Doing Business in China

The following article on establishing a legal framework for doing business in China is reproduced by courtesy of ICS Trust. You can email Daniel Booth at dbooth@icstrust.com or download the full ICS brochure. Also see their comments on opening an office in Hong Kong. We do not take any liability for the accuracy of material supplied by third parties.

Company Structure

Foreign companies that rush into the China market often make two common mistakes: first, entering China without a carefully planned risk mitigation strategy and secondly, failing to develop an exit strategy for the worst case scenario – the death of a venture.

There are many implications in going directly into China, these include:

Exposure to potential legal and financial risk arising from China’s tight monetary controls;
Entrapment in complex and unfamiliar corporate compliance procedures;
Trying to keep up to date with the forever changing laws; or simply
Repatriating profits out of China.

With no exit strategy, companies may find themselves waiting months or even years to rationalize assets and repatriate capital. Many companies are stunned by heavy taxes which could have been avoided with appropriate early tax planning to minimize liabilities both in China and in the home country.

Both large and small companies face similar risks, although large multinational corporations tend to have greater financing capabilities and therefore a larger tolerance for bearing such risk. This unfortunately is not the case for the majority of SMEs.A wrong move may mean a very expensive and time-consuming fix.

Nevertheless, regardless of whether an investor in China is a large multinational corporation or an entrepreneurial SME, the question remains, why take unnecessary risks, when these can be mitigated?

Foreign investors have a number of options available when deciding on the type of FIE they use to establish a presence in China. Different FIEs provide varying levels of flexibility and enable the business to conduct a broad spectrum of commercial activities in China. A business decision on which investment vehicle to use should effectively be centered on its intended commercial objectives and the industry sector in which the business is engaged.

The more commonly used types of FIEs available in China and the relevant capabilities and restrictions of each are outlined on our China company structure page.