corporate restructuring 2010
DESCRIPTION
Restructuring your entity in China - updated 2010TRANSCRIPT
Solutions for China Entry & Growth
The JLJ Group All Rights Reserved - July 22, 2010
Investment Vehicle Options
2
Hold Co
Op#on 2
Parent Co
Op#on 1
WFOE
Overseas
PRC
Parent Co
WFOE
• Buffer between Parent and China Operations
• Tax Optimization / Profit Repatriation
• Future sale or investment/ restructuring simplified
• Option to take local partner offshore
• Modern legal structure and mature rule of law
Overseas
PRC
The JLJ Group All Rights Reserved - July 22, 2010
Withholding Tax on Dividends
3
Tax Treatment Countries Notes
0% Georgia • Applicable for investments of
50% with a total investment of EUR200 million
5%
Kuwait, Mongolia, Mauritius, Slovenia, Jamaica, Yugoslavia, Sudan, Laos, South Africa, Croatia, Macedonia, Seychelles, Barbados, Oman, Bahrain, Saudi Arabia
5% Luxemburg, Korea, Ukraine, Armenia, Iceland,
Lithuania, Latvia, Estonia, Ireland, Moldova, Cuba, Trinidad and Tobago, Hong Kong, Singapore
• Must hold at least 25% of the investment
7% Austria • Must hold at least 25% of the
investment
8% Egypt, Tunis, Mexico
10% Most other Countries
The JLJ Group All Rights Reserved - July 22, 2010
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
4
The #1 source of FDI for China (32% YOY Growth)
Jurisdiction FDI 2009 (Billion)
Hong Kong US$54
Taiwan 6.6
Japan 4.1
Singapore 3.9
United States 3.6
The JLJ Group All Rights Reserved - July 22, 2010
Investment Vehicle Options II Substance Over Form
5
Hold Co
Op#on 2
Parent Co
WFOE
• Reduced Tax Rate Exclusions: If State Administration of Taxation (SAT) deems the offshore 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 treaties between the jurisdiction it is located and Mainland China
• Indirect Transfer of Assets: an investor that has structured its equity interest in a Mainland China 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
Overseas
PRC
Don’t Forget to Consider Benefits Between the Hold Co and the Parent Company
The JLJ Group All Rights Reserved - July 22, 2010
New Rep. Office Restrictions
6
Prior to January 2010 New RO Current RO
Foreign Representatives
No Limit No more than 4 allowed May maintain current Representatives but not additional Reps.
Effective Tax Rate 8.8% ~10.9% ~10.9%
Duration of entity 3 years 1 year 1 year after current
license expires
Registration Complexity
COI Authenticated COI + Bank Statement
Authenticated N/A
Renewal Complexity
N/A COI Authenticated COI Authenticated
Parent Company Qualification
Must be a legal entity in home country
Must exist for at least 2 years in home country
N/A
The JLJ Group All Rights Reserved - July 22, 2010
Foreign Investment Catalog Investment Categories
7
Status of industry/activity
Description Examples
Encouraged
• Special incentives possible
• Usually high-tech or agriculture industries
• Manufacture of high-performance welding robots
• Software Development
Permitted
• All activities not mentioned in catalog are permitted
• But may be difficult to get approval for uncommon activities
• All sectors not mentioned in catalog
Restricted
• Special approval required – usually JV partner necessary
• Usually are protected sectors
• Automotive Production
• Operation of oil refineries
• Media production
Prohibited
• Activities are disallowed
• Harms national interests or environmentally damaging
• Arms manufacturing
• Operation of gaming industry
When considering setting up in China, first step is to check the catalog
The JLJ Group All Rights Reserved - July 22, 2010
Foreign Investment Catalog Legal Setup Options
8
Setup Options Description Investment Restrictions
Encouraged Permitted Restricted Prohibited
Representative Office
(RO)
• Liaison office for parent company
Foreign Invested Enterprises (FIE’s)
Wholly Foreign Owned Enterprise (WOFE)
• Service WFOEs • FICE • Manufacturing WFOE • Trading WOFE
• 100% invested and owned by foreign entities
Equity Joint Venture
(EJV)
• Capital investment from both foreign and Chinese entities
Cooperative Joint Venture (CJV)
• Partnership between foreign and Chinese entities
The JLJ Group All Rights Reserved - July 22, 2010
Nature of Business
9
Import/Export Rights
Domestic Distribution
Capital Requirements
Registration Complexity
Service Activities
Rep. Office
Manufacturing WFOE
FICE
Service WFOE
WFOE’s provide greater flexibility for future operations
The JLJ Group All Rights Reserved - July 22, 2010
Entity Options Analysis Sourcing
10
Rep. Office
Service WFOE
FICE
Conduct negotiations, QC for Parent company .
