- Doing Business in China
- Contracts
- Income Tax
- Intellectual Property
- Joint Ventures
- Market Entry
- Versus WFOE
18 RULES of Doing Business in China
- Know the rules. Formal and Informal. Using creative solutions does not mean to go against the law.
- Know the risks. Do a thorough risk analysis. Search for problems before they materialize. If you can't find any you are not looking hard enough.
- Make certain the project is economically viable (market sources). Promises are easy. Profits vs prophets. Subsidies are not enough (they should augment profit not create it). Local partners can not assure national level incentives.
- Know the people. Choose the right people, the right partner. Know your counterparty, know your partner, know who you are talking to, know who you should talk to, know his/her related parties, know how to approach him/her, know how to follow up.
- Understand relationships. The notion of “relationship” in a Chinese context. Different levels, cultural and even spiritual gap.
- Get independent and experienced advice. Use advisors, with local and international background.
- Prepare to negotiate. Practice, practice, practice.
- Look for continuous balance in structures and contracts.
- Be aware of constant change. Adjust to a fast paced changing environment. Be willing to make changes, and look for innovation. Replication will happen!!
- Permanent Follow up on the business. Mind the store.
- Expect virulent competition and pricing pressure.
- Do not expect a level playing field.
- Keep proximity to Market and Customers.
- Protect your "property rights" including your IP rights. Understand your rights. Duly protect them through any available means.
- Have clear contract terms, through all the business chain. Do not think you know it all. Make sure that in most respects the interests of both parties are fully aligned.
- Get paid. Never agree to unsecured payments after delivery.
- Prepare your case. Prepare for potential disputes. Leave a record of relevant communications. Do no accept communications that contradict the contracts.
Contracts. A Chinese Perspective
The Chinese have a reputation for “not abiding by the contract" or for changing contractual terms after they have been agreed.
Different View of the Contract. An Unfolding Continuum. Flexibility
Chinese people tend to think (and feel) that a contract merely sets out the basis of the business relationship.
Therefore, they do not focus as much in setting and regulating all the details in the contract as a westerner would do.
Chinese people would think that if there is agreement on the main terms and principles, this will be enough foundation for reaching a consensus regarding other specific matters.
Also, considering that the Chinese counterparties are operating in their own business environment, most of them feel confident of being able to make the contract work. The western counterparties stand in a different position. The Chinese business environment is less transparent and predictable to them and therefore they try to reduce contingencies and risks by regulating them in the contract.
Additionally, Chinese parties believe that as the relationship develops and grows, the agreement will also unfold and make things easier in all respects. This would give the relationship a “flexible framework” instead of a rigid one.
Decision Making Process and Implementation Work-flow
The mentioned approach needs to be managed carefully, especially when the contract requires input from several different levels and departments from the Chinese side.
There can be many conflicting messages. In large Chinese companies and even in provincial or local governments, there can be confusion as to who should manage contractual negotiations and communications.
This may become a serious hurdle in the process of contract negotiation or implementation.
It is very important to identify the responsible agents in the decision-making process and implementation workflow. This should be done in the very beginning and should also be set out in the main agreement for the future implementation of the same.
Balance of Interests
The standard Western contract templates not necessarily work in China.
Both parties need to contribute with ideas and suggestions in order to make the contract a useful platform for continued cooperation and communication.
However, this flexibility should not exist at the expense of excluding essential terms.
The western party should be ready to study new proposals from the Chinese party –that involve a change in the agreement-. These proposals could eventually become new business opportunities. They could make the contract work better.
The New Enterprise Income Tax Law
The new PRC Enterprise Income Tax Law (the “New Law”), which took effect on January 1st 2008, levels the playing field between foreign invested enterprises (“FIEs”) and domestic enterprises.
The New Law sets an enterprise income tax (“EIT”) rate of 25% applicable to both FIEs and domestic enterprises.
