Establishing a presence abroad

1. Establishing a presenceabroad Session 2: Direct Trade CHINA BUSINESS DEVELOPMENT VUB-BICCS 2014-2015 koen.vanheusden@abh-ace.be

2. Indirect trade vs. direct trade advantages of doing it yourself • independency • no sharing of profits • flexibility • product knowledge • direct contact with customers disadvantages of doing it yourself • high financial involvement • no sharing of risks • no costs sharing • limited market knowledge • no pre-existing customers

3. Rep office Branch Subsidiary http://www.doingbusiness.org/data/exploretopics/starting-a-business http://www.saic.gov.cn/; http://www.saic.gov.cn/english/ http://english.mofcom.gov.cn/ http://www.fdi.gov.cn/index.htm - http://www.fdi.gov.cn/1800000121_10000041_8.html http://investinbelgium.fgov.be/; http://www.ib.fgov.be/home.htm; http://www.investinflanders.com/ch/home/default.aspx; http://www.invest.belgium.be/; Direct Trade China

4. Foreign Investment in China • Foreign Investment Operating Structures • Representative Office • Equity Joint Venture • Cooperative Joint Venture • Wholly Foreign Owned Enterprise

5. http://www.oecd.org/china/WP-2013_1.pdf

6. Rep office Branch Subsidiary Direct Trade

7. Rep Office • No separate legal entity = Branch without permanent establishment • No autonomous activities – contracts • Limited cost • No local currency • invoicing – import/consignment/warehousing • collecting accounts • Banking, engineering, project management, transport …  China

8. International Taxation of Cross-Border Transactions • Countries tax national taxpayers on “worldwide” income • The foreign tax paid can be claimed against • whether the national tax  foreign tax credit • whether the national taxable income  deductible expense to reduce double-taxation of the same income • Countries use a territorial approach in taxing foreign persons • Such “inbound” taxpayers are taxed only on the income they earn that is connected to national income-producing activities, whether the activities involve passive investments or an active trade or business Risk of double taxation

9. International Tax Treaties • These treaties are designed to • eliminate or minimize double-taxation on the same income • identify which country (host or residence country) has original/exclusive taxing authority over specific types of income

10. International Tax Treaties • Tax treaties generally address three classes of income: • Income taxed exclusively in country where earned • e.g., real property income, employment income (183 days rule!), and business profits from a permanent establishment • Income subjected to only limited taxation in the country where earned • e.g., interest, dividends, and royalties • Income taxable exclusively in the taxpayer’s home country • e.g. business income without permanent establishment

11. International Tax Treaties • Concept of permanent establishment(PE)is defined in all tax treaties • A person has a PE within a country when activities within that country rise beyond a minimal level • Tax treaties outline activities that create a PE: • e.g., maintaining an office, plant, or other fixed place of business • Treaties also specify specific activities that do not create a PE • e.g., storing goods in a warehouse or engaging in a temporary construction project • Once a person has a PE within a country, the business profits associated with the PE become subject to tax in that country • Taxpayers must be residents of a treaty country to claim treaty benefits

12. Royalty’s – Intrest – dividends http://fiscus.fgov.be/interfafznl/nl/international/conventions/index.htm AOIF–BELINTAX North Galaxy - Tour A, 15ième étage Blvd. du Roi Albert II, 33 – POB 25 1030 Bruxelles Tél.: 02/576.34.70 Form 276

13. Standard Foreign Tax Credit (FBB/QFIE) •  80/90% of the invoiced amount is wired over; • Article 285, CIR 92 - Pour ce qui concerne les revenus de capitaux et biens mobiliers et pour ce qui concerne les revenus divers visés à l'article 90, 5° à 7°, une quotité forfaitaire d'impôt étranger est imputée sur l'impôt […] • Article 286, CIR 92: La quotité forfaitaire d'impôt étranger est fixée à quinze quatre-vingt cinquièmes du revenu net, avant déduction du précompte mobilier et, le cas échéant, du prélèvement pour l'Etat de résidence.

14. Representative Office • Quick (procedure to register is not complicated) and inexpensive way to establish a legal presence in China. • Can carry out market research, render advice, collection of information, coordinate company activities in China. • No direct business activities – cannot enter into sales contract, issue invoices, arrange for importing goods.

