Hong Kong & Shanghai, Gateways to Asia
Jan V. M. Holthuis
6 June 2013, Moscow
HIL International Lawyers & Advisers, Shangh...
Shanghai
© HIL 2013
Pudong
© HIL 2013
Shanghai
• Commercial Centre of China and home to China’s largest Stock Exchange
• Population of 16 million wit...
The Chinese Market
© HIL 2013
China GDP Growth 2011
© HIL 2013
Business Climate
Source: The World Bank, Doing Business 2011
China ranks number 79 for
“ease of doing business”
among 183 ...
Private Consumption
Source: Economist intelligence Unit 2011; KPMG analysis
© HIL 2013
Factors Chongqing (RMB) Shanghai (RMB)
Monthly wage
(technical personnel)
1200-1600/m 3600-4000/m
Monthly wage (worker) 10...
E-business
Source: PWC Analysis, Customers take control
© HIL 2013
Rule by Law
© HIL 2013
China’s Foreign Investment Law
• No direct business operations in China without prior government approval.
Approvals are g...
FDI Catalogue
Source: Catalogue 2011
© HIL 2013
China Policy Changes
1. Service Economy: change focus from fixed asset investment to “public
goods” and “Made in China”
2....
Source: Ministry of Commerce 2013 Guiding Opinions on Attracting Foreign
Investment, Shangzifa [2013] No.82 , issued on 14...
FIE’s
© HIL 2013
• Appoint a Chinese agent or distributor: Legally not too many restrictions.
Difficulty is to find a reliable and committe...
FDI Ratio’s
Source: China Statistical Yearbook 2011 © HIL 2013
• A WFOE / JV do not have shares by registered capital. There are minimum registered
capital requirements depending on the...
Foreign Direct Investment
Verification and approval procedures
© HIL 2013
Minimum Capital Requirements
Capital Requirement
No possibility of thin financing. The following capital ratios need to be...
Political Market Economy
© HIL 2013
Judiciary
• Judges are appointed by People’s Congresses at corresponding level
• Trials system is inquisitorial, not adver...
People’s Prosecution Office
Chinese Courts
Hotlines
Audit
Office
National Bureau For Corruption PreventionNPC
CCDI
Charged...
China’s Legal System
• Becoming cornerstone for social stability
• Protect interests of the CCP
• Mixture of law and polit...
China – Russia Business
© HIL 2013
• November 9, 2006, Agreement on the Promotion and Mutual Protection of
Investment between China and Russia
- Mutual inten...
• Advantages of the domestic currency settlement
– Example: money transfer from Russia to China on May 28th 2011 (same ban...
Russian exports to China: recent deals:
• Petroleum
– e.g. 2013 agreement between Roseneft and CNPC with respect to more p...
Maximum Foreign Shareholdings
Industry Maximum Foreign
Shareholding
Limitation Source
Bank 100% (if WFOE
foreign bank)
20%...
Hong Kong
© HIL 2013
Hong Kong
Hong Kong has a common law system based on British law.
The separation of the Hong Kong legal system to the PRC ...
Hong Kong
Some facts:
Hong Kong is one of the world's leading international trading and financial
centers. Its port is one...
Hong Kong
Low and simple tax system.
Corporate income tax is 16,5 % - levied on the Hong Kong-source profits of
businesses...
Why HK Route?
IN BRIEF:
• HK law more sophisticated for financing and exit scenarios for investments in Asia
(no strict mi...
Hong Kong
Setting up a Hong Kong Limited (Ltd)
Requirements:
• No statutory minimum or maximum share capital
• At least on...
Thank you!
© HIL 2013
HIL LAW OFFICES
Shanghai Office:
No. 3000, North Zhongshan Road
ICC-Tower, Room 2505B
200063 Shanghai, China
Email: Shangh...
