Opening your business in China...Opening your business in China - accessing the world’s largest market | Moulis Legal | Page 3 Despite the attraction, investing in China can be complex

Opening your business in China—Accessing the world’s largest market

Page 2 | Moulis Legal | Opening your business in China - accessing the world’s largest market

Your business in China

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The commencement of the China Australia Free Trade Agreement (“ChAFTA”) has made investing in China achievable for many Australian businesses. China is an attractive location for investment for a range of reasons – the world’s largest domestic consumer market, lower cost manufacturing, beneficial taxation environment and proximity to the rest of Asia.

Opening your business in China - accessing the world’s largest market | Moulis Legal | Page 3

Despite the attraction, investing in China can be complex and risky

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Establishing a commercially successful and legally compliant business in China takes more than an internet search. Foreign businesses operating in China that are not structured properly face significant risks – from increased taxation burdens and the inability to transfer profits; to critical delays in company registration and failing to protect intellectual property.

This guide provides Australian businesses with an introduction to the commercial and legal matters that should be considered prior to investing in China. However, this information is unavoidably general and cannot tell you what investment structure and plan will best suit your business.

Tailored advice package on your investment in China

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Moulis Legal provides Australian businesses with a targeted advice package that provides a legal structure for establishment, profit and payment repatriation, property and intellectual property protection and an overall legal investment plan.

Moulis Legal advises Australian businesses on the structure and risk management for investment into China, giving businesses a roadmap for the structure and steps for their investment. Our detailed and specific advice will provide the answers sought by directors and management needing to understand the process and risks of their Chinese business investment.

Details of this flat fee legal advice package are at Page 11 of this guide.


Our China investment team

Christopher Hewitt Consultant Counsel

T. +61 7 3367 6900 E. [email protected]

Charles Zhan Senior Associate

T. +61 2 6163 1000E. [email protected]

Macky Markar Lawyer

T. +61 2 6163 1000E. [email protected]


A completely foreign owned limited liability company, established by a foreign party without investment from a local partner or investor. An attractive structure for Australian businesses, however, there are some restrictions on the industries that it can operate in.

A limited liability company established with joint Chinese and foreign ownership, where the profits and losses of the company are distributed in proportion with each party’s capital contribution. Importantly, fewer restrictions are placed on the industries in which an EJV can operate in, in comparison to a WFOE.

Provides more flexibility than an EJV, where the capital contribution, distribution of profits and liability and the return on investment can be negotiated and agreed upon in the joint venture document. Most suited to specific industries, for example hotels, infrastructure and mining projects.

This structure is a local representative office of an offshore parent company. This is not suitable for businesses that intend to conduct business activities in China because there are heavy restrictions placed on direct activities. This structure provides the most basic market entry without formal legal establishment.

An unlimited liability company in which the profits and losses of the business are distributed in accordance with the partnership agreement. Due to the unlimited liability placed on the parties, this is not recommended for most Australian businesses.

Specific industries require specialised investment structures. Typically these are used by companies wishing to invest in real estate or venture capital investments.

Your guide to opening your business in ChinaEstablishment and structuring

TY

PE

S O

F F

OR

EIG

N I

NV

ES

TE

D E

NT

ER

PR

ISE

S:

Wholly Foreign Owned Enterprise

(WFOE)

Equity Joint Venture

(EJV)

Contractual Joint Venture

(CJV)

Representative Office (RO)

Foreign Invested Partnership (FIP)

Special Foreign Invested

Enterprise (SFIE)

When opening your business in China there are multiple options of how to structure the business. These different structures are called foreign invested enterprises.

SAIC has introduced a three-in-one licence that covers the business licence, new business Taxation Registration Certificate and the Organisation Code Certificate. In most cases this will be granted in 3 business days and will reduce the time frames and the number of separate applications required for post registration matters.

Registration process for a WFOE —Most Australian businesses investing in China use a WFOE. The process for establishing and registering a WFOE is more complex and time consuming than the equivalent process in Australia.

