This is the last of a four part series about the different choices you have to start a business in Shanghai. Today we will look at the

Wholly Owned Foreign Enterprise (WOFE) option.

Please check the previous three postings for details on the Representative Office, Hong Kong LLC, and Foreign Investing Partnership Enterprise (FIPE), and Joint Venture options.

From the title of this entity you may have guessed it is the most expensive option. There is no domestic partner involved.

Foreign investors assume all risk and provide all capital.

The minimum capital requirements according to China law are 100,000 RMB with very vague guidance. All Shanghai districts require a minimum capital requirement equal to $150,000 USD which is nearly 1 million RMB. The Jing’An district (part of CBD) requires 15% to be paid within 90 days and the remainder to be paid within 6 months of establishment. All other districts in Shanghai give better payment terms with 15% due within 90 days and the remainder due within 2 years of establishment. The capital requirement is determined by the level of capital needed for a company to break even for 2 years, though it cannot be less than $150,000 USD.

There are 5 types of WFOE registrations based on industry with different government fees.

1. Consulting Company: Approximately 5,000 RMB
2. Service/IT Company: Approximately 5,000 RMB
3. Trading Company: Approximately 6,500 RMB
4. Food & Beverage Company: Approximately 15,000 RMB
5. Manufacturing Company: Approximately 20,000 RMB

You can only engage in business for the type of WFOE you are registered as. For example, if you are a consulting company but develop software, you cannot sell the software under the Consulting WFOE. On your application you will be asked what your “Business Scope” is. Authorities who approve your application will want your scope to be narrow, but you can try to negotiate something more broadly. Once your Business Scope is approved, you can only legally conduct business that was originally defined. If your business changes or evolves you can apply for the scope to be amended.

Benefits:

1. Autonomy and independence without a local partner
2. Ease of carrying out strategy from an overseas parent company
3. An overseas parent company does not need to be at least 2 years old
4. Full human resource control
5. Ability to issue invoices and make profit
6. Protection of trade secrets and technology

WOFE Tax Rates (same as Joint Venture)

Profits are taxed as corporate income.

Non- Manufacturing: All profits are subjected to a 30% corporate income tax and a 3% local income tax.

Manufacturing:


There are more taxes for various areas of business! For more details, please check out:

http://www.shzb.gov.cn/en/policyfaq_list_d.php?parentid=157&sortid=163&id=9178


Support Agencies

Up to now I have summarized government costs, minimal capital requirements, and income tax for each strategy to give you an idea of the minimum amount you need for startup costs. There are also what I call optional or even “insurance” costs that can be added to navigate the complexities for your new business in China.

Starting a business in a foreign country is fraught with potential problems including but not limited to language barriers in speaking and reading, ever-changing laws and regulations, multi step processes, lots of paperwork, and time.

You may think you can do it yourself and save some cash.

But, hire an agency could save you from many headaches and delays and free up your valuable time. Local agency’s like these have relationships with the government, know what paperwork is needed, and know all of the steps required for you to be successful.



In partnership with DragonGate these local agencies will also set up bank accounts, navigating the employee visa process, accounting, HR, taxes, and auditing needs.
So don't hesitate to contact our partners to help you guide start-up your business in China.

This concludes our detailed look at starting a business in Shanghai. Check back in two weeks for a comprehensive look at starting a business in Hong Kong. Remember setting up a Hong Kong LLC is an option for Shanghai.

This is part three of four on a series about the different choices you have to start a business in Shanghai.

Today we will look at the Joint Venture option.

Please check the previous two postings for details on the Representative Office, Hong Kong LLC, and Foreign Investing Partnership Enterprise (FIPE) options.

A Joint Venture is started when two parties want to start a business and enter into a contract in which they share management, operation expenses, investment, profits and losses.

If you are entering into a government-controlled business like restaurants & bars or building & construction this is your only choice as laid out by the government.

A Joint Venture is usually used by a foreign company that has special technology or knowledge and wants to enter the market. The foreign company can tap a big market this way in which to launch its products or services.

There are two kinds of Joint Ventures that a very different from each other.

1. Equity Joint Venture:

Profit and loss is determined by equity share of the partners. Share restructuring needs to be approved by the Chinese government.