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Jan Holthuis. Hong Kong and Shanghai Gateway to Asia 06.06.2013

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Jan Holthuis. Hong Kong and Shanghai Gateway to Asia 06.06.2013

  1. 1. Hong Kong & Shanghai, Gateways to Asia Jan V. M. Holthuis 6 June 2013, Moscow HIL International Lawyers & Advisers, Shanghai/Beijing © HIL 2013
  2. 2. Shanghai © HIL 2013 Pudong
  3. 3. © HIL 2013 Shanghai • Commercial Centre of China and home to China’s largest Stock Exchange • Population of 16 million with average per capital GDP highest in China • 1/12th of total industrial output value • Shanghai port handles 1/4th of China’s total exports • 1/8th of China’s total financial revenue • Shanghai should overtake Hong Kong at the time that the RMB will become a freely convertible currency
  4. 4. The Chinese Market © HIL 2013
  5. 5. China GDP Growth 2011 © HIL 2013
  6. 6. Business Climate Source: The World Bank, Doing Business 2011 China ranks number 79 for “ease of doing business” among 183 countries. This indicates that China is not an easy place to do business, but it is still the top ranked economy among the BRIC countries. © HIL 2013
  7. 7. Private Consumption Source: Economist intelligence Unit 2011; KPMG analysis © HIL 2013
  8. 8. Factors Chongqing (RMB) Shanghai (RMB) Monthly wage (technical personnel) 1200-1600/m 3600-4000/m Monthly wage (worker) 1000-1200/m 1700-2000/m Social insurance 1177.6-17664/m 2338-11688/m Electricity 0.551-0.843 0.815-0.885 Gas 1.8-2.4/m³ 3-3.8/m³ Salary Costs © HIL 2013
  9. 9. E-business Source: PWC Analysis, Customers take control © HIL 2013
  10. 10. Rule by Law © HIL 2013
  11. 11. China’s Foreign Investment Law • No direct business operations in China without prior government approval. Approvals are granted on the basis of the FI Catalogue • The FI Catalogue encourages or restricts investment in specific economic sectors and protects China’s strategic industries (such as: automobile, media, banking and insurance) • As the RMB is still not freely convertible, capital inflow and capital outflow is government controlled (State Administration of Foreign Exchange and State Banks approvals) • Chinese law & regulations are an instrument to control FI and guide economic development © HIL 2013
  12. 12. FDI Catalogue Source: Catalogue 2011 © HIL 2013
  13. 13. China Policy Changes 1. Service Economy: change focus from fixed asset investment to “public goods” and “Made in China” 2. Green Economy: energy saving technologies, sustainable economy: important focus on agriculture and food safety 3. Development of Inland China regions: Chongqing (32 mio. inhabitants and world’s largest city) Chengdu (14 mio. inhabitants) are important inland metropole’s China’s development has been a big success, but it has come at a price: environmental problems, growing gap between rich and poor, need for energy resources. Changes are necessary for China’s growth to be sustainable. © HIL 2013
  14. 14. Source: Ministry of Commerce 2013 Guiding Opinions on Attracting Foreign Investment, Shangzifa [2013] No.82 , issued on 14 March 2013 Encouraged Investment Sectors 1. Advanced manufacturing 2. High technology 3. Modern services 4. Energy-saving 5. New energy 6. Modern agriculture © HIL 2013 MOFCOM Opinion
  15. 15. FIE’s © HIL 2013
  16. 16. • Appoint a Chinese agent or distributor: Legally not too many restrictions. Difficulty is to find a reliable and committed Chinese counter-part. Contracts can be subjected to foreign law & arbitration. China International Economic Trade Arbitration Commission is an acceptable forum to settle trade disputes • Set-up Rep Office in China. BUT: no invoicing, no direct sales, no Chinese bank account to be used for trading. The RO requires government approval. All business remains foreign business. Tax is levied on cost-plus • Set-up a WFOE (wholly foreign owned entity) or joint venture with a Chinese party. Advantage is that all business becomes domestic (no need for international payment approvals): suppliers and customers can pay locally. Assembly of parts in WFOE can reduce VAT and import duty liabilities. CIT is 25% Start Business in China © HIL 2013