Name approval

1

Investment approval

Business licence

Post registration

matters

FROM THE STATE ADMINISTRATION FOR INDUSTRY AND COMMERCE (SAIC)

1–5 DAYS

FROM THE MINISTRY OF COMMERCE (MOFCOM)

30–45 DAYS

REGISTRATION WITH SAIC

5–10 DAYS

THIS INCLUDES:

TAXATION BUREAU, STATE ADMINISTRATION OF FOREIGN EXCHANGE, FINANCE BUREAU (AMONG OTHER THINGS)

Should I invest via a HK company?

2 3 4

Investment in China via a Hong Kong company can provide protection for a foreign parent company, added flexibility for investing and a more efficient and cost effective administration. However, a Hong Kong based company is considered a foreign company in China and cannot be used to circumvent restrictions placed on foreign companies.

Q. A.


>


Getting your money out of China —A large part of all business establishment is ensuring that profits and payments can be transferred back to the parent company or investors in Australia.

THE AFTER-TAX PAYMENT OF DIVIDENDS TO

A FOREIGN PARTY IS RELATIVELY STRAIGHT

FORWARD, HOWEVER NOT THE OPTIMAL

SOLUTION FOR ALL BUSINESSES BECAUSE

OF TAX IMPLICATIONS AND ADDED

REPORTING OBLIGATIONS.

D I V I D E N D S

CHARGED BY AN AUSTRALIAN COMPANY TO

A RELATED COMPANY IN CHINA FOR

SERVICES RENDERED. A CHANGE TO

REMITTANCE PROCESSES HAS FACILITATED

GREATER USAGE AS A MECHANISM

FOR PRE-TAX REPATRIATION.

SERVICE FEES ARE REGARDED AS ROYALTY

FEES WHERE THE SERVICE IS L INKED TO

SPECIFIC KNOW HOW OR TECHNOLOGY.

IMPORTANTLY, THE AGREEMENT HAS TO

BE REGISTERED WITH THE RELEVANT

INTELLECTUAL PROPERTY OFFICE.

SIMILAR TO SERVICE FEES, HOWEVER

AUSTRALIAN BUSINESSES SHOULD BE

AWARE THAT MANAGEMENT FEES ARE

NOT TAX DEDUCTIBLE.

R O Y A LT I E S

S E R V I C E F E E S M A N A G E M E N T F E E S


Contracting and licensing

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When establishing a business in China there are a number of contracts that need to be entered into, including agreements with service providers, consultants, employees, and leasing of property, plant and equipment. China has its own contract laws and system for enforcing contracts. Australian businesses need to be aware of the differences and obtain expert advice to ensure their interests are protected, they are not assuming unnecessary risk, and the rights of directors and managers are considered.

Licensing is a critical part of business investment in China and allows Australian businesses to engage local expertise to manufacture and produce goods in China. There are special laws in China relating to the operation of licenses for manufacturing and production, and expert advice should be obtained.

Franchising is also an option, although most businesses avoid the franchise model because of the complicated regulatory requirements in China.

Protecting intellectual property

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For many businesses entering China, intellectual property rights are the most valuable asset and the threat of infringements is the most significant business risk. Businesses opening in China should protect intellectual property through a combination of administrative, contractual and enforcement strategies:

• Administrative: China’s legal systems for protecting intellectual property rights are improving constantly. Some rights, including trademarks, patents and designs, may be formally registered with the State Intellectual Property Office (“SIPO”). Other rights, such as copyright and trade secrets, may be protected by non-registration administrative processes.

• Contractual: Businesses should carefully prepare contracts and licenses to protect intellectual property, set compensation rights for infringement and clarify the ownership of all new intellectual property.

• Enforcement: There is increased focus on the enforcement of administrative and contractual intellectual property rights in China. SIPO is active in protecting local and international intellectual property rights, and businesses should actively engage with enforcement processes. China has also introduced new specialised intellectual property courts that are focused on contractual and legal enforcement.


