Doing Business in China

FAQs on doing business in China.

Where to locate?

Investors setting up a venture in China can now choose from a wide range of locations. There are many factors which will determine where you actually set up. The intended scope of business may determine the district or zone in which the investment is located. For example, Wholly Foreign Owned Enterprise (WFOE) trading companies can only be set up in bonded zones and some forms of consulting companies may only be established in Pudong New Area in Shanghai.

Commercial issues such as access to distribution channels, infrastructure, ease of procurement of supplies and materials and the general attitude of local government towards the project are all important factors that may influence choice of location. Another important consideration is the general legal environment in the relevant locality. In this respect setting up in a city such as Shanghai provides significant advantages over less sophisticated areas.

Are foreigners allowed to own land?

Private ownership of land is not permitted in the PRC. The central Government retains title to all urban land and some rural land, with the remainder of rural land belonging to townships or village collectives. Foreign companies are therefore not permitted to own land, but may
lease office space or acquire the right to use land for a fixed term in various ways (“land use rights”).

What are the various Incentives to locate in China?

When China decided to open its doors to foreign investment in 1979, the Government wanted to limit foreign investors’ access to the Chinese market and to keep control over their activities. Special economic zones (SEZs) were established in Shenzhen, Xiamen, Shantou and Zhuhai. Hainan SEZ was set up in 1988. To encourage investors to set up in these areas a number of incentives were offered:

• reduced corporate income tax of 15%
• two year tax breaks from their first year of profitability
• three year reduction of business tax, followed by continued reductions

The Government opened coastal cities for investment in 1984 setting up economic technological development zones (ETDZs) and then high-tech development zones (HTDZs) which also offer the tax and other concessions enjoyed by foreign investors in the SEZs. The coastal cities, include some of the most developed areas in China and provide better infrastructure and communication facilities than are available elsewhere.

Shanghai has been established as the economic powerhouse of China and the Government has established special areas for investors. For instance, the Pudong District of the city has been set up as a Special Investment Zone that allows foreign investors to invest in a wide range of
industries and gives them access to reduced rates of tax similar to those offered by the SEZs. The Government has also established Waigaoqiao Free Trade Zone within the Pudong New Area which offers tax benefits and trading opportunities. Other free trade zones (FTZs) have been established across China offering various incentives.

With the closure of the massive State-owned enterprises, cities in the north and the centre of China are also beginning to offer incentives to encourage foreign investors to set up business in their area to provide jobs for the increasing number of laid-off workers. There are various
incentives offered by different regions and cities, mainly involving tax reductions but also including the option of managing a SOE under a management contract with payment being a share of company profits.

What is a Representative Office?

Representative offices are usually set up by companies who wish to test the market prior to establishing full operations in China. A foreign company without much experience of doing business in China may not wish to commit significant amounts of capital to a new venture
before being confident that it is the right step to take. A representative office can conduct business liaison, product introduction, market surveys and research, and technological

exchange within the business scope of the enterprise it is representing. It can also act as the liaison and marketing office of a foreign company for imported products. However, a representative office is not a PRC legal person and it is not allowed to engage in direct business activities.

The main advantage of setting up a representative office is that although there is a complex application process, gaining approval is relatively easy and investment costs are low. Also it is much easier to terminate a representative office than to back out of a Joint Venture (JV) or
fully established Wholly Foreign Owned Enterprise (WFOE).

What is the status of Intellectual Property rights in PRC?

China has acceded to most of the more important international conventions on intellectual property protection and the legal framework within China now provides for comprehensive protection of intellectual property rights. The following rights can be protected in China, but it is essential to register them and to ensure that you have sufficient internal safeguards:

• registered trade marks and service marks
• patents, know-how and trade secrets
• copyright and related rights
• designs

China operates on a “first-to-file” system for protection of intellectual property rights. China is a member country of the Paris Convention for the Protection of Industrial Property which gives nationals of the member countries the right to claim priority in the filing of applications,
within six months of the first filing. China has also signed the Madrid Agreement Concerning the International Registration of Marks relating to international registration and registration of well-known trademarks.

The enforcement of intellectual property and associated rights in China has posed difficulties in the past. Protection is available in the form of administrative action through various Government bodies, as well as the more traditional mechanism of legal action. Both methods of enforcement have particular advantages and disadvantages, and it is often the case that a combination of both can be used as a strategy in relation to effective protection of intellectual property rights in China.