China Structure – Joint Ventures(0)
Unfortunately, this is not always the case, as evidenced by the fall in percentage of total foreign investment allocated to JV establishment from 32.2 percent in 2004 to 22.8 percent in 2007. This does not mean the JV is a deadweight entity, however. It has its purposes, and it?s crucial for foreign investors to understand those purposes and whether their Chinese partner is capable of fulfilling them. The popular Chinese idiom ?same bed, different dreams? has become the failed joint venture?s mantra.
There are two types of JVs in China: the equity JV and the cooperative JV, sometimes known as the contractual JV. They may appear similar on the surface but have different implications for the structuring of your entity in China. Here we explore the differences, providing practical advice on structuring and tips on investment clawbacks, land use rights and profit distribution.
Think of a JV as having both a heart and a mind. Its heart lies in the contract, which specifies the agreement and duties of each party. The mind lies in the articles of association, which determines how a JV can fulfill its responsibilities. They are equally important and attention to detail is essential.
There are significant operational differences between the contracts and laws governing EJVs and CJVs. EJVs and CJVs are respectively governed by the Sino-Foreign Equity Joint Venture Law of 1979, the Sino-Foreign Cooperative Joint Venture Law of 1988, and their related post-hoc amendments. The China Company Law of 2006 is also partially applicable to JVs. The are several key differences between the two.
EJVs must be established as limited liability companies, while CJVs can operate either as a limited liability company or as a non-legal person (though this option is becoming less popular). In the latter case, liability will be defined within the business contract. Such entities are run by a management committee rather than by a board of directors. They are typically operated in the event of the foreign party making capital contributions to a Chinese manufacturer to upgrade facilities, but then wanting some degree of control as to how that investment is managed.
China Structure – Foreign-Invested Commercial Enterprises(0)
Foreign-invested commercial enterprises are capable of conducting the following activities:
These activities can also be achieved through other means such as agents. A FICE will, however, bring the control needed to secure quality, service level and bring you closer to your suppliers as well as enable you to invoice your clients in Chinese currency.
China Structure – Wholly Foreign-Owned Enterprises(0)
In addition to the WFOE?s expansive business scope, its unrivaled popularity arises from multiple other factors:
Your organization has decided to invest in China. Deciding which entity to establish based on your short and long-term plans is the next step.
Structuring your WFOE
You need to ensure your business scope is accurate and genuine. The requisite administrative government offices will quickly pass your proposed business scope, but that does not mean you are finished. Your proposal will then make its way to the state and local tax bureaus, and they will also thoroughly check your application. Any attempts to fool the tax bureau into thinking you are producing one thing when you are actually producing another will inevitably fail.
WFOEs can only operate within the business scope approved by the authorities. The scope of business article within your articles of association will define exactly what your company is going to do. If you are going to be selling your product domestically, be sure to mention China?s required compliance with the WTO treaty. This will allow easier access to the domestic marketplace.
Registered capital requirements
Minimum capital requirement
Foreign-Invested Commercial Enterprises
China Structure – Representative Offices(0)
The RO can facilitate market entry and coordinate sourcing activities and marketing, but it is a toothless version of the possible foreign entities that has little control over the movement and sale of goods and services. ROs are the extended arm of overseas parent companies and can only interact
Do you need to control the process of invoicing locally for services or products? If not, and you simply need a local presence capable only of the following permissible activities, then perhaps the
ROs can be used for the following main purposes:
ROs can be very helpful in facilitating and establishing trade ties between your parent company overseas and your entities based in China. While ROs may not directly invoice for sales or services
Wholly Foreign-Owned Enterprises
Checking If You Are (Really) in Control of Your China Operations(0)
These are applicable to smaller businesses; accordingly we have not gone into details on director?s quorums, shareholder rights and larger corporate issues in this overview. However, they very much do apply to business managers in any company, small or large. If you consistently find these are applicable to you, an internal management systems audit may be a good idea.
One person holds all the company chops
Who trademarked your brand?
Business licenses are not immediately accessible
Are You (Really) Financially in Control of Your China operations?(0)
[ By Daisy Huang and Rosario DiMaggio, Dezan Shira & Associates ]
For this, understanding the limitations in China?s foreign exchange system is important.
China tightened its foreign exchange regulations last year, issuing the ?Regulations on the Administration of Foreign Exchange of China.? Under these new regulations, more emphasis is placed on the administration of inflow and outflow of foreign exchange. Legal entities, including wholly foreign-owned enterprises and representative offices, that previously only had an RMB Basic Account in China are now required to open a specific Foreign Currency Settlement Account for collecting proceeds and the conversion of such forex income into RMB. For entities that only have small
The stringency of such requirements can easily delay reception of payments to a company, leading to unexpected cash flow shortages and unpredictable degenerative outcomes. To understand how the regulation works and what it means for companies operating in China, we will try to outline the main aspects of such practice.
