Transcript Doing Business in China

Coudert Brothers
Global Legal Advisers
Coudert Brothers LLP
Global Legal Advisers
www.coudert.com
Principal Forms of Foreign
Investment
Equity Joint
Venture (EJV)
Onshore
Offshore
Foreign
Investor(s)
Joint Venture
Cooperative Joint
Venture (CJV)
Wholly Foreign Owned Enterprise
Representative Office
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REPRESENTATIVE OFFICE
Permitted Activities:
• act as local base to reach customers
• receive inquiries
• conduct market research
• develop contacts with Chinese government officials
Requirements:
• must have Chinese sponsor to assist with approval process (roughly 2-month
process)
• must apply for reapproval every 3 years
• chief representative at the office must be a resident of China (but may be foreign
national)
Pros:
• relatively easy to set up and maintain compared to other FIEs
Cons:
• has no "legal person" status in China and cannot enter into contracts
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JOINT VENTURES (EQUITY OR
COOPERATIVE)
Pros:
•
•
Chinese partner's connections with local government authorities
Chinese partner's existing supply/sales channels and customer base
Cons:
• Restrictions on transfers of foreign partner's equity stake
• Taking on existing operations and obligations of Chinese partner
Requirements:
• Constituent parties must consist of one or more Chinese entities and one or
more foreign entities or individuals
• 25% minimum foreign ownership requirement
• Minimum registered capital requirements vis-à-vis total investment
Other Characteristics:
• Capital contribution can be cash, in-kind contributions (including intellectual property)
• Capital contribution in the form of IP shall not exceed 20% of the JV's registered capital
(35% in the case of a high technology project)
• Contribution of IP requires Ministry of Commerce's approval if it is in the "restricted
category"; all other IP requires only registration
• Management vested in a board of directors the members of which are appointed
the investors based on the rough ratio of capital contributions (more flexibility in
CJVs than EJVs)
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by
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MAJOR DIFFERENCES BETWEEN EQUITY
JOINT VENTURE AND COOPERATIVE JOINT VENTURE
•
JV contract of CJV may provide that invested capital be
returned to investors during the term of the joint venture
•
Parties to EJV required to share profits in accordance
with proportion of capital contributions; parties to CJV
may share profits in manner as set forth in JV contract
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WHOLLY OWNED FOREIGN
ENTERPRISES
OLD:
• Must be exported-oriented or technologically advanced enterprises
NEW:
• WOFEs are no longer required to state in its AOA that it will export a minimum percentage of its
output
MAIN CHARACTERISTICS OF WFOE
• Has "legal person" status as a limited liability company
• Owned solely by foreign investors
• Approval process similar to a JV; but no need to negotiate with Chinese partner
• Transfer of equity interest requires government approval
• Distribution and allocation of dividends/profits is as agreed to among investors
PROS:
•
•
•
No need to consider interests of local Chinese partner
No need to take on existing obligations and operations of Chinese partner
Foreign investors retain 100% control in management of enterprise
CONS:
• No readily available local knowledge and connections by Chinese partner
• Cannot be utilized in certain industries where foreign ownership is limited (e.g.,
telecommunications)
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GOVERNMENTAL APPROVAL FOR JVs AND
WFOEs
•
Priority given to the project during the government
approval process for the FIE depends on specific
industry involved
• Prohibited Category
• Restricted Category
• Encouraged Category (preferences granted)
Examples are: water conserving irrigation equipment,
railway technology, integrated circuit manufacturing
• Everything else falls into the "Permitted Category",
which are reviewed by and passed upon by the
government on a case-by-case basis
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Establishment Procedures for FIEs
Obtaining Requisite Pre-Approval
(for certain projects only)
Project Proposal
Examined and Approved by
MOFCOM/COFTEC
Issuance of Approval Certificate
(prepared by Chinese party)
Examined and Approved by
MOFCOM/COFTEC
Registration with AIC
Issuance of Business License
(FIE Establishment Date)
Feasibility Study Report
(prepared by all parties)
Reservation of
the FIE
Company
Name
Examined and Approved by
MOFCOM/COFTEC
JV Contract and AOA, etc.
Post-Establishment Matters
Obtaining Company
Seals
Registration with Tax
Bureau, Financial Bureau,
Customs and SAFE, etc.
