Doing Business In China After Its Entry Into WTO Presented By George Pisaruk Presented By George Pisaruk

Doing Business Doing Business In China After Its In China After Its Entry Into WTOEntry Into WTO

CHINACHINACHINACHINA

Presented ByPresented ByGeorge PisarukGeorge Pisaruk



What Makes ChinaAn Attractive Market?


One of the Fastest Growing Economies

in the World

One of the Fastest Growing Economies

in the World

11




35% of Global Population

Purchasing Power

35% of Global Population

Purchasing Power

22




Significant Improvement ofLabor Quality

Significant Improvement ofLabor Quality

33


Surviving in an EconomySurviving in an EconomyWith “Chinese Characteristics”With “Chinese Characteristics”

Surviving in an EconomySurviving in an EconomyWith “Chinese Characteristics”With “Chinese Characteristics”

What Are TheseCharacteristics?What Are TheseCharacteristics?


China Before & After its Entry Into the WTOChina Before & After its Entry Into the WTOChina Before & After its Entry Into the WTOChina Before & After its Entry Into the WTO


China Before & After its Entry Into the WTOChina Before & After its Entry Into the WTOChina Before & After its Entry Into the WTOChina Before & After its Entry Into the WTO

Before• Policy determines the permitted

business form and treatment

• Open Door… designed to attract foreign funds and technology.

• Many government-regulating agencies

• Bureaurocracy designed to control and police foreign investment

• Policy based upon regional interest

• Goal = Integrate China into investor

• IP = Kingdom of Piracy

Before• Policy determines the permitted



• Many government-regulating agencies

• Bureaurocracy designed to control and police foreign investment

• Policy based upon regional interest

• Goal = Integrate China into investor

• IP = Kingdom of Piracy

After• Policy determines the permitted



• Reduction in government-regulating agencies (ex. SAIC and MOFTEC=MOFCOM)

• Bureaurocracy designed to guide and assist foreign investment

• Policy based upon national coordination

• Goal = Integrate investor into China

• IP views more westernized

After• Policy determines the permitted



• Reduction in government-regulating agencies (ex. SAIC and MOFTEC=MOFCOM)

• Bureaurocracy designed to guide and assist foreign investment

• Policy based upon national coordination

• Goal = Integrate investor into China

• IP views more westernized


Investment OptionsInvestment Options

1. Choice of business entity should be based upon your specific situation and goals

• China Historically: State-Owned Enterprises

• 3 main types of entities for foreign investment

• Equity Joint Venture (EJV – FIE)

• Contractual Joint Venture (CJV – FIE)

• Wholly Foreign Owned Enterprise (WFOE)

1. Choice of business entity should be based upon your specific situation and goals

• China Historically: State-Owned Enterprises

• 3 main types of entities for foreign investment

• Equity Joint Venture (EJV – FIE)

• Contractual Joint Venture (CJV – FIE)

• Wholly Foreign Owned Enterprise (WFOE)


Investment OptionsInvestment Options

EJV Easier approval Built-in guanxi Can be cheaper

Less control IP risk higher Guanxi can be a

limitation CJV Little investment

risk Lario-Joko

WFOE Greater control over hiring, quality, IP distribution

Subject to a seperate law

More expensive Restricted to

certain sectors


WFOE WFOE Advantages & DisadvantagesAdvantages & Disadvantages

WFOE WFOE Advantages & DisadvantagesAdvantages & Disadvantages

Advantages• Affords the overseas investor total

ownership of and full control over their business operations in China

• Can engage in direct sales activities

• Unlike a RO, it can employ its local staff directly, negating the need to go through an approved government employment agency. This reduces your staffing costs by approximately 50%.

Advantages• Affords the overseas investor total

ownership of and full control over their business operations in China

• Can engage in direct sales activities

• Unlike a RO, it can employ its local staff directly, negating the need to go through an approved government employment agency. This reduces your staffing costs by approximately 50%.

Disadvantages• Depending on industry, may be

required to register substantial capital (USD$ 3,000 – USD$ 65,000).

• Can only operate within certain industries.

• Its ‘approved industry’ application can take up to three months. ‘Restricted industries’ can take much longer depending on the particular approvals required.

Disadvantages• Depending on industry, may be

required to register substantial capital (USD$ 3,000 – USD$ 65,000).

• Can only operate within certain industries.

• Its ‘approved industry’ application can take up to three months. ‘Restricted industries’ can take much longer depending on the particular approvals required.


WFOE WFOE WFOE WFOE

1. What Is It?

• It is a limited liability company entirely owned by a foreign entity (individual / company). Unlike EJV’s the foreign owners of a WFOE enjoy total control over the management of their business operations in China.

