Copy Of Challenges For Investors In 2010(Final) In Shanghai


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Copy Of Challenges For Investors In 2010(Final) In Shanghai

  1. 1. CHALLENGES FOR INVESTORS IN 2010 Richard Kimber Managing Partner of RHK Legal 13 June 2010 in Shanghai10/16/12 1
  2. 2. ◆ China- An Overview◆ Challenges and Risks for Investors in 2010 PRC Tax Regulatory Environment IP Protection Corporate Governance – Trade Secrets Emerging Chinese Protectionism Summary10/16/12 2
  3. 3. The Overview10/16/12 3
  4. 4. The Overview10/16/12 4
  5. 5. The Overview10/16/12 5
  6. 6. The Overview Growth of Consumer Spending 2004-2007 [ US$ B ]10/16/12 6
  7. 7. 10/16/12 7
  8. 8. Challenges and Opportunities for Investors in 2010 a. China evolving from a Production Economy to a Consumer Economy b. Beijing priority now is to both encourage SME development and upgrade efficiency of tax revenue system WHY ( i) 2009-2010 drop in FDI- alarm bells (ii) 2009-2010 Infrastructure Stimulus will end (iii) Continued weakness in US and Europe (iv) SME development encourages consumer spending ie consumption (v) SMEs operate in the goods and services sector e.g. retail, food and beverage, franchise, education, health and fitness, fast food (vi) SMEs create 85% of all new jobs C. Social Pressures- Industrial Wage Claims ( Honda and Foxconn)10/16/12 8
  9. 9. ChallengesPRC Tax ComplianceChina is trying to streamline its tax assessment and tax collection An uphill battle largely of its own making – SAT not computerized. A bonus in an export oriented economy, aliability in a consumption based economy. GFC inspired tax reform-– FDI dropped 22% in 2009 – Europe and US was main culprit for fall in PRC taxrevenues.Representative Offices are discouraged now as an investment vehicle. New Circular in February 2010 willoperate to apply a deemed tax rate on ROs who do not keep adequate accounting records. SAT realizes a lot ofuntaxed business activity was going on involving ROs.The deemed profit rate for Ros raised to 15% from 10%- to increase tax revenues and also discourage use ofROs.WALKING A TIGHT-ROPEConflict between local tax bureaus and development zones giving unofficial and official tax incentives to attractFDI and SAT stepping up assessment and collection of tax revenue 10/16/12 9
  10. 10. PRC Tax Compliance Late 2009-2010- SAT has issued a raft of new circulars Circular 18- aimed at Representative Office deemed tax rate raised to 15% from 10% tax can be assessed on actual income if records not kept by RO Circular 601 Foreign investor can only rely on DTA with China if it satisfies “ substantial business” test NEED TO SHOW: Board meetings held offshore Local Director Registration as a Taxpayer Independent Company Image Office Lease Third Party Contracts10/16/12 10
  11. 11. Circular 698 -- December 2009 - retrospective from 1 January 2008 and set alarm bells ringing - Seeks to impose PRC capital gains tax on disposal by an offshore holding company of its shares in a PRC subsidiary (direct transfer) or disposal of shares of the intermediate holding company (indirect transfer) - requires disclosure to SAT of “offshore indirect transfers” of equity in a domestic enterprise. - investors use offshore companies, e.g. BVI, Hong Kong, Seychelles, Caymans to avoid PRC tax on capital gains by disposal of shares in the offshore holding companies. - SAT will look at the “indirect transfers” where the offshore holding company disposing its shares is located in a country with an offshore tax rate less ofthan 12.5% or is not taxed on offshore income. - obligation within 30 days of the execution of the equity transfer contract, for the foreign investor to submitrelevant documents to local tax bureau where domestic subsidiary is located. Note: If SAT decides the equity transfer has “no reasonable business purpose”, it may impose additional tax at domestic level or deem the local PRC subsidiary not to be foreign owned. 10/16/12 11