Provide sourcing consulting services exclusively to Parent Company
Source from within China then sell to Customer direct
• Allows more sophisticated means of tax optimization
• Heavy reliance upon 3rd party agents to facilitate trade
• May cause additional tax exposure if effective management is within China
• Not scalable
• Simplifies tax exposure (~8.8% on expenditures), registration complexity, & initial investment
• Heavy reliance upon 3rd party agents to facilitate trade
• May cause additional tax exposure if effective management is within China
• Not scalable
• Allows for the flexibility to bring more of the supply chain in-house
• Platform for future domestic distribution • More sophisticated tax optimization • Allows flexibility for future expansion of
business scope and scalability • Greater administrative costs/overhead • May cause tax complications if used as a
captive business model
Legal Gray Illegal
Legal Gray Illegal
Legal Gray Illegal
The JLJ Group All Rights Reserved - July 22, 2010
Entity Options Analysis Services
11
Rep. Office
Service WFOE
Conduct services /BD through local office while all invoicing is conducted offshore.
Provide services and invoicing directly to local & International clients
• Allows more sophisticated means of tax optimization
• Direct hire of local employees • Substantial presence within China with ability
to issue Fapiao • Option to establish branch office to expand
presence • May require higher upfront costs and greater
overhead • May cause tax complications if used as a
captive business model
• Simplifies tax exposure (~10.9% on expenditures), registration complexity, & initial investment
• Not a substantial presence in the market; may deter potential clients
• May cause additional tax exposure if effective management is within China
• Must setup a separate RO to expand presence
Legal Gray Illegal
Legal Gray Illegal
The JLJ Group All Rights Reserved - July 22, 2010
Entity Options Analysis Extension of Business Scope
12
Import/Export Rights
Domestic Distribution Tax Treatment Service
Activities
FICE
Manufacturing WFOE
Manufacturing / Development Rights
Mfg + FICE
The JLJ Group All Rights Reserved - July 22, 2010
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
13
Special Incentives should not be the only priority in choosing a location
The JLJ Group All Rights Reserved - July 22, 2010
Corporate Restructuring RO to WFOE- Current Location
Begin Final Audit for RO (1-‐2 Months)
Submit for Local Tax Bureau Cancela#on
(~4 months)
Cancela#on of RO License and other cer#fica#ons/WFOE
Document Prepara#on (1month)
WFOE Name approval & Lease Registra#on
(~1 month)
Business License (1 month)
Post-‐License registra#on (1 month)
14
Entire process can take up to 10/12 months to complete
The JLJ Group All Rights Reserved - July 22, 2010
Corporate Restructuring RO to WFOE – New Location
Begin Final Audit for RO (1-‐2 Months)
Submit for Local Tax Bureau Cancela#on
(~4 months)
Cancela#on of RO License and other cer#fica#ons/WFOE
Document Prepara#on (1month)
WFOE Name approval & Lease Registra#on in
New Loca#on (~1 month)
Business License (1 month)
Post-‐License registra#on (1 month)
15
Changing office locations can shave months off of the process
The JLJ Group All Rights Reserved - July 22, 2010
Capital Requirements Injection Methods
16
Total Investment
Less than 3 million
Registered Capital
No less than 70% of total investment, with a minimum of 3,700
Between 3 and 10 million
No less than 40% of total investment with a minimum of 5 million if total investment is below 12.5 million
Between 10 and 30 million
No less than 50% of total investment with a minimum of 2.1 million if total investment is below 4.2 million
Between 30 and 36 million No less than 1/3 of total investment with a minimum of 12 million
• Complete injection within 6 months
-or- • Capital contributed in
installments: 20% within first 3 months with the remaining injected within 2 years
Currency: US Dollars
The JLJ Group All Rights Reserved - July 22, 2010
Capital Requirements Investment Ratios
17
• 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
The JLJ Group All Rights Reserved - July 22, 2010
Capital Requirements Investment Ratio Examples
18
Equity (70%) Debt (30%)
Registered Capital
Total Investment
Example 2
Equity (100%)
Registered Capital
Total Investment
Example 1
Shareholder loans are an alternative means of profit repatriation
The JLJ Group All Rights Reserved - July 22, 2010
Business Registration Process WFOE
19
Company’s Chinese Name Approval
Approval to Establish Company
Registration of Business License
Stage I: Licensing
Filing and Carving Seals*
Foreign Exchange Approval
Open RMB & Foreign Currency Bank Accounts
Capital Verification
Statistics Bureau Registration†
Enterprise Code Certification**
Registration with Tax Bureau
*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
Stage II: Post-
Licensing
Update Business License
Stage III: Post-Capital
Injection
The JLJ Group All Rights Reserved - July 22, 2010
Business Compliance The License
20
• 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
The JLJ Group All Rights Reserved - July 22, 2010
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
21
Inject capital on time and update your business license
The JLJ Group All Rights Reserved - July 22, 2010
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
22
Try not to miss the joint examination… Simplifies work significantly
The JLJ Group All Rights Reserved - July 22, 2010
China by the Numbers
23 Source: National Bureau of Statistics/USCBC
FDI in 2009: 90.0bn -2.6% decrease over 2008
0
10
20
30
40
50
60
70
80
90
100
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 U#lized (USD Billion)"
The JLJ Group All Rights Reserved - July 22, 2010
China by the Numbers
24 Source: National Bureau of Statistics/USCBC
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
FDI By Investment Vehicle WFOE EJV CJV