DOING BUSINESS IN CHINA

  • Preparing For China   ( 8 Articles )

    The firm handles sensitive corporate and company law issues. These issues frequently arise in matters pertaining to corporate structure, corporate contracts, laws relating to the creation and regulation of corporations, the legal relationship between shareholders and management, the organization and mode of subscription of capital, transferability of shares, minority protection, deadlock, corporate roles, composition of the board and management, labour, compensation, staff welfare and pension issues, finance, parent companies influence and control on subsidiaries.    

    You need a local presence if you want to grow your business and have a long-term future in the Chinese market. Entering and setting up in this market involves a unique set of regulatory issues.

    The opportunities arise from rapid economic growth in the world's largest market and the availability of a cheap manufacturing base from which to sell to China and the world. From a manufacturing perspective, China in the long run will be distinguished by its overall business strength and structure, including the huge investments made to ensure China has a modern competitive manufacturing sector.

    "Rather than read 10,000 pages of a book, it is better to walk 10,000 miles." (Chinese proverb)

    After doing as much research as possible in your country, you will need to visit China to confirm the results of your research, develop a deeper understanding of potential markets, establish relationships and eventually negotiate contracts and agreements. Business visits to China require patience, understanding and commitment.

    China's markets, rules and regulations change rapidly so your information and advice have to be spot on.

  • Starting a Business   ( 8 Articles )

    Everyone knows that China is poised to become the world’s next economic and political superpower. Within the next five years, more new jobs will be created, more degrees will be earned, and more growth will be piled on than in any other 5-year period in the history of the world.

    As a conscientious international investor and businessperson, you’ve certainly spent time contemplating how to leverage your company’s services against these dynamic markets. Despite their amazing surge forward, however, China’s cities are still complex, often seemingly irrational places to do business. But with the potential payoff as large as it is, the risk is well worth the effort.

    China Commercial Law Firm business team provides the guiding hand that will make your move into China a safe decision for even the most-risk averse companies. Our team of American-, Australian-, & Chinese-born professionals have decades of combined experience on the ground in China. Our staff features only motivated & talented lawyers, accountants, and commercial real estate consultants. Plus, our strategic partnerships guarantee we’ll be there with an answer when you need it.

    This sets out the basics on forming a Wholly Foreign Owned Entity (WFOE) in China.Foreign companies can go into China as a WFOE, as a Representative Office (RO), or as part of a Joint Venture (JV).For the last few years, well over half of all foreign companies are choosing to enter China as a WFOE.

    Make Sure Your Business is Legal For Foreigners

    Determine if the proposed WFOE will conduct a business approved for foreign investment by the Chinese government. For example, until recently, China prohibited private entities from engaging in export trade. Be sure your business will be legal.

    Provide The Proper Documentation

    The investor in the WFOE must provide the documentation from its home country proving it is a duly formed and validly existing corporation or Limited Liability company, along with evidence showing the person from the investor who is authorized to execute documents on behalf of the investor. The investor also must provide documentation demonstrating its financial adequacy in its home country.

    Investor Documents Needed

    The Chinese government normally requires the following documents from the investing business entity: * Articles of Incorporation or equivalent (copy) * Business license, both national and local (if any) (copies) * Certificate of Status (original)(U.S. and Canada) or a notarized copy of the Corporate Register for the investor or similar document (original)(Civil Law jurisdictions) * Bank Letter attesting to the account status of the investor company (original). * Description of the investor's business activities, together with added materials such as an annual report, brochures, website, etc. The first four of these must be in Chinese. The last one may be submitted in English, with a Chinese summary.

    Consider Forming a Special Purpose Company to Own the WFOE.

    Many investors create special purpose companies to serve as the investor in China. China's company regulators have become accustomed to this process. However, the Chinese regulators will often still seek to trace the ownership of the foreign investor back to a viable, operating business enterprise. It is common to form a Hong Kong company for this purpose.

    Secure Chinese Government Approval

    In China, unlike in most countries with which Western companies tend to be familiar, approval of the project by the relevant government authority is an integral part of the company registration process. If the project is not approved, the company will not be registered.

    Compile and Provide These Documents for Chinese Government Approval

    *Articles of Association.This document will set out all the details of management and capitalization of the company.All basic company and project issues must be determined in advance and incorporated in the Articles.This includes directors, local management, local address, special rules on scope of authority of local managers, company address, and registered capital. # Feasibility Study.The project will not be approved unless the local authorities are convinced it is feasible.This usually requires a basic first year business plan and budget.We typically use the client produced business plan and budget to draft up the feasibility study (in Chinese). *Leases. An agreement for all required leases must be provided.This includes office space lease and warehouse/factory space lease.It is customary in China to pay rent one year in advance and this must be taken into into account in planning a budget because the governmental authorities will be expecting this.

