Transcript Dificultades en el panorama de la PI en China

Lehman, Lee & Xu
雷曼律师事务所
Gordiano Casas Herrera
Macau University of Science and Technology
澳门科技大学
November 2006
2006年11月
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Foreign Direct Investment
Investment Vehicles
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Market Statistics
In 2003, China surpassed US as leading destination for FDI
In 2006, China and India were main destinations for FDI in
the world
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first time for developing countries
FDI will exceed USD 60 billion in 2006
Between 1978 and 2006, average GDP growth rate over
9.5%
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Market Entry Essentials
Have a clear entry strategy
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Have a clear exit strategy
Have full knowledge of the risks:
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what
where
how
market research/due diligence
local and foreign competition
regulatory/legal issues (national, provincial and municipal)
Long-term commitment is key.
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Taxation
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Foreign Enterprise Income Tax
 Flat rate of 30%
 Plus 3% local tax on the taxable profit.
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Manufacturing: special treatment
 First 2 years : no tax
 Next 2 years: 50%
 Can enjoy 50% reduction for further 3 years if export
more than 70% of production
 In some SEZs can enjoy even further tax reduction if
export 100%
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Preferential Taxation
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Open Economic Zones
 Taxed at a rate of 24%
 Eligible for tax holiday & 3 year reduced rate.
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Special Economic Zones
 Taxed at a rate of 15%
 Shenzhen, Zhuhai, Xiamen, Shantou and Hainan Island.
 Eligible for tax holiday & 3 year reduced rate.
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Soon will be eliminated and general rate 27%
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FDI Legal Framework
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The legal framework guiding foreign investment in
China is contained in two sets of regulations:
 State Council, Guidance of Direction of Foreign
Investment Provisions (the "Guidance Provisions")
 Foreign Investment Industrial Guidance Catalogue (the
"Catalogue")
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Since China's World Trade Organization (WTO) entry,
government has relaxed investment regulations
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FDI Divisions
Encouraged (262)
Agriculture
New/high technology
Industries which develop Western/Central regions
Restricted (92)
Resource-intensive/wasteful enterprises
Approval according to the amount of Investment
Prohibited (33)
Industries which cause pollution and ruin natural resources
Projects which utilize processes/technologies which are unique to
China
Permitted
All other industries not listed in the Catalogue.
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Investment in PRC
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Business enterprises must:
 obtain state approval on a project-by-project basis
 comply with numerous regulations
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Each particular business scope requires a minimum
amount of Registered Capital, which must be
contributed in formation of the company.
Depending on the proposed investment vehicle and
industry, the requirements for approval will vary
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Foreign Investment Operating
Structures
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Representative Office
Equity Joint Venture
Cooperative Joint Venture
Wholly Foreign Owned Enterprise
Holding Company
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Representative Office
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Straightforward and inexpensive way to establish a
commercial presence in China
Over 35,000 foreign companies have established Rep Offices in
China
RO allow foreign companies to:
 further understand the Chinese market,
 promote their products and services,
 develop new contacts,
 examine the feasibility of an investment project
For certain industries (insurance and banking), a RO is a legal
prerequisite to establish an operating entity in China
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Representative Office
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A RO is an "extension" of foreign company (not a separate legal
entity)
Restrictions on business activities
Once established, RO may:
 lease premises,
 employ local and expatriate staff (approval)
 conduct business liaison activities on behalf of its overseas parent
company.
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Legal Framework
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People's Republic of China State Council Interim Provisions on
the Administration of Resident Representative Offices of Foreign
Enterprises (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)
Measures for the Administration of Registration of Resident
Representative Offices of Foreign Enterprises (外國企業常駐代
表機構登記管理辦法)
Detailed Rules for the Implementation of the Examination,
Approval and Administration of the Resident Representative
Offices of Foreign Enterprises in China (關於審批和管理外國
企業在華常駐代表機構的實施細則)
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Establishment Criteria
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Applicant must comply with stipulated establishment criteria:
 be lawfully registered in the country in which it is located,
 enjoy a "good business reputation"
 supply true and reliable information to approval and registration
authorities
 handle establishment procedures in accordance with Chinese law.
 applicant has been in business for a specified period of time
 evidence of prior business with China
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Permitted Scope of Business
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A RO may only engage in "non-direct business activities“
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business liaison,
product presentation,
market surveying,
technical exchange
"..... under no circumstances may a Rep Office sign contracts,
receive income or in any way engage in direct profit-making
activities ...."
