[ By Chris Devonshire-Ellis, Senior Partner, and the National Corporate Administration and Tax Services Team at Dezan Shira & Associates ]
China is an intensely bureaucratic country and loves its paperwork. Accordingly, even the most simple business applications can be complicated. Then of course there is the language – and then again the nuances of law that determine the huge difference in operational quality between the so-called “cookie-cutter” applications from those in which time and attention have been spent. Here we identify some of the common mistakes we are asked regularly to fix when clients have either been badly advised, or simply were not aware of the full application and structural procedures when making an investment into China.
REPRESENTATIVE OFFICES
Applications – Commonly Missing Documents
Premises
When arranging office premises with the landlord, you must ensure he has a certificate giving him permission to rent commercial property to foreign entities. This document is a requirement of all RO applications and without it your application cannot proceed. However, this also places the landlord in a higher tax bracket, so many do not obtain the required certificate. If you sign a contract and pay a deposit without ensuring the documents are all in place you may lose the deposit as well as lose time on the application.
Grade A Building Status
Most (but not all cities) require that the office is in a Grade A building. This certificate is issued by Ministry of Commerce (MOC), and a copy is required as part of the application. Fortunately, most cities now have a large number (and varying qualities) of Grade A buildings so it is not as much of a choice or cost problem as before.
Premises Ownership Certificate
This needs to be provided by the landlord and with the company seal.
Landlord's Business Licence
This is also required with the company seal.
RO Resident's Certificate
Issued by the property management company responsible for the building.
New Shanghai Regulations
Shanghai has recently been developing more, and not less, official bureaucracy and administration somewhat out of step with its purported international image. These new regulations have also mainly been issued without prior warning and at great inconvenience to applicants with licences pending. The main new procedure affects the lease agreement as follows:
Notarised Lease Agreements - Shanghai
Additionally, in Shanghai, a fairly recent additional requirement has been for all RO applications to require the regional lease record certificate, which has to be obtained from the real estate authority. This document should be notarized as a true copy. An original copy of this also needs to be provided to the pertinent local Shanghai tax bureau and also the Administration of Industry & Commerce.
Government Agents – Shanghai
Shanghai is also unique in that all applications for all business licences must go via Government Agents. This adds another layer of cost and administration as of course they also require payment for their services as well. It also means applications are effectively taken out of the hands of professional services firms and can be held up – if for example a smaller or cheaper agent is used and then goes on holiday or is just lazy or overworked ! Larger professional services firms tend to obtain better results when dealing with Shanghai’s government agents due to the volume of business they put through them and it is prudent to note this. Cheaper does not mean better service in Shanghai (or anywhere else in China for that matter).
Common RO Finance & Administration Problems
RO Bank Accounts :
Many clients authorize their agent to deal with the bank account opening, although in reality they can do this themselves. However, in order to avoid any inconvenience, and minimize the time and effort spent on the account opening procedure, the agent just simply opens the bank account without asking the clients how to manage the account. If the agent is a friend of the local employee assisting you there can be a conflict of interest here, as there are security issues that need to be discussed before opening the bank account, such as :
- (a) Whether to use chops (company seals) to manage the bank account in addition to signatures (we recommend this as it places an additional layer of security)
- (b) Whose signature and chops will be used for account management
- (c) Whether other signatories can manage the account with differing responsibilities, and if so who ?
Many agents will just open the account with the accounting chop and legal representative chop (often a local Chinese national appointed by Head Office) without checking the security or desired wishes concerning the above issues with their client’s Head Office. It is quite dangerous for clients to wire their registered capital into such an account, of which the clients know nothing, and cases of money disappearing or being skimmed off have unfortunately been far too common.
RO Car Importation
RO are entitled to import a foreign vehicle, duty free. The importation is logged with the tax bureau and the value of the vehicle should appear in the accounts and at annual audit as an asset. If it is not, the assumption can be that the office sold the vehicle for a profit and is subject to tax on this transaction. All well and good if you don’t import a vehicle. But have you ? There are many cases of vehicle dealers calling local staff in RO to see if they will ‘sell’ the rights – the going rate being about RMB20,000 (USD2,500) to them. The employee then arranges for the RO certificate and documents to be chopped, pockets the money, and the RO licence is then used, unwittingly by the foreign investor, to import a vehicle. Serious problems occur when the office is subjected to a scrutinized audit or closed.
