by three features: fixity, continuity, and business nature. It is mainly used to determine the taxing rights of the contracting states under a tax treaty over the business profits of enterprises from the other contracting state. According to the "business profits" clause of the tax treaty between our country and the host country, business profits attributable to a permanent establishment should be subject to income tax by the country where the permanent establishment is located. According to the tax treaty signed between our country and the host country, if the scope of business of the representative office or office of a "going global" enterprise is limited to preparatory and auxiliary activities such as warehousing or liaison, it does not constitute a permanent establishment in the host country. During the overseas expansion process of tea drink brand enterprises, it is inevitable that professional personnel or material samples will stay abroad for a long time, and it is necessary to pay attention to the potential tax issues brought about by permanent establishments.
03 Focus on the Selection of Foreign Tax Credit Methods
The foreign income obtained by "going global" enterprises is included in their current taxable income for tax declaration, and they may claim a credit for the foreign enterprise income tax directly paid or indirectly borne in connection with the foreign income. According to the "Notice of the Ministry of Finance and the State Taxation Administration on Improving the Policy of Foreign Tax Credit for Enterprise Income Tax" (Finance and Tax [2017] No. 84), enterprises may choose to calculate their taxable income from foreign sources separately by country (region) (i.e., "separate by country (region), not by item") or not by country (region) (i.e., "not separate by country (region), not by item"). Once this method is chosen, it cannot be changed within five years. "Going global" enterprises should select the optimal credit calculation method based on their actual circumstances. If an enterprise chooses to calculate the creditable foreign income tax amount and the credit limit in a new way different from the previous years, the balance that was not credited in previous years according to the "Notice of the Ministry of Finance and the State Administration of Taxation on Issues Concerning the Foreign Tax Credit for Enterprise Income Tax" (Finance and Tax [2009] No. 125) can continue to be carried forward and credited within the remaining years stipulated by tax law, based on the credit limit calculated in the new way.
Conclusion
The challenges currently faced by overseas chain catering enterprises include the local operation capabilities in overseas markets, the consistency of franchisee quality control, and the impact of geopolitics on the supply chain. In addition, the domestic and foreign tax treatment of royalties needs to take into account the VAT withholding obligations, the tax treaty benefits for enterprise income tax, and the compliance of cross-border payments. Enterprises should optimize tax burdens through contract clause optimization, application of tax treaties, and localization of supply chain layout, while retaining complete vouchers to cope with tax audits. This round of catering enterprise listing boom represents a shift from internal competition to external competition in the domestic catering industry. The "Matthew Effect" in the catering industry is still intensifying, and the threshold for capitalization is increasing. Only enterprises with strong comprehensive strength can win in the long-term competition.
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