Opening Bank Accounts
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Minimum Requirement for Registered
Capital of FIEs
Total Investment
Minimum Registered Capital
(% of Total Investment)
Up to US$3 million
70%
US$3-10 million
50% or US$2.1 million
(whichever is higher)
US$10-30 million
40% or US$5 million
(whichever is higher)
Over US$30 million
1/3 or US$12 million
(whichever is higher)
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Registered Capital Contribution Schedule for
JVs
Contribution Method
Registered Capital
Lump-Sum Contribution
No Limitations
Time Limit
within 6 months after the Business
License is issued
The first 15% to be contributed within 3 months after the issuance of the
Business License; and the remaining 85% is subject to the following schedule:
US$500,000 or below
Contribution in
Installments
US$500,000 - US$1 million
within 1.5 years after the Business
License is issued
US$1 million – US$3 million
within 2 years after the Business
License is issued
US$3 million – US$10 million
within 3 years after the Business
License is issued
Over US$10 million
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within 1 year after the Business
License is issued
determined by the relevant approval
authority
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Transferring Equity in a
Joint Venture – Onshore
New Owner
Equity
Consideration
Original
Foreign
Party
Original
Owner
Former Ownership
Offshore
China
Chinese
Party
JV
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OTHER OPERATING ISSUES
•
•
•
•
•
Source of Supplies
Export Requirements
Technology Transfer
Labor Issues
Foreign Exchange Controls and Repatriation of
Profits
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SUPPLY SOURCES
• Prior Law:
FIEs had discretion to determine whether to procure in
China raw materials, equipment, office supplies, etc., but
had to give priority to a Chinese source where relevant
conditions were the same.
• Current Law:
FIEs no longer required to give priority to Chinese
sources so long as the decision regarding whether to
procure in or outside of China is based on the principles
of "fairness and reasonableness."
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EXPORT REQUIREMENTS
•
WFOEs
Prior Law:
Current Law:
•
Export-oriented WFOEs were required to export at
least 50% of its annual products and to set forth
such minimum percentage in its AOA
WFOEs no longer subject to export requirements as
a pre-condition to establishment
JOINT VENTURES
Current Law:
Neither CJVs or EJVs are required to sell products
outside of China
Current Practice: To improve export performance, many local
governments have in practice required a stipulation
in the JV Contract that a stated percentage of the
JV's products be exported
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TECHNOLOGY TRANSFERS
Two Alternatives for transferring technology to the FIE by the foreign investor
• Transfer Technology as Registered Capital Contribution
• Must not exceed 20% of the FIE's registered capital (35% in the case of a high
technology project)
• Transfer of the technology requires government approval and valuation by the
government
• License the Technology to the FIE
• Whereas all technology import contracts used to require government approval, only
technologies that are on the "restricted" list now require approval
• Technology import contracts for all "non-restricted" technology merely require
registration with the government
• The technology import contract is not valid until the relevant authority has issued
the "technology import permit"
• The provider of the technology is required to guarantee that the technology is
complete, effective, and capable of accomplishing the goals set forth in the
technology contract
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LABOR ISSUES
• All Chinese "legal persons" required to enter into employment
agreements with their employees which must address the following:
1.
2.
3.
4.
5.
job duties
wages
term of contract
work conditions
conditions for termination of contract
• Employers required to pay into welfare and pension funds for each
employee (an amount equal to roughly 50% of employee's base
wage plus bonuses)
• Severance pay equal to 1 month's pay for each year of service
• Foreign nationals can be hired only if there is a special need and no
available local candidate in China
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FOREIGN EXCHANGE CONTROLS
AND REPATRIATION OF RMB PROFITS
•
•
RMB now fully convertible on current account basis
•
Examples of "Current Account" items include revenue or expenditures derived from import/export of goods
and services, fees or royalties on intangible assets
• Must submit documents to authenticity of the commercial transactions to the designated
foreign exchange bank
•
Examples of "Capital Account" items include investments, loans, issuance of shares, income from sale of
real estate
• Capital Account items subject to substantive and discretionary review by SAFE
Repatriation of profits out of China
•
No legal restrictions
•
Requirements:
• Must have paid all registered capital requirements of the FIE
• Must have paid all relevant taxes
• Documents to be presented to SAFE:
• FIE's board resolutions authorizing such profit distribution
• Proof of tax payments and tax returns by FIE
• Audited financials regarding profits / dividends for the current year
• FIE's foreign exchange registration certificate
• Review and approval process by SAFE is administrative and procedural rather than
substantive and discretionary
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