1. Hong Kong & Shanghai, Gateways to Asia
Jan V. M. Holthuis
6 June 2013, Moscow
HIL International Lawyers & Advisers, Shanghai/Beijing
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2. Shanghai
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Pudong

3. © HIL 2013
Shanghai
• Commercial Centre of China and home to China’s largest Stock Exchange
• Population of 16 million with average per capital GDP highest in China
• 1/12th of total industrial output value
• Shanghai port handles 1/4th of China’s total exports
• 1/8th of China’s total financial revenue
• Shanghai should overtake Hong Kong at the time that the RMB will
become a freely convertible currency

4. The Chinese Market
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5. China GDP Growth 2011
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6. Business Climate
Source: The World Bank, Doing Business 2011
China ranks number 79 for
“ease of doing business”
among 183 countries. This
indicates that China is not
an easy place to do business,
but it is still the top ranked
economy among the BRIC
countries.
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7. Private Consumption
Source: Economist intelligence Unit 2011; KPMG analysis
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8. Factors Chongqing (RMB) Shanghai (RMB)
Monthly wage
(technical personnel)
1200-1600/m 3600-4000/m
Monthly wage (worker) 1000-1200/m 1700-2000/m
Social insurance 1177.6-17664/m 2338-11688/m
Electricity 0.551-0.843 0.815-0.885
Gas 1.8-2.4/m³ 3-3.8/m³
Salary Costs
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9. E-business
Source: PWC Analysis, Customers take control
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10. Rule by Law
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11. China’s Foreign Investment Law
• No direct business operations in China without prior government approval.
Approvals are granted on the basis of the FI Catalogue
• The FI Catalogue encourages or restricts investment in specific economic sectors
and protects China’s strategic industries (such as: automobile, media, banking
and insurance)
• As the RMB is still not freely convertible, capital inflow and capital outflow is
government controlled (State Administration of Foreign Exchange and State
Banks approvals)
• Chinese law & regulations are an instrument to control FI and guide economic
development
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12. FDI Catalogue
Source: Catalogue 2011
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13. China Policy Changes
1. Service Economy: change focus from fixed asset investment to “public
goods” and “Made in China”
2. Green Economy: energy saving technologies, sustainable economy:
important focus on agriculture and food safety
3. Development of Inland China regions: Chongqing (32 mio. inhabitants
and world’s largest city) Chengdu (14 mio. inhabitants) are important
inland metropole’s
China’s development has been a big success, but it has come at a price:
environmental problems, growing gap between rich and poor, need for
energy resources. Changes are necessary for China’s growth to be sustainable.
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14. Source: Ministry of Commerce 2013 Guiding Opinions on Attracting Foreign
Investment, Shangzifa [2013] No.82 , issued on 14 March 2013
Encouraged Investment Sectors
1. Advanced manufacturing
2. High technology
3. Modern services
4. Energy-saving
5. New energy
6. Modern agriculture
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MOFCOM Opinion

15. FIE’s
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16. • Appoint a Chinese agent or distributor: Legally not too many restrictions.
Difficulty is to find a reliable and committed Chinese counter-part. Contracts
can be subjected to foreign law & arbitration. China International Economic
Trade Arbitration Commission is an acceptable forum to settle trade
disputes
• Set-up Rep Office in China. BUT: no invoicing, no direct sales, no Chinese
bank account to be used for trading. The RO requires government approval.
All business remains foreign business. Tax is levied on cost-plus
• Set-up a WFOE (wholly foreign owned entity) or joint venture with a
Chinese party. Advantage is that all business becomes domestic (no need for
international payment approvals): suppliers and customers can pay locally.
Assembly of parts in WFOE can reduce VAT and import duty liabilities. CIT is
25%
Start Business in China
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17. FDI Ratio’s
Source: China Statistical Yearbook 2011 © HIL 2013

