Joint Ventures may not be the best way forward in China
The Joint Venture (JV) structure usually comes up whenever we talk to foreign companies that are seeking to enter China. They are either already working with a potential JV partner in China or they have been told that a JV will be advantageous – a truly “WIN-WIN” situation, as the well-known Chinese idiom goes.
When we ask why they want to enter into a JV, we typically get one of the following responses: we don’t really know the Chinese market and our potential JV partner knows it well; or, we have been working successfully with this business for years and want to grow together as partners.
We don’t regard either of these responses as viable reasons for entering into a JV. In the former case, the foreign company is basically admitting that it has no idea what it is doing in China and is sending out a clear message that it is there to be exploited. In the latter case, being in love and getting married are not the same thing! You could, in most cases, get the same result by setting up a Wholly Foreign Owned Enterprise (WFOE) and engaging in a contractual relationship with your partner.
In our opinion, there is generally only one very good reason for a foreign company to enter into a JV – when it is operating in a regulated market in which it is mandatory to have a local JV partner. If however you are still convinced that an Equity Join Venture is the right structure, you must make sure you are well protected. Below are some of the bases that you should cover:
- Undertake thorough due diligence on your proposed JV partner. If there are no legal, financial or reputational issues, you can proceed with a clear mind. If something does come up, you can choose your next step. Good due diligence will always give you leverage.
- Ensure that the JV agreement states that any disputes must be handled in China. Foreign companies often believe that litigation or arbitration is best done outside China, preferably in their home country. But in reality this will offer little protection to a foreign company. A foreign court or arbitrator has NO authority in respect of a China JV.
- Ensure that you retain the power to appoint the legal representative and the general manager, because this will give you effective control over the JV. Securing a majority of board seats or even a majority shareholding will not.
- Hire you own legal counsel when setting up the JV. Do not relay on the Chinese JV partner to undertake the legal work for establishment. Your interests in this process are not aligned. Find a foreign lawyer with a lot of experience in China.
- Hire an independent accountant, rather than using one that is recommended by your JV partner. This should ensure that you retain transparency on what is happening within the JV.
- Outsource the control and maintenance of sensitive documentation, such as company certificates, seals (usually known as “chops’ in China), permits or licences. This will ensure that no contracts can be signed without you knowledge or approval.
Your potential JV partner may argue that such safeguards are unnecessary and that they will only serve to complicate and slow down operations, whilst also increasing expenses and eroding trust. Stand your ground. Achieving genuine transparency and certainty are far more important to the long-term success of a JV than trying to economise on the set-up process. If you follow these basic steps set out above, then hopefully when we see you in a few years time we will not be saying: “We told you so.”
Qualifying for DTA benefits in China
Double taxation agreements (DTAs), also known as tax treaties, can play a crucial role for businesses operating globally. They are designed to help avoid double taxation by setting out which country has the right to collect tax on different types of income and, increasingly, they also provide a mechanism for the exchange of information between respective tax authorities.
DTAs specify which country has taxing rights over an individual, and, if they both have such rights, which one takes priority. The agreements may set down different rules for different types of income. They may also agree to exempt some income or gains from tax or allow a set-off of tax paid in one country against tax due in the other.
China has made great strides over the past decade in building up its regulation in the area of double taxation avoidance and has now signed over 100 DTAs with partner countries. Foreign-invested companies operating in China should be aware of the specific DTAs that may apply to them and their operations and how they can benefit under them.
Dividends repatriated abroad, for example, are typically taxed at 10%; DTAs can, in some cases, reduce this by 50%. Payments to foreign service providers, including your company’s headquarters, will be subject to withholding taxes. Withholding tax typically ranges from 10 to 20%, but this can be halved under the terms of a DTA.
It is important to check your own company’s circumstances and be aware of potential service-specific benefits. You can view the State Administration of Taxation’s website for fuller detail on existing treaties at http://www.chinatax.gov.cn/2013/n2925/n2955/index.html Please be aware that in some cases you may need some specific advice, or additional registration details, from your local tax bureau.
It is not uncommon for foreign companies in China to own their company here through a Hong Kong entity. Details on Hong Kong’s network of DTAs can be found on the HK Inland Revenue Department’s website at http://www.ird.gov.hk/eng/tax/dta_inc.htm
As mentioned above, DTAs can offer certainty to businesses operating globally. As we know, however, tax is generally a complex matter. It is always best to seek advice as soon as possible regarding your own particular case and it is never a good idea to get into a misunderstanding with the tax bureau.
Contact us for more information.
Sovereign China provides a suite of services designed to lead foreign investors through the market entry process and stay with them to develop long-term success in China. From helping you understand the market and developing a market entry strategy to establishing your operations and providing back office and compliance support services, we’re there for you – from planning through to execution.