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Investing in China / Establishing a Company

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An R&P Lawyers presentation on foreign direct investment structures in China:

- Wholly Foreign-Owned Enterprise, Joint Venture and Representative Office: What are the strenghts and weaknesses of each structure?
- Steps needed to set up a business in China

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Investing in China / Establishing a Company

  1. 1. Investing in China / Establishing a Company An R&P Publication on Chinese Law and Legal PracticeC R&P China Lawyers Shanghai 2012T +86 21 6173 8270E info@rplawyers.com www.rplawyers.com
  2. 2. Introduction • Wide open market to various types of Foreign Direct Investment China Today • Foreign companies encouraged to establish permanent presence • Ideal form depends on goals + Foreign Direct interests – each have pros’ and cons’ Investment • Restrictions remain only in few industrial sectors <2 of 26>
  3. 3. Choosing Your Investment Structure Representative Office Wholly Foreign- Invested Enterprise Joint Venture <3 of 26>
  4. 4. Representative Office (1)Window to the Chinese Market Representative Offices are common for sourcing activities… <4 of 26>
  5. 5. Representative Office (2)Window to the Chinese Market Advantages • Market research & quality control • Establishing business contacts • Low investment + easy set-up • Financed directly by investor (need-basis) <5 of 26>
  6. 6. Representative Office (3)Window to the Chinese Market … but the operational scope is very narrow: Disadvantages • Cannot engage in business • Cannot issue invoices (fapiao) • Cannot hire more than 4 expats • Cannot hire Chinese employees directly (only through agent) <6 of 26>
  7. 7. Representative Office (4)Window to the Chinese Market Disadvantages • Taxation based on turnover • Chief Representative subject to individual income tax in China • Unlimited liability of foreign investor • Increasingly strict establishment procedures and supervision <7 of 26>
  8. 8. Representative Office (5)Window to the Chinese Market Conclusion Operational limitations, higher tax costs, complex structures: RO increasingly unattractive compared to consulting / trading WFOE <8 of 26>
  9. 9. Wholly Foreign-Owned Enterprise (1)100% Control WFOE is the most used structure in China … Advantages • Owned and controlled solely by foreign investor • Can engage in manufacturing, trading, consulting (actual business activities) • Can invoice investors / third parties <9 of 26>
  10. 10. Wholly Foreign-Owned Enterprise (2)100% Control Advantages • Corporate taxation based on actual profit • Limited liability • Can hire foreign / Chinese staff directly • Easy to manage, control and close <10 of 26>
  11. 11. Wholly Foreign-Owned Enterprise (3)100% Control Disadvantages • WFOE must be capitalized in advance  capital starts from CNY 100,000 (local authorities may demand more) • Limited scope of business  subject to pre- approval <11 of 26>
  12. 12. Wholly Foreign-Owned Enterprise (4)100% Control … despite its initial investment, the WFOE has proven to be the most suitable structure for foreign companies that want a permanent presence in China <12 of 26>
  13. 13. Wholly Foreign-Owned Enterprise (5)100% Control Conclusion WFOE gives foreign investors the maximum amount of flexibility in serving its investment objectives <13 of 26>
  14. 14. Joint Venture (1)Chinese-foreign Cooperation Advantages • Access to restricted industries • Shared risks  Chinese co-investor • Partner may contribute market knowledge, resources, local network + business practice • Relationships: simplifies dealing with government authorities <14 of 26>
  15. 15. Joint Venture (2)Chinese-Foreign Cooperation Even partners that once had a successful start frequently grow apart in terms of future goals and expectations <15 of 26>
  16. 16. Joint Venture (3)Chinese-Foreign Cooperation Disadvantages • Benefits must be shared • Difficult to control if Chinese partner active in management • High risk of dispute  disagreements on future direction / daily operations very common <16 of 26>
  17. 17. Joint Venture (4)Chinese-Foreign Cooperation Disadvantages • Difficult to close in case of dispute (share transfer restrictions) • Exposition of Intellectual Property + confidential corporate information that are brought into JV  Who owns IP? <17 of 26>
  18. 18. Joint Venture (5)Chinese-Foreign Cooperation Conclusion Failure rate of JV substantial – complex set-up and management of operations, different expectations In some cases, Chinese partner’s resources (location, market share, relations, funding) are crucial to success If legal restrictions or special needs require JV: • partner should be carefully chosen • JV agreement should provide for exit procedures <18 of 26>
  19. 19. Alternative Structures Hong Kong Ltd. Co. Informal Hiring• Separate legal systems in HK • Informal ways to hire / PRC (“one country, two personnel / pay costs systems”) without establishing company in China• HK companies treated as foreign in Mainland China • Temporary structure creates  no option for local complications + risks business • Illegal – not suitable as a• Offshore benefits: easy long term business model establishment, taxation <19 of 26>
  20. 20. Steps & Procedures Your Way into the Chinese Market1 3 Representative Office, Corporate Governance, WFOE directors, legal or Joint Venture? representative, supervisor?2 4 Registration: business scope, Contact local authority: (Chinese) name, registered specific requirements? capital, registered address <20 of 26>
  21. 21. Steps & Procedures Your Way into the Chinese Market5 7 Application for pre-approval Apply for special licenses of (Chinese) company name (e.g. environmental for manufacturing, food hygiene)6 8 Application for approval: Register company with competent department Administration of Industry under Ministry of Commerce and Commerce (except for RO)  Business License <21 of 26>
  22. 22. Steps & ProceduresYour Way into the Chinese Market 9 Post-registration procedures Carving of stamps Code certificate Registration: finance / tax / foreign exchange Opening of bank accounts <22 of 26>
  23. 23. Steps & ProceduresYour Way into the Chinese Market After establishing the WFOE/RO/JV: • Employment of staff (Chinese + expatriate)  Good employment contracts / handbook • IPR registration in China as soon as possible!  trademarks incl. Chinese brand name, patents… • Commercial contracts with suppliers + customers  (in Chinese law and language!) • Implementation of internal control system  Management of the WFOE, RO or JV <23 of 26>
  24. 24. Companies that want to do business in China may benefit to contact aprofessional services firm such as R&P China Lawyers to understand thebest approach. If you would like a free-of-charge discussion on how wecould assist you, please contact us:Robin Tabbers (International clients)Email: tabbers@rplawers.com Mobile: +86 13641605259Lukas Steinberg (International and German-speaking clients)Email: steinberg@rplawyers.com Mobile: +86 15221461321It is also a good idea to gain a preliminary understanding of the issue, byreviewing materials such as introductions and articles which are free and easilyavailable online. One convenient place to find more information on the legalaspects of doing business in China, including: ‘Guides on Establishing a ChineseCompany’, ‘Delaying with Chinese Customers and Suppliers’, ‘ProtectingIntellectual Property’, ‘Hiring Employees’, and ‘Dealing with Disputes’ is atwww.rplawyers.com .© R&P China Lawyers 2012 <24 of 26>
  25. 25. About R&P China LawyersForeign-managed Chinese PRC Law Firm  Corporate / Investment  Commercial Transactions  Employment  Intellectual Property  Taxation / Forex / Customs  Dispute Resolution 2011 <25 of 26>
  26. 26. Good luck in your China venture!Shanghai 2012 www.rplawyers.com