Lehman, Lee & Xu - www.lehmanlaw.com Lehman, Lee & Xu Lehman, Lee & Xu Edward E. Lehman Edward E. Lehman Macau University of Science and Macau University of Science and Technology Technology 澳澳澳澳澳澳 澳澳澳澳澳澳 November 200 November 200 7 7 200 200 7 7 澳 澳 11 11 澳 澳 Lehman, Lee & Xu - www.lehmanlaw.com 雷雷雷雷雷雷雷 雷雷雷雷雷雷雷
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Lehman, Lee & Xu - www.lehmanlaw.com
Lehman, Lee & XuLehman, Lee & Xu
Edward E. LehmanEdward E. Lehman
Macau University of Science and TechnologyMacau University of Science and Technology
澳门科技大学澳门科技大学
November 200November 20077
20020077 年年 1111月月
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雷曼律师事务所雷曼律师事务所
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Investment VehiclesInvestment Vehicles
Foreign Direct InvestmentForeign Direct Investment
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Market StatisticsMarket Statistics
In 2003, China surpassed US as leading destination for FDIIn 2003, China surpassed US as leading destination for FDI In 200In 20077, China and India were main destinations for FDI in , China and India were main destinations for FDI in
the worldthe world FDI will exceed USD FDI will exceed USD 770 billion in 20060 billion in 2006 Between 1978 and 200Between 1978 and 20077, average GDP growth rate over , average GDP growth rate over
9.5%9.5%
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Market Entry EssentialsMarket Entry Essentials
Have a clear entry strategyHave a clear entry strategy whatwhat how how wherewhere
Have a clear exit strategyHave a clear exit strategy Have full knowledge of the risks:Have full knowledge of the risks:
market research/due diligencemarket research/due diligence local and foreign competition local and foreign competition regulatory/legal issues regulatory/legal issues (national, provincial and (national, provincial and
municipal)municipal)
Long-term commitment is key.Long-term commitment is key.
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TaxationTaxation
Foreign Enterprise Income TaxForeign Enterprise Income Tax Flat rate of 30%Flat rate of 30% Plus 3% local tax on the taxable profit.Plus 3% local tax on the taxable profit.
Manufacturing: special treatment Manufacturing: special treatment First 2 years : no taxFirst 2 years : no tax Next Next 33 years: 50% years: 50% Can enjoy 50% reduction for further 3 years if export Can enjoy 50% reduction for further 3 years if export
more than 70% of productionmore than 70% of production In some SEZs can enjoy even further tax reduction if In some SEZs can enjoy even further tax reduction if
export 100% export 100% ((To be modified when the new Income Tax Law enters into To be modified when the new Income Tax Law enters into
effect on January 2008effect on January 2008))
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Preferential TaxationPreferential Taxation
Open Economic ZonesOpen Economic Zones Taxed at a rate of 24%Taxed at a rate of 24% Eligible for tax holiday & 3 year reduced rate.Eligible for tax holiday & 3 year reduced rate.
Special Economic ZonesSpecial Economic Zones Taxed at a rate of 15%Taxed at a rate of 15% Shenzhen, Zhuhai, Xiamen, Shantou and Hainan Island.Shenzhen, Zhuhai, Xiamen, Shantou and Hainan Island. Eligible for tax holiday & 3 year reduced rate.Eligible for tax holiday & 3 year reduced rate.
Soon will be eliminated and general rate 2Soon will be eliminated and general rate 255%%
((To be modified when the new Income Tax Law enters into To be modified when the new Income Tax Law enters into effect on January 2008effect on January 2008))
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New Income TaxNew Income Tax
To To be effective on Jan. 1, 2008be effective on Jan. 1, 2008 Introduce the conIntroduce the concept of "Tax Resident Enterprise" ("TRE")cept of "Tax Resident Enterprise" ("TRE")
Tax Resident Enterprise" ("TRE") concept is introduced whereby TREs are subject Tax Resident Enterprise" ("TRE") concept is introduced whereby TREs are subject to China income tax on worldwide income, and non-TREs on China source incometo China income tax on worldwide income, and non-TREs on China source income..
FIEs registered in China are always TRE.FIEs registered in China are always TRE. Foreign Enterprise ("FE") whose effective management institute is based in China is Foreign Enterprise ("FE") whose effective management institute is based in China is
regarded as a "TRE". regarded as a "TRE".
Tax Rate – FIEsTax Rate – FIEs Standardised rate of 25%, with reduced rate of 20% for qualified small and thin-Standardised rate of 25%, with reduced rate of 20% for qualified small and thin-
profit companies.profit companies. 15% for encouraged high/new-tech enterprises.15% for encouraged high/new-tech enterprises. FIEs approved before the publication date of the CIT Law and currently taxed at FIEs approved before the publication date of the CIT Law and currently taxed at
15% or 24% will be offered a gradual increase to 25% within 5 years.15% or 24% will be offered a gradual increase to 25% within 5 years. High/new tech enterprises no longer need to be located within so called high-tech High/new tech enterprises no longer need to be located within so called high-tech
parks and can enjoy tax incentives wherever located.parks and can enjoy tax incentives wherever located.
