Powerpoint Presentation that was viewed during the seminar hosted by SingerLewak on October 26th, 2010

1. PRESENTED BY:
DOING BUSINESSDOING BUSINESS
IN CHINAIN CHINA
OCTOBER 26, 2010

2. WELCOMEWELCOME
 Opening Remarks
 Introducing our Distinguished Panelists
 MODERATOR: Mark Kelson – Manatt, Phelps
& Phillips, LLP
 Tao Xiong – Broad & Bright
 Changchun Yuan – Broad & Bright
 Jun Li – Broad & Bright
 Jim Pitrat – SingerLewak

3. AGENDAAGENDA
 General Introduction
 Overview of China’s foreign investment regime
 Due diligence in China
 Structuring investment in China
 Strategies to protect IP and other rights in China

4. GENERALGENERAL
INTRODUCTIONINTRODUCTION

5. CHINA’S ECONOMIC GROWTHCHINA’S ECONOMIC GROWTH
REMAINS HIGH IN SPITE OFREMAINS HIGH IN SPITE OF
GLOBAL RECESSIONGLOBAL RECESSION
 During the past 30 years, the average annual
GDP growth rate is about 10%.
 Despite the global crisis, China’s economy grew
about 11.9% in the first quarter of 2010.
 In the second quarter of 2010, China’s economy
surpassed Japan’s, taking its place as the world’s
number two economy.
 Now China is so hot, so attractive – All roads lead
to China.

6. FOREIGN INVESTMENTFOREIGN INVESTMENT
IN CHINAIN CHINA
 Since 1980, the average increase rate is 20% annually.
 In 2008, actual foreign investment used was
USD92.4 billion. In 2009, due to the global economic
crisis, the investment used dropped 2.6%, but still reached
USD90 billion.
 Currently, China has more than 430,000 (including
branches) FIEs, and investment made by foreign investors
reached USD350 billion.
 In 2009, China was listed as the number two most
attractive country for investment after the United States.
 According to the World Investment Report 2010 (United
Nations on August 12, 2010), China will be the most
attractive country for investment in 2011-2012.
 Among the developing countries, China has been listed as
first among the most attractive countries for 18 years.

7. ARGUMENTS IN CHINAARGUMENTS IN CHINA
 Is China a good place for investment?
 Complaints from investors:
 heavily regulated market
 bureaucratic barriers
 foreign exchange control
 IP protection
 Local protectionism
 fewer privileges (national treatment, tax, etc.)
 tougher employment law

8. RISKS IN INVESTINGRISKS IN INVESTING
IN CHINAIN CHINA
 Doing business in China is an investment – like all
investments – with risks.
 Are risks in China any different from those in
other countries?
 Expert says: What makes overseas operations
more complex for international investors is that
many of the operational issues in China are
exacerbated by the very fact that they are so far
from the comforts of home, and from a familiar
regulatory and legal environment.

9. CHINESE POLITICALCHINESE POLITICAL
AND LEGAL SYSTEMAND LEGAL SYSTEM
 Political System
 Unitary state (central government vs. federal
government)
 Vertical relationship
 Central government (Beijing)
 Provincial
 Municipal
 County
 Township
 (Village)

10. CHINESE POLITICALCHINESE POLITICAL
AND LEGAL SYSTEMAND LEGAL SYSTEM
 Used to be a planned economy, in which
government makes and implements
economic plans
 Many government agencies participate in market
regulation
 NDRC, MOFCOM, SAFE, SAIC, SASAC, CSRC, CBRC,
SFDA
 All of these agencies have their counterparts/
subordinates at various levels of government

11. CHINESE POLITICALCHINESE POLITICAL
AND LEGAL SYSTEMAND LEGAL SYSTEM
 Legal System
 Civil law tradition (not common law)
 Codified law (not case law) – precedents’
instructive function
 Administrative regulations (too many, too
complicated)
 Local regulations

