Doing Business in China

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Coudert Brothers LLP Global Legal Advisers

www.coudert.com
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Principal Forms of Foreign Investment
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REPRESENTATIVE OFFICE

• Permitted Activities
• act as local base to reach customers
• receive inquiries
• conduct market research
• develop contacts with Chinese government
  officials
• Requirements
• must have Chinese sponsor to assist with
  approval process (roughly 2-month process)
• must apply for reapproval every 3 years
• chief representative at the office must be a
  resident of China (but may be foreign national)
• Pros
• relatively easy to set up and maintain
  compared to other FIEs
• Cons
• has no "legal person" status in China and
  cannot enter into contracts

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JOINT VENTURES (EQUITY OR COOPERATIVE)
Pros Chinese partner's connections with local
government authorities Chinese partner's
existing supply/sales channels and customer
base Cons Restrictions on transfers of
foreign partner's equity stake Taking on
existing operations and obligations of Chinese
partner Requirements Constituent parties
must consist of one or more Chinese entities and
one or more foreign entities or
individuals 25 minimum foreign ownership
requirement Minimum registered capital
requirements vis-à-vis total investment Other
Characteristics Capital contribution can be
cash, in-kind contributions (including
intellectual property) Capital contribution in
the form of IP shall not exceed 20 of the JV's
registered capital (35 in the case of a high
technology project) Contribution of IP
requires Ministry of Commerce's approval if it is
in the "restricted category" all other IP
requires only registration Management vested
in a board of directors the members of which are
appointed by the investors based on the rough
ratio of capital contributions (more flexibility
in CJVs than EJVs)
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MAJOR DIFFERENCES BETWEEN EQUITY JOINT VENTURE
AND COOPERATIVE JOINT VENTURE
JV contract of CJV may provide that invested
capital be returned to investors during the term
of the joint venture Parties to EJV required
to share profits in accordance with proportion of
capital contributions parties to CJV may share
profits in manner as set forth in JV contract
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WHOLLY OWNED FOREIGN ENTERPRISES

• OLD
• Must be exported-oriented or technologically
  advanced enterprises
• NEW
• WOFEs are no longer required to state in its
  AOA that it will export a minimum percentage of
  its output
• MAIN CHARACTERISTICS OF WFOE
• Has "legal person" status as a limited
  liability company
• Owned solely by foreign investors
• Approval process similar to a JV but no need
  to negotiate with Chinese partner
• Transfer of equity interest requires
  government approval
• Distribution and allocation of
  dividends/profits is as agreed to among investors
• PROS
• No need to consider interests of local
  Chinese partner
• No need to take on existing obligations and
  operations of Chinese partner
• Foreign investors retain 100 control in
  management of enterprise
• CONS

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GOVERNMENTAL APPROVAL FOR JVs AND WFOEs

• Priority given to the project during the
  government approval process for the FIE depends
  on specific industry involved
• Prohibited Category
• Restricted Category
• Encouraged Category (preferences granted)
• Examples are water conserving irrigation
  equipment, railway technology, integrated circuit
  manufacturing
• Everything else falls into the "Permitted
  Category", which are reviewed by and passed upon
  by the government on a case-by-case basis

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Establishment Procedures for FIEs
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Minimum Requirement for Registered Capital of FIEs
Total Investment Minimum Registered Capital ( of Total Investment)
Up to US3 million 70
US3-10 million 50 or US2.1 million (whichever is higher)
US10-30 million 40 or US5 million (whichever is higher)
Over US30 million 1/3 or US12 million (whichever is higher)
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Registered Capital Contribution Schedule for JVs
Contribution Method Registered Capital Time Limit
Lump-Sum Contribution No Limitations within 6 months after the Business License is issued
Contribution in Installments The first 15 to be contributed within 3 months after the issuance of the Business License and the remaining 85 is subject to the following schedule The first 15 to be contributed within 3 months after the issuance of the Business License and the remaining 85 is subject to the following schedule
Contribution in Installments US500,000 or below within 1 year after the Business License is issued
Contribution in Installments US500,000 - US1 million within 1.5 years after the Business License is issued
Contribution in Installments US1 million US3 million within 2 years after the Business License is issued
Contribution in Installments US3 million US10 million within 3 years after the Business License is issued
Contribution in Installments Over US10 million determined by the relevant approval authority
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Transferring Equity in a Joint Venture Onshore
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OTHER OPERATING ISSUES

