What To Know
- A newly released white paper has highlighted the risks through the case of a major Chinese new energy company that reportedly suffered losses exceeding S$2 million after Singapore authorities challenged a corporate structure built around a holding company with registered capital of just S$1.
- Yet, as this Bangkok Business News report examines, the enormous commercial opportunity is increasingly accompanied by a more demanding regulatory environment in which corporate substance, taxation, employment practices and licensing can determine whether an overseas venture succeeds or becomes an expensive liability.
Chinese companies racing to expand across Southeast Asia are entering a far less forgiving phase in 2026, as regulators tighten scrutiny of tax structures, employment practices and foreign investment arrangements. A newly released white paper has highlighted the risks through the case of a major Chinese new energy company that reportedly suffered losses exceeding S$2 million after Singapore authorities challenged a corporate structure built around a holding company with registered capital of just S$1.
Image Credit: Bangkok Business News
The case has become a warning for companies that once viewed Southeast Asia as a relatively straightforward destination for overseas expansion. China and ASEAN have been each other’s largest trading partners since 2020, and bilateral trade reached 7.55 trillion yuan in 2025, an increase of 8% from the previous year. Yet, as this Bangkok Business News report examines, the enormous commercial opportunity is increasingly accompanied by a more demanding regulatory environment in which corporate substance, taxation, employment practices and licensing can determine whether an overseas venture succeeds or becomes an expensive liability.
Singapore Tax Case Exposes Shell Company Risk
According to the white paper, “Breaking Through Southeast Asia: From Company Setup to Full-Scale Compliance Insights,” the Chinese new energy company established a Singapore holding company in 2024 with registered capital of only S$1.
The Singapore entity was created to hold an equity interest in an Indonesian nickel mine factory. However, it reportedly had no local office, no employees stationed in Singapore and no substantive operational decision-making taking place in the city-state.
Problems emerged in 2026 after the company generated income from selling its stake in the Indonesian operation. Singapore’s Inland Revenue Authority determined that the holding company lacked genuine commercial substance and was therefore not eligible for the tax treatment it had expected.
The company was subsequently pursued for a 24% capital gains tax, together with late-payment penalties, according to the white paper. Its overall losses exceeded S$2 million, equivalent to more than 10 million yuan.
The episode underscores a crucial distinction for foreign investors: a company may be legally registered in a jurisdiction without necessarily possessing sufficient commercial substance to qualify for particular tax advantages.
Singapore remains attractive as a location for regional headquarters, treasury operations, investment structures and high-end research and development. But the country’s low minimum registered-capital threshold should not be mistaken for relaxed regulatory oversight. Banking, Employment Pass applications, taxation and corporate activities can all involve scrutiny of whether a company is genuinely operating locally.
Southeast Asia Boom Meets Tougher Scrutiny
The regulatory shift comes against the backdrop of rapidly expanding China-ASEAN economic ties. The white paper says China-ASEAN trade accounted for 16.6% of China’s total foreign trade in 2025.
Meanwhile, three full years of implementation of the Regional Comprehensive Economic Partnership have helped intra-regional intermediate goods trade rise to 67%.
Chinese investment has followed. During the first half of 2026, China’s direct investment in Indonesia reached $3.9 billion, while the number of newly registered Chinese-funded enterprises in Vietnam, Thailand and Indonesia increased by more than 60% year-on-year, according to the report.
But rapid expansion is exposing weaknesses in the asset-light structures that some companies initially use to enter new markets. Tax, labor and immigration authorities across several Southeast Asian countries are carrying out increasingly routine inspections, making informal arrangements more difficult to sustain.
The white paper argues that agents and other lightweight structures may remain useful for short-term market testing. Companies planning substantial and long-term operations, however, increasingly need properly established local legal entities supported by compliant employment, accounting and tax systems.
Labor Problems Emerging as Major Threat
Employment compliance is identified as one of the most widespread risks.
Companies accustomed to operating under Chinese management systems can encounter trouble when those practices are transplanted into Southeast Asian jurisdictions without sufficient adaptation. Problems can include workers operating under inappropriate visas, poorly managed expatriate arrangements, non-compliant probation practices, improper dismissals and failure to provide legally required allowances.
Tax problems can arise alongside employment disputes, particularly where companies split salary payments, incorrectly report income or fail to withhold and remit required taxes.