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New Income TaxNew Income Tax
Tax Rate – FEsTax Rate – FEs 20% withholding tax ("WHT") rate for passive income 20% withholding tax ("WHT") rate for passive income
derived by Non-TREs.derived by Non-TREs. Foreign investors may explore potential use of a Special Foreign investors may explore potential use of a Special
Purpose Vehicle resident in treaty countries/regions to Purpose Vehicle resident in treaty countries/regions to do WHT planningdo WHT planning..
Tax Incentive PolicTax Incentive Policyy The tax incentive policy is shifting from "Geography-The tax incentive policy is shifting from "Geography-
The new tax incentive policy is focused on high/new The new tax incentive policy is focused on high/new technology which is critical to China's future success.technology which is critical to China's future success.
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New Income TaxNew Income Tax
Previous preferential tax treatmentsPrevious preferential tax treatments Unused tax holiday of FIEs approved to be established before CIT Law is Unused tax holiday of FIEs approved to be established before CIT Law is
grandfathered till the expiry. Where the tax holiday has not yet started grandfathered till the expiry. Where the tax holiday has not yet started because of tax losses, it shall be deemed to commence from the first because of tax losses, it shall be deemed to commence from the first effective year of Unified CIT Law.effective year of Unified CIT Law.
New FIEs which engage in high/new-tech industries encouraged by the New FIEs which engage in high/new-tech industries encouraged by the State and located in SEZs and Pudong may enjoy transitional preferential State and located in SEZs and Pudong may enjoy transitional preferential treatments (to be defined).treatments (to be defined).
Enterprises in encouraged industries located in Western regions would Enterprises in encouraged industries located in Western regions would continue to enjoy the existing tax incentives.continue to enjoy the existing tax incentives.
Tax DeductionsTax Deductions Most rules similar to current law for FIEs.Most rules similar to current law for FIEs. Charitable donation is limited with a cap.Charitable donation is limited with a cap. Non-deductible expenses have been expanded to include sponsorship Non-deductible expenses have been expanded to include sponsorship
expenses, and unverified provisions and reserves.expenses, and unverified provisions and reserves.
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FDI Legal FrameworkFDI Legal Framework
Legal framework guiding foreign investment in China:Legal framework guiding foreign investment in China: State Council, Guidance of Direction of Foreign State Council, Guidance of Direction of Foreign
Investment Provisions Investment Provisions (the (the "Guidance Provisions""Guidance Provisions")) Foreign Investment Industrial Guidance CatalogueForeign Investment Industrial Guidance Catalogue (the (the
"Catalogue""Catalogue")) Since China's World Trade Organization (WTO) entry, Since China's World Trade Organization (WTO) entry,
government has relaxed investment regulations government has relaxed investment regulations
Approval according to the amount of InvestmentApproval according to the amount of Investment
ProhibitedProhibited (33) (33)Industries which cause pollution and ruin natural resourcesIndustries which cause pollution and ruin natural resources
Projects which utilize processes/technologies which are unique to Projects which utilize processes/technologies which are unique to ChinaChina
PermittedPermittedAll other industries not listed in the Catalogue.All other industries not listed in the Catalogue.
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Investment in PRCInvestment in PRC
Business enterprises must:Business enterprises must: obtain state approval on a project-by-project basis obtain state approval on a project-by-project basis comply with numerous regulationscomply with numerous regulations
Each particular business scope requires a minimum Each particular business scope requires a minimum amount of Registered Capital, which must be amount of Registered Capital, which must be contributed in formation of the company. contributed in formation of the company.
Depending on the proposed investment vehicle and Depending on the proposed investment vehicle and industry, the requirements for approval will vary industry, the requirements for approval will vary
Straightforward and iStraightforward and inexpensive way to establish a nexpensive way to establish a commercial presence in China commercial presence in China
Over 35,000 foreign companies have established Rep Over 35,000 foreign companies have established Rep Offices in ChinaOffices in China
RO allow foreign companies to:RO allow foreign companies to: further understand the Chinese market, further understand the Chinese market, promote their products and services, promote their products and services, develop new contacts, develop new contacts, examine the feasibility of an investment projectexamine the feasibility of an investment project
For certain industries For certain industries (insurance and banking),(insurance and banking), a RO is a legal a RO is a legal prerequisite to establish an operating entity in Chinaprerequisite to establish an operating entity in China
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Representative OfficeRepresentative Office
A RO is an "extension" of foreign company A RO is an "extension" of foreign company (not a separate legal (not a separate legal entity) entity)
Restrictions on business activities Restrictions on business activities Once established, RO may:Once established, RO may:
lease premises, lease premises, employ local and expatriate staff employ local and expatriate staff (approval)(approval) conduct business liaison activities on behalf of its overseas parent conduct business liaison activities on behalf of its overseas parent
company. company.