• Source of Supplies
• Export Requirements
• Technology Transfer
• Labor Issues
• Foreign Exchange Controls and Repatriation of
  Profits

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SUPPLY SOURCES

• Prior Law
• FIEs had discretion to determine whether to
  procure in China raw materials, equipment, office
  supplies, etc., but had to give priority to a
  Chinese source where relevant conditions were the
  same.
• Current Law
• FIEs no longer required to give priority to
  Chinese sources so long as the decision regarding
  whether to procure in or outside of China is
  based on the principles of "fairness and
  reasonableness."

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EXPORT REQUIREMENTS

• WFOEs
• Prior Law Export-oriented WFOEs were required
  to export at least 50 of its annual products and
  to set forth such minimum percentage in its AOA
• Current Law WFOEs no longer subject to export
  requirements as a pre-condition to establishment
• JOINT VENTURES
• Current Law Neither CJVs or EJVs are required
  to sell products outside of China
• Current Practice To improve export performance,
  many local governments have in practice required
  a stipulation in the JV Contract that a stated
  percentage of the JV's products be exported

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TECHNOLOGY TRANSFERS

• Two Alternatives for transferring technology to
  the FIE by the foreign investor
• Transfer Technology as Registered Capital
  Contribution
• Must not exceed 20 of the FIE's registered
  capital (35 in the case of a high technology
  project)
• Transfer of the technology requires
  government approval and valuation by the
  government
• License the Technology to the FIE
• Whereas all technology import contracts used
  to require government approval, only technologies
  that are on the "restricted" list now require
  approval
• Technology import contracts for all
  "non-restricted" technology merely require
  registration with the government
• The technology import contract is not valid
  until the relevant authority has issued the
  "technology import permit"
• The provider of the technology is required to
  guarantee that the technology is complete,
  effective, and capable of accomplishing the goals
  set forth in the technology contract

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LABOR ISSUES

• All Chinese "legal persons" required to enter
  into employment agreements with their employees
  which must address the following
• 1. job duties
• 2. wages
• 3. term of contract
• 4. work conditions
• 5. conditions for termination of contract
• Employers required to pay into welfare and
  pension funds for each employee (an amount equal
  to roughly 50 of employee's base wage plus
  bonuses)
• Severance pay equal to 1 month's pay for each
  year of service
• Foreign nationals can be hired only if there
  is a special need and no available local
  candidate in China

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FOREIGN EXCHANGE CONTROLS AND REPATRIATION OF
RMB PROFITS

• RMB now fully convertible on current account
  basis
• Examples of "Current Account" items include
  revenue or expenditures derived from
  import/export of goods and services, fees or
  royalties on intangible assets
• Must submit documents to authenticity of the
  commercial transactions to the designated
• foreign exchange bank
• Examples of "Capital Account" items include
  investments, loans, issuance of shares, income
  from sale of real estate
• Capital Account items subject to substantive
  and discretionary review by SAFE
• Repatriation of profits out of China
• No legal restrictions
• Requirements
• Must have paid all registered capital
  requirements of the FIE
• Must have paid all relevant taxes
• Documents to be presented to SAFE
• FIE's board resolutions authorizing such
  profit distribution
• Proof of tax payments and tax returns by
  FIE

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Coudert Brothers LLP Global Legal Advisers
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? Sydney ? Tokyo ? Washington D.C.