Also, as a result of the New Law most tax benefits and preferential treatments previously available to FIEs are either restricted or abolished.
In order to deal with the impact of these legal changes most FIEs will need to assess there corporate strategies in China. Taxation treaties will be an essential part of this assessment and review.
In order to provide a general outlook of this new landscape the present memorandum covers the following matters:
I. Preferential Treatment to FIEs. Before and After the New Law.
II. Tax Treaties. Comparative Table.
I. Preferential Treatment to FIEs. Before and After the New Law.
The following is a comparative table of the situation before and after the New Law, regarding preferential treatments applicable to FIEs.
| Previous preferential tax treatments | Current Treatment. Comments |
Reduced EIT rates for FIEs established in special investment zones | This preferential treatment is eliminated by the New Tax Law, but for enterprises set up prior to January 1, 2008 which were enjoying income tax rate of 15%, their income tax rate will be gradually increased to 25% within five years as follows: 2008 18% For enterprises in encouraged industries in the western areas, including 12 provinces, and in 3 ethnic autonomous regions, they will continue to enjoy a preferential tax rate of 15% until year 2010. For entities set up prior to January 1, 2008 which were enjoying income tax rate of 24%, their income tax rate will be changed to 25% from January 1, 2008. |
Two-year exemption and three-year reduction | This preferential treatment is eliminated by the New Law. Nevertheless, for those enterprises which have commenced their two plus three tax holidays before year 2008, they can continue to enjoy the remaining tax holidays until expiry. But for those enterprises which have not commenced their tax holidays before year 2008 due to losses, their tax holidays will be deemed to commence in year 2008. For new enterprises registered in six economic zones, namely Shenzhen, Zhuhai, Shantou, Xiamen, Hainan and Shanghai Pudong after January 1, 2008, if they are qualified as high technology type enterprise that should be supported by the State, they are still eligible for the two plus three years tax holidays. The tax holiday is commencing from the first year that the enterprise generates incomes. Moreover, for enterprises in specific industries in western areas and 3 ethnic autonomous regions, they are still eligible for the two plus three years tax holidays. |
Reduced EIT rates for export-oriented FIEs | This incentive treatment is eliminated by the new Enterprise Income Tax Law. |
Tax exemption on repatriation of dividends | The general tax rate for repatriation of dividends is at 10%. However, see section II herein on relevant tax treaties. |
Tax reduction on reinvestment | This reduction treatment is eliminated by the new Enterprise Income Tax Law. |
Local tax exemption or reduction | Previously, the enterprise income tax was composed of two parts: income tax on enterprise and local income tax. As the new Enterprise Income Tax Law has unified the two parts into one general rate of 25%, so this exemption will not apply now. However, there is one exception: the autonomous authority of ethnic autonomous locality may decide on the reduction or exemption of the portion of enterprise income tax shared by such locality. |
II. Tax Treaties. Comparative Table.
Category of Income | Jurisdiction with No Treaty* | HK | Singapore | Mauritius | Barbados | |
Prior 2008 | Post 2008 | |||||
Dividends | Exempt | 10% | 5% | 10%/7% | 5% | 5% |
Royalties | 10% | 10% | 7% | 10% | 10% | 10% |
Interest | 10% | 10% | 7% | 7%/10%*** | 10% | 10% |
| Capital Gain (shares in PRC Property Co. with ≥25% holding) | 10% | 20% | 10% | 10% | 10% | Exempt**** |
Note:
Tax treaties are only compared in light of the mentioned categories of income. Additional considerations might be necessary, including administrative and regulatory costs in different jurisdictions.
* E.g., BVI (WHT on dividends, interest and royalty is reduced to 10% according to the EIT Regulation.
** 25% shareholding is required, or the rate increases to 10%. Furthermore, 5% is offered under the new Singapore-PRC treaty was signed on 11 July 2007 which is yet to be ratified by China.
