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Tuesday,
March 26, 2019

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Four Phases of the Chinese Business Cycle

The life cycle of a business in China can be grouped into four phases:

  1. initial investigation;
  2. setup;
  3. maintenance, development, and growth; and
  4. sale, merger, and public offering.

Professional services are needed at every stage, but the services differ from stage to stage.

  1. Initial investigation

    The initial investigation of a business opportunity is a critical step that lays the foundation for what is to come. The initial investigation into setting up business in China involves
    • assessing initial feasibility, including whether the project will be approved by the authorities;
    • determining possible locations within China;
    • structuring and planning tax (income tax, value-added tax, business tax, and customs duty);
    • developing projections of income and cash flow, and a critical path of tasks to be done;
    • visiting China; and
    • identifying joint venture partners and preliminary negotiations with them (if the business is structured as a joint venture).

We can assist in all of these areas, through our contacts in Hong Kong and China. In particular, we can

    • assess the overall feasibility, based on experience with similar situations;
    • advise on possible locations;
    • advise on tax matters, especially income tax exemptions;
    • review projections and advise on cost estimates;
    • advise on the overall process; and
    • find joint venture partners and make introductions.

 

  1. Setup

The second phase involves setting up operations in China. To establish the business, the following will be needed:

    • developing a feasibility plan to submit to various government bodies for approval,
    • negotiating tax incentives with state and local tax authorities,
    • obtaining various approvals,
    • finding a physical location and negotiating a lease or purchase of land-use rights,
    • incorporating a corporation,
    • setting up an accounting system,
    • hiring staff,
    • setting up banking facilities, and
    • making various tax and other filings (including foreign exchange clearances).

Our fundamental approach is to provide a professional adviser in China who is dedicated exclusively to the client in a one-on-one relationship. This person will be a locally established individual with business experience who is retained by our Hong Kong associates to oversee an agreed-on list of tasks critical to the project.

We also advise on Canadian tax issues concerning

    • deductibility of initial startup losses,
    • ownership of the China business,
    • characterization of the China income,
    • withholding tax issues,
    • application of the Canada-China tax treaty, and
    • repatriation of income back to Canada.

 

  1. Maintenance, development, and growth

Clients typically need ongoing assistance with a host of issues, including

    • tax filings and remittances;
    • accounting;
    • legal issues (copyright, contracts, leases, and annual directors' minutes),
    • government filings; and
    • labour and staffing issues.

Our representatives are available to support clients through these issues.

  1. Sale, merger, and public offering

Clients may also require advice and assistance to

    • expand into other areas and locations;
    • seek mergers or joint venture partners, or go public;
    • sell the business;
    • obtain financing; and
    • buy other entities.

We advise on the Chinese and Canadian tax consequences of a sale of the business in various formats.