  12. 12. Therefore SAT now applies Substance Over Form “Principle”: With more and more tax information exchange agreements being signed between China and BVI, HK etc it is clear full tax compliance is going to be on the agenda for foreign investors and SMEs in the PRC in 2010. Solution: (a)look carefully at how to structure investment into China. (b) Which DTA provides most benefit (c)Show “substantial business” of offshore investor. BE AWARE THAT FOCUS IN 2010 IS ON TAX AVOIDANCE10/16/12 12
  13. 13. IP Registration---- Patent/ Trademarks and Copyright More importance being attached to IP protection by both local and foreign enterprises. — China now creating its own local IP and technology transfer from China due to increased offshore investment. — Ever increasing need for clients to register copyright, patents and trademarks to operate in China. — Too often clients don’t take action to protect brands and IP until after establishing China operations. Now State Trademark Office has undertaken to shorten TM registration process from 26—32 months to 10 months. Case Studies: (a) Acted for Australian Olive Oil Manufacturer to advise on JVC for distribution. Negotiated Sales Agreement and TMLicense. Client discovered JV partner had registered Client’s trademarks during negotiations. Increase costs for Client in obtaining re-transfer of IP right. (b) Hong Kong based nightclub subject to copycat trademark registration in China MANTRA: REGISTRATION BEFORE NEGOTIATION 10/16/12 13
  14. 14. Trade Secrets- pre and post RioTintoPre- Rio TintoPRC Anti- Unfair Competition Law ( effective 1 December 1993) defines a trade secret as follows:(1)It is not known to the public(2)It is practically usefully and may bring profit to its owner(3)Owner has taken measures to keep it confidentialPRC Courts have upheld trade secrets in the “ YSJ Co. Ltd” case. – proprietary customer management database.Post- Rio TintoNOW: Interim Regulations for the Protection of Secrets in Centrally Administered Companies (SOES). – 26 April 2010Now defines that …”any technological information or business information that falls within the realm of state secretsmust be treated as such according to PRC state secret laws.Note: Any foreign investor negotiating with an SOE should ensure they sign mutual non-disclosure andconfidentiality agreements where there is an exchange of corporate information.- Obtain written undertaking from SOE that information provided does not breach the April 2010 Regulations 10/16/12 14
  15. 15. Corporate Governance – post Rio Tinto ● Ensure that anti-bribery and anti-corruption undertakings are signed and accepted by all local employees and thosewritten undertakings filed with HR. ● Obtain third party supplier undertakings whenever possible including an obligation to report employee misconduct. ● Not just a domestic issue, looks like ASIC in Australia will adopt stringent anti-bribery compliance regulations which will no doubt extend to PRC operating subsidiaries. Whistleblower phenomenon —ex-employees are now reporting tax and corporate compliance breaches forreward to local SAIC and tax bureaus and SMES are being increasingly subject to tax and labor audits with little or no warning. MANTRA: IN CHINA EVERYTHING IS NEGOTIABLE 10/16/12 15
  16. 16. Internal Corporate Governance Trade Secrets (Intangibles, business processes, client databases, product specifications, price details etc. ) 1. employees execute a separate detailed “Copyright and Trade Secret Assignment Agreement” and “Non-Disclosure and Confidentiality Agreement”. HOWEVER not enough to have handbooks and staff manuals. (recent PRC court decisions place onus on employer to prove specific written notice to employees and have employeessign undertakings) 2. Prepare a Handover Checklist of items which must be delivered up by an employee on finishing employment eg, Hard drives Communication Devices Databases in all formats Catalogues and Product Specifications Technical Materials 3. Ensure both the employer and employee sign this Handover Checklist preferably when joining and also on ceasing employment. Keep copies with human resources. 10/16/12 16