The foreign partner has at least a minimum capital requirement of 25% and it can be up to 100% because Chinese partners do not have a minimum capital requirement.

The total investment is considered to be all equity plus all debt. Equity can be in the form of cash, buildings, equipment, materials, intellectual property rights, and land use rights. There are requirements for the percentage of the total investment (equity plus debt) that is equity. These equity percentage requirements are between 33.3% - 70% of the total investment (equity plus debt).

a. Equity = 33.3%: If the equity plus debt total is over $30 million USD.

b. Equity = 40% or 5 million USD (higher value): If the equity plus debt total is between $10 and $30 million USD.

c. Equity = 50% or 2.1 million USD (higher value): If the equity plus debt total is between $3 and $10 million USD.

d. Equity = 70%: If equity plus debt total is less than $3 million USD.

You may be concerned about the initial capital requirements. How will I drum up this much equity? Good news! All capital does not have to be accounted for at the time of startup and initial investment. Only a minimum of 15% is required at registration. The remaining 85% can be paid over a period of 1 to 3 years depending on the size of the investment.

For example, using (d) from above if your total registered capital (equity) is $1.4 million USD, then you need to pay $210,000 USD at registration and then you can pay the $1,190,000 USD balance over the next 2 years. The balance could be cash from profit in your business or from the value of assets you purchase during the first 2 years.

After finalization, this venture will be considered a Chinese legal entity and must follow Chinese laws. This type of venture can purchase land and build on it too.


2. Cooperative Joint Venture:

a. Each entity, foreign and domestic, can operate independently.

b. There are no minimum capital requirements for foreigners or Chinese.

c. In kind services (services that are not paid for with money) like labor, resources, and services can be used as equity. These services are usually donated for trade by other companies you do business with. Being able to use in kind services means you can conserve cash and invest it in other areas of your business.

d. Value of in kind services are to be outlined in the contract as would profit and loss shares.

e. Restructuring can happen at any time without government approval!!

f. Trade unions are used to protect labor interests because labor can be used as equity.

There are 5 types of JV registrations based on industry with different government fees.

1. Consulting Company: Approximately 5,000 RMB
2. Service/IT Company: Approximately 5,000 RMB
3. Trading Company: Approximately 6,500 RMB
4. Food & Beverage Company: Approximately 15,000 RMB
5. Manufacturing Company: Approximately 20,000 RMB


Joint Venture Tax Rates

Profits are taxed as corporate income.

Non- Manufacturing: All profits are subjected to a 30% corporate income tax and a 3% local income tax.

Manufacturing:



There are more taxes for various areas of business! For more details, please check out:

http://www.shzb.gov.cn/en/policyfaq_list_d.php?parentid=157&sortid=163&id=9178

Check back in two weeks for the final installment of our four part series on starting a business in Shanghai. It will be the details on setting up a Wholly Owned Foreign Enterprise (WOFE).


By: Matt Flax - Senior Business Advisor at DragonGate.Asia

Two weeks ago we looked at the two simplest ways to open a business in Shanghai, via a Representative Office or by opening a Hong Kong LLC. Please check the previous blog post for more details on these two options.

Now let’s look at what it takes to start a profit-seeking company on the mainland.

This can be done by starting a Foreign Investing Partnership Enterprise, Joint Venture, or Wholly Foreign Owned Enterprise.

The Foreign Investing Partnership Enterprise (FIPE) is a new designation that started in 2010 that allows a business to be formed with unlimited business liability and has no registered capital requirements.

Reasons to consider forming an FIPE include:

1. There is no corporate income tax, only regular income taxes which are usually lower than the 33% for non-manufacturing (see tax section at the bottom).

2. No minimum on capital requirements.

3. Partnership can be formed between a foreigner and a Chinese person.

4. The income distribution can be pre-decided in a contract at startup.

Drawbacks for forming a FIPE include:

1. No personal bankruptcy laws in China.

2. All debts must be paid by libel partners.

3. A company cannot use the word “Company” in the name of the business.

4. Trading businesses have the disadvantage of not being able to apply for the Value-Added Tax rebate that corporations are able to collect.

There are three choices for an FIPE if you choose to go down this path. Government fees will be approximately 5,000 RMB.