Serious consequences:
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warning,
hefty fines,
confiscation of any illegally-generated income
cancellation of its business registration!
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Taxation
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Although permitted activities do not generate income,
ROs must pay:
 foreign enterprise income tax
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RO tax is based on turnover at a rate around 10% over
expenses
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How to Establish a Rep Office
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Two separate stages:
 applying for approval
 applying for registration
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Upon registration, Registration Certificate (登記証)
will be issued (fully established)
Post-registration formalities within 30 days.
Parent company is responsible for all activities
conducted by the RO in China.
 RO under a newly incorporated subsidiary company
 in existence for at least one year
 minimum capital US$10,000
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Approval Process
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Approval Authority:
 MOFCOM or its local bureau (provincial or municipal
level)
 In specialised industries, the relevant Chinese
government authority (Ministry of Justice…)
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Designated Sponsor:
 application submitted to MOFCOM through a
government-authorised "sponsor" organisation
 role of the sponsor is to submit application documents on
behalf of the Applicant for approval.
 renewal or change in Business Registration Certificate
must be effected through the original sponsor
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Application Documents
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Documents to be submitted:
 application form and application letter (Chinese)
 copy of Applicant's constitutional documents (also Chinese
translation)
 reference letter from bank
 lease agreement of the premises
 letter of appointment of the Chief Representative
 passport copies
 any other documents which may be required.
Approval authorities will grant approval within 20 working
days (Certificate of Approval (批準証書))
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Registration
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With the State Administration for Industry and
Commerce (SAIC) or its local bureau (AIC)
Within 30 days from date of issuance of the Certificate
of Approval
Documents to be submitted:
 original Certificate of Approval,
 copies of all documents submitted at the approval stage,
 registration form and a prescribed fee (RMB2,000).
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SAIC (or local AIC) issues Business Registration
Certificate, within 20 days.
Registration Certificate valid for one year (renewed
annually)
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Post-Establishment Registrations
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Once Registration Certificate has been issued
Registration with various official departments:
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public security bureau,
local and state tax authorities,
customs authorities
local bank
Also apply for work permits, employment visas and
residence permits for expatriate staff
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Employment of Local Chinese
Employees
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RO may not directly employ local Chinese employees
(not independent legal entities)
Must use “local service agencies" (FESCO…)
Impose:
 service charge on RO
 administration fee on employee
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Takes care of labour and social insurance contributions
on behalf of the employee.
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RO Summary
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Advantages
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Quick and simple.
Inexpensive
No minimum registered capital.
Allows for collection of market information and preparation for
direct market entry.
 Easy to dismantle
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Disadvantages
 Cannot engage in revenue generation.
 Taxation regardless of prohibition on profit making activities.
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Joint Ventures
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First structure established by PRC to facilitate foreign
investment in the country.
Two JV structures available:
 equity joint venture (“EJV”)
 cooperative or contractual joint venture (“CJV”).
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In some sectors JVs are the only means for foreign
firms to get a foothold into the market (aviation,
telecoms..)
