Successfully doing business in China
China is the world’s second largest economy, and its phenomenal growth over the past decade has made it one of the most popular destinations for foreign investments. While there are many opportunities for UK investors, there are also many challenges likely to be faced when establishing businesses in China. Therefore, to achieve success, it is crucial for businesses to partner with relevant experts.
Based on our experience, below is a brief overview of some of the factors that need to be considered when doing business in China:
It is essential to have a well-developed business strategy when entering China that is based on up-to-date and local knowledge. The insights of partners and professional advisors can be critically important. Foreign investors are advised to carry out a detailed feasibility study prior to committing investment into China to ensure commercial objectives can be realised.
The Chinese government places restrictions on foreign investment in certain sectors. These are itemised in its Investment Catalogue. Investment activities are categorised into four types: Encouraged, Allowed, Restricted or Prohibited. The catalogue provides specific details for all category activities, with the exception of the Allowed category – all activities not covered in the catalogue are categorised as Allowed. The catalogue is frequently updated and, therefore, foreign investors should review how their proposed activities in China are categorised.
Deloitte China has a law firm within its business and is ideally placed to provide legal advice to support your expansion plans.
Capital and corporate structure
There are several types of structural options available for multinational companies to establish an enterprise in China. This decision is particularly crucial in the initial process of setting up a business in China. A successful China strategy cannot be implemented without establishing the right capital and corporate structure from the outset, and poor choices may lead to restrictions on future growth, difficulties in accessing finance and a lack of business flexibility.
The most common investment vehicles for foreign investors include a Joint Venture (JV), Wholly Foreign-Owned Enterprise (WFOE), Representative Office, China Holding Company (CHC) and Regional Headquarter. Deloitte UK and China’s tax and business advisory teams have worked with many multinational companies on capital and corporate structuring to ensure that they are maximising return on their investment in China.
China is a huge country and, as such, there is considerable variation in the size and business practices of local markets. Foreign investors are strongly encouraged to carefully consider the location of their operations at an early stage. Local resources vary from region to region, as does the quality of local government assistance (financial or otherwise) given to non-resident enterprises.
Deloitte China has very good relationships with government authorities across China. These relationships help our UK clients to access the support they need and understand the full range of regional benefits and incentives that may be available.
China has a complex and rapidly-evolving tax system. Against this back-drop, the authorities are continuing to strengthen the administration of tax in relation to non-resident enterprises. Recently, China’s tax authority launched the value-added tax pilot program. This has been designed to gradually replace Chinese business tax by VAT, and decrease the overall tax burden of tax payers. It was initially launched in Shanghai and now reaches across China.
It is important to understand the latest rules and practices to reduce the risk of penalties and unexpected costs. This is particularly true in when considering acquisitions, where thorough financial and tax due diligence can identify significant liabilities and risks that could potentially be mitigated through an appropriate acquisition structure.
As tax advisers, we are regularly updating our UK clients on current developments, and assisting them to plan for the latest reforms.
Foreign exchange controls
China’s foreign exchange controls can lead to difficulties when making or receiving payments from China for non-resident enterprises. It is highly recommended that businesses receive professional advice in advance of entering into service contracts or remitting profits from China, to ensure that cash does not become ‘trapped’ in China. Deloitte UK and China have significant experience in helping clients manage a wide range of payment scenarios.
Non-resident enterprises will often second staff to China during the early stages of an investment to help set up their business. The complexity of secondment arrangements in China can, however, create unexpected issues and cause additional costs, particularly from a tax and immigration perspective. Significant savings can be achieved with a properly structured employment contract and remuneration package, which means the review of the proposed secondment arrangements by a professional adviser is highly recommended.
The information provided here does not constitute professional advice and is subject to conditions detailed here - Deloitte - Profile
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