Opening case

Ability to sell products in Chinese domestic market by foreigners is very limited and tightly controlled. Basically three types of private business organizations may engage in such activity:

1. Chinese companies with limited liability. They are allowed to sell products in accordance with permits issued on the basis of their licenses for business activities. However, such companies can be established only by citizens of China or Chinese entities.

2. Companies with 100%-governmental foreign investment. Such enterprises are allowed to sell 50% of its products in the domestic Chinese market (some regional differences and the entry of China into the WTO will increase this figure), with the remainder of the required export products abroad. However, the establishment of such an enterprise in one of the free economic zone equates to the Customs to the foreign enterprise. And in this case 100% of the products of such an enterprise can be exported to China.

3. Joint ventures. Joint ventures can be based on its license to get permission to manufacture and sell products on the domestic market through the licensing of Chinese joint venture. But the size of the quota on sales to the domestic market to the joint venture under the watchful eyes, as China was faced with competition from the WTO, and sometimes quite difficult to get a quota on the desired level of domestic sales. In addition, the opportunity for the newly established Chinese companies to enter into joint ventures is increasingly under question, as the Chinese Government wishes to see evidence of work experience (track record) of these companies before allowing them to gain official access to overseas investors. The Chinese joint venture partners have the final say in matters of production, in addition to the fact that they are authorized for distribution of profits.

The foregoing brings us to the choice of enterprises with 100%-governmental foreign investments established in free economic zones, as the most acceptable forms of business organization in China.

Companies with 100%-governmental foreign investment for foreign investors are becoming increasingly popular tool for doing business in China, mainly due to the possibility of full control over investments and activities of the enterprise. With the imminent entry of China into the WTO, the popularity of enterprises with 100%-governmental foreign investment will increase further because for the establishment of such enterprises does not require a co-founder of the Chinese: to date, foreign investors need a Chinese partner in order to gain access to the internal Chinese market, and only in order to achieve this goal, many enterprises were established in the form of joint ventures. Due to the fact that with the entry of China into the WTO will have more foreigners free access to the Chinese domestic market (this is a condition of China's accession to the WTO), the use of enterprises with 100%-governmental foreign investment and restructuring of the existing joint venture in such enterprises will be the most viable options for the organization of work in China. It is, however, bear in mind that the process of opening the domestic market in China laid out for a period of more than 6 years old, and therefore there will be some restrictions on sales by foreigners on it during this transitional period.

Companies with 100%-governmental foreign investment mainly established in the form of limited liability companies. They are legal entities in accordance with the laws of the PRC and are protected by Chinese law. The founders (participants) of such enterprises may act only foreign (physical or legal) person. The minimum number of founders – one. Chinese citizens or organizations may not be the founders (participants) of such enterprises. Status company with limited liability "is to limit its liability to an amount of a constituent of capital, which should be paid, usually within 90 days of receipt of the license for the business (yingye zhizhao). This amount can be used to cover running costs the company, and director of the company, in case of insolvency of the company, may be subject to personal liability for the debts of the company until the amount of limited liability if their actions on the use of a constituent of capital led to the insolvency of the company.

Scope of enterprises with 100%-governmental foreign investment

Law of the PRC on enterprises with foreign investment, and its implementing regulation, determines that the activity of enterprises with 100%-governmental foreign investments "should be helpful for the development of Chinese economy, bringing tangible economic benefits, and, moreover, be consistent, at least one of the following conditions:

1. An enterprise should use advanced technologies and equipment, develop new production, save energy and natural resources, improve and replace existing products, which can be used instead of similar import.

2. The cost of enterprise, every year is exported, must not exceed 50% of the total products produced during a given year, reaching or exceeding the foreign exchange balance.

Businesses with 100%-governmental foreign investment is prohibited to engage in the following categories (although these provisions should be reviewed after the entry of China into the WTO): journalism, publishing, broadcasting, television or cinema, internal and external trade, postal and telecommunications services. Most of these provisions are likely to remain unchanged. Under internal and external trade means selling products exclusively on the Chinese market, although currently on this subject already exist certain indulgences. The activities for which there are restrictions for companies with 100%-governmental foreign investment include the provision of utility services, transportation, real estate, trust and investment and leasing. It is also subject to review in connection with the entry into the WTO, but in most cases, full access to these market segments will be opened gradually and not overnight.

