Dr. Stephane J. Grand

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Business in China: Modes of Entry. Dr. Stephane J. Grand. BACK TO THE BASICS. WHAT WE HAVE SEEN SO FAR Importance of personal relations in China and local preference Problems with contracts Relative importance of power vs. authority Appearances vs. fact-based reality - PowerPoint PPT Presentation

Text of Dr. Stephane J. Grand

  • Business in China:Modes of EntryDr. Stephane J. Grand

  • BACK TO THE BASICS*WHAT WE HAVE SEEN SO FAR

    Importance of personal relations in China and local preferenceProblems with contractsRelative importance of power vs. authorityAppearances vs. fact-based realityDo not take anything for granted, remember that Chinese culture is different and just as real as western cultures

    S.J. GRAND

  • THE PROJECT*DEFINE WELL THE GOALS

    Importing into ChinaSourcing from ChinaTaking advantage of production costs in China for foreign marketsProducing in China for the Chinese market

    S.J. GRAND

  • THE SPECIFICITIES OF THE PRC FDI REGS*THE HURDLES

    Convertibility of the RMB, both for repatriation of dividends and payments into ChinaHigh import duties and taxesHigh capital investment

    THE REGULATORY FRAMEWORKThe Foreign Investment Catalog

    S.J. GRAND

  • 1. COMPANY SETUP

    S.J. GRAND *

  • CONFIDENTIAL*ENCOURAGED INDUSTRIESThe most favored categorySJ GRAND Financial and Tax Advisory CHINAS FOREIGN INVESTMENT CATALOGUEExamples of Encouraged industries:

    Water conservation technology;Intellectual property services;Mining;Manufacturing;Transportation;Warehousing;Sanitation, fitness, and social welfare industriesEducation, culture, art, radio, film, and television industries;Foreign funded projects that directly export all of their products;Vocational education and training.Subject to less strict administrative requirements

    Eligible for favorable tax treatment and other benefits

    Investment only requires its registration with the PRC government

    Encouraged investments generally relates to:

    New and/ or advanced technology to China

    Projects increasing exports

    Projects improving manpower efficiency

    Projects conserving the resources

    Projects protecting the environment

  • CONFIDENTIAL*PERMITTED INDUSTRIESThe standard categorySJ GRAND Financial and Tax Advisory CHINAS FOREIGN INVESTMENT CATALOGUEExamples of Permitted activities:

    Production of carbonated soft drinks;Construction and operation of oil refineries- (Annual output of eight million tonnes or less);Franchise business, Commission business;Automobile wholesale, retail and logistics;Medical institutions (Investment here is limited to equity joint ventures and contractual joint ventures);Financial leasing companies;Distribution and importation of books, newspapers and journals;Importation of audiovisual products and e-journals;Internet music services.Investment approval is generally assumed to be granted without a hitch

    No particular restrictions

    No favorable tax treatments and other benefits

    Investment requires its registration with the PRC government

    Reasons for allowing investments under permitted category and not under encouraged one:

    Potential overcapacity

    Concerns over blind investments in Chinese market

  • CONFIDENTIAL*RESTRICTED INDUSTRIESThe category subject to high scrutinySJ GRAND Financial and Tax Advisory CHINAS FOREIGN INVESTMENT CATALOGUEExamples of Restricted activities:

    Certain agricultural, forestry, animal husbandry and fisheriesMining of precious metal and certain oresCertain manufacturing (tobacco, certain textiles)Electricity (adoption of low capacity generator)Certain telecommunicationsCertain wholesale and retail tradeElectricity, gas, and water productionBanking and insurance industriesReal estate in high end propertyGolf coursesProduction and distribution of radio and TV programmingSubject to higher levels of scrutiny and stricter administrative requirements

    Automatic approval of the investment cannot be assumed

    Reasons for investments being subject to restrictions:

    Technology has already been imported into China

    Industry is not conducive for healthy environment

    Industry is prone to high energy consumption

    Industries is highly regulated by the State or fall under State central planning

  • CONFIDENTIAL*PROHIBITED INDUSTRIESThe disbarred categorySJ GRAND Financial and Tax Advisory CHINAS FOREIGN INVESTMENT CATALOGUEExamples of Prohibited activities:

    Mining of radioactive materialsArms and ammunition manufacturingAir traffic controlPostal ServicesFutures tradingSocial researchGamblingPornographyPublication of books, magazines, and newspaperConstruction and operation of villas.Breeding and growing of precious, high quality breeds of animals

    Foreign investment is not permitted

    Investment may be denied at the discretion of approval authorities

    Reasons for investments being prohibited:

