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Doing Business In China After Its Entry Into WTO

Doing Business In China After Its Entry Into WTO. Presented By George Pisaruk. One of the Fastest Growing Economies in the World. 1. What Makes China An Attractive Market?. 35% of Global Population Purchasing Power. 2. What Makes China An Attractive Market?.

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Doing Business In China After Its Entry Into WTO

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  1. Doing Business In China After Its Entry Into WTO Presented By George Pisaruk

  2. One of the Fastest Growing Economiesin the World 1 What Makes ChinaAn Attractive Market?

  3. 35% of Global Population Purchasing Power 2 What Makes ChinaAn Attractive Market?

  4. Significant Improvement ofLabor Quality 3 What Makes ChinaAn Attractive Market?

  5. Surviving in an EconomyWith “Chinese Characteristics” What Are TheseCharacteristics?

  6. China Before & After its Entry Into the WTO

  7. China Before & After its Entry Into the WTO • Before • Policy determines the permitted business form and treatment • Open Door… designed to attract foreign funds and technology. • Many government-regulating agencies • Bureaurocracy designed to control and police foreign investment • Policy based upon regional interest • Goal = Integrate China into investor • IP = Kingdom of Piracy • After • Policy determines the permitted business form and treatment • Open Door… designed to attract foreign funds and technology. • Reduction in government-regulating agencies (ex. SAIC and MOFTEC=MOFCOM) • Bureaurocracy designed to guide and assist foreign investment • Policy based upon national coordination • Goal = Integrate investor into China • IP views more westernized

  8. Investment Options • Choice of business entity should be based upon your specific situation and goals • China Historically: State-Owned Enterprises • 3 main types of entities for foreign investment • Equity Joint Venture (EJV – FIE) • Contractual Joint Venture (CJV – FIE) • Wholly Foreign Owned Enterprise (WFOE)

  9. Investment Options

  10. WFOE Advantages & Disadvantages • Advantages • Affords the overseas investor total ownership of and full control over their business operations in China • Can engage in direct sales activities • Unlike a RO, it can employ its local staff directly, negating the need to go through an approved government employment agency. This reduces your staffing costs by approximately 50%.  • Disadvantages • Depending on industry, may be required to register substantial capital (USD$ 3,000 – USD$ 65,000). • Can only operate within certain industries. • Its ‘approved industry’ application can take up to three months. ‘Restricted industries’ can take much longer depending on the particular approvals required.

  11. WFOE • What Is It? • It is a limited liability company entirely owned by a foreign entity (individual / company). Unlike EJV’s the foreign owners of a WFOE enjoy total control over the management of their business operations in China. • Are there restrictions to establishing a WFOE in China? • WFOE’s and other foreign investment industries (FIE’s), are classified as: • Encouraged • Restricted • Prohibited

  12. WFOE • 3. What documentation is required to establish a WFOE in China? • Application form and requisition (original) • Certificate of Incorporation or business license of the overseas company (original) • Bank letter of capital balance and credit status (original) • Power of attorney for _____ to act as your WFOE registration agent (original) • Passport copies of legal representative of your WFOE • Resume and 8 passport photos of legal representative of your WFOE • Proposed name of the WFOE (Submit five in case your first choice name has been registered) • Document outlining your business scope of your WFOE WFOE • Feasibility study report • Articles of Association for your WFOE • Overseas company introduction • Building leasing agreement (original) or; • Building property right (copy)

  13. WFOE • 4. What is the liability of a WFOE? • Liability is limited to the total amount of capital registered (including the value of equipment etc.) upon establishment. • Can a WFOE employ expatriate workers? • Government approval is required for the employment of all expatriate workers, but approval is generally granted for qualified foreign employees. • Are there any restrictions as to the local staff a WFOE can employ?Unlike RO’s (which must recruit their Chinese employees through the Foreign Employment Service Company, FESCO), WFOE’s have complete freedom over all employment issues pertaining to its local staff.

  14. WFOE • What are the Registered Capital requirements for a WFOE in China? • Production         500,000RMB (USD 62,000 +/-) • Commodity Wholesale   500,000RMB (USD 62,000 +/-) • Commodity Retailing      300,000RMB (USD 37,000 +/-) • Technology Dev. 100,000RMB (USD 12,500 +/-) • Consultancy & Services   100,000RMB (USD 12,500 +/-) • Other             30,000RMB (USD   3,500 +/-) • To Note: The above figures are to be used as a guideline only. The exact registered capital amounts for your WFOE in China will vary between municipalities.

  15. WFOE • 8. How is a WFOE taxed? • WFOE Corporate Income Tax is at the standard rate of 33%. However, if you establish your WFOE in a special economic zone (such as the Tianjin tax protected area in Beijing) or an economic and technical development zone, this figure may be reduced to 15%. •  9. How long does it take to establish a WFOE in China? • An application in an ‘approved’ industry should take two to three months. ‘Restricted’ industries can take much longer depending on the approvals required. •  10. What approvals are required to establish a WFOE in China? • All foreign investment matters fall under the authority of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC).

  16. WFOE • 11. New EIT Law • The long-awaited new Enterprise Income Tax Law of the People’s Republic of China (“New EIT Law”) was finally promulgated by the National People’s Congress (“NPC”) on March 16, 2007, and is scheduled to come into effect January 1, 2008. • The New EIT Law will replace the two separate, existing laws on enterprise income tax (“EIT”) that are applicable to domestically funded enterprises (“DEs”) and foreign invested enterprises (“FIEs”), respectively.  • Currently, FIEs enjoy a more preferential tax treatment than DEs in the PRC. • Results in both DEs and FIEs being subject to taxation under the same law. 