15. 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 2-3 month process) • must apply for re-approval every 3 years  1 year • chief representative at the office must be a resident of China (but may be foreign national) • physical office with minimum lease of 1 year • existence as a foreign entity of minimum 2 years

16. Representative Office Pros: • relatively easy to set up and maintain compared to other FIEs • No minimum capital • No liability • up to 55.000 € subsidy (FIT – Brussels – AWEX) Cons: • has no "legal person" status in China and cannot enter into contracts • No direct hiring Chinese employees  Labour Dispatch Service Contract with a Foreign Enterprise Service Company (FESCO); max 1 (head) + 3 (representatives) foreign employees • No possibility of continuance after setting up WFOE • Higher tax liabilities • Registration certificate for only 1 year

17. http://www.fitagency.be/site/landing.nsf/NL • http://www.awex.be/fr-BE/Pages/Home.aspx • http://www.invest-export.irisnet.be/nl/home

18. Branch • Formalities of establishment • no new statutes, no minimum capital, no registration duties, registration commercial registry + VAT-registration • certified documents (CR – Decision GA …) • incorporated under the laws of a foreign country • Management and supervision • Representative of the head quarters • Taxation • Permanent establishment - taxed only on those profits which arise in that country • sometimes higher tariff, minimum profits, reduced deduction and depreciation possibilities

19. Branch • Income • Profits branch are profits head quarters, idem losses • Start up costs usually can be carried forward and set-off against future profits both with a branch and a subsidiary. Branches can benefit from double tax relief by setting its losses against worldwide profits of the parent • Liability • Head quarter has unlimited responsibility/liability (losses, product liability ...) • Relation • Branch is no separate company and can not ‘invoice’ it’s head quarter • Banking, insurance, leasing …

20. Subsidiary • Formalities of incorporation • Financing plan, articles of association and bylaws (notary public + publication), minimum capital, registration duties, registration commercial registry, income taxes, VAT, social security ... • incorporated under national law • Management and supervision • General meeting of shareholders, board of directors, statutory auditor • Taxation • as if national company • charged on the world-wide profit of subsidiary company

21. Subsidiary • Income • profits (and losses) are taxed within the company; distributed as dividends to the parent • Liability • Limited liability of the ‘parent company’ / shareholder • Relationship • mother- and daughter companies can sell and buy, give licenses, conclude agency agreements …

22. ?

23. China – forms of enterprise • Structures used by domestic entities: • ‘Wholly Individually Owned Enterprise’ • similar to the VOF – eenmanszaak in Belgian law • no legal entity - owner is personally and unlimitedly liable for the commitments of the enterprise. • ‘Partnership Enterprise’ • similar to the Comm. Venn. in Belgian law. • no legal entity – partners have a personal and unlimited liability.

24. China – forms of enterprise ‘Limited Liability company’ (LLC – art. 23-76 Company Law) • Equivalent of the BVBA in Belgian law • legal entity with a separate capital and liability • liability of the partners is limited to their share in the capital stock • 1 - 50 partners, who can be both a natural and legal entity • required minimum capital stock depends on the number of partners. • one person LLC (art. 59 CL): 100.000 CNY (approx. 11.000 €), to be deposited entirely upon establishment; • LLC’s with several partners: 30.000 RMB (approx. 3.300 €), 20% to be deposited immediately, the margin within two years after setting up (art. 26 CL). • Management: • board of directors • general assembly • supervisory board, to which in larger LLCs also a workers' delegate must belong.

25. China – forms of enterprise • Joint Stock (Limited) Company (art. 77-146 CL) can be created as an open (‘by stock floatation’) or closed (‘by promotion’) corporation. • Setting up requires at least two initial partners and a minimum capital stock of 5 million CNY (approx. 550.000 €). • Organs are the general assembly of shareholders, the board of directors and the supervisory board.

26. China – general rules • Company Law also rules enterprises with foreign participation (218 CL) but specific foreign investments laws have priority. • Threshold requirement for registered capital may be subject to specific regulations that may set higher thresholds for different industries (insurance, banks, …). • Any non-cash asset, including intellectual property, that can be monetarily valued and legally transferred can be counted towards the minimum capital requirement. Cash contributions shall not be less than 30 percent of a company’s registered capital. • Foreign invested enterprises (exc. WFOE) are allowed to contribute their registered capital by installments, provided that: • the first installment of no less than 15% of the total registered capital is paid within 90 days upon establishment; and • the remainder is paid within one to three years depending on the amount of registered capital.