2. Are there restrictions to establishing a WFOE in China?

• WFOE’s and other foreign investment industries (FIE’s), are classified as:

• Encouraged

• Restricted

• Prohibited

1. What Is It?

• It is a limited liability company entirely owned by a foreign entity (individual / company). Unlike EJV’s the foreign owners of a WFOE enjoy total control over the management of their business operations in China.

2. Are there restrictions to establishing a WFOE in China?

• WFOE’s and other foreign investment industries (FIE’s), are classified as:

• Encouraged

• Restricted

• Prohibited


WFOE WFOE WFOE WFOE

3. What documentation is required to establish a WFOE in China?

• Application form and requisition (original)

• Certificate of Incorporation or business license of the overseas company (original)

• Bank letter of capital balance and credit status (original)

• Power of attorney for _____ to act as your WFOE registration agent (original)

• Passport copies of legal representative of your WFOE

• Resume and 8 passport photos of legal representative of your WFOE

• Proposed name of the WFOE (Submit five in case your first choice name has been registered)

• Document outlining your business scope of your WFOE WFOE

• Feasibility study report

• Articles of Association for your WFOE

• Overseas company introduction

• Building leasing agreement (original) or;

• Building property right (copy)

3. What documentation is required to establish a WFOE in China?

• Application form and requisition (original)

• Certificate of Incorporation or business license of the overseas company (original)

• Bank letter of capital balance and credit status (original)

• Power of attorney for _____ to act as your WFOE registration agent (original)

• Passport copies of legal representative of your WFOE

• Resume and 8 passport photos of legal representative of your WFOE

• Proposed name of the WFOE (Submit five in case your first choice name has been registered)

• Document outlining your business scope of your WFOE WFOE

• Feasibility study report

• Articles of Association for your WFOE

• Overseas company introduction

• Building leasing agreement (original) or;

• Building property right (copy)


WFOE WFOE WFOE WFOE

4. What is the liability of a WFOE?

• Liability is limited to the total amount of capital registered (including the value of equipment etc.) upon establishment.

5. Can a WFOE employ expatriate workers?

• Government approval is required for the employment of all expatriate workers, but approval is generally granted for qualified foreign employees.

6. Are there any restrictions as to the local staff a WFOE can employ?

Unlike RO’s (which must recruit their Chinese employees through the Foreign Employment Service Company, FESCO), WFOE’s have complete freedom over all employment issues pertaining to its local staff.

4. What is the liability of a WFOE?

• Liability is limited to the total amount of capital registered (including the value of equipment etc.) upon establishment.

5. Can a WFOE employ expatriate workers?

• Government approval is required for the employment of all expatriate workers, but approval is generally granted for qualified foreign employees.

6. Are there any restrictions as to the local staff a WFOE can employ?

Unlike RO’s (which must recruit their Chinese employees through the Foreign Employment Service Company, FESCO), WFOE’s have complete freedom over all employment issues pertaining to its local staff.


WFOE WFOE WFOE WFOE

7. What are the Registered Capital requirements for a WFOE in China?

• Production 500,000RMB (USD 62,000 +/-)

• Commodity Wholesale 500,000RMB (USD 62,000 +/-)

• Commodity Retailing 300,000RMB (USD 37,000 +/-)

• Technology Dev. 100,000RMB (USD 12,500 +/-)

• Consultancy & Services 100,000RMB (USD 12,500 +/-)

• Other 30,000RMB (USD 3,500 +/-)

To Note: The above figures are to be used as a guideline only. The exact registered capital amounts for your WFOE in China will vary between municipalities.

7. What are the Registered Capital requirements for a WFOE in China?

• Production 500,000RMB (USD 62,000 +/-)

• Commodity Wholesale 500,000RMB (USD 62,000 +/-)

• Commodity Retailing 300,000RMB (USD 37,000 +/-)

• Technology Dev. 100,000RMB (USD 12,500 +/-)

• Consultancy & Services 100,000RMB (USD 12,500 +/-)

• Other 30,000RMB (USD 3,500 +/-)

To Note: The above figures are to be used as a guideline only. The exact registered capital amounts for your WFOE in China will vary between municipalities.


WFOE WFOE WFOE WFOE

8. How is a WFOE taxed?

• WFOE Corporate Income Tax is at the standard rate of 33%. However, if you establish your WFOE in a special economic zone (such as the Tianjin tax protected area in Beijing) or an economic and technical development zone, this figure may be reduced to 15%.

9. How long does it take to establish a WFOE in China?

• An application in an ‘approved’ industry should take two to three months. ‘Restricted’ industries can take much longer depending on the approvals required.

10. What approvals are required to establish a WFOE in China?

• All foreign investment matters fall under the authority of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC).