  17. 17. FDI Ratio’s Source: China Statistical Yearbook 2011 © HIL 2013
  18. 18. • A WFOE / JV do not have shares by registered capital. There are minimum registered capital requirements depending on the business activity • Investors can not thin finance a WFOE / JV. There are capital ratio’s to be observed (next slide). Local financing by commercial banks is subject to local bank policy • The decision making body in the WFOE / JV is the board of directors (minimum 3). Directors are appointed by the investors and appointment is regulated in the articles of association of the WFOE / JV or in joint venture agreements • The directors of the board do not have power to represent the JV/WFOE towards third parties. This power is vested in the Legal Representative (LR). The appointment and dismissal of a LR is a burdensome affair (one of the flaws in Chinese law) • The GM is appointed as an employee or service provider. More easily dismissed, but a crucial figure in the continuity of day-to-day operations WFOE / JV © HIL 2013
  19. 19. Foreign Direct Investment Verification and approval procedures © HIL 2013
  20. 20. Minimum Capital Requirements Capital Requirement No possibility of thin financing. The following capital ratios need to be observed in FIE’s: © HIL 2013
  21. 21. Political Market Economy © HIL 2013
  22. 22. Judiciary • Judges are appointed by People’s Congresses at corresponding level • Trials system is inquisitorial, not adversarial • Supreme Court is responsible to NPC Standing Committee (present chairman does not have a legal education) • Interpretation Notices by SC, no legal precedent system © HIL 2013
  23. 23. People’s Prosecution Office Chinese Courts Hotlines Audit Office National Bureau For Corruption PreventionNPC CCDI Charged with corruption of CCP- Members Cooperates with Ministry of Supervision (unlimited power to investigate, unlimited budget, shuang gui (double rule)rule) • CCDI responsible for investigating China’s 76 mio CP members discipline violations Central Commission for Discipline Inspection © HIL 2013
  24. 24. China’s Legal System • Becoming cornerstone for social stability • Protect interests of the CCP • Mixture of law and politics but becoming more professional in big cities • Local economic interests influences decisions • Enforcement can be problematic © HIL 2013
  25. 25. China – Russia Business © HIL 2013
  26. 26. • November 9, 2006, Agreement on the Promotion and Mutual Protection of Investment between China and Russia - Mutual intention on promoting investment • June 17, 2009, China-Russia Investment Cooperation Outline - More specific implementations of the 2006 Agreement between China and Russia - Preferential investment sectors: Machinery Manufacturing; Information Technology and Communication; Bank, Security and Insurance; Innovation and Applied Science Development; Fuel Energy Source; Chemical; Forestry; Mining; Regional Cooperation • June 23, 2011, China-Russia Bilateral Agreement on Local Currency Settlement - Use domestic currencies in bilateral trade (in the past, it was only applicable to the border trade, now the policy applies to general trade) China & Russia Economic Cooperation © HIL 2013
  27. 27. • Advantages of the domestic currency settlement – Example: money transfer from Russia to China on May 28th 2011 (same bank commission fee and received at the same time) – Russian companies may hold the RMB deposit accounts in Russia – Advantages: avoid the risk of foreign exchange rate (US dollar) changes; saving financing cost; less operational procedures to exchange currencies RMB settlement Transferred from Russia RMB1,000 RUB 5,079.2 (equal to RMB 1,000) USD 158.3 (equal to RMB 1,000) Settled in China RMB 1,000 RMB 1,002 RMB 999.7 Source: http://newspaper.dbw.cn/jmsrb/html/2012-08/04/content_451971.htm © HIL 2013