Managing disputes

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Despite the perception of home field advantage, we counsel Australian businesses against relying on Australian courts to resolve commercial disputes relating to business in China. Australian court judgements are not enforceable in China, meaning that a victory in Australia will often not result in the dispute being resolved.

We have observed a steady improvement in the reliability and impartiality of Chinese courts when dealing with foreign business disputes. In some instances Chinese law will require that the contract involving a Chinese business rely on Chinese law and courts to resolve the dispute.

The most popular mechanism to manage foreign-related disputes in China is commercial arbitration. Commercial arbitration allows the parties to structure the dispute resolution process in advance, and most importantly the arbitration decision is enforceable in over 140 countries through the New York Convention. This means that an arbitration award from Australia can be directly enforced in China, and vice-versa.

Trading and investing

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Trade and investment often go together. Australian businesses operate in China in order to trade goods back to the Australian market or to strategically access various markets around Asia.

The China Australia Free Trade Agreement will facilitate greater efficiency in trade between Australia and China, with new harmonised systems for reporting and compliance. Australian businesses need to ensure that they comply with various regulations in Australia and China, including export/import licencing, customs, goods registration and reporting.

Moulis Legal’s trade law team is globally recognised and has consistently been ranked as Australia’s best law firm for trade and World Trade Organisation matters. Our trade lawyers regularly represent Australian and Chinese businesses and government organisations on cross-border trade agreements, transactions and disputes.

Exiting China

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How a business intends to exit China should be considered before operations commence. This allows for the optimal strategy to facilitate a smooth and efficient business liquidation, limit tax liabilities and minimise latent commercial risks.

When selecting and establishing a commercial structure in China, businesses should carefully consider the ease of asset transfer and liquidation, the repatriation of funds and the rights of any local partners or shareholders.

Foreign investment enterprises take between 6 to 18 months to liquidate, including the tax deregistration process.

Key considerations:


If you are serious about opening a business in China, then you need to take a serious look at the risks, options and specific requirements for your business. Moulis Legal is efficient, direct and can provide your business with tailored and specific advice on the risks and processes you need to undertake to complete your investment in China.


The package:

Moulis Legal advises Australian businesses on the structure and risk management for investment into China, giving businesses a roadmap for their investment.

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For a flat fee we will provide a China advice package tailored to your specific business circumstances. Our advice will provide answers regularly sought by directors and executives considering the processes and risks involved in an investment into China.

The advice package includes:

> Consultation

• An initial consultation to understand your business and your plans for China

> Advice

• On the most suitable legal structure for your investment into China

• On protecting your intellectual property through multiple methods

• On the most suitable option for repatriation of funds

• On the contracts, licenses and arrangements necessary to protect your business in China

• On the strategy and issues involved in an exit from China to optimise trade outcomes and mitigate the risk of disputes

• On any other relevant legal issues that we identify throughout the course of the transaction, and practical ways to deal with them

> Action Plan

• A roadmap of the steps required to make your China investment plan a reality

• A timeframe for completing the business and legal activities

This document presents an overview and commentary of the subject matter. It is not provided in the context of

a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.

moulislegal.com—

We are Australia-based commercial + international legal

advisors. We are client-centric, fully committed, focused

on success, and service-driven.

CANBERRA

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[email protected]

T+61 2 6163 1000

F+61 2 6162 0606

6/2 Brindabella Circuit

Brindabella Business Park

Canberra International Airport

ACT 2609 Australia

BRISBANE

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[email protected]

T+61 7 3367 6900

F+61 2 6162 0606

PO Box 1282

Milton

Brisbane

QLD 4064 Australia

MELBOURNE

—

[email protected]

T+61 3 8459 2276

F+61 2 6162 0606

Level 39

385 Bourke Street

Melbourne

VIC 3000 Australia

CURRENT AS AT 28 MAY 2018 | COPYRIGHT © 2018 MOULIS LEGAL | ALL RIGHTS RESERVED

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Opening your business in China...Opening your business in China - accessing the world’s largest market | Moulis Legal | Page 3 Despite the attraction, investing in China can be complex