P R E P A R E D B Y : J A C O B B L A C K L O C K F O R E I G N
L E G A L C O U N S E L L E H M A N , L E E & X U B E I J I N G
, C H I N A Start-Up Basics For China Business
Hong Kong Special Purpose Vehicle Hong Kong Special Purpose
Vehicle (HKSPV) A company founded in Hong Kong, normally conducting
no business of its own. Typically holds all IP rights for the
mainland China company. No restriction on value of initial capital.
Between one and fifty shareholders; individuals or corporate
entities. Liability of each shareholder is limited to the capital
they have invested. At least one Director which may be individual
or corporate entity.
Hong Kong Special Purpose Vehicle Hong Kong Special Purpose
Vehicle (HKSPV) At list one Company Secretary is required and must
be a Hong Kong resident or corporation. Must have a registered
office address in Hong Kong. Required to renew business
registration annually, file annual tax return. Required to appoint
auditors and prepare audited accounts every year.
Hong Kong Special Purpose Vehicle Hong Kong Special Purpose
Vehicle (HKSPV) Limited Liability: As the shareholder of the
mainland company, the HKSPV will be liable up to the subscribed
registered capital for the mainland company. Exit Strategy:
Provides option for quick exit from China operation. Can be sold in
one day under Hong Kong laws. Avoid lengthy winding down
proceedings in mainland China. Remittance of Funds: Provides for
easy transfer of funds out of China in form of payments for
services, royalties or licensing fees.
Hong Kong Special Purpose Vehicle Hong Kong Special Purpose
Vehicle (HKSPV) Tax Benefits: Tax rate on money not earned in Hong
Kong (i.e. in mainland China) is 0% Avoid 25% mainland China income
tax Tax rate for profits earned in HK is just 16.5% No dividend tax
in Hong Kong, dividends received by the Hong Kong company will not
be taxed in HK The China withholding tax applying to a Hong Kong
parent company can be as low as 5%. Funds can be managed easily
over internet, and moved easily in and out of the HKSPV due to no
currency controls.
Your China Company Wholly Foreign Owned Enterprise (WFOE)
Limited Liability corporations established in China by a foreign
corporation or individual(s) Permitted business activities include
production, sourcing, distribution, retail sale, and provision of
services. May produce products directly, or source from Original
Equipment Manufacturers. VAT refund on products produced for export
only Foreign components may be imported duty free for addition to
products produced for export only. More business capability than a
Representative Office. More control and less potential for disputes
than a Chinese-Foreign Joint Venture.
Changes to Chinas Company Law Effective March 1, 2014 The
requirement for a minimum amount of registered capital has been
removed The mandatory proportion of initial capital contribution
and the proportion of capital contribution paid in currency have
been eliminated Capital verification report no longer necessary at
registration.
Changes to Chinas Company Law Registered Capital Subscription
System: Registered Capital is now indicated by the shareholder in
the Articles of Association. The Subscribed amount stated in the
Articles will be legally binding on the company. The shareholders
will be allowed to determine the form and time of capital
contributions according to business needs. This information must be
recorded in the Articles of Association.
Changes to Chinas Company Law Additional Changes: Registration
Requirements: In general interactions with authorities should
gradually be streamlined and simplified Annual Reporting: Annual
Audits will be eliminated and replaced by an Annual Reporting
system, in which a report is generated by the Enterprise itself,
and sent to Authorities Enterprise Credit System: Annual Reports
will be available for the public to view. Enterprises which do not
submit an Annual Report for three years will be blacklisted.
Changes to Chinas Company Law Anticipated Effects: More holding
companies: Lowered costs to establish a new company will lead to
the establishment of more holding companies and special purpose
vehicles to facilitate multilevel financing and complex transaction
structures. More hi-tech companies: More flexibility to allocate
assets such as technology, Intellectual Property, and physical
assets for capital contribution. More opportunities for development
of hi-tech companies and startups.
Changes to Chinas Company Law Anticipated Effects: Need for
more due diligence: Due to the removal of the need for paid in
capital and the absence of any requirement for annual inspection of
companies, more prudent legal and financial due diligence on
counterparties in transactions is recommended to prevent
transaction risk.
Employment Systems Type of Labor Contract: Fixed Term Non-Fixed
Term Contract for completion of specific task Termination of an
Employment Contract: Every Employee is Required by Law to have an
Employment Contract Proper causes for Termination with 30 days
notice Unable to resume work after treatment period for work
related injury Employee is incompetent and remains so after
training Employment is impossible to perform due to material change
in conditions Proper causes for Immediate Termination Employee
fails to meet employment requirements during probation Employee
materially breaches Employers regulations Employees Serious
dereliction of duty causing substantial loss (including fraud)
Employee begins another job
Employment Systems Company Handbook: Responsibilities of
Employees to Company. Employment Trainee Agreement: Requiring the
employee to pay back trainee costs if the employee leaves
employment within a certain time period. Non-Disclosure Agreement:
A standalone agreement. Non-Competition Agreement: A standalone
agreement. Intellectual Property Work for Hire Agreement: A
standalone agreement, indicating that all intellectual property
created by the employee during employment is the property of the
company. China Anti-Bribery/Foreign Corrupt Practices Act
Agreement: A standalone agreement. China Expense Reimbursement
Agreement: A standalone agreement.
Intellectual Property Protection Types of Intellectual Property
Trademarks: Protection for the words or logo used to identify goods
or services. Copyrights: Protection for an original work of art or
writing (including software) Patents: Protection for a new
invention, an incremental improvement, or a new use of existing
technology Design Patents: Protection on the unique appearance of
the design of a product. Domain Names: Register your name, and
variations on your name, under multiple domains (.com, .com.cn,
.cn, .)
Intellectual Property Protection Intellectual Property
Registration First-to-File System: The first to file for protection
of a Intellectual Property (IP) will be the owner, prior use is not
a consideration. Benefits of Registration Legal ownership of the IP
Ensures rights to use the protected IP in China Reduces potential
for infringement Grants right to initiate legal action against
infringement and unauthorized use. After filing with customs
authority, may prevent import and export of infringing goods
Important as an aid to transfer money out of China legally
Intellectual Property Licensing Transferring funds out of China
using Licensing Agreements IP Licensing Agreements signed between
the China company and the foreign IP holder (Usually a HKSPV).
Income of the China company transferred to the HKSPV as licensing
payments. Avoid 25% income tax on China company profits. Licensing
Fee will be subject to 6% VAT on transfer Typically the IP and the
Licensing Agreement, must both be registered with Chinese
authorities. However, registering the Licensing Agreement is not
necessary if license is held by a Hong Kong company.
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