    Compile and Provide These Additional Documents for Chinese Government Approval

    You will also be required to provide the following: *Proposed personnel salary and benefit budget. If the specific people who will work for the company have not yet been identified, one must specify the positions and proposed salaries/benefit package. Benefits for employees in China typically range from around 30% to 40% of the employee base salary, depending on the location of the business. Foreign employers are held to a strict standard in paying these benefit amounts. The required initial investment includes an amount sufficient to pay salaries for a reasonable period of time during the start up phase of the Chinese company. *Any other documentation required for the specific business proposed. The more complex the project, the more documentation that will be required. All of the documents in both Step 6 and Step 7 must be in Chinese.

    The Approval Process

    It usually takes two to five months for governmental approval, depending on the location of the project and its size and scope. Large cities like Shanghai tend to be slower than smaller cities. The investor must pay various incorporation fees, which fees vary depending on the location, the amount of registered capital and any special licenses required for the specific project. Typically, these fees equal a little over 1% of the initial capital. On large and/or complex projects, the approval process often involves extensive negotiations with various regulatory authorities whose approval is required. For example, a large factory may have serious land use or environmental issues. Thus, the time frame for approval of incorporation is never certain. It depends on the type of project and the location. Foreign investors must be prepared for this uncertainty from the outset.

  • Employing Workers   ( 3 Articles )

    You should take note of Rigidity of Employment by considering the following factors when starting your business and hire workers:

    Difficulty of Hiring Index
    Are fixed-term contracts prohibited for permanent tasks?
    What is the maximum duration of fixed-term contracts (including renewals)? (in months)
    What is the ratio of mandated minimum wage to the average value added per worker?
    Rigidity of Hours Index
    Can the workweek extend to 50 hours (including overtime) for 2 months per year to respond to a seasonal increase in production?
    What is the maximum number of working days per week?
    Are there restrictions on night work?
    Are there restrictions on "weekly holiday" work?
    What is the paid annual vacation (in working days) for an employee with 20 years of service?
    Difficulty of Firing Index
    Is the termination of workers due to redundancy legally authorized?
    Must the employer notify a third party before terminating one redundant worker?
    Does the employer need the approval of a third party to terminate one redundant worker?
    Must the employer notify a third party before terminating a group of 25 redundant workers?
    Does the employer need the approval of a third party to terminate a group of 25 redundant workers?
    Is there a retraining or reassignment obligation before an employer can make a worker redundant?
    Are there priority rules applying to redundancies?
    Are there priority rules applying to re-employment?
    Firing costs (weeks of salary)
    What is the notice period for redundancy dismissal after 20 years of continuous employment? (weeks of salary)
    What is the severance pay for redundancy dismissal after 20 years of employment? (weeks of salary)
    What is the legally mandated penalty for redundancy dismissal? (weeks of salary)
  • Registering Property   ( 1 Article )
    This topic examines the steps, time, and cost involved in registering property in China. 
    Procedure 1.
    Parties obtain application and notifications sheet, and pay fees
    Time to complete:
    1 day
    Cost to complete:
    Deed tax: 3% of property value to be paid by the buyer
    Stamp duty: 0.05% of property value paid each by buyer and seller (total 0.1%)
    Comment:
    The parties visit the House and Land Resources Administration Centre to pick up an application and a notification sheet that gives instructions on how to proceed. The parties fill the application on the spot, impose their company seals on it, and present it to pay the applicable taxes at the Finance Window. Some property registry offices in Shanghai do not collect stamp duty from companies. In such a case, both the seller and the buyer will have to pay stamp duty to the tax authorities with jurisdiction over them.
    Procedure 2.
    Parties file the application at the House and Land Resources Administration Centre
    Time to complete:
    up to 20 business days
    Cost to complete:
    no cost
    Comment:
    Private ownership of land is not permitted in China; all land is subject to either State ownership or collective ownership. However, a private party is entitled to obtain the right to use the land. Regarding the State-owned land, there are two types of land use rights, the “granted land use right” and the “allocated land use right”. The difference is that the granted land use right is limited in time against payment, whereas the allocated land use right is usually given for free with no time limit, but for specific purposes only. A private party also may transfer to another private party the granted land use right. The allocated land use right cannot be commercially transferable before being converted into granted land use right.
    In this case, the land is used for commercial purposes. Usually land for commercial use is owned by the State, and the relevant land use right is the State-owned land use right. As to the term of the land use right in this case the buyer, who will use the land for commercial purposes, will only get 40 years as the initial term (as maximum unless it extends the granted land use rights at the end of the 40 year period by paying to the State the additional land price) minus the period from the granting date from the State to the date of the transfer to ABC.

