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Expansion into China: Establishing a legal presence

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This is a complimentary recording: We are pleased to have Kristina Koehler-Coluccia join us from Koehler Group—recently acquired by Corporation Service Company®—to share her expertise in establishing a legal presence in China.

Establishing a legal presence in China is not as straightforward as incorporating an entity in the United States. There are several aspects that require due consideration, including:

• The general business scope and activity of the entity, which needs to be clearly defined from the start of the incorporation
• The physical office requirement for the entity as its registered place of business
• The structure and budget for the investment that need to be carefully thought through
• The opening, operation, and maintenance of three sets of bank accounts in China for continuous operations

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Expansion into China: Establishing a legal presence

  1. 1. June 30, 2016 Expansion into China: Establishing a legal presence
  2. 2. Page 1 About Your Speaker Kristina Koehler-Coluccia, director, Koehler Group Kristina is one of the leading experts in entity incorporation in China. She has worked in the Chinese legal and accounting industry since 2003, and advises and represents Western clients with their business interests in China. She has worked on numerous complex transactions including foreign direct investments, corporate (re)structuring, company liquidations, and M&A deals. She frequently advises on, and represents, foreign clients in tax, accounting, and trade related matters. Kristina is the author of Koehler Group’s monthly magazine, ChinaInvest.biz, and has also contributed to numerous other publications relating to the Chinese legal, accounting, and business practices. She frequently holds seminars, webinars, and gives presentations at business groups and government institutions around the world.
  3. 3. Page 2 About Koehler Group CSC BLU CSC NAVY CSC LIGHT BLUE Koehler Group provides a wide range of market entry consulting, incorporation, tax, accounting, and human resource services to organizations interested in entering and expanding their business throughout Hong Kong, Singapore, and China. • Koehler Group was established in 1979, and is managed by an international and local team of over 120 consultants, accountants, and legal professionals in 10 offices throughout these regions. • From our offices in Beijing, Chengdu, Dalian, Guangzhou, Hangzhou, Hong Kong, Shanghai, Shenzhen, Singapore, and Tianjin, we offer services to small-to-medium sized privately owned companies, as well multinational corporations. • Our objective is to provide an efficient and cost-effective service tailored to each client’s specific needs, developing a lasting partnership with our customers with a focus on protecting their investments, and maximizing their returns. • Our international desks speak English, German, Spanish, French, Italian, Portuguese, Russian, and Japanese.
  4. 4. Page 3 Wholly Foreign Owned Enterprise (WFOE) – owned solely by a foreign investor(s) • Management consulting company • Information technology • Recruitment • Architecture and design • Logistics • Restaurants Foreign Invested Commercial Enterprise (FICE) – a WFOE that handles import and export functions • Wholesale trading • Retail trading • Ecommerce trading • Manufacturing Types of Entities in China
  5. 5. Page 4 • Domestically Invested Enterprise (DIE) – owned solely by mainland Chinese investor(s) • Joint Venture (JV) – owned between a foreign investor and a mainland Chinese investor • Foreign Invested Partnerships (FIPs) – a foreign invested partnership is an enterprise, where foreign companies and individuals are permitted amongst themselves or in partnership with China domestic individuals or entities, to directly establish FIPs in China • Representative Office (RO) – a liaison office which is tied to its parent company (i.e. a shareholder which is overseas and must be a corporate entity – not individual) Types of Entities in China
  6. 6. Page 5 Articles of Association Key points for consideration when formulating your Articles of Association (AoA’s): • They are the legal basis for a company to do business with third parties • They are very important documents for setting up a company in China • The AoAs form the self governed rules of a company • Mandatory items of the AoAs • Principal on shareholders voting at the shareholders’ meeting • Basis for dividends distribution and/or subscription of the increased capital • The power of the organizations of the company • Share transfer
  7. 7. Page 6 An LLC may conduct business activities within the business scope of its business license as approved by the foreign investment approval authority and registered with the Administration of Industry and Commerce (AIC). Examples of business scopes are: • Management Consulting Company: investment consulting, enterprise management consulting, enterprise planning consulting (excluding advertising), trade information consulting, environmental information consulting, economic information consulting, scientific and technical consulting (related to administrative licensing with license management). • Wholesale Trading Company: wholesale of certain product; commissioned distribution (excluding auctions); import and export; and other related services (related to administrative permit for operation). An RO can only observe the market conditions, including: • Market research, product display and publicity activities relating to the foreign company’s products or services, and • Liaison activities relating to the sale of products or provision of services, and local procurement or investments, by the foreign company. Business Scope