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Legal FrameworkLegal Framework
People's Republic of China State Council Interim Provisions on People's Republic of China State Council Interim Provisions on the Administration of Resident Representative Offices of Foreign the Administration of Resident Representative Offices of Foreign Enterprises (Enterprises ( 中華人民共和國國務院關於管理外國企業常駐中華人民共和國國務院關於管理外國企業常駐代表機構的暫行規定代表機構的暫行規定 ))
Measures for the Administration of Registration of Resident Measures for the Administration of Registration of Resident Representative Offices of Foreign Enterprises (Representative Offices of Foreign Enterprises ( 外國企業常駐代外國企業常駐代表機構登記管理辦法表機構登記管理辦法 ))
Detailed Rules for the Implementation of the Examination, Detailed Rules for the Implementation of the Examination, Approval and Administration of the Resident Representative Approval and Administration of the Resident Representative Offices of Foreign Enterprises in China (Offices of Foreign Enterprises in China ( 關於審批和管理外國關於審批和管理外國企業在華常駐代表機構的實施細則企業在華常駐代表機構的實施細則 ))
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Establishment CriteriaEstablishment Criteria
Applicant must comply with stipulated establishment criteria:Applicant must comply with stipulated establishment criteria: be lawfully registered in the country in which it is located, be lawfully registered in the country in which it is located, enjoy a "good business reputation" enjoy a "good business reputation" supply true and reliable information to approval and registration supply true and reliable information to approval and registration
authorities authorities handle establishment procedures in accordance with Chinese law. handle establishment procedures in accordance with Chinese law.
applicant has been in business for a specified period of time applicant has been in business for a specified period of time evidence of prior business with Chinaevidence of prior business with China
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Permitted Scope of BusinessPermitted Scope of Business
A RO may only engage in "non-direct business activities“A RO may only engage in "non-direct business activities“ business liaison, business liaison, product presentation, product presentation, market surveying,market surveying, technical exchangetechnical exchange
"..... under no circumstances may a Rep Office sign contracts, "..... under no circumstances may a Rep Office sign contracts, receive income or in any way engage in direct profit-making receive income or in any way engage in direct profit-making activities ...."activities ...."
Serious consequences:Serious consequences: warning, warning, hefty fines,hefty fines, confiscation of any illegally-generated income confiscation of any illegally-generated income cancellation of its business registration!cancellation of its business registration!
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TaxationTaxation
Although permitted activities do not generate income, Although permitted activities do not generate income, ROs must pay:ROs must pay: foreign enterprise income tax foreign enterprise income tax
RO tax is based on turnover at a rate around 10% over RO tax is based on turnover at a rate around 10% over expenses expenses
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How to Establish a Rep OfficeHow to Establish a Rep Office
Two separate stages:Two separate stages: applying for approval applying for approval applying for registration applying for registration
Upon registration, Registration Certificate (Upon registration, Registration Certificate ( 登記登記証証 ) will be issued) will be issued (fully established)(fully established)
Post-registration formalities within 30 days.Post-registration formalities within 30 days. Parent company is responsible for all activities Parent company is responsible for all activities
conducted by the RO in China. conducted by the RO in China. RO under a newly incorporated subsidiary companyRO under a newly incorporated subsidiary company
in existence for at least one yearin existence for at least one year minimum capital US$10,000minimum capital US$10,000
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Approval ProcessApproval Process
Approval Authority:Approval Authority: MOFCOM or its local bureau (provincial or municipal MOFCOM or its local bureau (provincial or municipal
level) level) In specialised industries, the relevant Chinese In specialised industries, the relevant Chinese
government authority (Ministry of Justice…)government authority (Ministry of Justice…) Designated Sponsor: Designated Sponsor:
application submitted to MOFCOM through a application submitted to MOFCOM through a government-authorised "sponsor" organisation government-authorised "sponsor" organisation
role of the sponsor is to submit application documents on role of the sponsor is to submit application documents on behalf of the Applicant for approval.behalf of the Applicant for approval.
renewal or change in Business Registration Certificate renewal or change in Business Registration Certificate must be effected through the original sponsor must be effected through the original sponsor
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Application Documents Application Documents
Documents to be submitted:Documents to be submitted: application form and application letter (Chinese) application form and application letter (Chinese) copy of Applicant's constitutional documents (also Chinese copy of Applicant's constitutional documents (also Chinese
translation) translation) reference letter from bankreference letter from bank lease agreement of the premises lease agreement of the premises letter of appointment of the Chief Representative letter of appointment of the Chief Representative passport copies passport copies any other documents which may be required. any other documents which may be required.
