Doing Foreign Business in China - Research Paper Example

?Business Law International In order to transact business more successfully in China, a foreign company investing in China should consider forming a subsidiary in China. The establishment of a subsidiary is important because it will enable a company to do business directly in China. If such companies could enter into commercial contracts with established Chinese enterprises for operations like sales contracts, distributions agreements or licensing agreements, they will still not be allowed to conduct business directly in China without an approved business license. This therefore makes the establishment of wholly owned subsidiary an alternative to consider. The legal risks Definitely Maybe will be exposing itself to if it embarks on export of Chocolates to China Some difference in law exist between China and UK and this is bound to affect important areas of business for Definitely Maybe. These areas include taxation, import procedures, currency dealings, agency distribution arrangements, protection of intellectual property and property rights. It is also important to understand that international laws and regulations in China could change and this could be applied differently from that of UK. This means that the interests if Definitely Maybe may be compromised if such changes are not friendly to foreign enterprises exporting their products or services to China. However, there is a way to overcome this potential threat. One of the best ways is for the business to draft a contraction in collaboration with a chine legal firm to ensure its interests are taken care of (Exim Guru 1). China is very sensitive when allowing the importation of goods that are directly consumed by its people. The government is also very sensitive to lawsuits involving life threatening issues like production of harmful products. Definitely Maybe is therefore exposing itself to the risk of being sued for any harm that its chocolates could cause on the Chinese people.. If the company happens to conduct business with a customer who is not trustworthy and the customer fails to pay, the government does not intervene in any way. In addition, legal actions for the recovery of such debts is often expensive and even impossible. Because of this risk, Definitely Maybe must acquaint itself with the type of law and dispute-settlement procedure which the company will apply. Dealing with a different legal system increases the risks of a foreign company becoming confused and experiencing potential problems arising out of this. It is also worthy to note that the company fails to enlighten itself on the responsibilities and issues surrounding the appointment of intermediaries such as distributor or agent, it could lead to unpleasant legal risks like legal disputes. Such legal issues are likely to arise if the company fails to follow the right procedure when appointing its intermediaries. The company must therefore obtain a list stating these issues and ensure they are included in its contract agreement, specifying the duties and rights of the parties involved. The best form of corporate entity that is ideal for Ultra-educators in China It is more significant for Ultra-educators to have wholly owned subsidiary in China as compared to operating through other corporate entities like a branch. One of the reason is that this form of corporate entity limits the liability of the parent company in UK in regard to the activities of its subsidiary in China. Unlike having a branch, there is some there is separation of legal corporate identities between the parent company and its subsidiary (Klein and Coffee 265). Because of this, the parent company is insulated and cannot be sued for the financial and legal issues of the subsidiary. If the company was to open a branch in China for purposes of physical presence, the parent company will totally liable to the legal and financial liabilities of its branch. This is because a branch is not recognised by Chinese law as an entity that is legally separate from its parent company. A wholly owned subsidiary will be registered according to the laws and regulations of China and this will limit the impact of change of Chinese laws and regulations on the two companies. This entity will still allow the parent company to have a great deal of control over the new company since a Chinese partner is not required. All policies, orders and directions for the wholly owned subsidiary come from parent company thus the patent company controls the activities of its subsidiary like designing and production. This will ensure that it produces the quality of products desired by the parent company. Procedure for forming of a wholly owned subsidiary When forming a wholly owned subsidiary in China, Ultra-educators will begin by presenting a corporate resolution for setting up a subsidiary in China. This resolution will authorise a specific person to sign the required subsidiary documents on behalf Ultra-educators . After this, Ultra-educators will be authorised by China to subscribe to the memorandum of Association (MOA) and Articles of Association (AOA). When this is complete, the company will the go through the normal procedure for the formation of a company with China’s Registrar of Company. The subsidiary can have more than one directors and must hire at least one director who is a resident of China. In regard the shareholders, the parent company is allowed to own up to 100 of the shareholding. Chen (1) states that if the company can allow Chinese to become part of the shareholders, the equity shares in the subsidiary that are held by the foreign investors should be more than 25%. Requirement for Ultra-educators Software to have a local partner for opening their business in China Ultra-educators does not require s local partner for it to open a wholly owned subsidiary in China. Such a requirement is only placed for companies that wish to establish and operate as a joint-venture (JV) in China. In China, foreign investments are allowed to establish and operate either as a Wholly foreign-owned enterprise (WFOE), Sino-foreign contractual joint ventures (CJV), Sino-foreign equity joint venture (EJV) or a Sino-foreign joint stock company limited (JSCL). Out of all these, WFOEs are allowed to establish and operate independently. This means that provided the company has specified that it will operate as wholly owned subsidiary, the acquisition of a Chinese partner will not be a requirement for it to establish in China. Double Tax Avoidance agreement between UK and China and how companies can make use of it There exists an agreement between UK, and China for the avoidance of double taxation and evading fiscal evasion. Northern Ireland is also included in this agreement. According to Ernest &Young (1), a new double taxation avoidance agreement (DTAA) was entered into between the three countries to replace the existing DTA that the three countries signed in 1984 and amended in 1996. The new DTAA shall enter into force when all the countries have finished their legislation procedures. Companies can make use of DTAA by increasing their investment in foreign countries where their