  28. 28. Russian exports to China: recent deals: • Petroleum – e.g. 2013 agreement between Roseneft and CNPC with respect to more petroleum supplying (743,000 barrels per day starting from 2018) • Natural Gas – e.g. 2013, memorandum between Gazprom and CNPC with respect to the natural gas supplying (38 billion cubic meters starting from 2018) • Coal – e.g. 2011, Winsway Coking Coal purchased 60% of the shares of Divalane who has the mining right of the Apsatskoe coal mine. The exploited coals will be exported to China Russia - China Trade Source: http://online.wsj.com/article/SB10001424127887324557804578376510628682312.html http://news.xinhuanet.com/world/2011-05/05/c_121381497.htm; http://finance.eastmoney.com/news/1356,20130406283528016.html © HIL 2013
  29. 29. Maximum Foreign Shareholdings Industry Maximum Foreign Shareholding Limitation Source Bank 100% (if WFOE foreign bank) 20% (if Chinese financial institution) -- Administrative Regulations on Foreign-invested Banks (State Council [2006] No. 478) China Banking Regulatory Commission [2003] No. 6 Oil Processing 100% -- Catalogue of Industries for Guiding Foreign Investment 2011 edition Exploitation 49% • limited to Sino-foreign equity/cooperative joint venture operations; • Maximum foreign shareholding is unclear based on the Catalogue. In practice, it will generally not be more than 50% • Catalogue of Industries for Guiding Foreign Investment 2011 edition (encouraged sector); • verbally confirmed by MOFCOM Mining 49% • limited to Sino-foreign equity/cooperative joint venture operations (excl: iron and manganese minerals exploitation) • Maximum foreign shareholding is unclear based on the Catalogue. In practice, it will generally not be more than 50% • Catalogue of Industries for Guiding Foreign Investment 2011 edition (encouraged sector); • verbally confirmed by MOFCOM © HIL 2013
  30. 30. Hong Kong © HIL 2013
  31. 31. Hong Kong Hong Kong has a common law system based on British law. The separation of the Hong Kong legal system to the PRC is guaranteed constitutionally until 2047. © HIL 2013
  32. 32. Hong Kong Some facts: Hong Kong is one of the world's leading international trading and financial centers. Its port is one of the busiest and the HK dollar is one of the most traded currencies worldwide. These facts are due to: • Low corporate taxation • CEPA - preferential policy for investments in China • Free market policies • Well developed legal system, capital market and banking system • Corporate-friendly laws • Positioning: located close to China and Pearl River Delta © HIL 2013
  33. 33. Hong Kong Low and simple tax system. Corporate income tax is 16,5 % - levied on the Hong Kong-source profits of businesses carried on in Hong Kong. No withholding tax on dividend distributions from a Hong Kong entity No import or export duties (except for tobacco, liquor, etc) Personal income tax is progressive up to max. 17% (on chargeable income less personal allowances) © HIL 2013
  34. 34. Why HK Route? IN BRIEF: • HK law more sophisticated for financing and exit scenarios for investments in Asia (no strict minimum capital requirements and share transfers can be easily executed) • HK Ltd’s are structured as off-shore (zero CIT tax) and used for trading in Asia BUT: Consider transfer pricing issues! Lack of substance in HK Ltd can create tax presence in shareholder’s home country! © HIL 2013
  35. 35. Hong Kong Setting up a Hong Kong Limited (Ltd) Requirements: • No statutory minimum or maximum share capital • At least one shareholder (private or corporate) • At least one director (private or corporate) • One company secretary (Hong Kong resident) • Domiciliation in Hong Kong (through corporate services company) A Hong Kong Limited can be incorporated within 7 working days. © HIL 2013
  36. 36. Thank you! © HIL 2013
  37. 37. HIL LAW OFFICES Shanghai Office: No. 3000, North Zhongshan Road ICC-Tower, Room 2505B 200063 Shanghai, China Email: Shanghai@hil-law.com Tel +86(21)-61730388 Beijing (Holding) Office: A6 North Gongti Road, Chaoyang District Zhongyu Plaza, Room 1602 100027 Beijing, China. Email: Beijing@hil-law.com Tel +86(10)-8523 5780 CORPORATE SERVICE FIRMS HTM Amsterdam office HIL Trust Management (Europe) B.V. Haaksbergweg 33, P.O Box 51109 1007EC Amsterdam, the Netherlands Email: info@hil-trust.com Tel: +31(20)-4529901 HCS Hong Kong office HIL Corporate Services (Asia) Limited Room 1001, 10/F Boss Commercial Centre 28 Ferry Street, Kowloon, Hong Kong Email: info@hcs-asia.hk © HIL 2013

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