Our company is considering expanding to China; what are the most common mistakes we should avoid?
Doing Business In China - Ettiquette, Tips & More Needed
Answers
Can you please give a little more information? What type of business? Are you looking to sell there or use it as a resource? What is your experience in Asia, China, international markets, partnerships, etc. Are you interested in partnerships? Senior or minor partners? The question is just too broad to answer as is.
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Generally speaking, the decision to enter China is both exciting and challenging. With the fastest-growing economy worldwide, and consistent annual growth rates of around 10 percent for the last three decades, it’s no surprise that China is the aim of many companies considering international expansion.
One of the biggest issues to be aware of in China is that it’s very difficult to get past the red tape. Dealing with the government of the People’s Republic can at times defy logic. Laws and regulations in China are practiced and enforced unevenly, often leaving it difficult to determine what the appropriate legal course of action is in many circumstances. Even as the country expands its private sector, there are still thousands of state-owned enterprises to compete with and numerous industries. Additionally, just getting on the ground is a challenge. Wholly owned foreign enterprises, joint ventures, etc. - determining the right option for your business when setting up can be a struggle, especially when dealing with the country’s complicated and constantly changing regulations. Also, a shifting employment landscape can create ambiguity around employer obligations, meaning that administrative complexity around hiring and retaining workers is high. New rules, in fact, even impose certain burdens on expatriates being sent to China. Foreign companies looking to expand into China need to be absolutely clear on what duties they have delegated to their local employees and that those duties fit within activities approved for their legal entity. Finally, another consideration is the significant
There are a variety of mistakes commonly made by companies entering most foreign markets, not just China, but it is fair to say that China does represent a unique challenge to foreign investors.
Things to get right / that you should know:
1. Make the right decision on your choice of investment vehicle. The most common choices are Representative Office and Wholly Foreignly Owned Enterprise (WFOE). The Representative Office is not a separate legal entity and extends trading and employment liability to its foreign parent. It is also limited in its scope of activity - essentially it represents the brand of its parent company but cannot provide services, make sales, generate revenue etc. Think of a WFOE as a Subsidiary. 75% of US Companies enter the Chinese market with a WOFE because it gives them control and the ability to perform all manner of legal business activity.
2. You will be required to lease office space in an 'approved' building - i.e. a building which is authorized to lease office space to foreign investors.
3. If you establish a Representative Office you will be required to 'lease' your employees through one of the local government employment bureaus such as CIIC, FESCO, China Star. These organizations take care of payroll processing and can also assist with the implementation and
4. Provide your local employees with China compliant employment agreements. Failure to do so can result in penalties. Justin is correct that legislation changes rapidly in China and it can be difficult to stay on top of your obligations.
5. Think about where to locate the parent company of the WFOE so that withholding taxes on repatriated funds are minimized. Hong Kong tends to be highly favored these days where it used to be Cayman.
6. Be sure to flow all transactions through the Chinese bank accounts that will be set up as part of the registration process for both a Rep Office and a WFOE as when the government audit takes place this will avoid significant questions about whether or not all transactions have actually been recorded.
7. If you make one of your new hires your Chief Representative be sure to agree a process for appropriate use of his/her corporate 'chop' so as to avoid unauthorized payments and transactions taking place.
8. Allow sufficient time for the registration work to take place. A Representative Office can take 2 to 3 months to complete. A WFOE can take 3 to 6 months to complete.
9. If you make your US based CEO (or anyone else) your Chief Representative, he/she will be require to submit an Indivual Income Tax (IIT) Return in China. Where days are spent in China a copy of his/her passport should accompany the return.
10. Allow sufficient budget - it is more expensive to establish a business in China that one would imagine. It is a time consuming, bureaucratic process fraught with frustration and the need for more analysis and forecasts than one would expect and as a result it also costs more than one would expect.
11. Protect your IP - file your patents and your trademarks. The first to file rule applies in China so you should get on to this quickly.
12. Be patient and build relationships at all levels as they will pay off over time.
Hope this helps.
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