1. General Partnership Enterprise: General Partners must pay all debts incurred by the partnership.

For example If there are 3 partners and each partner is equal with a 33.33% share and there is 100,000 RMB in total debt, then each partner would be responsible to pay 33,333 RMB each to pay off the debt.

2. Limited Partnership Enterprise: A combination partnership with General and Limited partners. Limited partners must pay all debts accrued by the partnership based on the percentage of capital (value of shares) each Limited partner holds.

For example if there is 1 General Partner company and 2 Limited Partners, the Limited Partners each have 50% of capital, and the total debt is 100,000 RMB. Then, the General Partner would owe 0 RMB, but each Limited Partner would owe 50,000 RMB, which could come from their personal cash and or assets.

3. Special General Partnership Enterprise:Similar to a General Partnership Enterprise, but only for professional service institutions that offer services that require special professional knowledge and skills. This is similar to limited liability partnerships in Europe and the US. If one or a group of partners are found liable for misconduct or negligence, the other partners not found liable will not be responsible for losses.

For example if there are 3 General Partners in a Consulting Service business, 1 General Partner gives fraudulent information to a client, the other 2 General Partners are not involved in this transaction, and the fraudulent negligence is valued at 100,000 RMB. Then, the 2 General Partners not involved owe 0 RMB, but the 1 General Partner who gave the fraudulent information owes 100,000 RMB, which could come from their personal cash and or assets.

FIPE Tax Rates
Profits are taxed as regular income tax each month:

The income tax is progressive. You only pay the percentages for the income range.
Your taxable income is income after the deductable which is:

• 800 RMB if income is under 4,000 RMB
• 20% of income if over 4,000 RMB
• 4,800 RMB for foreigners

Example: A foreign partner in an FIPE business has a total profit/income of 20,000 RMB



FIPE’s are low cost in startup, however the risks and costs involved if the business fails are quite high. Your personal wealth could be wiped out if the business fails under an FIPE entity. Check back in two weeks for part 3, which will be a very detailed discussion of starting a Joint Venture business in Shanghai.

Over the past few months I have written many posts that have analyzed economic indicators around the world. In each case, Asia continues to look like the bright spot in a very shaky global economy. This will be the first part in a series for giving an overview of the financing needed and options for starting a new business in the main Asian hub cities starting today with the first part of Shanghai. Other cities to be covered over the coming weeks will be Hong Kong, Taipei, Bangkok, Singapore, and Tokyo.

Shanghai is the financial heart of Mainland China and currently ranks 5th as a Global Financial Center. Choosing how you setup your business in Shanghai is an important strategy that needs to be considered for the long term, including the possibility of your business failing. There are 5 types of business entities to choose from. Today, I will cover the first 2 (Representative Office & Hong Kong LLC) :

1. Representative Office:

This option is used only for non-profit making businesses, organizations, or offices. It is illegal to issue invoices or collect money for your services [under this business entity]. A Representative Office can only be involved in non-operational activities, which are activities that do not produce profits or income. These include public relations activities that relate to the company’s products or services, market research, and domestic procurement and investing.

China requires that a company has been established at least 2 years prior to opening a Representative Office in China. Setup costs are relatively low, but you must purchase top end office space and costs to close your business are high.

2. Hong Kong LLC:

For profit making businesses, forming a Hong Kong LLC is one avenue of choice that features lower taxes and easier regulations. Hong Kong operates under the “one country, two systems” rule, and will continue to do so until at least 2047. As a result, establishing headquarters in Hong Kong will mean that your company will be under the rules and regulations of British law. Taxes there are very straight forward, just 16.5% of profit. Shanghai has a multi-tiered tax system that varies for types of business and location that ranges from 15-33% with exemptions and sweeteners.

You can also transfer as much capital as you want in and out of Hong Kong since there are no foreign currency controls. In the long-term, a Hong Kong-registered company can make restructuring pretty painless compared to one registered on the mainland. Time involved for restructuring could be only a week in Hong Kong versus up to two months on the mainland. Startup costs are relatively cheap. The costs involved for new business incorporation is no more than 5500 RMB or about $850 USD.