  17. WFOE • 11. New EIT Law (cont) • The new EIT legislation abolishes certain generally available tax incentives for FIEs, for example, the typical 2+3 tax holiday for simply being a production-oriented FIE.  • Several substantive rules changes to note: • The New EIT Law has adopted a standard EIT rate of 25%, reduced from the 33% rate currently applicable to both FIEs and DEs.  • The standard withholding EIT rate applicable to the passive income of non-resident enterprises remains at 20%, subject to reduction or exemption in accordance with the rules of the State Council. • The New EIT Law changes the approach to the granting of tax incentives by limiting them, at least in principle, to encouraged industries and projects.

  18. WFOE • 11. New EIT Law (cont) • The State Council will issue more detailed implementation regulations, to take effect together with the New EIT Law on January 1, 2008. It is also envisaged that the Ministry of Finance and the State Administration of Taxation (“SAT”) will further review and consolidate existing EIT rules, as well as issue a large number of new technical EIT rules in the coming years.

  19. Expropriation EXPROPRIATION IS NOT A PROBLEM IN CHINA NO CASES SINCE 1978

  20. Values Influencing Chinese Business Behavior • Guanxi • Face • Hierarchy

  21. Guanxi And Chinese Business Behavior • Origins in “family”/group membership • Who you know is very important • Little distinction between • Business/Personal • Gets Things Done • Obligation; Return of Favors

  22. Concept Of Face (“Mian-Zi”) • Face is Related to Respect & Personal Dignity • You Can Lose/Give/Save/Take Away/Earn Face • Chinese Culture Very Image Conscious • A Non-Confrontational Approach More Effective

  23. Concept Of Hierarchy • Both Rank and Position are Respected • Age is Respected • Tenure and Longevity are Honored

  24. China M & A Model-A Offshore Transfer of Equity in FIE in China Special Governing Law Certain Provisions of Changeof Equity of Investor in Foreign Invested Enterprise(5/26/97)

  25. 1 Foreign Co. A and China Co. have an EJV China M & A Model-A China Offshore Transfer of Equity in FIE in China ForeignCo. A Offshore 60% ChinaCo. 40% EJV

  26. 2 Foreign Co. A is merged into Foreign Co. B China M & A Model-A China Offshore Transfer of Equity in FIE in China ForeignCo. B ForeignCo. A ForeignCo. A Offshore 60% ChinaCo. 40% EJV

  27. 3 After Merger – the existence of Foreign Co. A ceases China M & A Model-A China Offshore Transfer of Equity in FIE in China ForeignCo. B ForeignCo. A Offshore 60% ChinaCo. 40% EJV

  28. 4 Because of merger, Foreign Co. A is required to transfer its equity in EJV to Foreign Co. B China M & A Model-A China Offshore Transfer of Equity in FIE in China ForeignCo. B ForeignCo. A Offshore ChinaCo. 60% 40% EJV

  29. Lessons Learned in China • Contracts are Very Different in China • A contract is just one of several pieces of paper in a relationship • China: Overall picture US: Legally binding • China: Snapshot US: Specifics important • China: Guideline A: Absolute • The formal contract vs. side agreement dichotomy • Patience rewarded • Know your BATNA “Best Alternative to a Negotiated Agreement”

  30. Lessons Learned in China • Land cannot be privately owned in China • Foreign enterprises can obtain long-term leasehold rights • In China mandatory labor contracts are required between the enterprise and the employee (extensive) • Traditional “Iron Rice Bowl” system fading

  31. Lessons Learned in China • Corruption is a major concern in China • Know the “Foreign Corrupt Practices Act” • Try to locate your enterprise in Special Economic Zones • SEZ’s are established by the Central Govt. to promote and attract international businesses

  32. Lessons Learned in China • Dispute resolution is very different in China • Arbitration is the norm • Negotiating: Opening moves: probing, personal relationships Middle game: tedious, long, rigid, probing End game: flexibility returns Endless renegotiating: just the start…

  33. Lessons Learned in China • Don’ts: • Assume confidentiality • Conceded anything easily • Hesitate to cut losses • Assume contract is fixed • Show a divided front • Lose your temper • Lose track of your “chop” • Do: • Have patience • Your homework • Know your bottom line • Take detailed notes • Be able to walk away • Pad your price • Assume anything is possible • Check your ego at the door

  34. Final Thoughts…… • Nothing is Easy • Doing business in China is complex • Things are changing – rapidly! Pay attention! • Regionalism in business practices – each is different • Western business & legal logic does not apply • Be prepared (personally and organizationally) to deal with ambiguity, uncertainty, less than total control • It is a fun project if no deadline • Persistence/patience is key

  35. Final Thoughts…… • “You Do Not Know China”….means they disagree • “New Regulation”…means they found a new way to avoid doing something • “Internal Regulation”…means they are mad at you • “Basically No Problem”…..means BIG problem!

  36. Remember…”TIC” This Is China! Anything is Possible

  37. Special Thanks To US-CHINA BUSINESS COUNCILfor permission to reprint dataand information www.uschina.org

  38. THE END Presented By George Pisaruk

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