*** 7% on interest paid to a Singapore financial institution, and 10% in all other cases.
**** The Barbados-PRC treaty is being renegotiated and it is widely anticipated that the capital exemption provisions will be removed following the signing and the ratification of the new treaty.
Disclaimer
The above information should not be treated as a substitute for specific advice concerning individual situations. You should not rely on any of the above as formal and specific legal advice. If you require legal advice, please contact us.
The New Law has been detailed by the Regulations for the Implementation of PRC Enterprise Income Tax Law (the “Regulations”) promulgated on December 6, 2007.
Intellectual Property
Overview of Intellectual Property Protection in the People’s Republic of China
Part I. The Laws and Regulations of the IP Protection in the PRC
Part II. Main Issues of the IP Protection in the PRC
Part I. The Laws and Regulations of the IP Protection in the PRC
Scope of the IP:
- Patent;
- Trademark;
- Copyright; and
- Anti unfair competition and trade secret protections.
Patent Law and Regulations
- Patent Law of the PRC;
- Detailed Implementing Rules on the Patent Law of the PRC.
Trademark Law and Regulations
- Trademark Law of the PRC;
- Implementing Provisions on the Trademark Law;
- Provisions on Protection of Well-known Trademark.
Copyright Law and Regulations
- Copyright Law of the PRC;
- Implementing Provisions on the Copyright Law of the PRC;
- Regulations on the Protection of Computer Software.
Other Laws and Regulations
- Anti-Unfair Competition Law of the PRC;
- Provisions on Customs Protection of Intellectual Property;
- Criminal Law of the PRC.
International Treaties and Conventions
- Paris Convention for the Protection of Industrial Property;
- Berne Convention for the Protection of Literary and Artistic Works;
- Agreement on Trade-Related Intellectual Property Rights (TRIPs);
- Madrid Agreement Concerning the International Registration of Marks;
- Patent Cooperation Treaty (PCT).
Main Issues of the IP Protection in the PRC
Protection of Patent
- Obtaining a Patent;
- The Administrative Authority;
- Protection Term of Patent;
- Remedies for Patent Infringement;
- Legislation Improvements on PCT Implementation.
Protection of Trademark
- Obtaining a Trademark;
- The Administrative Authority;
- Protection Term of Trademark;
- Remedies for Trademark Infringement;
- Legislation Improvements.
- Well-Known Trademark Protections
- Implementation of the Madrid Agreement
Protection of Copyright
- Obtaining a Copyright;
- The Administrative Authority;
- Protection Term of Copyright;
- Remedies for Copyright Infringement;
- Legislation Trend.
Protection of Trade Secret
- Obtaining a Trade Secret;
- Remedies for Trade Secret Infringement.
Litigation
- Jurisdiction
- Venue;
Either the court at the place where the tort is committed or where the defendant is domiciled may hear the case.
- Court System;
The Basic People’s Courts / the Intermediate People’s Courts / the High People’s Courts / the Supreme People’s Court.
General procedures for remedy
- Administrative Procedure;
Application by the IP right owneràProcessing by the IP administrative authority;
- Civil Procedure;
Lawsuit raised by the IP right owner à Court hearing (First Instance / Second Instance)
- Criminal Procedure;
Providing clues by the IP right owneràInvestigation by the police àProsecution by the Prosecutor àCourt Hearing (First Instance / Second Instance) .
Judicial Practices in China
- Investigation and obtaining evidence:
Property Preservation/Evidence Preservation/Preliminary Injunction
- Evidence: Notarization
- Court appearance
Establishment of a Joint Venture
In order to establish a Joint Venture in China, the first step shall be to find a qualified and agreeable Chinese partner. In this regard, it should be borne in mind that Chinese laws often (expressly or by implication) provide for qualification requirements on the Chinese partner to a joint venture. Therefore, when seeking a joint venture partner, it is essential to ensure that the Chinese partner has the legal capacity to act as an investor in an equity joint venture by entering into a joint venture contract.