8. How is a WFOE taxed?

• WFOE Corporate Income Tax is at the standard rate of 33%. However, if you establish your WFOE in a special economic zone (such as the Tianjin tax protected area in Beijing) or an economic and technical development zone, this figure may be reduced to 15%.

9. How long does it take to establish a WFOE in China?

• An application in an ‘approved’ industry should take two to three months. ‘Restricted’ industries can take much longer depending on the approvals required.

10. What approvals are required to establish a WFOE in China?

• All foreign investment matters fall under the authority of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC).


WFOEWFOEWFOEWFOE

11. New EIT Law

• The long-awaited new Enterprise Income Tax Law of the People’s Republic of China (“New EIT Law”) was finally promulgated by the National People’s Congress (“NPC”) on March 16, 2007, and is scheduled to come into effect January 1, 2008.

• The New EIT Law will replace the two separate, existing laws on enterprise income tax (“EIT”) that are applicable to domestically funded enterprises (“DEs”) and foreign invested enterprises (“FIEs”), respectively.

• Currently, FIEs enjoy a more preferential tax treatment than DEs in the PRC.

• Results in both DEs and FIEs being subject to taxation under the same law.

11. New EIT Law

• The long-awaited new Enterprise Income Tax Law of the People’s Republic of China (“New EIT Law”) was finally promulgated by the National People’s Congress (“NPC”) on March 16, 2007, and is scheduled to come into effect January 1, 2008.

• The New EIT Law will replace the two separate, existing laws on enterprise income tax (“EIT”) that are applicable to domestically funded enterprises (“DEs”) and foreign invested enterprises (“FIEs”), respectively.

• Currently, FIEs enjoy a more preferential tax treatment than DEs in the PRC.

• Results in both DEs and FIEs being subject to taxation under the same law.


WFOE WFOE WFOE WFOE

11. New EIT Law (cont)

• The new EIT legislation abolishes certain generally available tax incentives for FIEs, for example, the typical 2+3 tax holiday for simply being a production-oriented FIE.

• Several substantive rules changes to note:

• The New EIT Law has adopted a standard EIT rate of 25%, reduced from the 33% rate currently applicable to both FIEs and DEs.

• The standard withholding EIT rate applicable to the passive income of non-resident enterprises remains at 20%, subject to reduction or exemption in accordance with the rules of the State Council.

• The New EIT Law changes the approach to the granting of tax incentives by limiting them, at least in principle, to encouraged industries and projects.


• The new EIT legislation abolishes certain generally available tax incentives for FIEs, for example, the typical 2+3 tax holiday for simply being a production-oriented FIE.

• Several substantive rules changes to note:

• The New EIT Law has adopted a standard EIT rate of 25%, reduced from the 33% rate currently applicable to both FIEs and DEs.

• The standard withholding EIT rate applicable to the passive income of non-resident enterprises remains at 20%, subject to reduction or exemption in accordance with the rules of the State Council.

• The New EIT Law changes the approach to the granting of tax incentives by limiting them, at least in principle, to encouraged industries and projects.


WFOE WFOE WFOE WFOE


• The State Council will issue more detailed implementation regulations, to take effect together with the New EIT Law on January 1, 2008. It is also envisaged that the Ministry of Finance and the State Administration of Taxation (“SAT”) will further review and consolidate existing EIT rules, as well as issue a large number of new technical EIT rules in the coming years.


• The State Council will issue more detailed implementation regulations, to take effect together with the New EIT Law on January 1, 2008. It is also envisaged that the Ministry of Finance and the State Administration of Taxation (“SAT”) will further review and consolidate existing EIT rules, as well as issue a large number of new technical EIT rules in the coming years.


EXPROPRIATION IS NOT A PROBLEM IN CHINA

NO CASES SINCE 1978

Expropriation Expropriation Expropriation Expropriation

Values Influencing Chinese Business Behavior

Guanxi

Face

Hierarchy b c d

a


Origins in “family”/group membership

Who you know is very important

Little distinction between

Business/Personal

Gets Things Done

Obligation; Return of Favors

Guanxi And Chinese Business Behavior Guanxi And Chinese Business Behavior Guanxi And Chinese Business Behavior Guanxi And Chinese Business Behavior


Face is Related to Respect & Personal Dignity

You Can Lose/Give/Save/Take Away/Earn Face

Chinese Culture Very Image Conscious

A Non-Confrontational Approach More Effective

Concept Of Face (“Mian-Zi”) Concept Of Face (“Mian-Zi”) Concept Of Face (“Mian-Zi”) Concept Of Face (“Mian-Zi”)


Both Rank and Position are Respected

Age is Respected

Tenure and Longevity are Honored

Concept Of Hierarchy Concept Of Hierarchy Concept Of Hierarchy Concept Of Hierarchy


China M & A Model-AChina M & A Model-AOffshore Transfer of Equity in FIE in ChinaOffshore Transfer of Equity in FIE in ChinaOffshore Transfer of Equity in FIE in ChinaOffshore Transfer of Equity in FIE in ChinaSpecial Governing LawSpecial Governing Law

Certain Provisions of ChangeCertain Provisions of Changeof Equity of Investor in of Equity of Investor in

Foreign Invested EnterpriseForeign Invested Enterprise(5/26/97)(5/26/97)

ChinaChinaChinaChina

ForeignCo. A

ForeignCo. A

ChinaChinaCo.Co.