governments has entered into DTAA with them. DTAA ensures that the income and profit of the company is not taxed more than once. This means that such an agreement protects their profit margins of companies investing abroad. UK companies should therefore focus their international investments in countries like China where labour is cheap. This is because the combination of their expenses, like operation costs and wages, and their total taxes will be minimal leading to larger profit margins. Bi-lateral investment treaties between the UK and China There are other bi-lateral trade agreements between UK and China. One example such a treaty is the agreement relating to dispute resolution. This treaty protects foreign investors, that is, UK companies in China or Chinese companies in the UK. Some of the things contained in this treaty include rights to protection and security of investors, rights to fair and equitable treatment, rights to protection of investments from nationalisation or expropriation. this agreement states that “either Contracting Party shall to the extent possible, accord treatment in accordance with the stipulations of its laws and regulations to the investments of national or companies of the other Contracting Party the same as that accorded to its own nationals or companies” (Berger 9). Smith (58) explains that the UK-China bilateral investment treaty (BIT) allows an investor to refer any dispute they encounter to international arbitration. Despite such treaties, the legal governance of foreign investment enterprises in China still poses some disadvantages on foreign investors. Although domestic companies and foreign owned wholly owned subsidiaries are all governed by the Chinese Company Law, foreign owned wholly owned subsidiaries and other foreign investments are also governed by particular FIE-related laws. These laws subject them to different or additional rules and regulations in many respects. Employment issues It is not mandatory to hire local employees when a foreign company forms a wholly owned subsidiary in China. This is because resident representatives of such companies are not recognised by the Chinese law as independent legal persons. In this case, they are free to hire local Chinese workers directly compared to the Chinese-owned companies. However, they are allowed to seek for local support on their own by hiring local people who are capable after they gain legal permission. Employing the local people is normally done through labour companies whose function is ensure that the interests and the rights of the Chinese workers are considered. The employment matters of wholly owned subsidiaries are subject to labour law of China and related regulations. Some of the legal requirements to be met when hiring Chinese workers include provision of pension, birth insurance, occupational insurance, unemployment insurance, social insurance benefits like medical insurance and housing funds (Terence and Mette 293). Currently, there is no requirement for foreign investors which states that Chinese should hold key management positions in wholly owned subsidiaries established in China. This is because in China, wholly owned subsidiaries are more flexible in setting up and controlling the allocation of the management team and power in the company. In majority of the cases, especially foreign wholly owned subsidiaries, it is the duty of the foreign investor to allocate its foreign staff. In this case, foreign companies have the chance to locate their most suitable staff to their subsidiary in China to work as experts and hold key management positions in the new company. Immigration issues Foreign investors in China are allowed to employ personnel from their home country. The country does not impose any restrictions in the hiring of British workers, especially for the UK-based companies. However, the Chinese law demands they such migrant workers must have a work permit to make clear their intentions and purpose of being in China. They are required to have a work visa for them to be employed officially in China. In addition to this, foreigners are normally restricted to working and living in premises that have been specifically approved for this (Hunter et al 256). This means the company should be able to pay well its British workers to enable them live in these premises that are often expensive Safety of intellectual property The protection of intellectual property is important for software services companies such as Ultra-educators. In China, intellectual property of all companies can be protected in judicially and administratively. The relevant local administrative authority belonging to the Chinese government could impose a penalty to those who steal the intellectual property of other companies. Trade secrets are also protected mainly through the contract law and unfair competition law. Conclusion The formation of a wholly owned subsidiary in China is more attractive for a company that has long-term business objectives in the land of China. it is also important if the company intends to hire local people, develop products, conduct research and market their services or products directly in the Chinese market. However, this mode is less advantageous in overcoming certain business and legal restrictions placed on foreign companies in China. In China, the representatives of a foreign company are not recognized by the Chinese law as independent legal persons and because of this, they cannot make independent civil liabilities to another third party. This prevents important commercial activities like making contracts with third persons. The understanding of the legal constrains to business is therefore important for successful establishment, operation and exit from a wholly owned subsidiary in China. Works Cited Berge Axel. China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making. UK. German Development Institute. 2008. Chen Jie (2005). Guide to Establishing a Subsidiary in China. Online: www.fenwick.com/.../establishing_subsidiary_in_china. Retrieved on 3rd November, 2011. Ernest &Young (2011). Agreement between China, United Kingdom and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion. Online: http://tmagazine.ey.com/agreement-between-the-government-of-the-people%C2%B4s-republic-of-china-and-the-government-of-the-united-kingdom-of-great-britain-and-northern-ireland-for-the-avoidance-of-double-taxation-and-the-prev/. Retrieved on 3rd November, 2011. Exim Guru. (2010). Export Risk Management. Online: http://www.eximguru.com/exim/guides/how-to-export/ch_14_export_risks_management.aspx#legal_risks. Retrieved on 3rd November, 2011. Hunter Christopher, Lam Louisa and Lin Ketong Employment law in China. Hong Kong. CCH Hong Kong Limited. 2008. Klein and Coffee. Business Organization and Finance: Legal and Economic Principles. Foundation. 2002 Smith Gordon. Chinese Bilateral Investment Treaties: Restrictions on International Arbitration. London. London. Law Publishers. 2010 Terence Jackson and Bak Mette "Foreign companies and Chinese workers: employee motivation in the People’s Republic of China. Journal of Organizational Change Management. ( 4) pp. 282 – 300. 1998 Read More