These two options are very straight forward. The other three are more detailed and complicated. I will cover each of the three in separate postings. Check back in 2 weeks for an overview of setting up a Foreign Investing Partnership Enterprise in Shanghai!!


By: Matt Flax - Senior Business Advisor at DragonGate.Asia

As we head to the last half of August, many countries have now published economic figures for the first half of 2011 ending June 30th.

Back in May I looked at World GDP growth and not surprisingly found that the Asia/Pacific region was leading the world.

In fact, the region was compensating for lackluster growth in Europe and the US. Two weeks ago, I looked at slowing manufacturing around the globe for July signaling a possible economic slowdown for the second half of 2011.

After poor manufacturing reports around the globe, the last two weeks of news from the US and Europe has included some stomach churning results. World financial markets have looked like a rollercoaster ride at an amusement park. Consumer confidence in the 70% consumer driven US economy fell to lowest reading ever since 1980. Even lower than during the depths of Global Financial Crisis in 2008 and 2009!!! Consumers shutting their wallets was a driving factor combined with a housing market collapse that sent the US economy a cliff in late 2008 and early 2009.

If consumer confidence is lower now, what does that foretell for the rest of 2011?

In Europe, the debt crisis that started last summer in Greece had spread to Portugal and Ireland by the beginning of this summer. All three being relatively small economies in the European Union. Over the past couple of weeks symptoms have spread to Italy and Spain, the 3rd and 4th largest economies in the EU. On top of that, French banks are reported to have great exposure to Italian and Spanish debt. France is the 2nd largest economy in the EU.

Many Asian economies derive a lot of their growth from exporting to large EU and US markets. Post financial crisis I have written much about these economies growing without much growth in the EU or US. The question now becomes will these economies be able to stay on the growth side if the EU and US return to periods of economic contraction? First half Asia GDP data shows that growth is slowing with a couple of key Asian economies close to contracting or contracting.

What is the first half picture in Asia?

Those marked in red are economies that slowed in the 2nd quarter from the 1st quarter, which is most. Indonesia and Japan showed no change. Japan of course continues to try to rebound from its March disasters. The two glaring examples are Singapore and India, with Singapore’s economy slowing to almost a complete halt. At the depths of the Global Financial Crisis Singapore’s economy contracted by -8.40%.

Seeing export dependant Singapore and India slow down considerably is a disturbing sign for the 2nd half of 2011. US GDP has been anemic in the first half with growth accelerating slightly from .8% in the 1st quarter to 1.3% in the 2nd quarter. Europe is expected to report that it moving the other way going from .8% in the 1st quarter down to .3% in the 2nd quarter. At this moment Vietnam and China are still doing well. The 2nd half of 2011 may show if the Asian economies have decoupled themselves enough from the US and Europe.


By: Matt Flax - Senior Business Advisor at DragonGate.Asia

The summer of 2011 has not been short of ominous news about possible economic storm clouds forming over the world’s largest economic areas. Europe has been dealing with its ongoing debt crisis. The United States has had its hands full with raising its debt ceiling to finance further borrowing. China has been dealing with higher than liked inflation and fear of a property bubble bursting slowdown. And Japan has been struggling to emerge from its natural disaster triggered slowdown. The latest cloud to move overhead is manufacturing. As we enter August, manufacturing is slowing or in some cases contracting around the world.



A reading above 50 indicates an expanding manufacturing sector and a reading below 50 indicates a contracting manufacturing sector.

All of the economic areas listed had lower readings in July than they did in June except for Japan.

This shows that these areas excluding Japan manufacturing even if expanding weakly in the USA and Europe or more briskly in India. Japan’s manufacturing is emerging from the massive supply chain disruptions in wake of the natural disasters in March.

Manufacturing is a very telling indicator for the overall economy. JP Morgan issues a global manufacturing figure each month as well. At the end of the first half of 2011, the global figure is a weak, but expanding 50.6. How concerned should we be? At the start of 2009 in the depths of the Global Financial Crisis, the global figure was about 35. So, I am only cautiously concerned at this point. Three major drags on manufacturing that have been causing a lot of uncertainty are subsiding. Japan is on the upswing after its horrific disasters. Europe has come to an agreement on restructuring Greek debt. And, the United States has come to an agreement to raise its debt ceiling. That said, China is still battling inflation and its overheated housing market.

