corporate restructuring 2010

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


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


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


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


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


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


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


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


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


•  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


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


•  Must setup a separate RO to expand presence

Legal Gray Illegal

Legal Gray Illegal


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


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


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


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


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


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


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


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


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


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


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


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)"


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

corporate restructuring 2010

Documents

jlj group

company tax rate

sales tax

tax treaties

parent company source

effective tax rate

investment vehicle options

tax rate exclusions