  8. 8. Page 7 Key points for consideration: 1.Can I change, update, add, remove items from my business scope? 2.What are the implications if I move from a consulting company, to a trading company, to a manufacturing company, to doing retail and ecommerce? 3.If I have an RO today, and I want to start offering consulting services, trading services, or manufacture, how can I change my business scope? Business Scope
  9. 9. Page 8 It is important to recognize that registered capital amounts (your investment) should be measured against the businesses cash flow needs and not against minimum qualified amounts issued as guideline. An Amendment to the PRC Company Law entered into force on March 1, 2014 indicates: 1. The minimum investment requirement is abolished. 2. The statutory schedule for capital contribution is abolished. 3. The requirement whereby shareholders must make their initial contribution (at least 20% of the registered capital) before they can apply for a business license is abolished. 4. The requirement to register the registered capital with the local AIC after each installment is removed. 5. There is no minimum ratio of cash contribution. 6. There is no capital verification report requirement. 7. The Business License will not mention the registered capital and total investment. An RO has no capital requirement; it is only required to be funded by the parent company. Investment Capital Requirements
  10. 10. Page 9 Key points for consideration: 1. Am I able to increase my registered capital and total investment? 2. Are there differences from city to city based on this new regulation? 3. Am I able to decrease my registered capital and total investment? 4. Is registered capital utilized as working capital? 5. If a representative office does not have registered capital, how can my representative office operate? Investment Capital Requirements
  11. 11. Page 10 Capital Account – For all registered capital and investment capital, such as loans, etc., the registered capital will be transferred from the shareholder to this account in the currency that is designated in all application forms. Settlement Account – Made up of RMB basic account and multicurrency accounts for daily transactions, the RMB basic account will be vital for day-to- day withdrawals for petty cash, or regular transfers to pay for expenses as well any trade/service transactions that are handled in RMB currency. The foreign currency account(s) are for any transfers made in these currencies. Tax Account – Used to settle all tax payments to the tax bureau, the tax account will be used to pay for all taxes. The tax amount to be settled each month must be transferred from the RMB basic settlement account to the tax account. Once the tax declaration is made, the tax bureau will deduct the tax amount automatically by a certain date. Opening Bank Accounts in China
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  13. 13. Page 12 Key features of circulars 160 and 482 include: • Transition from the taxpayer identification number (TIN) system to the unified social credit code (USCC) system • Transition related to the integration of three certificates • Procedures for implementing the integration of three certificates Key point for consideration: 1. Is the shareholder required to be present in China to deal with the various government bureaus for the establishment of the LLC, or can it be a representative? 3-in-1 Business License
  14. 14. Page 13 1. Name Approval Certificate – same procedure and paperwork 2. Approval Certificate – same procedure and paperwork 3. Business License (3-in-1) – same procedure and paperwork (plus one set of documents need to be submitted to the Tax Bureau) 4. Company chop – same procedure and paperwork 5. Enterprise code Certificate – abolished 6. Tax Certificate – abolished 7. Bank account opening 8. Import and export registration (if applicable) – same procedure and paperwork Changes in the Application Procedure
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  16. 16. Page 15 Key points for consideration: 1. What is a legal representative, and what are the role and responsibilities of this position? 2. How to select the legal representative. 3. What is a supervisor? 4. Recommendations and tips Corporate Structure
  17. 17. Page 16 1. A person cannot be appointed as a chief representative should s/he have been one in the previous 5 years and within this 5 years the registration certificate was cancelled or revoked by the government authorities. 2. It is a requirement that the chief representative be automatically liable to pay personal income tax in China, even if they are not residing in China. If the person is not residing in China, then they must pay personal income tax on their worldwide income based on the number of days they are in China per month. Should the person be based in China, then tax will be automatically paid monthly (particularly if they are holding a work permit and residence visa). 3. It is advisable to choose a chief representative who is familiar with Chinese business, will be travelling to China, and knows the staff that will be working for the China RO. At the end-of-year audit and/or closure of the China RO (should it occur), payment of personal taxes will be checked. Requirements of Chief Representative of ROs
