This document provides an overview of investment vehicle options and considerations for entering and growing a business in China. It outlines two main options - establishing a holding company offshore or setting up a wholly foreign-owned enterprise (WFOE) directly in China. The key benefits and risks of each approach are discussed. Tax rates, legal structures, capital requirements and the investment approval process are also reviewed to help evaluate the best strategy.

1. Solutions for China Entry & Growth

2. Investment Vehicle Options
Op#on
1
Op#on
2
• Buffer between
Parent Parent Parent and China
Co Co Operations
• Tax Optimization /
Profit Repatriation
• Future sale or
investment/
restructuring
Hold Co simplified
• Option to take
local partner
Overseas
Overseas
offshore
• Modern legal
PRC
PRC
structure and
mature rule of law
WFOE WFOE
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3. Withholding Tax on Dividends
Tax Treatment Countries Notes
• Applicable for investments of
0% Georgia 50% with a total investment of
EUR200 million
Kuwait, Mongolia, Mauritius, Slovenia, Jamaica,
Yugoslavia, Sudan, Laos, South Africa, Croatia,
5%
Macedonia, Seychelles, Barbados, Oman, Bahrain,
Saudi Arabia
Luxemburg, Korea, Ukraine, Armenia, Iceland,
• Must hold at least 25% of the
5% Lithuania, Latvia, Estonia, Ireland, Moldova, Cuba,
investment
Trinidad and Tobago, Hong Kong, Singapore
• Must hold at least 25% of the
7% Austria
investment
8% Egypt, Tunis, Mexico
10% Most other Countries
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4. Hong Kong Holding Company
• Tax rate: 16.5% income tax
• No VAT, Capital Gains, or Sales tax
• No withholding tax on dividends and interest
• Low country risk and strong rule of law
• Ease of disposal, acquisition and restructuring
Jurisdiction FDI 2009 (Billion)
Hong Kong US$54
Taiwan 6.6
Japan 4.1
Singapore 3.9
United States 3.6
The #1 source of FDI for China (32% YOY Growth)
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5. Investment Vehicle Options II
Substance Over Form
Op#on
2
• Reduced Tax Rate Exclusions: If State
Parent Administration of Taxation (SAT) deems the offshore
Co company’s day to day management occurs within
Mainland China, the offshore company may be subject
to corporate income tax in Mainland China
• Effective Management Rule: Offshore holding
companies with no substantive business activities may
not qualify for reduced withholding tax rates as per tax
Hold Co
treaties between the jurisdiction it is located and
Mainland China
Overseas
• Indirect Transfer of Assets: an investor that has
structured its equity interest in a Mainland China
PRC
enterprise through an offshore holding company could
be subject to an additional tax burden within China, in
the event that the investor sells interests in the
offshore company
WFOE
Don’t Forget to Consider Benefits Between the Hold Co and the Parent Company
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6. New Rep. Office Restrictions
Prior to January 2010 New RO Current RO
May maintain current
Foreign
No Limit No more than 4 allowed Representatives but not
Representatives
additional Reps.