Interestingly, however, noted that despite these conditions, which are strictly determined that these companies should be employed only in production, processing and assembling products in some of the free economic zones are subject to more liberal rules of interpreting the law in such a way that dealt with Our company may engage in such "servicing" activities, such as recruitment services, counseling and so forth. However, obtaining such a license – it rather difficult and expensive. The advantage of the possibility of such activities lies in the fact that the holder of a license has the right to officially receive the money in China for these services with the ability to transfer profits abroad. However, keep in mind that although such activities may be permitted in the zone, it (by the way, lately rampant in the business connected with the Internet) can bind your hands, if you act outside the zone, and presents difficulties of an associated her transactions with local companies. Be careful in conducting such activities better and to start, consult with experts as well as companies with 100%-governmental foreign investments, in fact, not intended for use as service providers. And the organization of your business, from the standpoint of the various operations must be carefully considered, if you want to take considering the possibility.

The establishment of the holding company for businesses in China

The reason for this decision may serve as the fact that the responsibility lies with the Chinese enterprise companies, establishing an enterprise. In order to protect the parent company can use an intermediate company, relegate the potential risk of legal or financial liability at a controlled distance.

If there is a need, it is recommended to use as a holding company of Hong Kong an offshore company.

Brief information on the establishment of such companies is contained in our article about the organization of representative offices of foreign companies in China. In the future we will consider this issue in more detail.

In order to invest in China, such a company must meet certain criteria set by the Commerce and Industry Office of the PRC, which include a requirement to ensure that the company has existed for at least one or two years and the requirement to provide certain documents confirming compliance with the company the necessary conditions . A simple solution in this case is the purchase has already registered a company with a certain age (probably best not previously used), change (if necessary) its name, and use this organization as a holding tool for Chinese enterprises.

The procedure for the establishment of enterprises with 100%-governmental foreign investment in China

The initial stage of establishment is to prepare a "Report on the proposal of the project, which is submitted to the local Committee on Foreign Trade and Economic Cooperation. Competence of the Committee is to provide authorization for the establishment of the enterprise. The report should reflect the following:

The scope of the enterprise (species proposed activities);

Production;

Technology and equipment that will be used;

Calculation of export sales;

Requirements for the necessary land;

Requirements necessary municipal infrastructure.

The next step is to prepare a "Report on the Study of Opportunities", which is a detailed business plan of the company. It should contain information on the following issues:

– Scope of activity, annual turnover rate of exports;

– Plan the production and implementation;

– Total investment and the size of the founding capital;

– Analysis of alleged foreign markets;

– Scheme of transportation and supply;

– Choice location of the enterprise and human land use;

– Equipment and technologies that will be used;

– Report on the protection of the environment;

– Schedule of the project;

– A financial plan and foreign exchange;

– Conditions of employment of workers. Many local free economic zones can offer assistance in preparing the necessary documents. Be careful, as they may include provisions relating to joint rights, financial security of employees or the requirements for export products, which may be disadvantageous to you. Recommended that this process is controlled by a third party, because Chinese employees has its own material interest in the provision of a lease of any property to the same for their services they charge a fee. This is almost the same as to ask your landlord to discuss and prepare for you a rental contract with them – sometimes you can sign a contract containing a rather unpleasant for you condition that occurs when there is no skilled care disinterested third party. And in general, at the conclusion of any agreements in China, as indeed, everywhere, it is reasonable to use a qualified consultant or lawyer.

It should also pay particular attention to the issue of granting the right to use land. Depending on the amount of your investment, you course of action may want to own their own land rights. In this case, you need to apply for your purchase "Provision of law", whereby you can own land and sell it (the right) in the future. "Granting the right to land" is that you get the opportunity of ownership and land use, but land ownership remains in China. In this regard, be careful when investing money in this right, although investment in property, you may have to do in any case.

As an enterprise with 100%-governmental foreign investments are in the form of limited liability companies need to be further developed and submitted to the Charter company.

Statutes of Chinese companies are similar to statutes of Western and Russian companies. The Charter should include the following provisions:

– Name and address of the company;

– Total investment in the company and the size of the share capital;

– Organizational structure;

-The principles of financial management, management accounting, profit sharing;

– Labor relations, the term of the order of liquidation, the procedure of amending the charter. It is also necessary to submit the following documents to the parent company:

– A document of state registration;

– A document of registration with the tax authority, certificate of satisfactory condition, or a tax report for the last period (year);

– Memorandum of association (Memorandum of Association) and the Charter (Articles of Association);

– Register of directors and shareholders (participants);

– A letter from the servicing bank to pay (Bank Reference);

– Board of Directors resolution on the establishment of the enterprise;

– Decision (letter) Board of Directors to appoint a "legal representative" (usually your main foreign manager in China, responsible for the project). The above documents must be notarized at the location of the founder and legalized by the local Consulate of China.

At the same time you need to find and prepare a business premises, to discuss the conditions of their lease (buying), make sure you have all the necessary network infrastructure (water, electricity, etc.) agree on the granting of rights to land use.

