Nations Abroad Consulting attorney is a Peoples Republic of China attorney-at-law.
We have been providing legal services to expatriates and foreign businesses in China for many years and have gained much experience in this regard. We can provide the following services:
Including providing advice, drafting relevant documents, going through the formalities until getting a business license, etc.
Companies seeking to form a WFOE in China are often confused about Chinese law regarding the minimum registered capital requirements for forming a WFOE. Part of the confusion stems from disreputable entity formation companies that encourage their hiring by claiming they know exactly how much will be required and that they have the ability to get the Chinese government to agree to a really low amount.
Under Chinese law, anyone forming a WFOE typically must put up a minimum of about USD $15,000 as a registered capital requirement. What exactly does this mean? Well, first off, the $15,000 is a minimum, but many Chinese cities have their own, much higher, minimum threshold. In fact, virtually every city in which foreign investment is common has a much higher minimum capital requirement. We just did a consulting WFOE in Qingdao and the capital required was about USD $80,000. We also just did a consulting WFOE in Shanghai for which around USD $150,000 was required. Our most recent Beijing WFOE needed around USD $300,000, but that was for a software development company. The amount of minimum capital required is going to depend primarily on the city and the nature of the business. Just by way of example, we did a WFOE not that long ago in not all that big a city but because of potential food safety and transportation risks, the minimum capital required was in the millions of dollars. To a certain extent you just never know and anyone who claims to know before engaging in serious and substantive discussions with the right governmental authorities is just guessing.
But here’s the most important and least understood thing you need to know about China’s minimum capital requirements: the lowest amount possible is not necessarily what you will want. Contrary to what many believe, the minimum capital required to go into a Chinese bank to secure a China WFOE is not frozen; you can use that money to fund your operations almost right away.
And that really matters. It matters because instead of seeking the lowest minimum capital required, you should be seeking the “just right” amount of minimum capital. In other words, the disreputable entity formation companies that seek to woo you with promises of securing you an ultra-low minimum capital requirement will almost certainly do you a disservice if they actually succeed — which they might as there are some cities in China where USD $15,000 will be enough. But what can be so bad about only having to put in a small amount? Surely you can put more in later if you need to do so, right? In theory, you can, but it will no doubt cost you a lot, either in legal help in getting approval for a new registered capital amount or in taxes.
If you do not have sufficient capital to operate, you mind find yourself having to shut down. For good. I have heard of that happening. The problem is that getting money over to China is not always easy and if you send that money over as anything other than registered capital, your China WFOE will get taxed on it as income, which is exactly what it will be. Alternatively, you could apply to have your registered capital increased and then send the money over as that, but we hear that takes at least two months, usually considerably more. My firm has actually never been involved in such a transaction (knock on wood), in large part because we make sure that our clients understand registered capital ramifications when we first register their WFOE for them.
In fact, there are all sorts of things that some local governments tie to a WFOE’s minimum capital, including the following:
including representing clients in the negotiations with their counterparts and representing clients in arbitration’s or litigation’s. Given the greater importance of commerce in urban areas, there are also more commercial disputes. This leads to a demand for better legal institutions and more just and efficient ways of resolving disputes. The government has invested heavily in improving the investment environment, including strengthening the
various mechanisms for commercial dispute resolution, particularly the courts. The government has done so because it relies heavily on economic growth for legitimacy, and because continued economic growth is essential if the government is going to continue to reduce poverty, improve human development, and create a harmonious society. At the same time, the government has ensured that the development of certain areas of commercial law that have broad-ranging significance for the national economy and sociopolitical stability, such as bankruptcy and competition law, remain subject to various political- administrative controls, with a limited role for private actors and the courts. The transition to a market economy has led to greater income inequality, environmental degradation, and social injustice.
People nowadays are much more conscious of their rights, and have much higher expectations of the government.
including giving legal advice in different aspects upon the instructions of the clients. Our ability to quickly get to grips with new developments in businesses and regulations is a key strength to our success. We are not only a leading Chinese law firm in traditional areas of law, but also a frontrunner in advising clients on their most important and challenging assignments in emerging areas such as private equity, structured finance and securitization, cross-border corporate transactions, real estate development and investment trusts.