Effective Tax Rate 8.8% ~10.9% ~10.9%
1 year after current
Duration of entity 3 years 1 year
license expires
Registration COI + Bank Statement
COI Authenticated N/A
Complexity Authenticated
Renewal
N/A COI Authenticated COI Authenticated
Complexity
Parent Company Must be a legal entity in Must exist for at least 2
home country N/A
Qualification years in home country
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7. Foreign Investment Catalog
Investment Categories
Status of
Description Examples
industry/activity
• Special incentives possible • Manufacture of high-performance
Encouraged welding robots
• Usually high-tech or agriculture
industries • Software Development
• All activities not mentioned in catalog
are permitted
Permitted • All sectors not mentioned in catalog
• But may be difficult to get approval for
uncommon activities
• Special approval required – usually JV • Automotive Production
partner necessary
Restricted • Operation of oil refineries
• Usually are protected sectors
• Media production
• Activities are disallowed
• Arms manufacturing
Prohibited • Harms national interests or
• Operation of gaming industry
environmentally damaging
When considering setting up in China, first step is to check the catalog
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8. Foreign Investment Catalog
Legal Setup Options
Investment Restrictions
Setup Options Description
Encouraged Permitted Restricted Prohibited
• Liaison office for parent
Representative Office company
(RO)
Foreign Invested Enterprises (FIE’s)
Wholly Foreign Owned
Enterprise (WOFE)
• Service WFOEs • 100% invested and
owned by foreign
• FICE
entities
• Manufacturing WFOE
• Trading WOFE
Equity Joint Venture • Capital investment from
both foreign and
(EJV) Chinese entities
• Partnership between
Cooperative Joint
foreign and Chinese
Venture (CJV)
entities
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9. Nature of Business
Import/Export Domestic Service Capital Registration
Rights Distribution Activities Requirements Complexity
Rep. Office
Service WFOE
Manufacturing
WFOE
FICE
WFOE’s provide greater flexibility for future operations
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10. Entity Options Analysis
Sourcing
• Simplifies tax exposure (~8.8% on
Conduct negotiations, QC for Parent expenditures), registration complexity, & initial
company . investment
Rep. Office
• Heavy reliance upon 3rd party agents to
facilitate trade
• May cause additional tax exposure if effective
Legal Gray Illegal
management is within China
• Not scalable
Provide sourcing consulting services • Allows more sophisticated means of tax
exclusively to Parent Company optimization
Service WFOE
• Heavy reliance upon 3rd party agents to
facilitate trade
Legal Gray Illegal • May cause additional tax exposure if effective
management is within China
• Not scalable
• Allows for the flexibility to bring more of the
Source from within China then sell to supply chain in-house
FICE Customer direct • Platform for future domestic distribution
• More sophisticated tax optimization
• Allows flexibility for future expansion of
Legal Gray Illegal business scope and scalability
• Greater administrative costs/overhead
• May cause tax complications if used as a
captive business model
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11. Entity Options Analysis
Services
• Simplifies tax exposure (~10.9% on
Conduct services /BD through local office
expenditures), registration complexity, & initial
while all invoicing is conducted offshore.
Rep. Office investment
• Not a substantial presence in the market; may
deter potential clients
Legal Gray Illegal • May cause additional tax exposure if effective
management is within China
• Must setup a separate RO to expand presence
• Allows more sophisticated means of tax
optimization
• Direct hire of local employees
Provide services and invoicing directly to • Substantial presence within China with ability
local & International clients
Service WFOE to issue Fapiao
• Option to establish branch office to expand
presence
Legal Gray Illegal • May require higher upfront costs and greater
overhead
• May cause tax complications if used as a
captive business model
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12. Entity Options Analysis
Extension of Business Scope
Manufacturing /
Import/Export Domestic Service Development
Tax Treatment
Rights Distribution Activities Rights
Manufacturing
WFOE
FICE
Mfg + FICE
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13. Incentive Programs
• 2009 economic downturn has spurred many local
governments to provide additional incentives for
establishing your FIE within their jurisdiction
 Recognizing encouraged statuses before official approval
 Reduced rates for local portion of tax
 2/3 Tax Holidays
 Reduced fees for land-use rights
 Subsidized rentals and expat housing
• Local incentive programs, once secured, may be tenuous at
best
Special Incentives should not be the only priority in choosing a location
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14. Corporate Restructuring
RO to WFOE- Current Location
Cancela#on
of
RO
Submit
for
Local
Tax
License
and
other
Begin
Final
Audit
for
RO
Bureau
Cancela#on
cer#fica#ons/WFOE