    There is a standard form sale and purchase agreement formulated by government authorities and is required to be used in practice. The contents of the standard form agreement may be revised or supplemented by way of a supplemental agreement attached to the standard form agreement as appendix. The sale and purchase agreement needs to be printed at designated printers. Such printers are only available at licensed real estate brokers and the property registry offices.

    Property Ownership Certificate and Land Use Right Certificate are combined into one certificate in Shanghai, which is called "Real Estate Title Certificate".

    The documentation shall include:
    The seller and the buyer should submit one original real estate sales and purchase contract (duly signed) and a writing representation of the seller and buyer regarding the title transfer. There is no standard form of the contract (except for newly constructed commercial residential properties) nor the participation of a lawyer/notary is required.

    The seller should submit the below documents:
    (i) The original copy of the Property Ownership Certificate and Land Use Right Certificate "Real Estate Title Certificate" (already in possession of the seller);
    (ii) The original copy of the Business License or Organization Code Certificate;
    (iii) The original copy of the Board resolution approving the sales of the real estate;
    (iv) District Branch-dedicated Form for proof of legal representative’s authority, and photocopy of the identification card (or passport) of the legal representative; and
    (v) Photocopy of the identification card of the individual authorized to handle the actual procedures, and the original copy of Power of Attorney.

    The buyer should submit the below documents:
    (i) Real Estate Ownership Registration Form;
    (ii) The original copy of the Business License or Organization Code Certificate;
    (iii) The original copy of the Board resolution approving the purchase of the real estate;
    (iv) District Branch-dedicated Form for proof of legal representative’s authority, and photocopy of the identification card (or passport) of the legal representative; And
    (v) Photocopy of the identification card of the individual authorized to handle the actual procedures, and the original copy of Power of Attorney.
    Procedure 3.
    Parties pay registration fee
    Time to complete:
    1 day
    Cost to complete:
    CNY 550
    Comment:
    The registration fee is paid at a separate window from that where one picks up the new title certificate.The Ministry of Finance and State Development and Reform Commission issued a notice, effective from May 1st 2008, to standardize the registration fees for real estate property. The registration fee is set at CNY 80 for one piece of residential housing and CNY 550 for one piece of non-residential building. The registration fee is decided by piece, not value of the property.
    Procedure 4.
    Parties pick up new title certificate
    Time to complete:
    1 day
    Cost to complete:
    no cost
    Comment:
    After paying the registration fee, along with the receipt, the buyer obtains the new Real Estate Title Certificate. In Shanghai the former Property Ownership Certificate and the Land Use Right Certificate have been combined into one certificate, the Real Estate Title Certificate. The title transfer procedure will be complete upon the issuance of the new Real Estate Title Certificate, and the certificate holder thereby becomes the official owner of the premises.
  • Getting Credit   ( 1 Article )

    The following table summarize legal rights of borrowers and lenders, and the availability and legal framework of credit registries in China.

    Legal Rights Index
    Can any business use movable assets as collateral while keeping possession of the assets; and any financial institution accept such assets as collateral ?
    Does the law allow businesses to grant a non possessory security right in a single category of revolving movable assets, without requiring a specific description of the secured assets ?
    Does the law allow businesses to grant a non possessory security right in substantially all of its assets, without requiring a specific description of the secured assets ?
    May a security right extend to future or after-acquired assets, and may it extend automatically to the products, proceeds or replacements of the original assets ?
    Is a general description of debts and obligations permitted in collateral agreements, so that all types of obligations and debts can be secured by stating a maximum amount rather than a specific amount between the parties ?
    Is a collateral registry in operation, that is unified geographically and by asset type, as well as indexed by the grantor's name of a security right ?
    Do secured creditors have absolute priority to their collateral outside bankruptcy procedures?
    Do secured creditors have absolute priority to their collateral in bankruptcy procedures?
    During reorganization, are secured creditors' claims exempt from an automatic stay on enforcement?
    Does the law authorize parties to agree on out of court enforcement?
  • Paying Taxes   ( 4 Articles )

    The table below addresses the taxes and mandatory contributions that a medium-size company must pay or withhold in a given year in China, as well as measures of administrative burden in paying taxes.