Approval of NDRC and the “department in charge”
If the Chinese partner is a State-owned enterprise and the proposed project will involve government investments in certain critical industries, the approval of National Development and Reform Commission (“NDRC”) or/and its local branches on the proposed project is needed.
With respect to each State-owned enterprise in China, there will be a “department in charge” (zhuguan bumen in Chinese) which is responsible for administration and supervision over that enterprise. As a result, the consent to the co-operation with foreign investor from such department in charge of the Chinese partner (to the extent that the Chinese partner is a State-owned enterprise or does have a “department in charge” in practice) is fundamental to the proposed co-operation between the Chinese and foreign parties.
Letter of Intent
After the Chinese partner and the foreign partner have reached an agreement on establishing a joint venture, they should conclude a letter of intent. Despite the non-binding effect, the letter of intent normally sets out the principal terms for the co-operation (such as the proposed business scope, total investment and constitution of the board of directors of the joint venture) as well as other procedure-related matters.
Project Proposal
Following the execution of the letter of intent regarding establishment of a joint venture, the Chinese partner should be responsible for preparing a project proposal (xiangmu jianyi shu in Chinese). The project proposal should contain the statements covering the major aspects of the future venture, such as the total investment and registered capital, capital contribution, supply of raw material, estimate of foreign exchange income and economic benefit.
The approval authority will make a decision as to whether or not to approve the project listing/project proposal within 20 working days of acceptance of the above-listed application documents. This project proposal and project listing procedure may not be needed in some provinces or cities in China.
Registration of Enterprise Name
Within 30 days of approval for the project listing/project proposal, the enterprise name registration procedure should be conducted with the relevant local branch of the AIC.
By completing the foregoing procedure, the proposed name could be registered with the registration authority to prevent third parties from using the same enterprise name, regardless of the fact that at the time of enterprise name registration, the JV is yet to be formed.
Feasibility Study
Upon the approval for project listing/project proposal, the Chinese partner and foreign partner should jointly prepare the feasibility study for the equity joint venture, detailing the feasibility of market, funds, technology, raw material, site, etc. of the joint venture.
In the event of any issue or dispute arising out of the preparation for feasibility study, the Chinese partner and foreign partner may turn to the approval authority from time to time for co-ordination.
Joint Venture Contract and Articles of Association
Simultaneously with preparation for the feasibility study, the Chinese partner and foreign partner may begin to draw up the joint venture contract and articles of association. The joint venture contract and articles of association will compose the main part of the constitutional documents in respect of the joint venture. As a common practice, certain documents will be attached to the joint venture contract and articles of association, which may include details of capital contributions of each partner, technology transfer/license contract (if any).
Location of Joint Venture
Simultaneously with preparation for the feasibility study, the joint venture contract and the articles of association, the Chinese partner and foreign partner may begin to decide the location of the proposed joint venture and to sign the relevant site usage contract (for instance, land use rights granted contract, site lease contract, and so on).
Establishment of Joint Venture
Once the feasibility study, the joint venture contract and articles of association are in place, the Chinese partner may apply to the approval authority for approval for the establishment of the proposed joint venture.
The approval authority will make a decision as to whether or not to approve the establishment of the joint venture within 30 to 45 working days. In the case of a positive approval, the approval authority will issue a formal approval letter (pifu in Chinese) in favor of the joint venture. If the approval authority refuses to grant the approval, as a matter of practice, it will raise comments on the documentation concerning the joint venture and withhold the approval until the documents have been amended to its satisfaction.
Enterprise Code
After issuance of the formal approval letter, the Chinese partner should apply for and obtain an enterprise code for the joint venture by presenting the formal approval letter to the relevant authority in charge.