(1-­‐2
Months)
(~4
months)
Document
Prepara#on
(1month)
WFOE
Name
approval
Business
License
Post-­‐License
&
Lease
Registra#on
(1
month)
registra#on
(1
month)
(~1
month)
Entire process can take up to 10/12 months to complete
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15. Corporate Restructuring
RO to WFOE – New Location
Cancela#on
of
RO
Submit
for
Local
Tax
License
and
other
Begin
Final
Audit
for
RO
Bureau
Cancela#on
cer#fica#ons/WFOE
(1-­‐2
Months)
(~4
months)
Document
Prepara#on
(1month)
WFOE
Name
approval
&
Lease
Registra#on
in
Business
License
Post-­‐License
New
Loca#on
(1
month)
registra#on
(1
month)
(~1
month)
Changing office locations can shave months off of the process
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16. Capital Requirements
Injection Methods
Total Investment Registered Capital
No less than 70% of total • Complete injection within 6
Less than 3 million investment, with a minimum
months
of 3,700
-or-
• Capital contributed in
No less than 50% of total installments: 20% within
investment with a minimum first 3 months with the
Between 3 and 10 million of 2.1 million if total remaining injected within 2
investment is below 4.2 years
million
Currency: US Dollars
No less than 40% of total
investment with a minimum
Between 10 and 30 million of 5 million if total
investment is below 12.5
million
No less than 1/3 of total
Between 30 and 36 million investment with a minimum
of 12 million
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17. Capital Requirements
Investment Ratios
• Registered Capital (RC)
 Foreign Contributed Capital
 Up to 70% of Non-Cash Assets
• Total Investment (TI)
 Combination of Equity and Debt
 Must maintain Ratio: RC/TI
• Non-Cash Assets may include Tangible and Non-Tangible Assets
 Intellectual Property Rights (i.e. Software)
 Hardware and a ‘Catchall’ for Most Items with Monetary Value
 Valuation procedure may be complicated and time consuming
Cash Investment is the Fastest Method of Investment
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18. Capital Requirements
Investment Ratio Examples
Example 1
Registered Capital
Equity (100%)
Total Investment
Example 2
Registered Capital
Equity (70%) Debt (30%)
Total Investment
Shareholder loans are an alternative means of profit repatriation
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19. Business Registration Process
WFOE
Company’s Chinese Name Approval
Stage I:
Licensing Approval to Establish Company
Registration of Business License
Filing and Carving Seals* Enterprise Code Certification**
Foreign Exchange Approval Registration with Tax Bureau
Stage II:
Post-
Licensing
Statistics Bureau Registration†
Open RMB & Foreign Currency Bank Accounts
Stage III: Capital Verification
Post-Capital
Injection
Update Business License
*Official company stamps required for many business and banking transactions in China
** Equivalent to a personal identification number for the licensed company
• † This process can be completed at any stage following foreign exchange approval and registration with the tax
bureau
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20. Business Compliance
The License
• Describes the following information:
 Official Name of Company
 Business Scope
 Registered Capital & Total Investment
 Currently injected Capital
 Expiration Date
• Greenfield MFG WFOE – 50 years
• Service WFOE – 30 years
• RO – 1 year
• RO’s must renew their license every year
• WFOE’s must conduct an Annual Inspection
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21. Business Compliance
The Capital
• Injection Options
 Full injection within six months
 15% to 20% within 3 months, and the remaining over 2 years
• Inject on Time
 Late injection » Felony by law
 Pudong: License termination for late injection
• 100% Capital Injection is required to
 Change office location
 Open Branch Office
 Increase capital
• Important to update Relevant Bureau & Business Licenses
Inject capital on time and update your business license
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22. Business Compliance
The Process
• Annual Audit and Examination
 Occurs between Mar 1st and June 30th every year
• Requires a Financial Audit
• Rep Offices: deadline by 30th Apr (only require financial audit)
• Examination by 7 Chinese authorities
• Joint examination offers simpler process (14th Apr to 23rd May)
 Miss it twice… License terminated
• Company Alterations
 Renewals
 Office Location
 Key Company Details –
• Chief Rep, Board Chairman, Executive Director, and Supervisor
• Company Name, Investors, etc
 Increasing Registered Capital
 Expanding Business Scope
Try not to miss the joint examination… Simplifies work significantly
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23. China by the Numbers
"FDI
U#lized
(USD
Billion)"
100
90
80
70
60
50
40
30
20
10
0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
FDI in 2009: 90.0bn -2.6% decrease over 2008
Source: National Bureau of Statistics/USCBC The JLJ Group All Rights Reserved - July 22, 2010 23

24. China by the Numbers
FDI
By
Investment
Vehicle
WFOE
EJV
CJV
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: National Bureau of Statistics/USCBC The JLJ Group All Rights Reserved - July 22, 2010 24