    Tax or mandatory contributionPayments (number)Notes on PaymentsTime (hours)Statutory tax rateTax baseTotal tax rate (% profit)Notes on TTR
    Social security/housing fund contributions1online filing19244.0%gross salaries58.9 
    Corporate income tax1online filing9633.0%taxable profit11.5 
    Urban maintenance tax0paid jointly-7.0%VAT3.5 
    Education surcharge0paid jointly-3.0%VAT1.5 
    Land use tax2 -RMB 15 per square meter1.5 
    Stamp duty2 -0.03%transaction value1 
    Property tax1 -1.2%80% building value0.9 
    Levies for construction and Maintenance of River projects0paid jointly-1.0%VAT and business tax0.5 
    Business tax1 -5.0%capital gain0.5 
    Value added tax (VAT)1online filing21617.0%value added not included
    Totals:9 504  79.9 


    Notes:

    Name of taxes have been standardized. For instance income tax, profit tax, tax on company's income are all named corporate income tax in this table.
    The hours for VAT include all the VAT and sales taxes applicable.
    The hours for Social Security include all the hours for labor taxes and mandatory contributions in general.

  • Protecting Investors   ( 1 Article )

    The table below provides a full breakdown of how the disclosure, director liability, and shareholder suits indexes are calculated in China. 

    Disclosure

     
    What corporate body provides legally sufficient approval for the transaction?  
    ●Immediate disclosure to the public and/or shareholders 
    ●Disclosures in published periodic filings  
    ●Disclosures by Mr. James to board of directors 
    ●Requirement that an external body review the transaction before it takes place 

    Director Liability

     
    ●Shareholder plaintiff's ability to hold Mr. James liable for damage the Buyer-Seller transaction causes to the company.  
    ●Shareholder plaintiff's ability to hold the approving body (the CEO or board of directors) liable for damage to the company. 
    ●Whether a court can void the transaction upon a successful claim by a shareholder plaintiff  
    ●Whether Mr. James pays damages for the harm caused to the company upon a successful claim by the shareholder plaintiff  
    ●Whether Mr. James repays profits made from the transaction upon a successful claim by the shareholder plaintiff 
    ●Whether fines and imprisonment can be applied against Mr. James  
    Shareholder plaintiff's ability to sue directly or derivatively for damage the transaction causes to the company 

    Shareholder Suits

     
    ●Documents available to the plaintiff from the defendant and witnesses during trial  
    ●Ability of plaintiffs to directly question the defendant and witnesses during trial 
    ●Plaintiff can request categories of documents from the defendant without identifying specific ones  
    ●Shareholders owning 10% or less of Buyer's shares can request an inspector investigate the transaction 
    ●Level of proof required for civil suits is lower than that for criminal cases 
    ●Shareholders owning 10% or less of Buyer's shares can inspect transaction documents before filing suit 
     
  • Trading Across Borders   ( 5 Articles )

    This table summarizes the procedures and costs associated with setting up a business in China.

    Nature of Export ProceduresDuration (days)US$ Cost
    Documents preparation14210
    Customs clearance and technical control270
    Ports and terminal handling285
    Inland transportation and handling395
    Totals:21460
    Nature of Import ProceduresDuration (days)US$ Cost
    Documents preparation15260
    Customs clearance and technical control470
    Ports and terminal handling280
    Inland transportation and handling3135
    Totals:24545
    Export documentsImport documents
    Bill of ladingBill of lading
    Cargo release orderCertificate of origin
    Certificate of originCommercial invoice
    Commercial invoiceCustoms import declaration
    Customs export declarationForeign exchange authorization
    Packing listPacking list
    Terminal handling receipts

  • Enforcing Contracts   ( 1 Article )

    This topic looks at the efficiency of contract enforcement in China.

    Nature of ProcedureIndicator
    Procedures (number)34
    Duration (days)406
    Filing and service21
    Trial and judgment195
    Enforcement of judgment190
    Cost (% of claim)*11.1
    Attorney cost (% of claim)3.6
    Court cost (% of claim)6.3
    Enforcement Cost (% of claim)1.23

    Court information: Shenzhen District People's Court
    * Claim assumed to be equivalent to 200% of income per capita.

  • Closing a Business   ( 1 Article )
    The time and cost required to resolve bankruptcies is shown below. The data identifies weaknesses in existing bankruptcy law and the main procedural and administrative bottlenecks in the bankruptcy process. The recovery rate, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm, is also shown.
    IndicatorCost
    Time (years)1.7   
    Cost (% of estate)22   
    Recovery rate (cents on the dollar)35.3   

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