Dezan Shira & Associates Establishing Businesses in China Peter Thomsen Senior Associate © 2008 Dezan Shira & Associates Ltd. All rights reserved.

Agenda  Representative Offices  Wholly Foreign Owned Enterprises  Joint Ventures  Tax Rates  Termination

Why China?  Low production costs  Supply chain  Cheap labour force  Increased purchasing power in domestic markets  Tax incentives

Representative Offices  Established by mother company  Inexpensive to establish  No minimum registered capital  Low risk  Establishment requires lease contract  Not a legal entity  Chinese staff hired through HR agent

RO Market research and product presentation Marketing and sales administration Can not sign contracts or invoice customers

RO Establishment Process

RO Tax Issues  Three major tax filling obligations:  Business tax  Corporate income Tax  Individual income tax for all staff From 8.82% to minimum 10.94% of total costs of an RO  Tax exemption can be claimed

Wholly Foreign-Owned Enterprises Business Categories Catalogue for the Guidance of Foreign Investment Industries Encouraged Permitted Restricted Prohibited Determines the business sectors investors can engage in Business scope determined by the authorities

WFOEs  100% of the control by the foreign investor  Limited liability  Minimum registered capital: RMB 100,000  Key document: Articles of Association  Governed by shareholders

WFOEs Three different types: Manufacturing WFOE - Manufacturing, assembly and processing Service WFOE - Service Foreign Invested Commercial Enterprise -Trading

WFOE Establishment Process

Joint Ventures Company B Company A JV

JVs  Foreign investor: minimum 25% of the ownership  Limited or unlimited liability  Minimum registered capital: RMB 30,000  Key document: JV Contract, Articles of Assoc.  Governed by Board of Directors

JVs Two types of JVs: -Equity Joint Ventures (EJVs) -Co-operative (Contractual) Joint Ventures (CJVs) JV partner due diligence of great importance Establishment process same as for WFOEs

Tax Rates Standard tax rate: 25% VAT: 17% Business tax: 5% Withholding tax: approximately 10%

Tax Exemptions Small and medium sized enterprises: 20% SME manufacturing/non-manufacturing:  Total assets: < RMB 30 million/< RMB 10 million  Employees: < 100 pers/< 80 pers  Taxable income: RMB 300,000 High-tech companies: 15%  Core: intellectual property  3-6% of the profits should be spent on R&D  At least 60% of profits should derive from R&D  30% of the employees should have a university degree

Termination Procedure - RO Not legal entity 1. Closing audit 2. Bank closing 3. Custom closing 4. Deregistration by Association of Industry and Commerce (AIC)

Termination Procedure - WFOE/JV Legal enitity WFOE: Decision of termination made by the Shareholders JV: Decision of termination made by the Board of Directors Takes 6-9 months to complete

Termination Procedure - WFOE/JV 1. Liquidation Committee -Articles of Association 2. Liquidation Report -Approved by shareholders/BoD 3. De-registration with the authorities 4. Cancellation of the Business License

Non-compliance  Black listed in local AIC and national SAIC  RO’s mother company not allowed to do business in China

Peter Thomsen Senior Associate, Dezan Shira & Associates