Approval authorities will grant approval within 20 working Approval authorities will grant approval within 20 working daysdays (Certificate of Approval ((Certificate of Approval ( 批準証書批準証書 ))))
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RegistrationRegistration
With the State Administration for Industry and With the State Administration for Industry and Commerce (Commerce (SAICSAIC) or its local bureau () or its local bureau (AICAIC) )
Within 30 days from date of issuance of the Certificate Within 30 days from date of issuance of the Certificate of Approval of Approval
Documents to be submitted:Documents to be submitted: original Certificate of Approval, original Certificate of Approval, copies of all documents submitted at the approval stage, copies of all documents submitted at the approval stage, registration form and a prescribed fee (RMB2,000). registration form and a prescribed fee (RMB2,000).
SAIC (or local AIC) issues Business Registration SAIC (or local AIC) issues Business Registration Certificate, within 20 days. Certificate, within 20 days.
Registration Certificate valid for one year Registration Certificate valid for one year (renewed (renewed annually)annually)
Once Registration Certificate has been issuedOnce Registration Certificate has been issued Registration with various official departments:Registration with various official departments:
public security bureau, public security bureau, local and state tax authorities, local and state tax authorities, customs authorities customs authorities local bank local bank
Also apply for work permits, employment visas and Also apply for work permits, employment visas and residence permits for expatriate staff residence permits for expatriate staff
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Employment of Local Chinese Employment of Local Chinese EmployeesEmployees
RO may not directly employ local Chinese employees RO may not directly employ local Chinese employees (not independent legal entities) (not independent legal entities)
Must use “local service agencies" (FESCO…) Must use “local service agencies" (FESCO…) Impose:Impose:
service charge on ROservice charge on RO administration fee on employeeadministration fee on employee
Takes care of labour and social insurance contributions Takes care of labour and social insurance contributions on behalf of the employee.on behalf of the employee.
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RO SummaryRO Summary AdvantagesAdvantages
Quick and simple.Quick and simple. InexpensiveInexpensive No minimum registered capital.No minimum registered capital. Allows for collection of market information and preparation for Allows for collection of market information and preparation for
direct market entry.direct market entry. Easy to dismantleEasy to dismantle
DisadvantagesDisadvantages Cannot engage in revenue generation.Cannot engage in revenue generation. Taxation regardless of prohibition on profit making activities.Taxation regardless of prohibition on profit making activities.
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Joint VenturesJoint Ventures
First structure established by PRC to facilitate foreign First structure established by PRC to facilitate foreign investment in the country. investment in the country.
Two JV structures available: Two JV structures available: equity joint venture (“EJV”) equity joint venture (“EJV”) cooperative or contractual joint venture (“CJV”).cooperative or contractual joint venture (“CJV”).
In some sectors JVs are the only means for foreign firms to get a foothold into the market (aviation, telecoms..)
The larger the project, the more likely the Chinese The larger the project, the more likely the Chinese government will require a EJV structure to be used government will require a EJV structure to be used
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Reasons for entering into JVReasons for entering into JV
Lack of viable options JV is often the only investment vehicle permitted
Real estate acquisition JV partner can provide land in crowded or expensive
development areas Investors must make sure that land-use rights have been
converted into granted rights and have been legally transferred to the JV
Guanxi or brand Network of connections, sales and distribution clientele,
or its strength as a brand name
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……also for Chinese partneralso for Chinese partner
Chinese partner looks to a foreign investor for the Chinese partner looks to a foreign investor for the following:following: CapitalCapital Management expertise and techniquesManagement expertise and techniques Training opportunities for Chinese staffTraining opportunities for Chinese staff Financial engineering and rescue skillsFinancial engineering and rescue skills
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Disadvantages of JVDisadvantages of JV
Inflexibility JV operations are governed by the initial JV contract Changes in the contract require:
unanimous vote of the board of directors (includes representatives of local and foreign partners)
government approval creates difficulties in adapting to market changes
Difficulties in expanding investment Chinese party unable to contribute additional capital increase equity stake in the venture (requires unanimous vote by the board)
Conflict of interest between partners management philosophies of Chinese and foreign JV partners may differ
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Setup ProcessSetup Process
Divided into 4 stages:Divided into 4 stages: Project approvalProject approval Feasibility study approvalFeasibility study approval JV contract/AOA approvalJV contract/AOA approval Enterprise registrationEnterprise registration
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Equity Joint VenturesEquity Joint Ventures
Most common type of foreign business structure in China
Method of transferring cash and expertise to domestic enterprises
Independent chinese legal person with limited-liability EJVs are associations of one or more companies jointly
undertaking a commercial enterprise with a Chinese partner
Established for a fixed term (usually 10 – 50 years)Established for a fixed term (usually 10 – 50 years)
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Equity Joint VenturesEquity Joint Ventures
Profits, risks and looses shared in proportion to the partners’ equity stakes determined by capital contributions
Foreign participation must be at least 25% for the JV to enjoy preferential tax treatment afforded to FIEs.