12. CHINESE POLITICALCHINESE POLITICAL
AND LEGAL SYSTEMAND LEGAL SYSTEM
 Court and trial system
 Supreme Court – Beijing
 High Court – Provincial Level
 Intermediate Court – Municipal Level
 Primary Court – County Level
 In addition to these ordinary courts, there are special
courts such as military court, maritime court and railway
court
 Litigation – One first-instance trial and one appeal

13. CHINESE POLITICALCHINESE POLITICAL
AND LEGAL SYSTEMAND LEGAL SYSTEM
 Legal Profession
 Lawyers are licensed by the Ministry of Justice – qualified
nationally
 There is a national bar
 A lawyer can practice anywhere in the country
 Foreign lawyers in China are not allowed to give advice on
Chinese law
 Currently, China has 190,000 lawyers, one attorney for
every 6,977 people.
 In California, currently the number of active attorneys is
169,016 (if inactive lawyers are counted, about the same
as China). Current population of California is 37,205,591,
one lawyer for every 220 people.

14. LAW AND REGULATIONSLAW AND REGULATIONS
CONCERNING FOREIGNCONCERNING FOREIGN
INVESTMENTINVESTMENT
 Market entry (foreign investment
guidelines/catalog)
 Company formation (Rep Office, JV, WOFE,
Partnership, etc.)
 Operation (capital requirement, foreign exchange
control, tax, employment)
 Incentives (tax holidays, preferential tax
treatment, land supply, local financial
subsidies, etc.)

15. RISKS IN CHINARISKS IN CHINA
 Common risks
 Regulatory and compliance risk
 Socio-poli-economic risk (big picture, long-term
strategy issue)
 Integrity and corruption risk
 IP risk
 Business partner risk
 Supply chain risk
 Restructuring risk
 HR and labor risk
 Dispute resolution risk
 Natural disaster

16. RISKS IN CHINARISKS IN CHINA
 Some are overlooked, while others are exaggerated, e.g.,
Guanxi vs. normal business rules.
 People often say “China is different,” and “China is all
about Guanxi.”
 Guanxi (government interference plays an important role in
China; Chinese traditional culture pays attention to a close
personal relationship).
 People tend to strengthen personal relationships through
gifts, kickbacks, etc. But if you take it for granted, then
you may be in big trouble (anti business bribery laws in
China, Foreign Corrupt Practices Act in the United States).

17. RISK MANAGEMENTRISK MANAGEMENT
 Ordinary business principles and prudence should
be followed (don’t only trust someone who has
good connections) – biggest risks
1. business plan/feasibility study
2. due diligence
3. auditing
4. risk evaluation/countermeasures/preparation for
unwanted surprises
5. partner screening
6. negotiation
7. contract draft and review
8. expert advice and opinion

18. DO YOUR HOMEWORKDO YOUR HOMEWORK
 Like all other investments
 Do your homework
 Consult professionals

19. OVERVIEW OFOVERVIEW OF
CHINA’S FOREIGNCHINA’S FOREIGN
INVESTMENT REGIMEINVESTMENT REGIME

20. FOREIGN INVESTMENTFOREIGN INVESTMENT
INDUSTRY CATALOGINDUSTRY CATALOG
 Encouraged
 Examples: software, certain high-tech businesses, high-end
services (logistics, business process outsourcing, etc.)
 Permitted
 Examples: retail, wholesale distribution, services consultancy
 Restricted
 Examples: telecom (including Internet), insurance, bank, print
and publishing (special approval required)
 Prohibited
 Examples: gambling, primary schools, etc.
 The Catalog is amended from time to time, latest update as
of October 2007.