18. • A WFOE / JV do not have shares by registered capital. There are minimum registered
capital requirements depending on the business activity
• Investors can not thin finance a WFOE / JV. There are capital ratio’s to be observed
(next slide). Local financing by commercial banks is subject to local bank policy
• The decision making body in the WFOE / JV is the board of directors (minimum 3).
Directors are appointed by the investors and appointment is regulated in the
articles of association of the WFOE / JV or in joint venture agreements
• The directors of the board do not have power to represent the JV/WFOE towards
third parties. This power is vested in the Legal Representative (LR). The appointment
and dismissal of a LR is a burdensome affair (one of the flaws in Chinese law)
• The GM is appointed as an employee or service provider. More easily dismissed, but
a crucial figure in the continuity of day-to-day operations
WFOE / JV
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19. Foreign Direct Investment
Verification and approval procedures
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20. Minimum Capital Requirements
Capital Requirement
No possibility of thin financing. The following capital ratios need to be
observed in FIE’s:
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21. Political Market Economy
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22. Judiciary
• Judges are appointed by People’s Congresses at corresponding level
• Trials system is inquisitorial, not adversarial
• Supreme Court is responsible to NPC Standing Committee (present
chairman does not have a legal education)
• Interpretation Notices by SC, no legal precedent system
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23. People’s Prosecution Office
Chinese Courts
Hotlines
Audit
Office
National Bureau For Corruption PreventionNPC
CCDI
Charged with
corruption of CCP-
Members
Cooperates with Ministry
of Supervision (unlimited
power to investigate,
unlimited budget, shuang
gui (double rule)rule)
• CCDI responsible for investigating China’s 76 mio CP members discipline violations
Central Commission for Discipline Inspection
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24. China’s Legal System
• Becoming cornerstone for social stability
• Protect interests of the CCP
• Mixture of law and politics but becoming more professional in big cities
• Local economic interests influences decisions
• Enforcement can be problematic
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25. China – Russia Business
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26. • November 9, 2006, Agreement on the Promotion and Mutual Protection of
Investment between China and Russia
- Mutual intention on promoting investment
• June 17, 2009, China-Russia Investment Cooperation Outline
- More specific implementations of the 2006 Agreement between China and Russia
- Preferential investment sectors: Machinery Manufacturing; Information Technology
and Communication; Bank, Security and Insurance; Innovation and Applied Science
Development; Fuel Energy Source; Chemical; Forestry; Mining; Regional Cooperation
• June 23, 2011, China-Russia Bilateral Agreement on Local Currency Settlement
- Use domestic currencies in bilateral trade (in the past, it was only applicable to the
border trade, now the policy applies to general trade)
China & Russia Economic Cooperation
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27. • Advantages of the domestic currency settlement
– Example: money transfer from Russia to China on May 28th 2011 (same bank
commission fee and received at the same time)
– Russian companies may hold the RMB deposit accounts in Russia
– Advantages: avoid the risk of foreign exchange rate (US dollar) changes; saving
financing cost; less operational procedures to exchange currencies
RMB settlement
Transferred from
Russia
RMB1,000 RUB 5,079.2
(equal to RMB
1,000)
USD 158.3
(equal to RMB
1,000)
Settled in China RMB 1,000 RMB 1,002 RMB 999.7
Source: http://newspaper.dbw.cn/jmsrb/html/2012-08/04/content_451971.htm
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28. Russian exports to China: recent deals:
• Petroleum
– e.g. 2013 agreement between Roseneft and CNPC with respect to more petroleum
supplying (743,000 barrels per day starting from 2018)
• Natural Gas
– e.g. 2013, memorandum between Gazprom and CNPC with respect to the natural gas
supplying (38 billion cubic meters starting from 2018)
• Coal
– e.g. 2011, Winsway Coking Coal purchased 60% of the shares of Divalane who has the
mining right of the Apsatskoe coal mine. The exploited coals will be exported to China
Russia - China Trade
Source:
http://online.wsj.com/article/SB10001424127887324557804578376510628682312.html
http://news.xinhuanet.com/world/2011-05/05/c_121381497.htm;
http://finance.eastmoney.com/news/1356,20130406283528016.html
© HIL 2013