After preparing all necessary documents, they can apply for registration of the company. As a rule, approval and authorization takes about a month, then executed corporate documents of the enterprise. After that, the company receives a license for business activities (yingye zhizhao), and opens a bank account into which, within 90 days after receipt of the license must enter the amount of the share capital. The company has not issued a license to engage in import / export activities until the introduction of the share capital.

Confirmation pay capital

As part of the registration procedure of such an enterprise, must demonstrate to the Chinese authorities that the enterprise is a serious investment. Getting help to confirm the payment of the share capital is an important step in establishing a business, and this process is strictly controlled. This certificate is issued after receipt of funds from the founder of the company's account in a Chinese bank. At the present time is a minimum amount of capital for enterprises with 100% foreign governmental investments in the amount of 200 000 dollars, but it is possible that up to 70% of the share capital was represented in the form of equipment. This requires that the equipment was delivered to China, and assessed by Customs, which issues its own opinion on the assessment of capital. Only after that the equipment can be installed at the plant.

Investment in statutory fund can be used to cover the current needs of the enterprise. This capital should not be exported outside of China, because it represents the size of the limited liability company.

Post-registration procedures: The latter include:

– Opening of bank accounts of companies (both in Renminbi or foreign currency);

– Registration at the office;

– Check the local tax authority;

– Registration of land use;

– Obtaining a building permit required facilities (if necessary);

– Registration of trade marks and patents (if necessary). Tax exemptions

If you pay capital companies with 100%-governmental foreign investment allowed in as a contribution to use necessary for the production of equipment – up to 70% of the share capital. The above equipment can be introduced into China duty free. This equipment must be new and must be imported at market price. (China Customs is becoming more sophisticated in determining the true costs of different goods). The remainder of the share capital must be paid in the currency to a bank account enterprise.

As a general rule, companies with 100%-governmental foreign investment is provided as a minimum two-year exemption from profit tax rate which is 33% of the profits from taxation of profits over the next three years at a reduced 50% rate (ie 16 , 5% of profits). This nationwide standard. In some areas in the north-west China (such as Gansu and Xinjiang) and exemption from income tax for up to 8 years. In the free economic zones in the income tax rate decreased to 15%, there is also applicable tax exemption for a 50% rate over the next few years (ie 7,5% of profit).

Free economic zones offer a better infrastructure than other areas, and, although it is reflected in the level of rent payments, the establishment of enterprises in such areas is often a good investment in ensuring a higher level of service. Free economic zones are also usually provide a full range of services related to the clearance of import and export formalities, including customs, which speeds up the process of operations for implementing the necessary you import and export. They are a really advanced service centers for manufacturing companies.

Another tangible benefit applies when your company exports all its products. The company, located in free economic zone, can import raw materials needed for production activities, duty-free. And when the finished products is exported, it is exempt from customs duties and VAT. When selling goods on the domestic market will have to pay import duties and VAT (17%).

Some of the free economic zones (one of these – Vaygaosyao in Shanghai) in order to attract foreign investors to apply the discount schemes for VAT. It looks as follows: 4% of the total collected value added tax remains at the disposal of local government, the rest is sent to the central budget. Local government returns part of its tax foreign investors. However, keep in mind that this practice is condemned by Beijing, and the central government may ban it. Therefore, you may not found this benefit to their long-term budget.

As for aspect use of raw materials, if your business is located in the free economic zone, producing components for products, where some other enterprise with foreign capital (spare parts for cars – a good example for this), then a company, say, a car manufacturer can buy your products as ingredients for their own, and by providing documents that the finished products were exported, it can reclaim VAT paid when buying your products. Agree that this is a fairly good mechanism that can be used when negotiating with large enterprises with foreign investments (joint ventures or enterprises with 100%-governmental foreign investment) in China. This applies particularly to the packaging industry.

Opinion

As you probably already noticed, it is very important to have high-quality professional assistance, both in legal and financial aspects of business organization in China. This applies to issues the business plan of the future enterprise, and issues passage of concord and registration formalities, obtaining licenses. The material provided in this article is only a brief overview on some issues and does not constitute an exhaustive information on the problem. Regional differences in taxes, benefits, compensation for import duties, export duties, and even VAT on different affect on the procedure of establishment. With the entry of China into the WTO tariff and tax rates will change fairly quickly, so we did not consider them here in great detail, but focused more on issues of organization structure, which enables you to produce and, if you wish, the sale of its products in the local market. Another caveat: some local governments in China may appear to be very hospitable, and provide excellent assistance in registering your business, but in many cases they have only their own interest in the foreground, and very easy to be deceived, when the consequences of such a trump card turns out to be a failed investment. Get professional advice before entering into such liabilities in China. Roman Sayapin