INFOCUS | INDIA-CHINA | DOING BUSINESS
DOING BUSINESS IN CHINA
objectives in China, you can establish a Joint Venture ( JV). However, there are significant risks and pitfalls associated with this structure. This does not mean you should not form a JV. It can be a successful endeavour if you understand whether your Chinese partner is capable of fulfilling your business objectives and each side’s goals, contributions and responsibilities are mutual and understood. A JV could be an Equity Joint Venture or a Co-operative Joint Venture also known as Contractual Joint Venture (CJV). In EJV mode, the foreign investment in the project must be 25% and partners share profits, losses and risks in proportion to their contribution to the registered capital. But in CJV mode, partners share profit on an agreed basis, not necessarily in pro-
The First Step
China is not the easiest places to do business in. A guide to overcome hurdles across the Great Wall. Anchit Goel
T
he bilateral trade between India and China touched a new milestone of USD 73.9 billion in 2011 as against USD 61.7 billion in 2010. China has become a hot favourite among many Indian companies who either want to source their products and raw materials from China or want to offshore their production facilities to a cheaper location and/or sell their products in China. Despite this attractive quality, the country is not an easy place to do business in. It is a complex market with its unique culture, difficult language and its own style of doing business. Businesses need to consider a wide range of strategies, evaluate the advantages and disadvantages before setting shop in China. The World Bank ranks China 91 (out of 183 countries) in its annual ‘Ease of Doing Business’ rankings for 2012. At the same time, there is a shortage of skilled and stable consulting professionals with rich practical experience of working in China and knowledge of
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the financial, regulatory and market environment in China, who can provide right guidance to those interested in China. Therefore, many companies find it very challenging to do business with China. Here we will attempt to address this challenge through a series of articles on various aspects of doing business in China. This will include how to enter the China market, choosing the right location for your business, establishing relationships (Guanxi), recruiting staff, sourcing, manufacturing and selling in China. In this article we deal with the various modes of entering the China market – the different forms of business organization and which form should you choose for your business. The structures typically used by foreign investors in China are: Representative Office (RO) Foreign Invested Enterprise (FIE) Joint Venture ( JV) Wholly Foreign Owned Enterprise (WFOE) – usually pronounced as woofie Each organization structure has
its benefits and drawbacks. The table shows the differences between a RO and FIE. If you are planning to do an initial feasibility study, understand the market, network, research about the opportunities for your products/service then establishing a Representative Office (RO) would be the right step for you. It is also faster, cheaper and easier. Once you feel that you have understood the market well and see a demand for your offerings in China or would like to establish a manufacturing plant, you can establish a WFOE or convert your existing RO to a WFOE. With WFOE status you can formally carry out your business, issue invoices, receive RMB revenues and convert your RMB profits into US dollars. If you feel that you do not have the required financial capacity and expertise of the China market and would like to partner with a Chinese company to further your business
THE WORLD BANK RANKS CHINA 91 (OUT OF 183 COUNTRIES) IN ITS ANNUAL ‘EASE OF DOING BUSINESS’ RANKINGS FOR 2012. portion to capital contributed. The foreign investor can obtain the desired level of control by negotiating management, voting, and staffing in advance with the Chinese partner. This mode is more convenient and flexible. Therefore it is easier to find a co-operative partner and reach an agreement. But at the same time a CJV could be time consuming and involve difficult negotiations in the beginning. Whether you choose a JV or a WFOE, you can incorporate your company in China in two ways – Limited Liability Company (LLCs) or a Joint Stock Company. Most FIEs in China are set up as LLCs as in this case your personal liability is limited to the amount of money you invest. An LLC cannot issue shares and has a specified life of 30 years, which can be extended. Joint stock companies are more complex in nature as their capital is divided into shares and any legal entity or individual can invest in the company in exchange for the
Representative Office Setting up requirements
FIE (JV or WFOE)
Prior approval required from Ministry of Commerce (MOFCOM) No registered capital required Parent company must be in operation for at least 2 years in its home country
Prior approval required from MOFCOM Minimum paid up registered capital required depending on the industry
Permitted activities
Can do profit making activities, Can do non-profit communication, issue invoices, receive RMB market research, relation building, exhibit products or services, liaison payments and earn profits. and coordination activities; Cannot do any direct profit making activities, sign contracts or bill customers. Additional rules for business sectors such as banks, insurance institutions, securities organizations, accounting and law firms.
Prohibited Industries
Certain business activities in the farming, animal husbandry, mining and quarrying, telecommunications, postal, manufacturing, scientific research, power, irrigation and education sectors are prohibited from foreign investment.
Funding of local operations
Through money sent by parent company
Through money sent by foreign company and profits generated by business operations
Cost and Time USD 1,000 to USD 5,000; 2-3 months for Setting to set up
Hiring of Employees
Cannot hire local Chinese staff; can hire foreign nationals (one Chief Representative and maximum 3 ordinary representatives)
Can hire Chinese employees after signing contract as per requirements of Labour Contract Law
Compliance Submit an annual report to the Requirements registration authority between 1 March and 30 June Principal Applicable Laws
Regulations on Administration of Registration of Resident Offices of Foreign Enterprises; some local provincial governments have their own requirements
Tax Generally 10% tax on the Gross Requirements Expenses of the office
proportional amount of shares. There isn’t one single structure which is the best. Each has its own benefits and drawbacks. Your choice should depend on your business objectives and how much time and financial resources you are ready to invest in pursuing those objectives. I would strongly advise you to first seek expert legal advice before setting up office in China. The India China Economic & Cultural Council (ICEC) has a panel of eminent lawyers/ law firms with expertise in the Chinese market to help you understand each organization structure in detail, its
Registered capital could vary from USD 10,000 to over USD 1,00,000 depending on the industry and location; 3-4 months to set up
Annual audit reports (balance sheet and income statements) to be submitted to relevant authorities Company Law, Law of the People's Republic of China on Wholly Foreign- Owned Enterprises and Law of the People's Republic of China on Chinese-Foreign Joint Ventures, Sino-Foreign Equity Joint Venture Law, Sino-Foreign Cooperative Joint Venture Law Depends on place of registration and industry; begins with 25% although some industries enjoy a lower rate of 15%
requirements and procedures. It can also find a suitable partner for your JV in China. For any queries you may have please email me at anchit@icec-council.org.
Anchit Goel is based in Shanghai. (This article is for information only and not a legal advice)
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