Equity can be contributed in the form of: foreign currency, equipment, buildings intangible assets (industrial property)
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CapitalizationCapitalization
Parties must make their contributions in proportion to their equity stakes in the venture
Parties may pay: in a single lump sum within six months after license issued by installments
15% within three months85% within two years (five years for
investment companies) If registered capital over US$10m can negotiate a longer schedule Failure to meet the capital payment schedule:
revocation of business license payment of damages
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EJV Management StructureEJV Management Structure
Two tier structure:Two tier structure: Board of DirectorsBoard of Directors
appointed by investors appointed by investors
Management organizationManagement organization responsible for day to day operation responsible for day to day operation
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Summary EJVSummary EJV
AdvantagesAdvantages Chinese partner will bring connections and an established Chinese partner will bring connections and an established
sales and distribution network;sales and distribution network; Local partner will bring local and particularized knowledge Local partner will bring local and particularized knowledge
of both market and bureaucracy.of both market and bureaucracy. Chinese partner will usually have or can easily obtain an Chinese partner will usually have or can easily obtain an
operational site, which aides in efficient start-upoperational site, which aides in efficient start-upDisadvantagesDisadvantages JV contract often difficult to negotiateJV contract often difficult to negotiate Differing objectives and management styles often result in Differing objectives and management styles often result in
conflict.conflict. Lack of control by foreign partyLack of control by foreign party Difficulty in selling shares in ventureDifficulty in selling shares in venture..
Offer more flexibility Organized in a very similar manner to an EJV Profits, risk and looses distributed according to the JV
contract can specify an accelerated return on investment for the
foreign investor Mainly used in ventures: Mainly used in ventures:
involving large fixed assets involving large fixed assets (real estate and infrastructure (real estate and infrastructure projects)projects)
where desired Chinese partner does not have sufficient where desired Chinese partner does not have sufficient cash/assets to contribute to an EJVcash/assets to contribute to an EJV
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Kinds of CJVsKinds of CJVs
Purely contractual arrangement:Purely contractual arrangement: each party agrees to:each party agrees to:
undertake certain obligationsundertake certain obligations provide certain capital (cooperative conditions)provide certain capital (cooperative conditions)
agreement sets out the objectives of the venture agreement sets out the objectives of the venture rights and obligations flow strictly from the contractrights and obligations flow strictly from the contract no separate legal entity and therefore unlimited liabilityno separate legal entity and therefore unlimited liability
Independent Chinese legal person Independent Chinese legal person liability limited to the amount of capital of the JVliability limited to the amount of capital of the JV sharing of profits and risks governed by agreement sharing of profits and risks governed by agreement
between the parties between the parties
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CJV AgreementCJV Agreement
Parties should provide in the CJV contract: Parties should provide in the CJV contract: investment or cooperation conditions, investment or cooperation conditions, distribution of earnings or products, distribution of earnings or products, sharing of risks and losses, sharing of risks and losses, form of operation and management form of operation and management title to property upon termination of the CJVtitle to property upon termination of the CJV
Since CJV is based on a contractual relationship, it Since CJV is based on a contractual relationship, it leaves much room for negotiating profit sharing, leaves much room for negotiating profit sharing, management etc…management etc…
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ContributionsContributions
Investment or cooperation conditions provided by Investment or cooperation conditions provided by parties may be in the form of:parties may be in the form of: cash, cash, material objects, material objects, land-use rights, land-use rights, industrial property rights, industrial property rights, non-patented technology non-patented technology other property rights.other property rights.
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Summary on CJVSummary on CJV
Similar to Equity Joint Venture in structure but with Similar to Equity Joint Venture in structure but with more flexibility because of the following:more flexibility because of the following:
1.1. Sharing profits is governed entirely by contractSharing profits is governed entirely by contract
2.2. Foreign partner can obtain return of investment in Foreign partner can obtain return of investment in priority to Chinese partner.priority to Chinese partner.
Setup requirements similar to that of Equity Joint Setup requirements similar to that of Equity Joint Venture.Venture.
Enterprises established by foreign investors in Enterprises established by foreign investors in accordance with relevant Chinese law, exclusively with accordance with relevant Chinese law, exclusively with their own capital (their own capital (Law of PRC onLaw of PRC on WFOEs) WFOEs)
WFOE structure can only be used in certain business WFOE structure can only be used in certain business sectors (restrictions)sectors (restrictions)
Not authorized in PRC until 1986 Not authorized in PRC until 1986 In 1997, WFOEs largest number of approved FIEs, In 1997, WFOEs largest number of approved FIEs,
eclipsing EJVeclipsing EJV WFOEs can better achieve business goalsWFOEs can better achieve business goals
WTO accession made it easier to establish WFOE WTO accession made it easier to establish WFOE
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Advantages of WFOEAdvantages of WFOE
Complete management control (no chinese partner) avoid disputes and conflicts (common in JV)avoid disputes and conflicts (common in JV) business decisions more flexibly and quickly to adjust business decisions more flexibly and quickly to adjust
operations to the demands of markets operations to the demands of markets Simpler establishment procedures
quicker negotiation and approval process (no JV contract)
Easier to terminate JV can only be liquidated on agreement of both parties or
through a court order Dissolution of a WFOE requires government approval
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Advantages of WFOEsAdvantages of WFOEs
Foreign investors are entitled to all the profitsForeign investors are entitled to all the profits reinvest or repatriatereinvest or repatriate
Greater control over:Greater control over: confidentiality of technology confidentiality of technology IPRsIPRs
Flexibility of location JVs located where local partner has an existing plant WFOEs are free to build on green field land
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Potential Drawbacks Potential Drawbacks
Foreign investors may need more time and energy to Foreign investors may need more time and energy to develop their businesses develop their businesses (no Chinese partner)(no Chinese partner)
More legal restrictions on the establishment and More legal restrictions on the establishment and operation of WFOEs operation of WFOEs (restricted in sensible areas)(restricted in sensible areas)
Foreign investor cannot rely on a Chinese partner to Foreign investor cannot rely on a Chinese partner to provide a site for operations. provide a site for operations. will have to make its own arrangements for land usewill have to make its own arrangements for land use
WFOEs are established in three stages:WFOEs are established in three stages: preparation, preparation, examination and approval, examination and approval, registration.registration.