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  20. 20. Page 19 The regulations have set forth more stringent legal liability responding to the violations of ROs. • If the foreign enterprise establishes a RO without authorization or engages in business activities in relation to the RO without authorization, the local registration authority shall order them to stop those activities and impose a fine of between RMB 50,000 to 200,000. • A fine of up to RMB 500,000 may be imposed if the RO violates the regulations by engaging in profit-making activities. In addition to that, the registration authority may correct and confiscate the assets. If the circumstance is severe, the registration certificate shall be revoked. Legal Liability of a Representative Office
  21. 21. Page 20 Legal Liability of a Representative Office Offense Penalty in RMB Establishing a RO or conducting business activities without registration 50,000 to 200,00 Conducting profit-making activities 50,000 to 500,000 Providing false materials or concealing the true situation 20,000 to 200,000 Conducting other activities beyond business 10,000 to 100,000 Failure to register a change in registration 10,000 to 30,000 Engaging illegal activities impairing the State security or public interests Suspend or revoke the registration certificate
  22. 22. Page 21 1. China is enforcing further restrictions on ROs and are investigating them more intensely. If the foreign investor is not 100% within his legal parameters of operating a RO, its highly recommended to avoid such a structure. 2. LLCs offer greater flexibility in terms of business scope, employment of foreign and mainland Chinese staff, and tax optimization solutions compared to ROs. 3. LLC means you are a fully registered entity in China and are capable of handling all activities legitimately, whereas an RO is now seen as a rather illegitimate vehicle. 4. For companies who are not clear on whether the China market is viable for them, it is still recommended to go straight to the LLC structure. Should the business become viable, the company can avoid the costs of closing down the RO and establishing the LLC as a brand new entity, which can be a rather complicated structure. 5. If you are not looking to have a “real” operational LLC, but only to handle the same functions that a RO would handle, then the LLC can be structured as a cost center as well. LLC vs Representative Office
  23. 23. Page 22 • Due to the limited activities available to an RO, foreign investors may want to close their representative office and set up a limited company in the form of a WFOE, FICE, or JV. • An RO should check whether there are any outstanding tax liabilities. • If there are any liabilities or the office does not have record of any of the official receipts (fa piao) of payments that need to be submitted to the tax bureau, then the bureau may arrange an on-site office inspection followed by a closure audit. • If the tax bureau believes that illegal work has been conducted, they will remove the company's books and computers for further examination. As a result the company will be liable for any outstanding tax payments and late payment fines of up to five times the amount that was due. • If the company did not register with the local tax bureau within 30 days of receiving its business license then another late payment will be due. This time it is 0.2% of the outstanding amount per day. • If the company has conformed to all the local and national rules and regulations by proving that it has no tax liabilities, which can be verified via its bookkeeping records and certificates and receipts issued by the local and national tax bureaus, then the company only needs to submit the required documents to the Administration for Industry and Commerce (AIC). The tax bureau will still require that the company go through a tax audit report signed by an official certified public accountant, which would also be submitted to the AIC. LLC Liquidation vs RO Closure
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  25. 25. Page 24 1. Do your market research on what the right structure is for you 2. Establish the right culture from day one; be aware of the cultural differences related to paperwork and bureaucracy 3. Avoid a lack of attention and communication with your partners/team 4. Ethical situations 5. Dealing with inexperienced foreign and local staff 6. Register your intellectual property, e.g. trademarks, patents 7. Additional licenses 8. Be aware of government interaction 9. Appointment of directors and senior management personnel 10. Obtain advice and pay for it Top 10 Tips for Establishing Your Legal Presence
  26. 26. Page 25 Mr. Klaus Koehler established Koehler Group Holdings and its associated entities in 1979 after many years of international trading activities with Hong Kong and China. He built an experienced international team of European, American, and Chinese professionals, who combined, have many years of expertise in accounting, tax, manufacturing, international trade, consulting, recruitment, and more. The cultural and professional diversity of Koehler group, along with multilingual skills, gives us the flexibility and knowledge required to understand our clients’ needs and offer integrated service packages. Our Team Group Headquarters, Hong Kong Mr. Sven Koehler Group Managing Director/Director, Hong Kong and Singapore 16/F Rykadan Capital Tower 135 Hoi Bun Road, Kwun Tong Kowloon, Hong Kong Tel: +852 2345 7555 Fax: +852 2345 5452 Email: info@koehlerservices.com Group Headquarters, Hong Kong Ms. Kristina Koehler-Coluccia Director, China 4/F Cross Tower 318 Fuzhou Road Shanghai, 200001, China Tel: +86 21 6391 3188 Fax: +86 21 6391 2032 Email: info@koehlerservices.com
  27. 27. Page 26 Subscribe FREE today to our monthly magazine and webinars on investment, tax, and operational issues for foreign companies entering or operating in Hong Kong, Singapore, and China at: www.koehlerservices.com. Follow us and subscribe to our LinkedIn and YouTube Channels! ChinaInvest.biz Information Series

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