Practical guide to basic legal issues to be aware of when planning China entry, including corporate structure, tax planning and intellectual property protection.

1. Starting Your China Business
A practical guide to the basics you need to know when entering China
Lehman, Lee & Xu

2. Hong Kong Special Purpose Vehicle
• A company founded in Hong Kong (HKSPV), normally conducting no business of its own.
• Typically holds all IP rights for the mainland China company.
• No restriction on value of initial capital.
• Between one and fifty shareholders; individuals or corporate entities.
• Liability of each shareholder is limited to the capital they have invested.
• At least one Director which may be individual.
• At list one Company Secretary is required and must be a Hong Kong resident or
corporation.
• Must have a registered office address in Hong Kong.
• Required to renew business registration annually, file annual tax return.
• Required to appoint auditors and prepare audited accounts every year.

3. Limited Liability: As the shareholder of the mainland company, the HKSPV will be
liable up to the subscribed registered capital for the mainland company.
Exit Strategy: Provides option for quick exit from China operation. Can be sold in one
day under Hong Kong laws. Avoid lengthy winding down proceedings in mainland
China.
Remittance of Funds: Provides for easy transfer of funds out of China in form of
payments for services, royalties or licensing fees.
Hong Kong Special Purpose Vehicle

4. Tax Benefits:
• Tax rate on money not earned in Hong Kong (i.e. in mainland China) is 0%.
• Avoid 25% mainland China income tax.
• Tax rate for profits earned in HK is just 16.5%.
• No dividend tax in Hong Kong, dividends received by the Hong Kong company will not
be taxed in HK.
• The China withholding tax applying to a Hong Kong parent company can be as low as 5%.
• Funds can be managed easily over internet, and moved easily in and out of the HKSPV
due to no currency controls.
Hong Kong Special Purpose Vehicle

5. WFOE
• Limited Liability corporations established in mainland PRC by a foreign corporation or
individual(s)
• Permitted business activities include production, sourcing, distribution, retail sale, and
provision of services.
• May produce products directly, or source from Original Equipment Manufacturers.
• VAT refund on products produced for export only
• Foreign components may be imported duty free for addition to products produced for
export only.
• More business capability than a Representative Office.
• More control and less potential for disputes than a Chinese-Foreign Joint Venture.
Wholly Foreign Owned Enterprise

6. • The current Company Law entered into force in 2018, and reflects efforts to make starting a
company easier and more streamlined.
• The requirement for a minimum amount of registered capital has been removed. (Other
administrative regulations or decisions of the State Council may require a minimum amount
in some circumstances).
• Mandate for initial paid in capital levels has been eliminated. (Initial paid in capital
requirements may vary depending on local rules and regulations).
• Capital verification report no longer required by law as part of company establishment
procedure.
Initial Capital Requirements

7. Registered Capital Subscription System:
• Registered Capital is now declared as “Subscribed” Capital by the
shareholder in the Articles of Association. The amount stated in the Articles
of Association will, be legally binding on the company and set the limit of
legal liability.
• The shareholders will be allowed to determine the form and time of capital
contributions according to business needs. This information must be
recorded in the Articles of Association.
Initial Capital Requirements

8. • Registration Requirements: In general interactions with authorities should
gradually be streamlined and simplified, thought variations may exist at local
level.
• Annual Reporting: Annual Audits have been eliminated and replaced by an
Annual Reporting system, in which a report is generated by the Enterprise itself,
and sent to Authorities without a substantive review.
• Enterprise Credit System: Regulatory non-compliance, failure to pay debts,
or severe business complaints may reduce Enterprise Credit rating. Companies
failing to comply with regulations may be listed as in “Abnormal Operation.”
Registration Requirements & Compliance