Issuance of Approval Certificate
After the procedure for enterprise code has been fulfilled, an application to the approval authority shall be made for issuance of approval certificate by completing and submitting certain documents in standard form as required by the approval authority. An approval certificate will be issued by the approval authority in the name of the joint venture within 10 days. The approval certificate certifies the “substantial” establishment of the joint venture in the sense that the matters following the issuance of approval certificate are of purely procedural nature.
Issuance of business License
Within 30 days of issuance of approval certificate, the Chinese and foreign partners should go through the registration procedure with the registration authority for issuance of business license.
Within 30 days of acceptance of the corresponding documents, the registration authority will make a decision on whether or not to register the joint venture. In practice, it is not common for the registration authority to refuse to register the joint venture in that the joint venture has been duly approved by the approval authority.
Upon the completion of the registration, the registration authority will issue a business license in the name of the equity joint venture, whereby the equity joint venture is ultimately formally established.
Other on-going registration
Following the formal establishment of the joint venture with the issuance of business license, the joint venture is required to further go through registrations with tax authority (i.e. the State Taxation Bureau and the Local Taxation Bureau), foreign exchange authority (i.e. the State Administration of Foreign Exchange), the Customs, etc., and to obtain the relevant certificates for its business operation.
For further details on the procedures and documents required for the establishment of a JV please see Annex 1.
ANNEX 1
Application Procedures for Establishment of Joint Venture
STEP | RELEVANT GOVERNMENT AGENCY AND REQUIRED DOCUMENTS | REMARKS |
Enter into Letter of Intent | ||
Approval for Project Proposal | Development and Reform Commission | |
Pre-registration of the name of JV | Local Administration for Industry and Commerce |
|
| Documents: |
|
| 1. Application form including Power of Attorney to authorize appointed person to arrange reservation of JV’s company name | Such From can be obtained AIC. |
| 2. Certificate of Incorporation or Memorandum of Association of the Oversea Investor. These copies must be: (a) certified as a true copy by a notary public; and (b) legalized by an Chinese Embassy, Consulate General or Representative Office (if there is no Embassy) closest to Oversea Investor. Business License of Chinese Investor. |
|
| 3. ID card or passport page with photo of Legal Representative of JV | - 1 copy with clear and authentic signature of the Legal Representative
|
Enterprise Code Certificate | Bureau of Quality and Technical Supervision | |
Application for Approval of JV | MOC’s Local counterpart (“the Examination and Approval Authority”) | |
| Documents: | |
| A completed standard application Letter with the common seal of Chinese and Oversea Investors (if any) and original signature of CEO, President, or Director of Chinese and Oversea Investors. | CEO, President, or Director of Parent means person who should be responsible for signing all papers for JV establishment process. |
| 2. A resolution by the board of directors of Chinese and Oversea Investors authorizing the establishment of JV | |
| 3. Bank Letter including Capital Balance and Credit Status of Chinese and Oversea Investors issued by bank of Chinese and Oversea Investors. | |
| 4. Certificate of Incorporation or Memorandum of Association of Chinese and Oversea Investors. These copies must be: (a) certified as a true copy by a notary public; and (b) legalized by an Chinese Embassy, Consulate General or Representative Office (if there is no Embassy) closest to Chinese and Oversea Investors. | |
| 5. Articles of Association of JV | |
| 6. Project Proposal | |
| 7. ID card or passport page with picture of CEO, President, or Director of Chinese and Oversea Investors | copies with clear and authentic signature of such person |
| 8. ID card or passport page with picture of Legal Representative of JV | with clear and authentic signature of the Legal Representative |
| 9. The résumé of JV’s legal representative. |
|
| 10. Photos of JV’s legal representative | Passport-sized |
| 11. Appointment Letters appointing Legal Representative, all the members of the board of directors (or the Executive Director), General Manager of JV | |
| 12. A list including Legal Representative, all directors (or Executive Directors), and General Managers of JV | Must be signed by CEO, President, or Director of Chinese and Oversea Investors |
| 13. ID card or passports of JV’s all directors including the Chairman and/or Vice Chairman and/or Executive Director and General Managers plus each person’s résumé | |
| 16. A brief introduction of Chinese and Oversea Investors, consisting of biographical details, provided by Chinese and Oversea Investors | |
| 17. Feasibility Study Report signed by Chinese and Oversea Investors |
|
| 18. Audit Report of Chinese and Oversea Investors for the most recent fiscal year | |
| 19. JV’s name reservation notice | It should have been obtained at the first stage. |
| 20. Assets Evaluation Report | Required only if there will be in-kind contribution |
| 21. Lease Agreement | |
| Record Certificate of the Lease Agreement with Real Estate Exchange Center | Some local AIC may require Lease Agreement to be filed with local Real Estate Exchange Center. Therefore, such record will be a pre-requisite.