  17. 17. Chinese Protectionism a. PRC Indigenous Innovation Policy- Government procurement to be of locally developed products for following sectors: (i): Computer Software (ii): Telecommunication Product (iii): Energy Conservation Product has caused US great concern b. Working Guidelines for Recognition of High and New Technology Enterprises- January 2008 -Tax preference only available to HNTE where the IP is owned by the FIE or Dom Co. CONTRAST: Circular No. 166- 31 December 2009 Income from a qualified environmental protection and energy and water saving projects -Eligible for 3 year EIT exemption10/16/12 17
  18. 18. SME Perspective1. Expect increase in random tax or labor audits and requests by SAT for self assessments of tax liabilities.2. Increased tax incentives for SME set up, lowered capital requirements and streamline application process.3. Corporate Governance now a priority and review internal office procedures, third party agreements and labor agreements.4. SME financing should become easier – local PRC banks are establishing SME loan departments and aggressively seeking FIE borrowers.5. Be aware of the broad definition of “commercial and state secrets” when dealing with SOEs and PRC private companies. Make your confidentiality and non- disclosure agreements mutually binding.6. Obtain written undertakings and indemnities 10/16/12 18
  19. 19. SME Opportunities 1. Chinese Fast Food 2. Western Fast Food 3. Retail 4. Beverages 5. Gym, Fitness and Leisure 6. Auto After-Market 7. Luxury Retail 8. Education + Training 9. Furniture + Household Products10/16/12 19
  20. 20. NATURE OF THE INVESTMENT Foreign Investment Catalog Status of industry/ Description Examples activityEncouraged Special incentives possible Manufacture of wind power Usually high tech or agriculture industries turbines AgribusinessPermitted All activities not mentioned in catalog are All sectors not mentioned in catalog permitted But may be difficult to get approval for uncommon activitiesRestricted Special approval required- usually JV Production of cigarettes partner necessary Operation of oil refineries Usually are protected sectors Media production/ Publishing/ TV and FilmProhibited Activities are disallowed Arms manufacturing Harms national interests or environmentally Operation of gaming industry damaging When considering setting up in China, first step is to check the catalog 10/16/12 20
  21. 21. Capital Requirements Injection MethodsTotal Investment Registered Capital Capital ContributionLess than 3 million No less than 70% of total investment Complete injection within 6 monthsBetween 3 and 10 No less than 50% of total investment Ormillion with a minimum of 2.1 million if total investment is below 4.2 million Capital contributed in installments: 20% within first 3Between 10 and 30 No less than 40% of total investment months with the remainingmillion with a minimum of 5 million if total injected within 2 years investment is below 12.5 million Currency: US DollarsBetween 30 and 36 No less than 1/3 of total investmentmillion with a minimum of 12 million 10/16/12 21
  22. 22. Doing Business in ChinaOpportunities in China do exist- country has been opening up, growth rates areimpressive, population is getting wealthier, FDI has been pouring in …However, competition is fierce; China market should be approached gradually, un-emotionally and with realistic expectationsLong-term vision is a must, quick profits are unlikely- time, money and effort arenecessaryThere is no such a thing as one China market, rather several regional/ provincial/ localmarketsGaining local knowledge is crucial- adapt your business practices to the localenvironmentConducting proper due diligence, developing a sound strategy, and legal frameworkare key success factors10/16/12 22
  23. 23. Golden Rules for Success in China Research your market Spend time on partner selection Seek the less travelled road- 2nd tier cities Use agent and representative where appropriate Ask for it all up front BUT- always have personal involvement Manage Risk- Political/ Economic/ Disaster/ Individual Register IP and Copyright Develop a strategy to protect your IP10/16/12 23
  24. 24. Thank You for you attention ! RHK Legal Shanghai Office Suite 507, Jingan China Tower No. 1701, Beijing West Road, Jingan District, Shanghai, 200040 China Tel: +86 21 6288 8821 Fax: +86 21 6288 8823 Hong Kong Office Room 2406, 24/F., Hopewell Centre, 183 Queens Road East, Wanchai, Hong Kong Email: Website: www.rhklegal.cn10/16/12 24