9. • National Treatment: The Foreign Investment Law requires that Foreign companies
and investments be treated no differently than Chinese domestic companies and
investments.
• Simplified Registration Process: Red-Tape eliminated. Reduced requirements to
apply for special approvals from authorities to conduct certain business activities.
Requirement for Ministry of Commerce approval eliminated.
• Negative List: Foreign Investment is restricted by a “Negative List” of sectors in
which foreign participation is not permitted.
• Intellectual Property: Explicit legal protections for Intellectual Property of foreign
parties (IP must be duly registered in China).
New Foreign Investment Law

10. Types of Labor Contract:
• Fixed Term
• Non-Fixed Term
• Contract for completion of specific task
Every Employee is Required by Law to have an Employment Agreement
The function of an Employment Agreement is very specific. The
Labor Contract Law sets rules for establishing and terminated an
Employment Agreement.
Generally, am Employer seeking early termination of an
Employment Agreement must provide due notice, and severance
compensation to the Employee.
Immediate termination without compensation with permitted only
where the Employer is able to point to severe disciplinary
breaches of the Employee.
Employment Systems

11. Company Handbook: Establishing rules and formally policies of the company, behavioral
expectations and responsibilities of Employees to the Company.
Employment Trainee Agreement: Requiring the employee to pay back trainee costs if the employee
leaves employment within a certain time period.
Non-Disclosure Agreement: A standalone agreement setting confidentiality obligations of the
Employee.
Non-Competition Agreement: A standalone agreement setting non-competition obligations of the
Employee.
Intellectual Property Work for Hire Agreement: A standalone agreement, establishing that all
intellectual property created by the employee during employment is the property of the company.
China Anti-Bribery/Foreign Corrupt Practices Act Agreement: A standalone agreement establishing
anti-bribery restrictions.
China Expense Reimbursement Agreement: A standalone agreement governing Employee
reimbursement.
Employment Systems

12. Types of Intellectual Property
Trademarks: Protection for the words or logo used to identify goods
or services. Should be registered in native language, and in Chinese.
Copyrights: Protection for an original work of art or writing
(including software).
Patents: Protection for a new invention, an incremental improvement,
or a new use of existing technology.
Design Patents: Protection on the unique appearance of the design of
a product.
Domain Names: Register your name, and variations on your name,
under multiple internet domains (.com, .com.cn, .cn, .中国).
Intellectual Property Protection

13. Intellectual Property protections are national in nature. Steps must be taken to register IP in
each country where protection is desired.
First-to-File System: The first to file for protection of a Intellectual Property (IP) will be the
owner, prior use is not a consideration.
Benefits of Registration
• Legal ownership of the IP
• Ensures rights to use the protected IP in China
• Reduces potential for infringement
• Grants right to initiate legal action against infringement and unauthorized use.
• After filing with customs authority, may prevent import and export of infringing goods
Intellectual Property Protection

14. Transferring funds out of China using Licensing Agreements
• Licensing fees and royalties paid to overseas entities which own IP registered in China can be
a legal and effective way to transfer funds abroad, beyond PRC capital controls.
• IP Licensing Agreements are signed between the China company and the foreign IP holder
(Usually a HKSPV).
• Income of the China company transferred to the HKSPV as licensing payments.
• Avoid 25% income tax on China company profits and minimize cash transfer restrictions due
to capital controls.
• Licensing Fee will be subject to 6% VAT on transfer.
• Typically the IP and the Licensing Agreement, must both be registered with Chinese
authorities. However, registering the Licensing Agreement is not necessary if license is held
by a Hong Kong company.
Intellectual Property Licensing

15. 10-2 Liangmaqiao Diplomatic Compound
No.22 Dongfang East Road,
Chaoyang District, Beijing, 100600, China
北京市朝阳区东方东路22号亮马桥外交
公寓A区10-2 邮编：100600
Tel: (86)(10) 8532-1919
Copyright 2021 - Lehman, Lee & Xu
Follow LLX on WeChat
A Licensed PRC Law Firm
Since 1992
www.lehmanlaw.com
mail@lehmanlaw.com
Managing Director:
Edward Lehman