Chinese authorities keep their control on foreign exchange through a close supervision of bank accounts. Foreign companies in China operate through three different types of bank accounts: capital accounts, settlement accounts and basic RMB accounts.
Checking If You Are (Really) in Control of Your China Operations
Are You (Really) in Control of Your China Operations?(0)
[ By Zoe Zhou and Rosario DiMaggio, Dezan Shira & Associates ]
First, as expected, the flow of foreign direct investment into China has decreased. Second, there has been an increase in oversight from overseas headquarters. This article will focus on latter trend; exposing several common difficulties that undermine the real control foreign managers should have when running their China operations.
Managing a legal entity in a country with a language not easily understood by foreigners, a young legal system, a complicated and quickly evolving tax regime, and a strict foreign exchange control is often full of challenges and pitfalls for foreign managers. Moreover, the financial crisis is pressuring many companies to clear up old structural inaccuracies, adopt efficient financial control systems, layoff underperforming personnel and reduce overall costs.
Ensuring full control over an investment from both the legal and financial side of a business requires a thorough understanding of the laws and regulations and a clear perception of local practices. We first look at some of the common legal issues that managers should ensure have been properly carried out as they can have a long-term impact on the success of the China business.
The concept of a company?s business scope is easy to understand and basically refers to a detailed explanation of what the company is entitled to do, the sector it will be involved with (manufacturing, service, trading), and the products it will handle.
In China, an enterprise can only engage in operations within its business scope as approved in its registration with the enterprise registration authority. Because of this, the drafting of the business scope deserves particular attention as the company will need to register it with a wide range of authorities that will validate it before authorizing business operations.
A typical well-drafted business scope for a foreign company involved in trading (also known as a foreign-invested commercial enterprise or FICE) can be divided in three parts. It should state that the company is ?engaged in  wholesale, commission (excluding auction) and import/export of  products,  relevant commercial consulting, technical support and after sale service (following the national and local regulations on license management goods, special regulated goods).?
There are two very common types of mistakes made by foreign investors when drafting their business scope.
1) Mistakes related to lack of local knowledge and understanding of how foreign invested companies operate in China. These usually include the omission of services such as ?commission-based services? and relevant other services such as after sales, quality control and so on.
2) Mistakes related to negligence, for example, when describing the treated product.
Some of the ?omissions? may not initially seem important or relevant to the investor, nevertheless these may impact operations later in ways that would have been useful and furthermore, could have been included without further capital injection, time or paperwork.
From an operational point of view, an erroneously registered business scope may bring problems and serious limits to a business. Many FICEs in China often start operation by assisting their headquarters on a commission basis, providing services such as quality control and supplier or client searches, avoiding (at least at the beginning) being involved with the actual buying and selling of products, the extensive paperwork and the handling of customs. However, if these business operations have not been accounted for from the beginning, a newly established trading company might not be able to operate without revising or enlarging their business scope, costing both time and money.
From a strictly legal point of view, punishment for operating outside the stated business scope can induce fines ranging from RMB10,000 to RMB100,000, and more importantly, in cases that involve items requiring special approval like chemicals or food and beverages, the revocation of the business license. Companies therefore need to ensure that their business scope is an accurate description of the actual business and if not, to find the chance ? during a capital increase ? to review and update it.
Are You (Really) Financially in Control of Your China operations?
China and Europe(0)
[ By Andy Scott, China Briefing ]
The European Union is China?s largest trading partner, and despite growing protectionism on the mainland, optimism among EU businesses in China remains high, but for how long? While gains by some marquee European companies have strengthened ties between the EU and China, falling exports and rising barriers are causing problems.
Protectionism on the rise
The European Union recently filed a World Trade Organization complaint against China on the grounds that Beijing was unfairly helping domestic makers of steel, aluminum and chemicals by effectively blocking overseas exports of the raw ingredients needed for steel aluminum and chemical products. The complaint alleges that Chinese steel, aluminum and chemical companies are getting first rights on raw materials from domestic producers at super low prices. This is allowing them to compete unfairly against overseas companies who have to buy their raw materials on the open market, which are now arguably at higher prices because the lack of Chinese output is limiting availability of supplies.
The United States filed a similar complaint, saying that there appeared to be a ?conscious policy to create unfair preferences for Chinese industries by making raw materials cheaper for China?s companies to get, and goods more economical for them to produce.?
In response, China?s Ministry of Commerce said in a statement: ?The main objective of China?s relevant export policies is to protect the environment and natural resources. China believes the policies in question are in keeping with WTO rules.?
Beijing is not expected to change its policy anytime soon as infrastructure projects launched as a result of China?s huge stimulus package ramp up and begin to require the steel and aluminum products that are benefitting from the alleged unfair trade practices.