|
| Property Ownership Certificate of the business premises of JV
| The copies with company seal of landlord on each page
|
| Qualification Certificate of Fire Protection for leased premises | Need to get help from Landlord. |
| Environmental Impact Assessment Report and its approval | Need to be prepared by qualified Environmental Agency |
| Project Location Proposal and Permission of Land Use issued by City Planning Department | |
| Power of Attorney authorizing the execution of organizational documents for JV | It shall be signed by Chinese and Oversea Investors |
| Power of Attorney for law firm | It shall be signed by Chinese and Oversea Investors |
| Power of Attorney for lawyer | It shall be signed by Chinese and Oversea Investors |
| Power of Attorney for the Service of Legal Documents | It shall be signed by Chinese and Oversea Investors |
Application for Registration of JV with Administration for Industry and Commerce | Administration of Industry and Commerce (“AIC”) | |
| Documents: |
|
| 1. Registration Application Form | From relevant AIC
|
| 2. JV’s Certificate of Approval | It should have been obtained at the second stage. |
| 3. Original of Duplicate 1 of the Certificate of Approval | It should have been obtained at the second stage. |
| 4. Original of Official Reply from the Examination and Approval Authority which agreed the establishment of JV | It should have been obtained at the second stage. |
| 5. Application Cover Letter in Chinese |
|
| 6. Copies of all the documents submitted at the above two stages |
|
Post-Registration with AIC | Relevant Government Authority | Remarks |
Obtain Company chop | Public Security Bureau | |
Obtain FOREX Certificate | State Administration of FOREX Local Branch | |
Obtain Tax Registration Certificate | Foreign Taxation Department of Taxation Bureau |
|
Obtain Statistic Registration Certificate | Statistic Bureau |
|
Customs Registration Certificate | Customs Bureau |
|
Open social security account | Local Labor and Social Security Bureau |
Intelligent Materials
Must-Knows about China Market Entry
More and more companies are setting up their own presence in China in order to source products/services directly from China, in order to enter the Chinese market, or in order to attract Chinese investment.
However, the Chinese regulatory and business environment is complex and therefore it is critical to understand the process and develop a strategy in advance.
Here are some “must-knows” at the time of planning your market entry into China:
1. Define the business scope of your China presence
Chinese laws and regulations may prohibit, restrict, permit or encourage your business set-up based on your business categorization and scope. Hence it is critical to carefully define your business scope so as to be permitted or encouraged to set up such a presence.
2. Understand the Alternatives
You have more than one legal structure for a local presence in China. Your China presence may be in the form of a wholly owned foreign enterprise, a contractual joint venture, an equity joint venture, a representative office or a local representation by a third party (local secretary/representation service companies). There are also other alternatives that can be tailor made to your needs, especially in those highly regulated areas of business.
3. Select Location and Find and Know your Allies or Partners
Select the right location for your China operation. China abandoned its preferential tax rate for investments of foreign companies from January 1st 2008. However, some areas still offer local preferential policies for foreign investors in terms of land leasing/procurement, staff recruitment and management, local tax, etc.