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PreparationPreparation
Prior to application for establishment, submit a report Prior to application for establishment, submit a report to the local government where enterprise is to be to the local government where enterprise is to be established established
Report shall include: Report shall include: aim of the establishment aim of the establishment scope and scale of business operation scope and scale of business operation products to be producedproducts to be produced technology and equipment to be usedtechnology and equipment to be used area of land to be used area of land to be used quantities of water, electricity, coal, gas and other forms quantities of water, electricity, coal, gas and other forms
of energy resources required of energy resources required requirement of public facilities.requirement of public facilities.
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ApplicationApplication WFOE application must be submitted to MOFCOM (local) WFOE application must be submitted to MOFCOM (local) Include following documents:Include following documents:
written application form written application form (in Chinese)(in Chinese)
feasibility study report feasibility study report articles of association of the WFOE articles of association of the WFOE (in Chinese)(in Chinese)
name list of the legal representative name list of the legal representative legal and credit certifying documents legal and credit certifying documents inventory of goods and materials to be importedinventory of goods and materials to be imported any other documents required any other documents required
Business License: 90 daysBusiness License: 90 days Registration (SAIC): within 30 daysRegistration (SAIC): within 30 days Secondary filings (tax, customs and SAFE): 30 days Secondary filings (tax, customs and SAFE): 30 days
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Articles of AssociationArticles of Association Most important documentMost important document Must include:Must include:
name and location of the enterprise;name and location of the enterprise; aim and scope of business operations;aim and scope of business operations; total amount of investment, registered capital, and time limit for total amount of investment, registered capital, and time limit for
contributing investment;contributing investment; form of organization;form of organization; internal organizational structures and functions, duties and limits of internal organizational structures and functions, duties and limits of
powers of legal representative, general manager, chief accountant powers of legal representative, general manager, chief accountant and other staff members;and other staff members;
system of financial affairs, accounting and auditing;system of financial affairs, accounting and auditing; labor administration;labor administration; term of business operations, termination, and provisions for term of business operations, termination, and provisions for
liquidation;liquidation; procedures for the amendment of the articles of association.procedures for the amendment of the articles of association.
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CapitalizationCapitalization Capital contributions can be made in:
currency machinery equipment technology
Capital paid according to schedule set forth in AOA Payment can be made in installments:
15% or more within 90 days remaining within two years of establishment
If not met, business license may be revoked FIEs may not reduce registered capital Increases or reassignment must be:
approved by original approval authorities registered with SAIC
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Total Investment and CapitalizationTotal Investment and Capitalization
Ratio between registered capital and total capital Ratio between registered capital and total capital investment:investment: Total investments up to $3,000,000, registered capital Total investments up to $3,000,000, registered capital
must be a minimum of 70% of this amount;must be a minimum of 70% of this amount; Total investments over $3,000,000 to $10,000,000, Total investments over $3,000,000 to $10,000,000,
registered capital must be a minimum of 50% of this registered capital must be a minimum of 50% of this amount;amount;
Total investments over $10,000,000 to $30,000,000, Total investments over $10,000,000 to $30,000,000, registered capital must be a minimum of 40% of this registered capital must be a minimum of 40% of this amount;amount;
Total investments over $30,000,000, registered capital Total investments over $30,000,000, registered capital must be a minimum of one third of this amount.must be a minimum of one third of this amount.
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Summary on WFOESummary on WFOE
AdvantagesAdvantages Quicker setup as there is no Chinese partnerQuicker setup as there is no Chinese partner Simpler management structure and objectives which are simply those Simpler management structure and objectives which are simply those
of the parent organization.of the parent organization.
DisadvantagesDisadvantages Independence is often, in itself, a shortcoming because of lack of Independence is often, in itself, a shortcoming because of lack of
connections, established markets, and local knowledge.connections, established markets, and local knowledge. WFOEs cannot operate in some sensitive areas such as securities.WFOEs cannot operate in some sensitive areas such as securities.