    Endanger state security

    Pollute the environment

    Against public well-being

    Occupy a large amount of farmland

    Endanger the use of military resources

    Use manufacturing techniques that are unique to China

  • LIMITATIONS TO LIMITATIONS*BEING SMART ABOUT THINGS

    It is always possible to structure businesses differently when needed, and have licenses held by third parties;

    Some industries are only forbidden to foreign businesses on paper: The Variable Interest EnterpriseLaw firms and their tax regimes

    S.J. GRAND

  • COMPANY REGISTRATION IN CHINA*INITIAL PHASE IS CRITICAL

    Your business scope, structure and location will affect registration procedures and required documentation, minimum registered capital, tax and insurance obligations, environmental and hygiene regulations;

    Early mistakes can be costly to correct.

    S.J. GRAND

  • PREPARATION CHECK-LIST*S.J. GRAND

    BEFORE MAKING YOUR INVESTMENTDefine precise business scope and assess feasibility/regulatory requirements.Analyze set up costs in detail.Be cost-skeptical and approach income and growth estimates conservatively, planning for several foreseeable results (Low/Med/High).Develop company financing plans with and without the support of foreign & local loans. Address main tax concerns and expenses in consultation with a tax professional: Business Tax, Income Tax, Tariffs, VAT, and other local taxes.Pay attention to suppliers hubs and distribution centers, client bases, export/import logistics, regional and local tax rebates, and staff residence and employment options.Inform yourself about Chinas social welfare and insurance systems as many of these charges are the responsibility of employers.Have management team in place and start local recruitment.Most importantly, brace yourself for unexpected events and obstacles.

  • 1. Representative Office ("RO")

    2. Wholly Foreign-owned Enterprise ("WFOE")

    3. Equity Joint Venture ("EJV")

    4. Contractual Joint Venture ("CJV")

    MOST COMMON FIE STRUCTURESCONFIDENTIAL*

  • REPRESENTATIVE OFFICE Least dynamic of available entities.Legal status: No capacity under Chinese law; head office liable for its RO activities in China.Sources of fund: Exclusively from ROs head office.Employment: Can NOT directly employ Chinese employees; must be employed via a registered human resources agency.

    DECIDING ON STRUCTURE*STRUCTURAL LIMITATIONS

    Research and market surveys relating to the products/ services of the head officeHead office product/service displays and promotional activitiesLiaison activities in connection with product sales, the provision of services, domestic investment by head officeCannot issue invoices (Fa Piao)Cannot engage in profit making activitiesCannot receive paymentCannot sign contracts

    S.J. GRAND

  • WFOE Most popular optionLegal status: Limited Liability CompanySources of fund: Minimum registered foreign capital requirements set according to business scope and location.Employment: Can hire directly; staff must be provided with contracts that are duly prescribed under Chinese law concerning matters of employment, remuneration, dismissal, welfare benefits etc.

    DECIDING ON STRUCTURE*STRUCTURAL LIMITATIONS

    Research and market surveys relating to the products/ services of the head officeHead office product/service displays and promotional activitiesLiaison activities in connection with product sales, the provision of services, domestic investment by head officeCannot issue invoices (Fa Piao)Cannot engage in profit making activitiesCannot receive paymentCannot sign contracts.

    ADVANTAGESIndependence; no domestic partner requiredAutonomous legal entityAble to take advantage of industry- and location-based tax exemptions and subsidiesGreater level of IP protectionCan issue invoices and receive revenue in RMB

    DISADVANTAGESLengthy registration and licensing processLack of established connections of joint venture partner

    S.J. GRAND

  • *S.J. GRAND

    Quick ComparisonROWFOERegistration ProceduresIncorporation documents, bank statements of creditBusiness plan, name approval, corporate documentation such as Articles of AssociationTime Required1-2 months3-5 monthsCapitalizationNo registered capital requiredMinimum registered capital depending on industry and locality; minimum investment RMB 100,000 Business scopeCannot engage in profit making activities (except law firms)Can engage in direct business operations as listed in Articles of AssociationLiabilityNOT legal person; liability assumed in parent companyLegal person; limited liability company; parent company liability limited to WFOE registered capitalRegulatory RequirementNo MOFCOM approval for most industries; registration with AICMOFCOM approval and registration with AICTax MethodCost + or Actual methodActual taxation methodAdaptability to demandCannot establish subsidiaries or branchesCan establish subsidiaries or branchesStaffCannot employ directly; must use registered employment agenciesCan employ directly

  • JOINT VENTURES A joint venture is an entity formed by a foreign investor or a foreign ind