Trading relations between the Netherlands and China are well entrenched. Even before the founding of the People's Republic of China, Dutch traders, through the Vereenigde Oostindische Compagnie, established outposts in Asia including those in China, Canton, and Taiwan.
The Netherlands are currently one of China’s largest trading partners in the EU. Major Netherlands export to China includes petrochemicals, machinery, transport equipment, food, high technology and fossil fuels. China's export to the Netherlands includes toys, clothes, and electronics. It is, therefore, not surprising that, from January to November of 2010, of the top ten nations and regions with investment into China (as per the actual input of foreign capital), Holland ranks at number nine with USD911m.
These operations are taking advantage of two main areas of opportunity or perhaps a combination of both. The first is the setting up of operations for the sourcing or production of goods for export. China’s cheap and increasingly sophisticated workforce, excellent shipping and port services and a well-tried modus operandi, has resulted in the label “Made in China” becoming ubiquitous on a diverse array of goods. Secondly, China’s rapid economic development has created a growing market for raw materials, sophisticated manufacturing products and systems, consumer goods and professional services.
The basic decision on how to establish a presence in China turns on whether an organisation needs to issue invoices for goods or services from within China. If no such need exists a Representative Office (RO) could be the appropriate solution.
The RO offers an inexpensive way to establish a permanent presence in the country to provide access to the China market. A RO can generally be used for conducting market research, quality control, purchasing, marketing and sales administration for sales conducted between China and the parent company as well as administration for Group activities elsewhere in China.
ROs must be located in Grade A, government approved buildings and will need a lease of a minimum of one year. The immediate parent company of the RO must have existed for at least two years prior to the RO registration. It is generally possible to purchase an existing clean Hong Kong company for this purpose if desired. The number of foreign staff is limited to four only though there is no restriction on local staff. If local staff are employed, they need to be hired and paid via a government recognized organization approved for this purpose.
Where an organisation does have the need to issue invoices within China they have a choice between Joint Ventures (JV) or Wholly Foreign Owned Enterprises (WFOE).
The choice between a JV and a WFOE depends on whether the organization will have a local Chinese partner. Where a Chinese partner does exist the operation could be structured as a JV. JVs are further subdivided into equity JVs and contractual JVs. An equity JV is a partnership between a foreign and a Chinese organization and needs to be approved by the China government. The overseas investor is allowed to contribute a maximum of 25% of the total registered capital, and profits are divided accordingly. The strategies must be in compliance with state economic development programmes. With a contractual JV, all liabilities, rights, and responsibilities are agreed upon in a contract, and things like the division of profits are not dependant on the proportion of shares held.
A Wholly Foreign Owned Enterprise (WFOE) is often the chosen method of operation as no local Chinese partner is necessary.
A WFOE is a Chinese limited liability company that is wholly foreign owned and limited by its registered capital which is generally a combination of equipment and cash. The amounts of cash required and ratio between equipment and cash vary depending on the location and business activity. The required minimum registered capital was previously USD140,000 and although this requirement was removed in 2006, the authorities still view this as the bench mark when approving new WFOE’s. Generally, the test would be that the minimum registered capital should be sufficient for the WFOE to maintain itself until it is self sustainable. Critical to the successful set up of a WFOE is the careful drafting of the company articles as these define what a WFOE will and will not be able to do in its trading and financial operations.
In addition to the above, the parent company of a WFOE will generally be required to pay the registered capital in full upon registration OR 20% of the registered capital within 3 months from the issuance of the business licence with the outstanding capital required to be paid in within 2 years. There are restrictions on numerous business activities in China and these are regularly changed.
For a firm wishing to enter the China market the complexities of the operation can at first seem extremely bewildering. Not only are there the normal concerns of business viability and cost structures but issues are further compounded by the various types of entity through which an operation can be set up in China. Each of these has its own set of operating restrictions and tax treatments. Furthermore there are literally hundreds of special economic zones offering special rates and tax concessions which differ from state to state, city to city, and at times from district to district. China also divides foreign goods and services into three categories - encouraged, accepted and prohibited, all of which can command different approaches to their establishment. China’s legal and accounting system is run on very different lines to the West. Reliable information is not easy to find and China is rapidly overhauling its legal, financial, accounting and tax systems to meet reform programmes. All this means that a potential investor is faced with daunting obstacles in setting up his operation. Some see the above as a barrier to entry.
However, provided the business plan is well thought through and the method of entry is based on sound advice, the rewards can be tremendous. Whatever method is followed to establish a presence in China, China has become too important economically to ignore.
This was written by Frederik Van Schalkwyk.
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