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Liquidation of JVs and WFOEsLiquidation of JVs and WFOEs
Liquidation Liquidation can occur voluntarily and involuntarily.can occur voluntarily and involuntarily. FIEs declared in bankrupt liquidated in accordance with FIEs declared in bankrupt liquidated in accordance with
laws and regulations on liquidation due to bankruptcy. laws and regulations on liquidation due to bankruptcy. Solvent FIEs who wish to liquidate, may proceed:Solvent FIEs who wish to liquidate, may proceed:
in accordance with constituting documentation in accordance with constituting documentation (AOA)(AOA)
procedures set out in laws procedures set out in laws appointment of a liquidation committee to oversee the appointment of a liquidation committee to oversee the
processprocess
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Restructuring the Joint venture Restructuring the Joint venture
Restructuring FIEs through Restructuring FIEs through M & A M & A need to rationalize investments need to rationalize investments create new investment opportunitiescreate new investment opportunities
Transforming EJV to a WFOE.Transforming EJV to a WFOE. not possible to use the restructuring of a JV to circumvent not possible to use the restructuring of a JV to circumvent
WFOE restrictions WFOE restrictions relevant authorities must approve the new created WFOErelevant authorities must approve the new created WFOE creation of WFOE only allowed if not restricted or creation of WFOE only allowed if not restricted or
forbidden sectorforbidden sector
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Holding CompaniesHolding Companies
Established as JVs or WFOEs Allows to consolidate all China projects under one corporate
umbrella No direct involvement in production activities Minimum registered capital US$30m Latest changes in 2004 regulations:
allow to provide after-sales service for all products that it imports (before limited to parent’s company)
sell imports made by its overseas parent company (no retail) entrust other enterprises to manufacture its products or the products
of its parent company and sell them on the domestic and overseas markets
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Holding CompaniesHolding Companies
Over 250 foreign investors have established holding companies
Examples: Unilever, Rhone-Poulenc, Philips, Motorola, General Electric, Siemens BOSCH
Total asset value of US$400m in the year prior to application, have established FIEs with a paid-up capital of over US$10m and plans for three or more investment projects.
Ten or more FIEs established in China with paid-up capital of at least US$30m.
If established as JV, Chinese partner must have assets of at least Rmb100m
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Establishment ProcedureEstablishment Procedure
Holding company must be approved (both): by commercial department of the city or province in
which it is to be established by MOFCOM
Registration with SAIC, tax bureau, customs bureau and SAFE are required
Registered capital must be paid in full within two years of approval: must be paid in cash existing paid-in capital of FIEs in China may not be used
to capitalize the holding company.
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Acquiring ControlAcquiring Control
Holding company acquires control over existing FIE by: assign the equity interests to the holding company as a
gift; use the holding company’s earnings to purchase the
equity from the foreign investor; increase the holding company’s registered capital
(US$30m) as necessary to acquire the FIE
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Offshore Holding CompaniesOffshore Holding Companies Valuable tool to manage China investments Valuable tool to manage China investments Established in tax free Jurisdictions Established in tax free Jurisdictions (HK, BVI, Mauritius)(HK, BVI, Mauritius) Benefits:Benefits:
Exit StrategyExit Strategy easy transfer of interests in the China operation (offshore easy transfer of interests in the China operation (offshore
transfer)transfer) no approval needed from SAIC, MOFCOM or SAFEno approval needed from SAIC, MOFCOM or SAFE
Limiting LiabilityLimiting Liability liabilities incurred by the China entity will be the liability liabilities incurred by the China entity will be the liability
of the holding companyof the holding company Transfer PricingTransfer Pricing
lower taxes for products made in China but sold elsewherelower taxes for products made in China but sold elsewhere
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Offshore Holding CompanyOffshore Holding Company
Tax BenefitsTax Benefits Offshore:Offshore: money held by holding company will be tax freemoney held by holding company will be tax free
In China:In China: impact of China taxation can be managed by impact of China taxation can be managed by licensing the IP from parent companylicensing the IP from parent company
In Home Jurisdiction,In Home Jurisdiction, money can be: money can be:
repatriated at a tax advantageous timerepatriated at a tax advantageous time reinvested in international venturesreinvested in international ventures
ParentCompany
OffshoreCompany
ChineseCompany
IP IP
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Two Relevant Case Studies of Two Relevant Case Studies of Direct Investment in ChinaDirect Investment in China
1) Carrefour1) Carrefour 2) Microsoft2) Microsoft
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Carrefour Case StudyCarrefour Case Study
Entering into the Chinese marketEntering into the Chinese market:: China partially opened its retail for foreign investment in 1992. China partially opened its retail for foreign investment in 1992. Carrefour entered China in 1995 by forming a joint venture with Carrefour entered China in 1995 by forming a joint venture with
the Chinese firm Zhong Chuang, establishing a firm named “Jia the Chinese firm Zhong Chuang, establishing a firm named “Jia Chuang” to hold the majority of shares.Chuang” to hold the majority of shares.