Includes providing due diligence for individuals and companies based on the clients’ instructions.
A lot of companies, funds and other investors ask us about doing due diligence in China. They have heard many stories about business deals that have gone horribly wrong, particularly those very public deals which have made the front pages of the international financial press. They have been told that getting information in China is difficult, particularly if you want to stay on the right side of the law. They have also heard that accessing accurate data about the business they are buying, learning how a company secured its lucrative contract with a State Owned Enterprise (SOE), or understanding more about the background of the favoured candidate to run their joint venture is impossible.
That is not strictly true. Yes, it can be challenging: the press is heavily monitored, self-censors and, at times, is actively controlled; company records can be difficult (if not impossible) to access legally; and we all know that every company keeps at least three sets of accounts and you may never see the real figures. But China is just like every other country: the people who understand how it works can help you to unearth information that will help shape your decisions.
– The black, the white and the grey
First, a word on the law with the caveat that this should not in any way be construed as legal advice. I will leave that to the blog hosts.
On occasion we get asked by our clients if we can tell them how much money the company has in the bank, obtain individuals’ personal and family details from copies of their household registration files (hukou), details of telephone calls, text messages or some other equally illegal information. The answer is no. There are laws which protect certain classes of information in most countries in the world and China is no different. I would be wary of anyone who offers access to information not generally available elsewhere in the world. The issue in China is one of interpretation. While in all markets laws are subject to interpretation, in China the interpretation is inconsistent and changes regularly and without warning.
By way of illustration, last year, there were tens, possibly hundreds of newspaper articles published about increasingly limited access to corporate filings across the country. There were no known changes to the law. Yet, a year or so ago, access would be given to full corporate files by the Administrations of Industry and Commerce (AIC) bureaus. But in 2012, access to financial information and any personal data in the records became much more heavily restricted. The clampdown has not been uniform across China. Access has been far more restricted in Beijing than anywhere else. That is probably no surprise. Civil servants working so close to the seat of power are likely to err on the side of caution, and particularly so in the year of the transition. Today, some AIC bureaus simply refuse any access to the file at all.
But why has there been a clampdown? The answer is far from clear. Many draw a direct line between external events that have damaged China’s reputation and that of its companies over the last 12 months, citing events such as the publication of Muddy Waters Research into Sino Forest, and similar reports by short-sellers. Others suggest that investigative articles detailing the wealth of senior politicians published by The New York Times, the Wall Street Journal and Bloomberg, all of which drew heavily on detailed analysis of corporate and regulatory filings, were the root cause. It could well be either of those things, or it may be something entirely different. Nobody really knows because China is not a transparent place.
– So what does (good) due diligence get you in China?
As with everything in life – that depends. We regularly look at a broad spectrum of industries and people, and in many different provinces in China, and it surprises me how little investors know (or are willing to pass on) about the company in which they are proposing to invest. The more you, the client, share about the deal, your concerns and what you already know – as well as the more time and resources you invest – the more value due diligence is likely to add.
For example, one of our clients was considering funding a small business in northeast China. They had its name and that of the company’s founder – in Chinese characters, fortunately, because transliteration from English can cause a lot of false hits and a lot of wasted time – and very little else. In this case it was enough. Open sources revealed little about the businessman, but through the contacts we have in that part of China, we were able to uncover the businessman’s colorful past. He had started out in construction and applied some heavy-handed tactics to grow his business. This meant he had plenty of enemies and a few friends in high places who were responsible for sorting out the resulting mess without sullying his name. For some, this alone would have been enough to put them off the deal. But we found more, not related to the reputation of the entrepreneur, but more importantly perhaps, through the conversations we had with people who knew the business, there were serious questions raised over the quality of the food products his company sold and therefore the long-term sustainability of the business in which our client wanted to invest.
All of this information gave our client a much better understanding of the challenges it would face if it went ahead with its investment and for skilled researchers who know their way around China it was not too challenging to find.
In some cases, you can find a gold mine of information. During the course of an investigation into an SOE we unearthed reams of legal documents. Those filings detailed allegations of fraud, misuse of company funds and the illegal transfer of assets from the SOE to private companies controlled by some of its directors. Such revelations about SOEs are normally closely guarded secrets and not necessarily made public. That may be changing.