Also you need to carefully determine the allies or partners you will cooperate with. A basic due diligence of those allies or partners will be critical. Your partners may be something very different from what they claim to be. China has a business culture to show off wealth and status. However, your Chinese business partners may look financially viable and well connected but, as a matter of fact, live on bank loans and personal debts.
4. Clarify the Basic Requirements of the Vehicle you choose
Confirm the minimum registered capital for your China operation. The Chinese government requires certain minimum registered capital for various types of businesses. However, local Industry and Commerce Administrations may decide on your minimum registered capital based on their judgement of your business scope and operation scale.
5. Plan the repatriation of Profits and your Exit
Integrate commercial clauses in the Articles of Association to maximize profit repatriation into Australia. You may have commercial arrangements between your Head Office in Australia and the subsidiary in China in order to guarantee maximum profit repatriation. However, some arrangements must be included as part of the Articles of Association to be valid. The Articles of Association is to be submitted to local government agencies for approval and filing during business license registration. Hence, you must incorporate necessary clauses in the Articles of Association in the first instance.
6. Protect your Intangibles
Define a strategy to protect your trademarks, patents, industrial secrets and all your IP assets before coming into China.
7. Understand Employers Responsibilities and Risks
Fully understand employers’ responsibilities and liabilities in China. China issued the new Law of Labour in 2007 which specified issues on employment contract, redundancy, etc.
Without preliminary knowledge of this law, you may end up spending a huge amount of time and money terminating the contract with under performing employees, as the structure of the contract was wrong. You also need to be aware of the mandatory employee welfare and benefits so as to include such cost in the budget.
8. Develop a comprehensive employee management system
In China, the hardest task is to find the right human resources. A well thought out employee management system will encourage the engagement and commitment of local staff and avoid potential risks. You may include reporting and communication policies, staff training, performance assessment, remuneration, career management and employee management manual in the system.
9. Find the Right Counsel with Local and International Experience
It is essential to indentify a competent agent to manage this complex market entry process. This will be a cost and time effective way to avoid potential pitfalls. Local Chinese agents with no international exposure may not look into the risks in the same way an internationally seasoned attorney will do.
Versus WFOE
BENEFITS AND COSTS OF SETTING UP A
WHOLLY FOREIGN OWNED ENTERPRISE (WFOE)
A COMPARISON WITH THE SETTING UP OF A REPRESENTATIVE OFFICE
The benefits and costs will be reviewed by way of comparison between a WFOE (commercial or trading company) and a Representative Office (“RO”).
BENEFITS | WFOE | RO |
Legal status | WFOE is an independent PRC legal entity, and WFOE will be legally responsible for all of its activities. | RO is NOT an independent PRC legal entity, but rather a liaison office with a limited range of authorized activities. The foreign owner of the RO will be legally responsible for the activities of RO. |
Conduct of business activities | WFOE may conduct business activities within the business scope of its business license as approved by the foreign investment approval authority and registered with the AIC;
| RO is prohibited from engaging in direct business activities. A RO can only observe market conditions. At most, a RO will be able to conduct business liaison for its investor, introduce products, conduct market research and carry out activities related to its own office administration; |
Legal capacity to buy directly from factories | Yes. Therefore, there is no legal need to use agents, brokers and trading companies. Therefore, commissions or fees will tend to disappear. This requires the development of a direct commercial relationship with the factories. | No, the RO can only buy from trade agents. Trade agents will normally: |
Legal capacity to locally distribute in China (wholesale or retail) | Yes, after obtaining the applicable licenses. | No, the RO can only observe market conditions. |
Income Tax | Based on income (25%)
| Based on expenses (10%) |
Value Added Tax | Yes. Access to the Drawback of the VAT paid by exporters in purchase of products in China. The Drawback varies from 0 to 13% of the applicable VAT. The recent government policies are tending to give preference to products with more added value (i.e technological products). Consequently, the drawback of basic products or commodities is tending to 0. It is advisable to carry out a review of all the relevant products of a company to understand the practical consequences of this tax benefit. | No access to the drawback. |