ChinaChinaCo.Co.

EJVEJV

China M & A Model-AChina M & A Model-AOffshore Transfer of Equity in FIE in ChinaOffshore Transfer of Equity in FIE in ChinaOffshore Transfer of Equity in FIE in ChinaOffshore Transfer of Equity in FIE in China

Foreign Co. A and China Co. have an EJVForeign Co. A and China Co. have an EJV11

60%60%

40%40%

OffshoreOffshore


OffshoreOffshore

ForeignCo. B

ForeignCo. B

ForeignCo. A

ForeignCo. A

ChinaChinaCo.Co.

ChinaChinaCo.Co.

EJVEJV


Foreign Co. A is merged into Foreign Co. BForeign Co. A is merged into Foreign Co. B22

60%60%

40%40%

ForeignCo. A

ForeignCo. A


OffshoreOffshore

ForeignCo. B

ForeignCo. B

ChinaChinaCo.Co.

ChinaChinaCo.Co.

EJVEJV


After Merger – the existence of Foreign Co. A ceasesAfter Merger – the existence of Foreign Co. A ceases33

60%60%

40%40%

ForeignCo. A

ForeignCo. A


OffshoreOffshore

ForeignCo. B

ForeignCo. B

ChinaChinaCo.Co.

ChinaChinaCo.Co.

EJVEJV


60%60% 40%40%

ForeignCo. A

ForeignCo. A

Because of merger, Foreign Co. A is required to transfer its equity in EJV to Foreign Co. BBecause of merger, Foreign Co. A is required to transfer its equity in EJV to Foreign Co. B44


Contracts are Very Different in China

A contract is just one of several pieces of paper in a relationship

China: Overall picture US: Legally binding

China: Snapshot US: Specifics important

China: Guideline A: Absolute

The formal contract vs. side agreement dichotomy

Patience rewarded

Know your BATNA

“Best Alternative to a Negotiated Agreement”

Lessons Learned in China Lessons Learned in China Lessons Learned in China Lessons Learned in China


Land cannot be privately owned in China

Foreign enterprises can obtain long-term leasehold rights

In China mandatory labor contracts are required between the enterprise and the employee (extensive)

Traditional “Iron Rice Bowl” system fading



Corruption is a major concern in China

Know the “Foreign Corrupt Practices Act”

Try to locate your enterprise in Special Economic Zones

SEZ’s are established by the Central Govt.

to promote and attract

international businesses



Dispute resolution is very different in China

Arbitration is the norm

Negotiating:

Opening moves: probing, personal relationships

Middle game: tedious, long, rigid, probing

End game: flexibility returns

Endless renegotiating: just the start…



Do:

Have patience

Your homework

Know your bottom line

Take detailed notes

Be able to walk away

Pad your price

Assume anything is possible

Check your ego at the door


Don’ts:

Assume confidentiality

Conceded anything easily

Hesitate to cut losses

Assume contract is fixed

Show a divided front

Lose your temper

Lose track of your “chop”


Nothing is Easy Doing business in China is complex Things are changing – rapidly! Pay attention! Regionalism in business practices – each is different Western business & legal logic does not apply Be prepared (personally and organizationally) to deal with

ambiguity, uncertainty, less than total control It is a fun project if no deadline Persistence/patience is key

Final Thoughts…… Final Thoughts…… Final Thoughts…… Final Thoughts……


“You Do Not Know China”….means they disagree

“New Regulation”…means they found a new way to avoid doing something

“Internal Regulation”…means they are mad at you

“Basically No Problem”…..means BIG problem!

Final Thoughts…… Final Thoughts…… Final Thoughts…… Final Thoughts……


Remember…”TIC”Remember…”TIC”Remember…”TIC”Remember…”TIC”

This Is China!

Anything is Possible

This Is China!

Anything is Possible


Special Thanks Special Thanks ToTo

US-CHINA BUSINESS COUNCILUS-CHINA BUSINESS COUNCIL for permission to reprint datafor permission to reprint data

and informationand information

www.uschina.orgwww.uschina.org

THE ENDTHE END




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Doing Business In China After Its Entry Into WTO Presented By George Pisaruk Presented By George Pisaruk