To set up its stores the company entered into direct deals with To set up its stores the company entered into direct deals with different local governments.different local governments.
Local Local approach to the Chinese marketapproach to the Chinese market:: Carrefour considered the country to be comprised of several small Carrefour considered the country to be comprised of several small
marketsmarkets.. Most of the products were procured from ChinaMost of the products were procured from China.. Store formats, location, and the products sold were customized Store formats, location, and the products sold were customized
according to the local preferencesaccording to the local preferences.. Store managers were empowered to run the stores according to the Store managers were empowered to run the stores according to the
local requirementslocal requirements
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Carrefour Case StudyCarrefour Case Study
Descentralized managementDescentralized management.. SStore managers operate stores with complete freedom. tore managers operate stores with complete freedom. Freshness ensured by Freshness ensured by procuring the majority of its products locallyprocuring the majority of its products locally
(a well valued atribute by chinese consumers).(a well valued atribute by chinese consumers). Results of Carrefour strategyResults of Carrefour strategy
In China, where vast economic, social, and cultural differences In China, where vast economic, social, and cultural differences existed among different provinces, Carrefour existed among different provinces, Carrefour has been has been able to cater able to cater to the needs of different customers successfully.to the needs of different customers successfully.
As of As of 20072007, Carrefour operate, Carrefour operatess in China through its 80 in China through its 80 hypermarkets and around 250 hard discount stores. hypermarkets and around 250 hard discount stores.
China China isis Carrefour's sixth largest market, with sales of over € 2.06 Carrefour's sixth largest market, with sales of over € 2.06 billion.billion.
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Microsoft Case StudyMicrosoft Case Study
Chinese market arrival: 1992Chinese market arrival: 1992 In 1992 Microsoft entered in the Chinese Market by setting up a In 1992 Microsoft entered in the Chinese Market by setting up a
Rep. Office.Rep. Office. Wrong pricing strategyWrong pricing strategy:: Microsoft Microsoft chargedcharged same prices same prices asas
elseelsewhere in the world.where in the world. Piracy: Piracy:
Counterfeit copies available on the street aCounterfeit copies available on the street att very cheap prices. very cheap prices. The problem wasThe problem was not not brand acceptancebrand acceptance.. EEveryone was using veryone was using
Windows but no one was paying.Windows but no one was paying. Microsoft fought unsuccessfully to protect its intellectual property.Microsoft fought unsuccessfully to protect its intellectual property.
AAnothernother problem problem was: was: The promotion and implementation of Linux operating systems by The promotion and implementation of Linux operating systems by
the Bejing Government.the Bejing Government.
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Microsoft Case StudyMicrosoft Case Study
Tolerating piracyTolerating piracy as strategy: as strategy: By 2001, Microsoft realized that usual pricing strategies By 2001, Microsoft realized that usual pricing strategies
were going to fail due to China´s weak IP enforcement.were going to fail due to China´s weak IP enforcement. Tolerating piracy turned out to be Microsoft's best long-Tolerating piracy turned out to be Microsoft's best long-
term strategy:term strategy: Windows is used on an estimated 90% of China's 120 Windows is used on an estimated 90% of China's 120
million PCs.million PCs. Piracy helped to competPiracy helped to competee with Linux. A counterfeit copy with Linux. A counterfeit copy
of windows is cheaperof windows is cheaper.. The latter requires The latter requires lessless discs. discs.
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Microsoft Case StudyMicrosoft Case Study
Local Investment and Institutional cooperation.Local Investment and Institutional cooperation. Microsoft set up a long-term vision strategy that matches with the Microsoft set up a long-term vision strategy that matches with the
government's development agenda to get their support. government's development agenda to get their support. Launching extensive training programs for teachers and Launching extensive training programs for teachers and
software developers.software developers. Microsoft computing initiatives in rural areas of China.Microsoft computing initiatives in rural areas of China. Making officials participate to decide in which local software Making officials participate to decide in which local software
and outsourcing companies should invest.and outsourcing companies should invest. Chinese government started thinking more like Microsoft:Chinese government started thinking more like Microsoft:
It required central, provincial, and local governments to begin It required central, provincial, and local governments to begin using legal softwareusing legal software..
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Microsoft Case StudyMicrosoft Case Study
Microsoft's strategy outcomeMicrosoft's strategy outcome In 2006 the Chinese government required local PC In 2006 the Chinese government required local PC
manufacturers to load legal software on their computers manufacturers to load legal software on their computers Microsoft Corp. and Lenovo announcedMicrosoft Corp. and Lenovo announced in 2007 in 2007 a a
global agreement to pre-load Windows Live services on global agreement to pre-load Windows Live services on Lenovo PCs sold worldwideLenovo PCs sold worldwide..
More than 24 million PCs will be sold More than 24 million PCs will be sold in 2007in 2007, adding , adding to the 120 million already in place.to the 120 million already in place.