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The larger the project, the more likely the Chinese
government will require a EJV structure to be used
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Reasons for entering into JV
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Lack of viable options
 JV is often the only investment vehicle permitted
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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
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Guanxi or brand
 Network of connections, sales and distribution clientele,
or its strength as a brand name
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…also for Chinese partner
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Chinese partner looks to a foreign investor for the
following:
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Capital
Management expertise and techniques
Training opportunities for Chinese staff
Financial engineering and rescue skills
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Disadvantages of JV
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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
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Difficulties in expanding investment
 chinese party unable to contribute additional capital
 increase equity stake in the venture (requires unanimous vote by the
board)
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Conflict of interest between partners
 management philosophies of Chinese and foreign JV partners may
differ
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Setup Process
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Divided into 4 stages:
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Project approval
Feasibility study approval
JV contract/AOA approval
Enterprise registration
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Equity Joint Ventures
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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)
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Equity Joint Ventures
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Profits, risks and looses shared in proportion to the
partners’ equity stakes
 determined by capital contributions
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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:
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foreign currency,
equipment,
buildings
intangible assets (industrial property)
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Capitalization
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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 months
 85% within one to three years
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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 Structure
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Two tier structure:
 Board of Directors
 appointed by investors
 Management organization
 responsible for day to day operation
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Summary EJV
Advantages
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Chinese partner will bring connections and an established
sales and distribution network;
Local partner will bring local and particularized knowledge
of both market and bureaucracy.
Chinese partner will usually have or can easily obtain an
operational site, which aides in efficient start-up
Disadvantages
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JV contract often difficult to negotiate
Differing objectives and management styles often result in
conflict.
Lack of control by foreign party
Difficulty in selling shares in venture.
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Cooperative Joint Venture
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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
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Mainly used in ventures:
 involving large fixed assets (real estate and infrastructure
projects)
 Where desired Chinese partner does not have sufficient
cash/assets to contribute to an EJV
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Kinds of CJVs
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Purely contractual arrangement:
 each party agrees to:
 undertake certain obligations
 provide certain capital (cooperative conditions)
 agreement sets out the objectives of the venture
 rights and obligations flow strictly from the contract
 no separate legal entity and therefore unlimited liability
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Independent Chinese legal person
 liability limited to the amount of capital of the JV
 sharing of profits and risks governed by agreement
between the parties
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CJV Agreement
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Parties should provide in the CJV contract:
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investment or cooperation conditions,
distribution of earnings or products,
sharing of risks and losses,
form of operation and management
title to property upon termination of the CJV
Since CJV is based on a contractual relationship, it
leaves much room for negotiating profit sharing,
management etc…
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Contributions
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Investment or cooperation conditions provided by
parties may be in the form of:
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cash,
material objects,
land-use rights,
industrial property rights,
non-patented technology
other property rights.
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Summary on CJV
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Similar to Equity Joint Venture in structure but with
more flexibility because of the following:
1. Sharing profits is governed entirely by contract
2. Foreign partner can obtain return of investment in
priority to Chinese partner.
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Setup requirements similar to that of Equity Joint
Venture.
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EJV vs. CJV
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Wholly Foreign Owned Enterprise
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Enterprises established by foreign investors in
accordance with relevant Chinese law, exclusively with
their own capital (Law of PRC on WFOEs)
WFOE structure can only be used in certain business
sectors (restrictions)
Not authorized in PRC until 1986
In 1997, WFOEs largest number of approved FIEs,
eclipsing EJV
 WFOEs can better achieve business goals
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WTO accession made it easier to establish WFOE
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Advantages of WFOE
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Complete management control (no chinese partner)
 avoid disputes and conflicts (common in JV)
 business decisions more flexibly and quickly to adjust
operations to the demands of markets
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Simpler establishment procedures
 quicker negotiation and approval process (no JV contract)
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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 WFOEs
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Foreign investors are entitled to all the profits
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Greater control over:
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reinvest or repatriate
confidentiality of technology
IPRs
Flexibility of location
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JVs located where local partner has an existing plant
WFOEs are free to build on green field land
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Potential Drawbacks
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Foreign investors may need more time and energy to
develop their businesses (no Chinese partner)
More legal restrictions on the establishment and
operation of WFOEs (restricted in sensible areas)
Foreign investor cannot rely on a Chinese partner to
provide a site for operations.
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will have to make its own arrangements for land use
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WFOE Registration Procedures
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WFOEs are established in three stages:
 preparation,
 examination and approval,
 registration.