Other Tax implications | If WFOE performs as an “expense center” only, the PRC taxing authorities may request an explanation on why no revenue is generated by WFOE. | Tax will be imposed on the actual income generated, including amounts received by the investor that are attributable to RO. Annual activity reports should be filed within one month of the year-end if no income is generated. In our case, since RO is just an “expense center”, the income tax and business tax to be paid by RO may be nominal. The tax issue may not be a big concern of the taxing authorities unless they realize that RO actually engages in direct business activities by performing as a service center of investor in China. |
Capital requirement | The minimum registered capital of a WFOE required by law is no less than RMB 30,000, but in reality the government requirement may be much higher than the minimum amount depending on the industry in which WOFE is involved and the feasibility study report of the WFOE; It is very hard to withdraw the registered capital invested in WFOE during its operation period; Any increase of registered capital is subject to government approval and AIC registration. | No capital requirement. |
Employment of foreign employees | WOFE may directly hire foreign employees by signing employment agreements with them; WFOE is not required to register its foreign employees (except GM, directors, supervisors, and legal representative) or any change of them with a competent administration for industry and commerce (“AIC”); There is no limitation on the maximum number of employees who may be hired by a WFOE. | RO is NOT allowed to hire foreign employees either directly by signing employment agreements with them or indirectly through third party HR service providers (e.g. FESCO); The foreign owner of RO may appoint its foreign employees as the representatives of RO. Legally speaking, the representatives of RO are not the employees of RO, but of the foreign owner. All representatives and any change of them need to be registered with the AIC; There is no statutory limitation regarding the maximum number of representatives of a RO. However, if a RO has a good number of representatives and/or the representatives change frequently, the AIC may require reasonable explanations. |
Application for work permit and residence permit for foreign employees | WFOE may apply for work permit and residence permit for any of its foreign employees; The entire application procedures may take 35-40 working days if everything goes smoothly. | RO may apply for work permit and residence permit for any of its RO representatives; Compare with the WOFE scenario, it normally takes less time to complete the entire application procedures with respect to such an application. |
Employment of PRC employees | WOFE may either directly hire PRC employees by signing employment agreements with them or indirectly employ PRC employees through third party HR service providers (e.g. FESCO). | RO is NOT allowed to hire PRC employees directly by signing employment agreements with them BUT can hire PRC employees indirectly through third party HR service providers (e.g. FESCO). |
Ability to protect strategic sourcing information (identity of the factories (that are used by the company). | Yes. Information on the original factories will not pass to clients or third competitors. Format F for Chile FTA can also be managed in order to protect the information.
| No. The names of the Chinese factory or the Chinese trading company will appear in all documents and registries, and therefore third parties or competitors will have access to this information. |
Establishment time frame | It will take approximately 3-5 months in Shanghai (time in other cities may vary) to complete the WFOE incorporation process, counting from the date of submission of all required documents for the application up to issuance of “Business License” by the AIC. | Compared with WFOE establishment, relatively simple and comparatively short time frame required for setting up RO. Normally, the entire RO establishment process will take not more than 45 days in Shanghai (time in other cities may vary), counting from the date of submission of all required documents for the application up to the issuance of “Registration Certificate of Foreign Enterprise’s Permanent Office in China” by the AIC. |
COSTS | ||
Offices | No regulations. Costs should not differ from RO case. | Only certain buildings that are allowed to house representative offices. |
Human Resources | It should not differ from a RO. However, it normally includes more administrative staff especially for the handling of export documents. | Depending on the size of the operations. 3 to 5 people is the average. |
Accounting | Full accounting | Simplified accounting |
Legal Costs | USD10,000 to USD12,000 | USD3,000 to USD5,000 |