The United States and Europe will continue to restructure their economies in wake of the Global Financial Crisis and be tough markets.

Asia again looks to be the safe place to invest and sell products.

China and India combined have about 30% of the world’s population, economies that are still growing quite fast, consumers who are increasing their purchasing, and are large exporters. This last point is very important. With Europe and the United States continuing to struggle it makes sense that China and India would see manufacturing contract. The key in the world’s largest markets by population is to sell more domestically.

Manufacturing can be a leading indicator for an economy’s growth or lack of. These figures show that businesses and people across the globe were ordering and buying less in July, the first month of the 2011 3rd quarter. We will not know until October if July was the beginning of negative growth in the currently barely growing economies of the United States and Europe.

China and India continue to look like the best place to expand your business or start a new one. During the Global Financial Crisis, China was able to keep its economy expanding, all be it at the slower pace (World GDP Analysis). India manufacturing is holding up better than most countries right now. These markets may be a safe haven if another global economic storm forms.


By: Matt Flax - Senior Business Advisor at DragonGate.Asia

Find out what you need to be aware of and how to do it:

Looking for higher return on investments; the next big individual run-up; willing to take on higher risks; there is no magic you need to buy low and sell high. Now we all know it’s not that easy, so to maximize your chances

you must be able to understand basic accountancy principles, a company’s annual report, stock market history and financial news.

Then, you need to define your goal and plan on how achieving it (your goal towards financial satisfaction).

The biggest question for the “amateur” investor would certainly be “How much money do I have to invest?” Although, you should always try to figure out first – “How much money you can afford to lose?”,

So, be sure you:

1. Only trade/invest money you can afford to lose!
2. Do not jeopardize the future of yourself, your family, by investing all your assets in unstable stocks; DIVERSIFY (in the nature of your investment, so not just stocks), look into real-estate, other businesses…
3. If you have a stable monthly/annual income, keep at least 6-9 months living expenses for you and your family in your savings account before you start investing with the “extra cash”.
4. Don’t look at it like a source of revenue that would take care your basic living expenses; Look at it like a source of funds that would allow you to buy “the extra stuff “ you don’t really need.
5. Never invest in stocks or any kind of funds if you already have a bad debt, credit card debt or any other high debt.
6. Finally, be ready to make mistakes and learn; Do not go against a “trend” and cut your losses short; Furthermore, you don’t have to let your emotions interfere with your daily trading (sell if you were wrong and don’t keep it hoping it’s going up again)

Now, once you figured out you have enough savings to start trading, go ahead and:
“Open an account with a broker”

There are two kinds of broker with which you can start with: Discount Brokers and Full-service brokers.

Discount brokers cater well if you are willing to do your own research and make your own investment decisions.

Start by finding one that fits your needs at best, i.e.: maybe with the lowest commissions per trade, or located in your home country or who deals specifically with Asian markets.
Some famous examples include: Interactive Brokers, Charles Schwab and TD Waterhouse. If you decide to go for less famous ones out of your home country, be sure they are certified, Google the company name and check records. For instance, “BOOM Securities” in Hong-Kong: gives access to almost all Asian markets and is a fully licensed broker.

Register, send the required documents, get your private access and buy your first stock!

Go for a “full-service broker” such as “J.P. Morgan”, “Barclays”, “Deutsche Bank” if you wish to have access to more markets, be given “expertise and advices” and don’t have the time to do your homework. If you choose the “service” then you will also pay higher commissions and fees than you would with a discount broker.

Finally, you should be aware that most Asian markets are open to foreign investors except India (closed to non-indians). Some exceptions exist in China or Thailand but you shouldn’t be too concerned if you just started “trading”…

So to begin with, stick with the larger markets

where you will have plenty of choice and don’t bother looking into complicated deals. If you’d ask me which one to choose between a “full-service” or a “discount” broker, I’d say go for the discount broker if you know what the basics are (P/E Ratio, P/E Growth Ratio, ROE, ROI, EPS, Dividend Payout Ratio, Net Asset value, Turnover & Leverage Ratio, Current Ratio) or go for a full service broker if you have no idea of what you just read.


A.S.- partner @ dragongate.asia