21. FORMS OF ENTRYFORMS OF ENTRY
 Greenfield investment
 Creating a China entity from scratch
 Governed by a special set of regulations and rules on the
setup of FIEs (vs. Company Law)
 Mergers and acquisitions
 Direct onshore equity acquisition by offshore entity
 Indirect offshore equity acquisition by offshore entity
 Asset acquisition
 Governed primarily by the Foreign M&A Regulations (the
so-called “Circular 10”)

22. FORMS OFFORMS OF
ESTABLISHMENTESTABLISHMENT
 Representative office
 Generally not permitted to “do business” in China
 Limited functions: primarily marketing and liaison functions
 May not enter into sales contract on behalf of offshore parent
company
 Joint ventures
 Equity joint ventures (EJV) and Cooperative joint ventures
(CJV)
 Parties to an EJV share profits based on their respective shares in
the equity investment, while parties to a CJV may split the profits
disproportionately to their equity percentages.
 CJV allows a foreign investor to accelerate its withdrawal of
investment amount out of the CJV.
 The highest authority of an EJV is the board of directors, while a
CJV may be managed through a joint management committee.
 Required for certain businesses (e.g., restricted industries)

23. FORMS OFFORMS OF
ESTABLISHMENTESTABLISHMENT
 Wholly foreign-owned enterprise (WFOE)
 Increasingly popular and common form of establishment
for foreign investors
 Joint stock company (FICLS)
 Capital of an FICLS consists of shares of equal par value
 Paid-in capital at least RMB30 million
 Existing FIEs must be converted into an FICLS when
seeking a public listing in China
 Foreign-invested partnership
 Newly issued regulations in late 2009, allowing “foreign-
invested partnerships” effective March 1, 2010

24. Company Name
Reservation with local AIC
Industry preapproval (if
applicable)
Obtain Approval Certificate
from local MOC
Obtain Business License
from local AIC
Tax
registration
Enterprise
ID
registration
SAFE
registration
Finance
registration
Customs
registration
Statistic
registration
FOREIGN INVESTMENTFOREIGN INVESTMENT
REGULATORS ANDREGULATORS AND
ESTABLISHMENT PROCEDURESESTABLISHMENT PROCEDURES
Note: The approval level of MOC may differ under various total amount and national industry guidance.
Flow Chart

25. DUE DILIGENCE IN CHINADUE DILIGENCE IN CHINA

26. GENERALGENERAL
CONSIDERATIONS FORCONSIDERATIONS FOR
CHINA INVESTMENTCHINA INVESTMENT
 Business objectives/scope
 Industry specialties and products
 Site selection issues
 Overall business model
 Entity selection
 IP ownership and protection
 Financing strategy
 International structure
 Foreign exchange control issues
 Tax issues
 Repatriation strategy
 Exit strategy

27. DUE DILIGENCEDUE DILIGENCE
IN CHINAIN CHINA
 Common practices
 Almost no central registration system for security
interest
 Court files are not public and mostly not searchable
 Management interview very important (not all
transactions are documented in China)
 Key issues to watch – examples
 Tax incentives and government subsidies
 Land use rights and zoning
 Social security payments

28. DUE DILIGENCEDUE DILIGENCE
IN CHINAIN CHINA
 Site selection issues
 Location shopping: business model, local preferential
policies, availability of labor and talents, etc.
 Investment LOI or agreement with local governments
 Caveat: Local government may not have the authority to
sign the documents.
 Know your business partner
 Be engaging
 Do homework (background check)
 Be discreet – challenging or withdrawing

29. STRUCTURINGSTRUCTURING
INVESTMENT IN CHINAINVESTMENT IN CHINA

30. U.S. Co.
CHINA Op Co.
STRUCTURES FORSTRUCTURES FOR
CHINA INVESTMENTCHINA INVESTMENT
 Direct ownership of Chinese company

31. U.S. Co.
CHINA Op Co.
HOLD Co.
STRUCTURES FORSTRUCTURES FOR
CHINA INVESTMENTCHINA INVESTMENT
 Ownership through one or more intermediate
holding companies
 Treaty countries/territories: Hong Kong, Singapore,
Barbados, Ireland, and Mauritius

32. INVESTMENT STRUCTURESINVESTMENT STRUCTURES
– TAX CONSIDERATIONS– TAX CONSIDERATIONS
 Investment structure has to be right from the
beginning as later change may be taxable
 Tax planning must be supported by economic
substance
 Overall tax rate
 Taxation of income flows from China to ultimate investor
 Deferral
 Use funds for business purposes
 Where current period repatriation or recognition of income
in home country would increase tax burden
 Exit
 Minimize taxation on capital gain