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Preparation
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Prior to application for establishment, submit a report
to the local government where enterprise is to be
established
Report shall include:
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aim of the establishment
scope and scale of business operation
products to be produced
technology and equipment to be used
area of land to be used
quantities of water, electricity, coal, gas and other forms
of energy resources required
 requirement of public facilities.
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Application
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WFOE application must be submitted to MOFCOM (local)
Include following documents:
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written application form (in chinese)
feasibility study report
articles of association of the WFOE (in chinese)
name list of the legal representative
legal and credit certifying documents
inventory of goods and materials to be imported
any other documents required
Business License: 90 days
Registration (SAIC): within 30 days
Secondary filings (tax, customs and SAFE): 30 days
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Articles of Association
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Most important document
Must include:
 name and location of the enterprise;
 aim and scope of business operations;
 total amount of investment, registered capital, and time limit for
contributing investment;
 form of organization;
 internal organizational structures and functions, duties and limits of
powers of legal representative, general manager, chief accountant
and other staff members;
 system of financial affairs, accounting and auditing;
 labor administration;
 term of business operations, termination, and provisions for
liquidation;
 procedures for the amendment of the articles of association.
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Capitalization
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Capital contributions can be made in:
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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 three years of establishment
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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 Capitalization
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Ratio between registered capital and total capital
investment:
 Total investments up to $3,000,000, registered capital
must be a minimum of 70% of this amount;
 Total investments over $3,000,000 to $10,000,000,
registered capital must be a minimum of 50% of this
amount;
 Total investments over $10,000,000 to $30,000,000,
registered capital must be a minimum of 40% of this
amount;
 Total investments over $30,000,000, registered capital
must be a minimum of one third of this amount.
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Summary on WFOE
Advantages
 Quicker setup as there is no Chinese partner
 Simpler management structure and objectives which are simply those
of the parent organization.
Disadvantages
 Independence is often, in itself, a shortcoming because of lack of
connections, established markets, and local knowledge.
 WFOEs cannot operate in some sensitive areas such as securities.
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Liquidation of JVs and WFOEs
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Liquidation can occur voluntarily and involuntarily.
FIEs declared in bankrupt liquidated in accordance with
laws and regulations on liquidation due to bankruptcy.
Solvent FIEs who wish to liquidate, may proceed:
 in accordance with constituting documentation (AOA)
 procedures set out in laws
 appointment of a liquidation committee to oversee the
process
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Restructuring the Joint venture
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Restructuring FIEs through M & A
 need to rationalize investments
 create new investment opportunities
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Transforming EJV to a WFOE.
 not possible to use the restructuring of a JV to circumvent
WFOE restrictions
 relevant authorities must approve the new created WFOE
 creation of WFOE only allowed if not restricted or
forbidden sector
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Holding Companies
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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 Companies
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Over 250 foreign investors have established holding
companies
Examples:
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Unilever,
Rhone-Poulenc,
Philips,
Motorola,
General Electric,
Siemens
BOSCH
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Establishment Requirements
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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 Procedure
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Holding company must be approved (both):
 by commercial department of the city or province in
which it is to be established
 by MOFCOM
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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 Control
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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 Companies
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Valuable tool to manage China investments
Established in tax free Jurisdictions (HK, BVI, Mauritius)
Benefits:
 Exit Strategy
 easy transfer of interests in the China operation (offshore
transfer)
 no approval needed from SAIC, MOFCOM or SAFE
 Limiting Liability
 liabilities incurred by the China entity will be the liability
of the holding company
 Transfer Pricing
 lower taxes for products made in China but sold elsewhere
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Offshore Holding Company
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Tax Benefits
 Offshore: money held by holding company will be tax free
 In China: impact of China taxation can be managed by
licensing the IP from parent company
Parent
Company
IP
Offshore
Company
IP
 In Home Jurisdiction, money can be:
 repatriated at a tax advantageous time
 reinvested in international ventures
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Chinese
Company