China Focus – July 2016

China’s new Unified Business Certificate

The introduction of the new “Unified Business Certificate” is a very welcome step in China’s attempts to lessen the administrative burdens on companies. The reform, which followed the issue by the State Council of the People’s Republic of China of the “Opinions of the General Office of the State Council on Accelerating the Registration Reform of Consolidating Three Certificates into One Certificate”, took effect on 1 September 2015 in Guangzhou and 29 September 2015 in Beijing. It was then rolled out nationwide as of 1 October 2015.

Under this reform, the old business licence, organisation code certificate and tax registration certificate have been combined into one certificate – the new “Unified Business Licence” – which can be obtained from the local Administration of Industry and Commerce (AIC). This is a significant improvement. Previously, companies were obliged to apply for a business licence from the AIC, a tax registration certificate from the tax authorities, and an organisation code certificate from the technical supervision authority.

Any new entities established after 1 October 2015 are required to apply only for the new “3 in 1” or “Unified Business Licence”. Companies existing prior to October 2015 have been granted a transition period during which to update their licence according to the new requirements. Shanghai and Beijing have set 31 December 2017 and 31 December 2020 as their respective deadlines for transition; the old licences will become invalid from these dates. We await further notifications on transition periods from the relevant AICs in other localities.

To apply for the new licence, companies must surrender their old licences and submit the application documents for a “Unified Business Certificate” at the relevant AIC; there is no fee for this. It should be noted that regional differences in terms of implementation of the reform might exist, so it is best to seek professional guidance regarding your particular situation. Sovereign has been assisting foreign companies with their operations in China for a number of years and can help you to navigate these new rules and procedures.

Identifying and Working with Suitable Partners in China – Part 2

Commercial Due Diligence

China is not just a massive market but is often described as being like the “wild west” because the commercial environment can seem relatively “untamed” in comparison to more developed jurisdictions. Although this is an exaggeration, it is true to say that China is a “rule-by-law” country – the protections of the law are not always equally enforced and cannot always be relied upon when disputes arise. It is therefore critically important to conduct appropriate levels of commercial due diligence on potential partners in order to avoid problems or misunderstandings before they become issue.

Conducting commercial due diligence can be a costly and time-consuming exercise, so the decision to proceed should be based closely on the perceived risk profile of the partnership. A vendor, for example, may represent a very different potential risk to that of a distributor or licensee.

Some key questions to address in respect of commercial due diligence include:

  • Is it a real business? In China (and elsewhere for that matter) there are many unregistered companies that are purporting to conduct legitimate business activities. It is in your best interest to ensure that the company you are dealing with is a legally registered entity and that it is licensed to conduct the activities that it is undertaking. If it is not and problems arise, you will have very limited (or no) recourse available.
  • What is the company’s customer and supplier track record? Understanding how the company interacts with its other partners, such as suppliers and vendors, will provide invaluable insights into how it may work with you. Obtaining references and making thorough checks on these is essential to knowing how a potential partner will act after the courtship and honeymoon phase.
  • Does the company (or its principals) have a history of legal disputes or a tarnished reputation? If a company has a record of regular litigation with its partners, then red flags should be raised. Equally, you need to know if a company has a generally tarnished reputation in the business community because that reputation may attach to you.

When entering into any partnership, even with a distributor, conducting commercial due diligence will be beneficial in terms of avoiding exposure to risk. If unchecked, these risks can result in a decline in reputation, litigation and financial loss. Conducting commercial due diligence also provides an opportunity to address other questions, such as market situation or regulatory hurdles that may prevent the partnership going forward.

To ensure that due diligence is impartial and comprehensive – and to avoid jeopardising a potentially beneficial commercial partnership – it is important to use an independent third party. Sovereign provides due diligence services, including independent assessment, review and verification of projects and partner companies in a variety of different sectors.

Registered Capital and Captive Business Models

It is common for new market entrants in China to use a “captive” (or cost-plus) business model, under which the new Chinese entity has one primary client or customer that is a related party. When entering the market in such a way, companies need to consider carefully the transfer pricing implications of such an arrangement and its impact on the required registered capital.
While minimising registered capital makes sense in terms of transfer pricing compliance, there are several other areas related to registered capital that companies should consider before settling on the final investment amount:

  • Local Employees’ Residence Permits: with a low capital amount, companies might be unable to sponsor temporary residence permits for local employees whose “hukou” – the registered residency status of a particular individual – is outside where the company is located. This could forcibly limit the available talent pool.
  • Foreign employees: certain jurisdictions in China will limit the number of foreign employees a company can employ based on that company’s registered capital.
  • Future Alterations: the potential to make changes to a company’s structure – including the ability to establish branch offices – could be restricted by the capital amount invested.

It may be that none of these factors is currently relevant for a particular city in which a company is looking to establish. However, it is not uncommon for requirements to change at the local level and this can greatly impact a company’s operations. Balancing the local requirements with those of your transfer pricing arrangement is essential for long-term planning if you are operating a captive business model in China.

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 to execution.

If you have questions, we’d love to answer them for you. Please contact Sovereign China

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