33. DIRECT OWNERSHIP –DIRECT OWNERSHIP –
CONSIDERATIONSCONSIDERATIONS
 Treaty between United States and China would
limit dividend withholding tax to 10%
 Disposition of shares in China entity subject to
10% capital gains tax in China
 Changes in shareholder(s) require regulatory
approval of Chinese authorities

34. OWNERSHIP THROUGH AOWNERSHIP THROUGH A
HOLDING COMPANY –HOLDING COMPANY –
CONSIDERATIONSCONSIDERATIONS
 Shares in Holdco may be transferred without
Chinese government approval
 Shares in Holdco may be transferred without
Chinese capital gains tax – much more difficult to
achieve after 2008
 Increased focus on anti-avoidance and taxation of
nonresident enterprises
 More anti-treaty shopping rules
 Taxation of indirect share transfers
 Access to reduced dividend withholding tax rate –
must show substantive business reasons, other
than tax avoidance objective

35. BENEFITS OF ANBENEFITS OF AN
INTERMEDIARY HOLDINGINTERMEDIARY HOLDING
COMPANYCOMPANY
 Allow U.S. Co. to establish an entity with its own terms and
conditions without being limited to Chinese JV laws
 Avoid future Chinese governmental approval on transfer of
ownership in China entity, which saves time and money
 Provide an additional buffer from potential liability arising
from U.S. Co.’s China investment
 Facilitate future financing strategies for China operations
and expansion
 Allows an opportunity for expatriate tax planning where
appropriate (dual employment contracts, etc.)
CHINA Op Co.

36. STRATEGY TO PROTECTSTRATEGY TO PROTECT
YOUR IP AND OTHERYOUR IP AND OTHER
RIGHTS IN CHINARIGHTS IN CHINA

37. HOW TO AVOID DISPUTEHOW TO AVOID DISPUTE
AND PROTECT YOURAND PROTECT YOUR
RIGHTS IN CHINARIGHTS IN CHINA
 Due to legal and cultural differences, dispute
easier to arise in cross-border transactions
 Chinese companies become more litigious
 More uncertainty in Chinese laws and regulations
 More difficulty in enforcement

38. HOW TO MITIGATE RISKSHOW TO MITIGATE RISKS
OF DOING BUSINESS INOF DOING BUSINESS IN
CHINACHINA
 Understand Chinese culture and local business
practices
 Plan carefully and move slowly
 Form strong business relationships
 Establish close relations with government officials
 Localization of Management

39. MAJOR TYPES OFMAJOR TYPES OF
DISPUTEDISPUTE
 Dispute with Chinese Joint Venture Partners
 Dispute with Suppliers and Distributors
 IP Infringement
 Dispute with Employees
 Dispute with Government Authorities

40. HOW TO AVOID DISPUTEHOW TO AVOID DISPUTE
WITH JV PARTNERWITH JV PARTNER
 Is your partner able to deliver what you expect?
 Take your time to select a right partner
 Build trust with your partner
 Have a detailed and practical JV Contract
 Have a clear exit strategy

41. HOW TO AVOID DISPUTEHOW TO AVOID DISPUTE
WITH SUPPLIER ANDWITH SUPPLIER AND
DISTRIBUTORDISTRIBUTOR
 Have clear criteria for supplier or distributor
selection
 Keep certain level of control over your suppliers
and distributors
 Take particular care for IP protection

42. HOW TO PROTECT IPHOW TO PROTECT IP
RIGHTSRIGHTS
 China does protect IP rights and makes the
system work for your benefit
 Register IP rights timely
 Take both defensive and offensive measures
 Educate your Chinese employees
 Classify IP rights and limit their access

43. HOW TO AVOID LABOR-HOW TO AVOID LABOR-
RELATED DISPUTERELATED DISPUTE
 Know both national and local rules relating to
labor and social welfare
 Formulate work-related disciplinary rules and
bylaws
 Have a country-tailored and detailed labor
contract
 Be careful of the procedural requirements