29. Maximum Foreign Shareholdings
Industry Maximum Foreign
Shareholding
Limitation Source
Bank 100% (if WFOE
foreign bank)
20% (if Chinese
financial
institution)
-- Administrative Regulations on
Foreign-invested Banks (State Council
[2006] No. 478)
China Banking Regulatory
Commission [2003] No. 6
Oil Processing 100% -- Catalogue of Industries for Guiding
Foreign Investment 2011 edition
Exploitation 49% • limited to Sino-foreign equity/cooperative
joint venture operations;
• Maximum foreign shareholding is unclear
based on the Catalogue. In practice, it will
generally not be more than 50%
• Catalogue of Industries for Guiding
Foreign Investment 2011 edition
(encouraged sector);
• verbally confirmed by MOFCOM
Mining 49% • limited to Sino-foreign equity/cooperative
joint venture operations (excl: iron and
manganese minerals exploitation)
• Maximum foreign shareholding is unclear
based on the Catalogue. In practice, it will
generally not be more than 50%
• Catalogue of Industries for Guiding
Foreign Investment 2011 edition
(encouraged sector);
• verbally confirmed by MOFCOM
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30. Hong Kong
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31. Hong Kong
Hong Kong has a common law system based on British law.
The separation of the Hong Kong legal system to the PRC is guaranteed
constitutionally until 2047.
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32. Hong Kong
Some facts:
Hong Kong is one of the world's leading international trading and financial
centers. Its port is one of the busiest and the HK dollar is one of the most
traded currencies worldwide.
These facts are due to:
• Low corporate taxation
• CEPA - preferential policy for investments in China
• Free market policies
• Well developed legal system, capital market and banking system
• Corporate-friendly laws
• Positioning: located close to China and Pearl River Delta
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33. Hong Kong
Low and simple tax system.
Corporate income tax is 16,5 % - levied on the Hong Kong-source profits of
businesses carried on in Hong Kong.
No withholding tax on dividend distributions from a Hong Kong entity
No import or export duties (except for tobacco, liquor, etc)
Personal income tax is progressive up to max. 17% (on chargeable
income less personal allowances)
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34. Why HK Route?
IN BRIEF:
• HK law more sophisticated for financing and exit scenarios for investments in Asia
(no strict minimum capital requirements and share transfers can be easily
executed)
• HK Ltd’s are structured as off-shore (zero CIT tax) and used for trading in Asia
BUT: Consider transfer pricing issues!
Lack of substance in HK Ltd can create tax presence in shareholder’s home
country!
© HIL 2013

35. Hong Kong
Setting up a Hong Kong Limited (Ltd)
Requirements:
• No statutory minimum or maximum share capital
• At least one shareholder (private or corporate)
• At least one director (private or corporate)
• One company secretary (Hong Kong resident)
• Domiciliation in Hong Kong (through corporate services company)
A Hong Kong Limited can be incorporated within 7 working days.
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36. Thank you!
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37. HIL LAW OFFICES
Shanghai Office:
No. 3000, North Zhongshan Road
ICC-Tower, Room 2505B
200063 Shanghai, China
Email: Shanghai@hil-law.com
Tel +86(21)-61730388
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A6 North Gongti Road, Chaoyang District
Zhongyu Plaza, Room 1602
100027 Beijing, China.
Email: Beijing@hil-law.com
Tel +86(10)-8523 5780
CORPORATE SERVICE FIRMS
HTM Amsterdam office
HIL Trust Management (Europe) B.V.
Haaksbergweg 33, P.O Box 51109
1007EC Amsterdam, the Netherlands
Email: info@hil-trust.com
Tel: +31(20)-4529901
HCS Hong Kong office
HIL Corporate Services (Asia) Limited
Room 1001, 10/F Boss Commercial
Centre
28 Ferry Street, Kowloon, Hong Kong
Email: info@hcs-asia.hk
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