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Going global: doing business in China.

Article Excerpt
As we begin the Year of the Ox, China's economic juggernaut, while slowing down, will continue to be an engine of growth for Asia and the West for decades to come. While lower-cost labor still is available for U.S. businesses expanding into China, the better reasons for having a presence there are the opportunities for growth, being positioned in what will be the largest economy in the world and access to a highly motivated and educated workforce.

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There is no cookie-cutter approach for a U.S. business looking to expand into China due to the fluid nature of tax and legal issues, and industries that are subject to special tax concessions. The Cultural Revolution essentially banned scholars, lawyers and capitalists until they were welcomed back in the late 1970s. As one lawyer from China recently told me, you will not find many lawyers in their 60s and 70s, which means strategies that are well established in the West are still in their early stages in China.

The following is intended to provide a general familiarization with the legal forms of doing business in China and the existing tax system and rates.

Legal Forms of Doing Business in China

The representative office is considered to be part of the foreign parent, similar to a branch, and often restricted in the range of business activities that, it can conduct. It is often used to manage and coordinate operations, marketing and research and development, and generally is not permitted to undertake activities that generate a profit. Restrictions apply with respect to hiring local Chinese labor. Because a representative office is not a separate legal entity, it must hire staff through authorized state-owned employment agencies, which ensures that local staff's rights and interests are respected. Representative offices generally pay tax on a deemed profit basis, with the total tax liability amounting to about 11 percent of expenses.

An equity joint venture is formed for joint ventures and must have at least 25 percent foreign investment. A key requirement is that profit distributions among joint venture partners must be proportional to their equity contribution, unlike a cooperative joint venture (discussed below)....