Dezan Shira & Associates Strategies and Best Practices for Doing Business in China - Overview of Chinese Business Culture - David Chan Senior Associate Dezan Shira & Associates www.dezshira.com

Dezan Shira & Associates The Asian Practice 18 years in China 10 Offices in China, 5 Offices in India, 2 Offices in Vietnam 2000 clients from 81 countries Provide business incorporation, tax & accounting, legal and HR services www.dezshira.com 1

New Opportunities for Business in China New Consumers, New Opportunities: Chinese have money Stronger currency increases demand for higher quality products Increase in demand opens up new markets for foreign investors www.dezshira.com 3

Risk of Violation of IP Rights in China Higher penalties for export and import enterprises for violation of IP rights Increased international cooperation to fight IP piracy Intensified moves to crack down on IT-related piracy More security for foreign products and foreign IP! 1 www.dezshira.com 4

U.S. Exports to China 2010 Grand Total: $91,878,263,856 5 Source: U.S. Department of Commerce http://tse.export.gov/TSE/ChartDisplay.aspx www.dezshira.com 5

Biggest US Exporters To China (in 1,000 US$, 2010) California 12,468,134 Washington 10,300,279 Texas 10,254,205 Louisiana 6,457,418 Oregon 4,046,199 New York 3,365,649 Illinois 3,179,793 Pennsylvania 2,673,049 Georgia 2,393,007 Ohio 2,295,100 North Carolina 2,236,229 Massachusetts 2,193,392 Michigan 2,179,919 South Carolina 2,156,012 Alabama 1,934,798 18. New Jersey 1,389,623 Source: http://tse.export.gov/TSE/MapDisplay.aspx www.dezshira.com 6

Types Of Legal Structures -Strategy MUST follow structure- Freelancer Representative Office Wholly Foreign Owned Enterprise (WFOE) Foreign Invested Commercial Enterprise (FICE) Joint Ventures (JV) Foreign Invested Partnerships (FIP) Hong Kong Holdings www.dezshira.com

Freelancer  Usually only used as a first step Pro Contra Flexibility Reliability No Permanent Establishment No full commitment Uncomplicated & Fast Potential waste of time & money for training Cheap Risk of job changeover  Usually only used as a first step www.dezshira.com 10

Representative Office Typical uses: Marketing, Research, Liaising Hiring of employees in China (visa, residence permit, working permit) Advantage Disadvantage Incorporation quick and easy to set up (2-3 months) No possibility to issue invoices in RMB (Fapiao) Cheap Common, but not imperative, monthly payment of 10.94% business tax on overheads RO example: Sourcing in China www.dezshira.com 11

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Wholly Foreign Owned Enterprise (WFOE) Typical Use: Can engage in manufacturing, processing & assembling, services & consulting and/or trade Advantage Disadvantage Can directly hire employees Application and incorporation procedure: at least 4 -6 months Can issue invoices in RMB (Fapiao) Standard problem: Ratio between registered capital and total investment Important: Exit Strategy, Cash Flow! www.dezshira.com 13

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Joint Venture (JV) Typical Use: Can engage special in manufacturing, processing & assembling, services & consulting and/or trade Advantage Disadvantage Able to enter a restricted market Same bed, different dreams New network or sales channels Contract negotiation time-consuming & eventually expensive www.dezshira.com 15

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Foreign Invested Partnership (FIP) - New Investment Vehicle (“3rd Road to China”) - Ideal for High-Tech enterprises Advantages: Easy incorporation Only approval by SAIC and regional authorities, not by MOFCOM Flexible Structure Management structure defined by partnership agreement Dividend distribution No minimum registered capital has been set yet Registered Capital can be brought in as: Cash (legally obtained RMB or foreign currencies), Land use rights, IP Rights, Technology, Know-How, Service/Labor Income Tax Incentives: No Corporate Income Tax for FIP, partners file separate tax returns Disadvantages: No detailed regulations yet, no approval for Beijing yet Uncertainty regarding issues, such as customs, foreign exchange etc. Limitations regarding investment (certain industries are prohibited) www.dezshira.com

Hong Kong Companies Legal: Easy and fast to set up “cheap” Tax: Set-up costs Ongoing compliance No “real” office necessary Tax: Corporate Income Tax 16.5% (compared with 25% in mainland China) Dividend distributed from mainland via Hong Kong back to headquarters could be tax efficient HQ 0% 10% HK Company 5% Mainland WFOE www.dezshira.com

Business Issues: Labor Law Common Misconceptions: Labour is “cheap” in China Documents are correct Flexibility: I can hire and dismiss employees as I please www.dezshira.com

Fixed-Term Contract Most common type of contract Duration set by employer and employee Can only be renewed once (Art. 14 III) Afterward the employee must receive an open-term contract If the fixed-term contract is not being renewed severance must be paid – one monthly salary for every year of the labor relationship Exceptions: The employee refuses to renew a contract, which contains at least the same conditions www.dezshira.com

Open-Term Contract What is this? Preconditions for such a contract: A contract, which only ends with the retirement of the employee Preconditions for such a contract: After a one-time renewal of the fixed-term contract , the employee must receive an open-term contract An employer has failed to provide a written contract after one year of labor relationship Problem: Almost impossible to terminate the contract www.dezshira.com

Overall – A Great Market www.dezshira.com 17

Publications Magazine Websites Books www.dezshira.com 18

Media Portfolio – DSA Library Registration is free The library provides in-depth resources on doing business in China: - Reports - Articles - Detailed PDF documents Receive regular updates on regulatory changes and tax issues www.dezshira.com 19

THANK YOU FOR YOUR ATTENTION! Q&A david.chan@dezshira.com Mob: +86 13681207542 THANK YOU FOR YOUR ATTENTION! www.dezshira.com 21