The recent WTO filing is not the first time Europe has had issue with China?s protectionist policies. In its 2008/2009 white paper, the European Union Chamber Commerce in China (EUCCC) stated that despite improvements in some sectors, European companies are still not granted fair and equal market access to China.
?In too many areas, European companies are still waiting for free and equal access to the Chinese market in line with the World Trade Organization commitments and in the spirit of WTO membership.?
In June, Beijing introduced a new ?Buy Chinese? policy that could agitate foreign trade relations and encourage protectionism. The new policy outlines that only Chinese products and services may be used for government procurement except when certain products or services are not available within the country or could not be bought on reasonable commercial or legal terms.
The move was a response to reports from local industry associations complaining that local governments discriminate in favor of foreign suppliers for projects related to China?s RMB4 trillion stimulus package. Since China?s exports and foreign direct investment have been depressed in recent months, the economy has been coping largely because of the deployment of the massive stimulus package which has increased subsidies, lending by state-owned banks and infrastructure spending.
Green technology and innovation breeds optimism
Despite Beijing?s recent protectionist moves, EU companies remain mostly positive on their investments in China. According to the EUCCC, Beijing?s ?affirmation of the importance of innovation, openness and competition,? and China?s efforts to ensure ?sustainable balanced growth? have been encouraging.
The EU is China?s top tech supplier and European companies are keenly interested in China?s burgeoning ?green tech? sector. At the Second EU-China High-level Economic and Trade Dialogue held in May, Ambassador Serge Abou, head of a delegation for the European Commission to China, said European companies expect to increase participation in clean, new and renewable energy in China.
China contributes 57 percent of the world?s certified emission reduction (CER) produced with more than 500 U.N.-registered Clean Development Mechanism (CDM) projects ? the Kyoto Protocol, developed countries can reduce their emission by providing fund or technologies in projects under CDM in developing countries. European companies are major buyers of Chinamade CER.
[ By Hank Bourg and Peter O?Neil, Dezan Shira & Associates ]
The 1988 Trade Act by the United States Congress directed the U.S. Attorney General to provide guidance to potential exporters and small business regarding the Foreign Corrupt Practices Act of 1977, an act all U.S. businesses operating in China need to be familiar with.
The FCPA prohibits the ?corrupt? payment of money or bribes to foreign officials for the purpose of keeping or maintaining business. The FCPA also links in with several other U.S. acts, providing for federal prosecution of violations of state commercial bribery statutes. The FCPA requires U.S. listed companies to meet their accounting provisions, which are designed to operate in parallel with the anti-bribery provisions of the FCPA and require corporations to make and keep books and records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls.
The basic requirements of the FCPA are fairly straightforward. Rather, it is the cultural traditions and the common business practices that lend a layer of complexity to enforcement of the FCPA with respect to business done in the People?s Republic of China. While some business practices may be considered entirely acceptable, or even expected, in the course of doing business in China, these practices can often be a violation of the FCPA and are subject to steep fines and jail time in the United States. Companies subject to the FCPA may find themselves faced with making the decision between losing business and violating the FCPA. Violators face the prospect of criminal sanctions, civil sanctions, and injunctions. Criminal sanctions against corporations and other entities can exceed fines of one million dollars. Sanctions against individuals may reach five years in prison and fines of one hundred thousand dollar.
American companies hoping to retain business in China, as well as American companies with the desire to enter the market, face an imperfect and dubious business environment with respect to the FCPA. However, with meticulous planning, careful oversight, and the proper tools violations of the FCPA can be avoided. The mounting prominence of China?s position in the world markets is undeniable. Certainly the benefits of investment in China far outweigh the risks presented by the FCPA, so long as the proper precautions are taken. With an annual growth in the GDP of 9 percent for the last 26 years and an increasingly attractive environment for foreign directinvestment, foreign companies cannot afford to ignore the opportunities for investment. However, companies subject to the FCPA must be aware of several particular risks that are posed by doing business in China.
A potential violation of the FCPA would include the following elements:
China and Europe
The State Administration of Taxation recently promulgated transfer pricing measures detailing the administrative rules for all special tax adjustments with the intention of ensuring high standards and consistency throughout the various local tax bureaus in China, making the administration and enforcement of transfer pricing-related issues uniform. The new rules will act as a foundation for future policy changes to China?s transfer pricing regime.
When choosing a transfer pricing method, companies will need to take into account the characteristics of the assets or services involved in the transaction, the functions and risks of each transactional party, the terms of the contract, the economic circumstances, and their business strategies.
It should be noted that the tax authorities will investigate companies that tend to have the following characteristics: significant amounts or numerous types of related party transactions; long-term losses, low profitability, or fluctuating patters of profit and loss; below average profitability than industry standards or profits that do not match the companies functions; business dealings with companies established in tax havens; absent or incomplete transfer pricing documentation; and obvious violations of the arm?s length principle.