Approaches to international expansion

Transcription

1 Approaches to international expansion High Pressure for control Representative office Licensing, exports WFOE Joint venture Low Need for local presence/capital intensity High 1

2 Foreign investment in China Catalogue of Foreign Investment amended in 2015 Encouraged, restricted and prohibited areas Negative list approach 2

3 Restricted to foreign investment 3

4 Prohibited to foreign investment 4

5 Source for foreign investment catalogue English Investment_Catalogue_Redline_Comparison.pdf Chinese shtml 5

6 Potential Paper Topics China s VAT reform impact on professional service companies How to set up a WFOE in China China s foreign currency controls and foreign owned business Selecting a Chinese name for your company in China China s labor laws and managing human resources Anti-competition rules in China 6

7 Good sources for paper topics

8 Factors influencing entry method Regulatory Tax What entity choices are available? What business scope is permitted? Is local ownership required? Which structure minimizes worldwide tax? Can local manufacturing reduce indirect taxes? Corporate governance Legal liability control Alignment of strategy 8

9 Licensing Authorize Chinese company to use intellectual property of foreign company to manufacture and sell within China in exchange for royalty. Subject to Chinese withholding tax on royalty Generally precludes other entry methods (direct imports, setting up manufacturing). 9

10 Exporting to China Selling directly to Chinese customers (or a distributorship in China) Goods shipped directly to customer from abroad Subject to VAT and import duties on arrival Limited customer relationship No customer service or inventory on location Distributors may sell competitors products Exclusive distributorships may limit future opportunity 10

11 Operating illegally Many companies set up China operations without registering an entity. Employees use business or tourist visas. Can be shut down at any time Severe Penalties Ways you get caught No fa piao Not paying employee taxes Business cards 11

12 Representative offices Simplest way to establish a legal presence in China Tens of thousands of rep offices opened, but have faded in popularity due to restrictions and availability of WFOE. Many foreign entrepreneurs set up Hong Kong company and China representative office in order to get residence permit for entrepreneur and family. 12

13 Setting up Representative Office 13

14 Restrictions of representative offices Even though Rep Offices are not permitted to earn income in China, they are subject to taxation. Taxes are usually based on 15% deemed profit based on expenses. A Rep Office is not permitted to hire Chinese nationals directly; such hiring must be done indirectly through contracting with a Chinese employment agency such as FESCO. Such contracts are generally unattractive for foreign companies. A Rep Office is limited to four foreigners, each of whom is called a representative. The Rep Office hires these people directly and they are treated as normal employees under China s employment law system. That is, they are to be hired pursuant to a written contract and their taxes and social benefits must be paid. Cannot have sales revenue or issue fa piao. 14

15 Representative offices There must be a lease on an approved space for a period of at least one year beyond the approval date of the Rep Office. Since many jurisdictions accept leases only from a small group of approved office buildings, care is required. Shanghai, for example, is one such jurisdiction. The lease must be registered, which also can cause problems in some jurisdictions. There must be a designated Chief Representative to manage Rep Office affairs. There must a foreign entity (typically a limited liability company or a corporation) for the China Rep Office to represent. Private individuals and partnerships cannot establish a Rep Office in China. In addition, most jurisdictions in China do not allow newly formed entities to form a Rep Office. 15

16 Sino-Foreign joint ventures Equity Joint Venture (EJV) Profits and losses are distributed between partners in proportion to their respective equity interests. Foreign partner typically owns at least 25% equity. Limited liability Cooperative Joint Venture (CJV) Profits and losses are distributed between partners in accordance with CJV contract. Usually operates as a limited liability company. 16

17 Foreign invested enterprises (FIE) Joint Ventures Equity joint ventures Contractual joint ventures Wholly foreign owned enterprises (WFOE) Foreign invested partnership enterprise (FIPE) Variable Interest Entities 17

18 Steps to set up WFOE 1. WFOE name approval. 2. MOFCOM online registration. 3. Application to form WFOE submitted to local Administration if Industry and Commerce (AIC). 4. Issuance of business license by AIC. 5. Start of business processes: a) open bank accounts, b) cut and register chops, c) open tax and other government accounts, d) set up daily bookkeeping and reporting to the local government, e) execute written employment agreements with employees and open employee tax/social benefit accounts, 18

19 WFOE Setup Procedure 19

20 WFOE Names Official WFOE names are in Chinese in the following format: ABCD. A is the location. B is the company name. C is the type of WFOE, typically either consulting or trading. D is the type of corporation: typically Company Limited. In English: Universal Pictures (Beijing) (Consulting) Company Limited. 20

21 Business Scope One-sentence description of companies activities in China. Operations outside of business scope are illegal and may be subject to fines. Will be printed on business licences. Expansive business scopes unlikely to be approved. 21

22 WFOE Capitalization Registered capital is capital required to get WFOE established. No formal requirement for amount Must be sufficient to cover operations. Illegal to start business with inadequate capital. Rule of thumb is two years of expenses But lower amount can be justified Contributions in excess of registered capital are taxed Contributions must be made within 20 years. 22

23 Business License 23

24 Trading WFOEs Customs Registration Certificate Import-Export License Foreign trader Operator filing with MOFCOM Quality inspection registration with the Entry-Exit Inspection and Quarantine Bureau. Obtain E-port IC card, software, and card reader from China Electronic Port. 24

25 Foreign Invested Commercial Enterprise Special category of WFOE or JV. Used for retail, wholesale and franchising. Perhaps faster to set up than conventional WFOE. 25