Corporate structures present another danger. Businesses may mistakenly conduct commercial operations through representative offices, exceed foreign ownership limits, fail to pay required registered capital or begin operating without mandatory industry certifications.
Such violations can have consequences extending beyond fines. In serious cases, businesses may face labor disputes, regulatory intervention or suspension of operations.
Indonesia Shows Why Local Rules Matter
Indonesia provides another illustration of the importance of localization.
The white paper describes a Chinese short-video company that attempted to reduce costs by providing employees’ Eid al-Fitr THR allowances through goods such as rice and cooking oil instead of making the required cash payments.
Employees subsequently joined with unions and launched a strike.
The case demonstrates how seemingly minor cost-saving decisions can escalate when companies misunderstand local employment requirements. Regulatory breaches can create financial costs while also threatening business licensing and disrupting operations.
Indonesia additionally presents market-specific requirements linked to its religious and regulatory environment. Companies selling certain food and cosmetic products must carefully navigate halal certification requirements, with non-compliant goods potentially facing seizure and other enforcement measures.
Thailand, Vietnam and Malaysia Take Distinct Roles
Rather than functioning as a single production bloc, Southeast Asia’s major economies are developing increasingly specialized roles in Chinese companies’ regional strategies.
Singapore is positioned primarily as a headquarters, financing, high-end R&D and professional-services center. Vietnam has become an important export manufacturing base, particularly for electronics and solar products, supported by its proximity to Chinese supply chains and network of free trade agreements.
Malaysia is increasingly associated with higher-precision industries, including semiconductors and data centers.
Thailand, meanwhile, has emerged as an important production, distribution and export platform for new energy vehicles and electromechanical products. The Eastern Economic Corridor has strengthened the kingdom’s position as a destination for manufacturers targeting both local demand and international markets.
Indonesia combines a huge consumer market with extensive mineral resources, making it particularly significant for new energy mineral processing and locally focused consumer industries.
Entire Supply Chains Are Moving Overseas
The changing pattern is particularly visible in the automotive sector. Chinese manufacturers are moving beyond the earlier model of establishing overseas assembly plants while continuing to ship most critical components from China. Increasingly, anchor companies are encouraging suppliers to establish production facilities alongside them.
When SAIC-GM-Wuling developed its Indonesian operations, the company brought 16 Chinese suppliers covering areas including batteries, motors, electronic controls, wiring harnesses and interiors into the local industrial ecosystem.
A similar pattern has emerged in Thailand. During construction of its vehicle plant in Rayong, BYD also encouraged supporting businesses involved in die-casting and precision components to establish local facilities.
The strategy can lower logistics costs, reduce delivery risks and strengthen supply-chain resilience.
It also reflects a broader transformation in Chinese outbound investment. Earlier waves were heavily associated with labor-intensive industries such as textiles and contract manufacturing. The new wave increasingly involves electric vehicles, batteries, advanced manufacturing, digital technology and sophisticated supply chains.
Compliance Becomes the New Competitive Advantage
The white paper proposes a four-stage approach for companies entering Southeast Asia: designing the corporate architecture before investment, testing markets through asset-light structures, adapting operations to local rules and maintaining documentation throughout the entire process.
Companies can, for example, divide functions across jurisdictions, placing regional headquarters in Singapore, manufacturing operations in Thailand or Vietnam and consumer-market activities in Indonesia or Malaysia. But each operation requires an appropriate corporate entity, employment structure and tax arrangement.
The report also suggests that companies may initially test a market through Employer of Record arrangements or representative offices before committing substantial capital to their own local entities. Once operations expand, however, the corporate structure must evolve with the business.
One telecommunications equipment company cited in the report initially employed four Indonesians through an EOR arrangement. As orders increased, the absence of a local company prevented it from signing certain contracts and issuing compliant invoices. It eventually established a foreign-owned PT PMA entity and assembled payroll, tax and distributor documentation to satisfy banking requirements, completing its corporate account opening in four weeks.
The message for businesses expanding into Southeast Asia in 2026 is increasingly difficult to ignore. Competitive pricing, manufacturing capacity and technological advantages remain important, but they are no longer enough. Companies capable of combining those strengths with disciplined employment practices, defensible tax structures, appropriate corporate entities and genuine local operations will be better positioned to survive the region’s next phase of growth. Those treating compliance as an administrative afterthought could discover that Southeast Asia’s opportunities come with increasingly expensive consequences.
Reference:
https://eu.36kr.com/zh/p/3934599851726725
