The Hindu Business Line : Expert's tips on doing business in China

When doing business with China, you better do your homework well. It could be as tricky as rewarding, says Mr Christopher A. Devonshire-Ellis, Senior Partner, Dezan Shira and Associates Ltd, business and tax consultants based in China.

Mr Devonshire was speaking at a seminar on international taxation, organised jointly by the Madras Management Association and the International Fiscal Association. He stressed on the point that foreigners who want to do business with China, be it investment or trade, ought to do their due diligence right, or else they could get tricked.

Capital rules

For setting up a wholly-owned subsidiary, investors would need to declare their `registered capital' in the application. They should capitalise the working capital required by the business too, for recapitalisation is difficult.

For putting in more capital later, the investors would have to seek permission, which could take about six weeks to get. Business could suffer for want of funds in the meantime. If recapitalisation is made without getting the permission, the capital sent in would be treated as income of the company and taxed.

Again, location is a key criterion for investment. In China, there are three types of locations.

First, the special economic zones and free trade zones, where the tax is 15 per cent. Second is the municipalities, where the tax rate is 24 per cent and the third is the rest of the region, where the national tax rate of 33 per cent applies.

Mr Devonshire noted that the Chinese Government was planning to consolidate the three rates into a single rate of 26 per cent, which in his opinion, could happen in two years' time. The new rates could apply retrospectively, but the existing businesses might be given five years time before they are taxed at the new rates, he said.

If an investor wants to set up a joint venture, the aspect of `due diligence' becomes even more critical. Investigate the partner thoroughly, Mr Devonshire stressed.

The least an investor should do is to study the business licence of the prospective partner. The licence would give information such as how long the company has been in existence, what businesses are it allowed to do, who the legally responsible person is.

Most of the Chinese companies run double books, he warned, adding that it might be tricky to get the prospective partner to show the true accounts. Other areas the due diligence exercise should look into are whether the land is given to the joint venture company involves transfer of title or just rights of use, financial assets of the partner and what kinds of staff liabilities the investor would have to assume.

Termination

Answering a question about termination of businesses, Mr Devonshire said that there is a mandatory termination clause in the Articles of Association, worded in a "woolly" language, basically saying that termination would be done according to the laws of the region. This puts termination of a business under the control of the local authorities.

How to get around this? Mr Devonshire pointed out that there is usually another mandatory clause in the Articles where the projected production and sales would be mentioned.

He advised that this clause could be recalled in the mandatory termination clause in such a way that the business could be terminated if a specified percentage of production or sales is not achieved.

Answering a question about intellectual property rights in China, Mr Devonshire said the Chinese were "rapacious in copying".

He said that there was a flaw in the Chinese patent law, which left open all the details of a patent application to the public before the patent was granted.

This issue, he said, had to be settled under international protocols.

However, there were practical ways of dealing with patent violations. The first step, he said, was to get the patents registered in China. If there was an infringement, "write a nasty letter to the guy" and often the infringement would stop.

If it didn't, then the patent holder should decide whether the infringement was hurting. If it was not, then "let they guy have his day in the sun". If it did, the only way was to go to the court. Mr Devonshire said that he was "reasonably satisfied" with the legal process.

Sometimes, the infringement would not stop even if the patent holder got a favourable judgment. What to do in such cases? The policeman (is usually) a tall, burly, officious-looking man, who is available in his off-duty hours for about $10 an hour. Show him the judgment, show him the patent violator, he will take care of you.

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