27. Non Resident Forex Payment abroad (L/C, …) No Y tax 183 days rule No customs No VAT Foreign law Int. Arbitration Resident CNY Domestic payment Y tax Salary tax Customs VAT Chinese law People’s Courts Rep Office Subsidiary Currency Payment Taxes Employees Formalities Invoices Applicable law Disputes

28. FDI - how ? • Greenfield • initial establishment of fully owned facilities and operations. • Acquisition • cross border transaction in which an acquiring firm buys an established local firm. • Privatization – Brownfield • Joint-venture - mergers • Contractual • Equity

29. 100% Ownership • Advantages • more decision making control • no need to bargain with local shareholders • no sharing of profits • Disadvantages • greater risk - no local partner for “protection” • no sharing of losses • may draw hostile attention • political risk is higher

30. Co-Ownership • Legal obligations • Land – tax – free trade zones ... • Reduced political risk • Administrative formalities, banking … • Treaty protection • When a Co. does not have • the money to pay for everything • experienced management • and is willing to let a partner (co-)lead

31. Joint ventures • Common goal •  identical objectives • Shared ownership • spreading the initial investment costs helps reduce the risk  spreading the profit • allocating the profit • different skills can be complementary • shared management • Choosing the right partner is very important • Due diligence

32. JV Checklist • Parties to the contract: • Due diligence – related parties, shareholder structure … • Consideration • Each party’s motives to enter in the JV  interpretation later on • Object of the JV • Description of the JV activities  influence on future development party’s activities • Legal form • Tax issues, liabilities, … • Contribution • Valuation (parts of companies), cash, kind, goodwill, technology, … • Is title contributed or licensed?

33. JV Checklist • Financing activities of the venture • How (in balance with share, maximum, minimum, new shares, loans, letters of comfort, …) • Valuation • How to establish profits and losses of JV, policy of accounting (valuation, …), reservation, profit vs. investment vs. debt payment, minimum reserves, … • Management • Election of a policy steering committee • Which decisions require unanimity, qualified majority, simple majority? • Authority of the management – authority of the policy steering committee • Changes in management and/or shareholder structure of partners • Consequences of mergers – take over – privatization of a party

34. JV Checklist • Assignment of shares in the venture • Free ? – prior right – exclusive – valuation – authorization … • Relationship between the partners in the venture / and the venture • Often technology licenses, management support, subcontracting, financial cooperation, invoicing … How are prices established, who owns future IP of the venture, goodwill, confidentiality … ? • Term and termination of the venture • Indefinite term – definite term – renewing – notice … • Consequences of early notice (unanimity, …) • Cumulated losses … • Liquidation (created know how …) • Choice of law – dispute settlement • Steering/policy committee (mediation) - arbitration

36. Equity Joint Venture • The joint venture set up requirements: • Feasibility study • Letter of intent • JV contract • Articles of Association • Capital investment requirements • Minimum equity investment by the Foreign investor is 25% Treaty protection – International Arbitration - …

37. Cooperative Joint Venture • Similar to Equity Joint Venture in structure but with more flexibility because • Sharing of profits is governed entirely by contract • Foreign partner can obtain return of investment in priority to Chinese partner • Establishment procedure similar to Equity Joint Venture

38. EJV - CJV • 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

39. JV  WFOE • Many early JV’s had no sound business logic or common interests • Global track record of international JV’s is generally disappointing • WFOE’s offer nearly complete control of: • Direction of the company • Management • Marketing • Employees • Technology • Intellectual property JV

40. JV  WFOE • WTO mandated rule revisions have made business case for some older enterprises doubtful • Ill Advised JVs’ need to be unwound • New sectors being opened to WFOE’s • Desire to Acquire PRC Company Assets • Interest in Acquiring/Merging with PRC Co. • …

41. Wholly Foreign Owned Enterprise • A Wholly Foreign Owned Enterprise is basically a wholly owned subsidiary of foreign enterprise. • Restricted to fewer business sectors than Joint Ventures. • Must further the development of the Chinese economy and should use some degree of advanced technology. • Approval and registration procedure similar to Joint Ventures.

42. Wholly Foreign Owned Enterprise 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., automobile sector (max. 50%), petrochemical, chemical & energy (max. 50%), telecommunications, steel, media)

43. Joint Venture • Traditionally a commonly used foreign investment structure: • First foreign investment structure allowed in China; • Mandated by Chinese law to be used for most types of foreign investment; • Benefit to the Chinese economy - foreign party generally provides technology, management expertise & cash.

44. Joint Venture 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

45. Joint Venture • 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 by the investors based on the rough ratio of capital contributions (more flexibility in CJVs than EJVs)

46. Export requirements WFOEs • Prior 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 • Current Law: 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

47. 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

48. Foreign exchange controls and repatriation of CNY profits CNY 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