44. HOW TO DEAL WITHHOW TO DEAL WITH
PRC GOVERNMENTPRC GOVERNMENT
 Make efforts and take time to build a trustful
relationship with government
 Know the scope and limits of each governmental
authority
 Set clear internal guidance on dealing with
officials
 Put all important things in writing

45. HOW TO RESOLVE AHOW TO RESOLVE A
DISPUTEDISPUTE
 Applicable Law Issue
 Litigation vs. Arbitration
 Choose a Favorable Venue

46. TITLE

47. Risks – considerations for companies doing business in China
Accounting & control challenges in dealing with foreign
subsidiaries
Tax considerations from a U.S. standpoint

48. COMMON FOREIGN OWNEDCOMMON FOREIGN OWNED
ENTITIES IN CHINAENTITIES IN CHINA
-Wholly Owned Foreign Enterprise (WOFE)
-Representative Office
-Joint Venture

49. IP IN CHINA vs. IP NOT IN CHINAIP IN CHINA vs. IP NOT IN CHINA
COST SHARING vs. COST PLUSCOST SHARING vs. COST PLUS
-Transfer pricing requirement and enforcement in China
-Transfer pricing requirement in U.S.
-U.S. CFC rules and subpar F income
-Holding company structure

50. CORPORATE TAXESCORPORATE TAXES
IN CHINAIN CHINA
-Corporate Income Tax (rate change in 2008, tax holiday
grandfather treatment, new holiday for qualified industry and
special zones)
-Business Tax
-Value Added Tax

51. PRC NEW TAX DEVELOPMENT :PRC NEW TAX DEVELOPMENT :
REPRESENTATIVE OFFICEREPRESENTATIVE OFFICE
-Circular 18 effective 1/1/2010
-Limited head count requirement
-Using actual profit method to file quarterly CIT and BT
-Other methods: “actual revenue-based method” (ETR
8.75%) or “cost plus method” (ETR 10.94%)
-Minimum deemed profit rate for cost plus is 15% increased
from previous 10% (the deemed profit rate stipulated in
Circular 19 is generally in the range of 15%-50% dependent
on the type of activities engaged by the nonresident
enterprises)
-Tax authority no long accept tax exemption applications
-Treaty treatment

52. PRC NEW TAX DEVELOPMENT :PRC NEW TAX DEVELOPMENT :
TRANSFER PRICINGTRANSFER PRICING
-Circular 2 issued in 2009 focus on transfer pricing issues
-500 transfer pricing tax officials by the end of 2010 with
intensive training
-167 cases closed in 2009 resulted in RMB 16.09B taxable
income adjustment and RMB 2.09B additional tax
-Transfer pricing report required if revenue > RMB 40M.
A Benchmark report should be in place for revenue < RMB
40M

53. U.S. COMPLIANCE REQUIREMENTSU.S. COMPLIANCE REQUIREMENTS
FOR FOREIGN ENTITIESFOR FOREIGN ENTITIES
-Form 5471 – Information Return of U.S. Persons With
Respect To Certain Foreign Corporations
-Form 8858 – Information Return of U.S. Persons With
Respect To Foreign Disregarded Entities
-Form 8865 – Return of U.S. Persons With Respect to Certain
Foreign Partnerships
-TD F 90-22.1 - Report of foreign bank and financial accounts

54. RISKS – CONSIDERATIONSRISKS – CONSIDERATIONS
FOR COMPANIES DOINGFOR COMPANIES DOING
BUSINESS IN CHINABUSINESS IN CHINA

55. ACCOUNTING & CONTROLACCOUNTING & CONTROL
CHALLENGES IN DEALINGCHALLENGES IN DEALING
WITH FOREIGNWITH FOREIGN
SUBSIDIARIESSUBSIDIARIES

56. www.BroadBright.com www.Manatt.com
310.312.4000
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877.754.4557
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