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Business> Legal-Ease
UPDATED: December 25, 2006 NO.45 NOV.9, 2006
Faulty or Inefficient Business Applications (IV)
Doing Business in China-this is the fourth in a series of articles where we identify some of the common mistakes made when making an investment in China



Maintaining currency consistencies in the articles and business license

When applying for your business license, it is important to pay attention to detail when completing the business license application and cross-referencing this against the articles. If, for example, as does sometimes occur, the capital amount to be registered on a business license is shown in renminbi, it may, however, be identified as euros or dollars.

Consequently, if the exchange rate fluctuates, the injection verified by the local accounting firm as is required to prove that the registered capital transfer was made, may no longer match the figures on the business license. If the registered capital converted into renminbi is less than their promised capital amount, the client has to again transfer the uncovered small missing amount caused by currency fluctuations into their capital bank account. He or she also has to complete another capital verification.

Keeping the legal address and the operational address the same

Many smaller consultants or agents in China may advise investors that it is permissible for the foreign-invested enterprises (FIEs) to register in one location (in a small office building for example) but then have its manufacturing facility set up in a different location (such as in a rural area). This may be to take advantage of better profit tax rates or other incentives in the office location area, yet effectively operate from a different location. If so, this does cause trouble for post-registration procedures such as environmental appraisal and value-added tax (VAT) application. Consulting firms and certain lawyers who do not provide post-registration work often miss this point. It can have serious effects on the client and possibly make their businesses unworkable. To illustrate this, we were recently called in to handle a client involved in metal production with such a problem. Their legal and production addresses were different. When we took on the post-registration processes and applied for environment bureau appraisal, the related authority refused to accept and hear the case since the legal and production addresses were separated. Accordingly it was extremely difficult for this FIE to obtain their final permanent business license and commence production, resulting in a delay of several months and missed contracts. This problem also arose with the application for VAT general tax-payer status. The local state tax bureau required the addresses to be at the same location. The problem was finally solved, but only after extensive negotiations and a re-assessment of the original lower tax rate, the client had been advised we would be able to enjoy from being apparently based in the office location.

Other business application issues

Other relatively common problems include:

· Lazy scopes of business

Only using the phrase “production of (product)” will not necessarily qualify an FIE as a production company as the tax bureau may require a more detailed and specific explanation of the business activities in order for it to apply for tax holiday benefits. We have encountered numerous problems of this nature, all requiring a business license change to the scope of business prior to the tax bureau being satisfied with exemption status.

· Inappropriate site locations

Not all locations are applicable to all kinds of businesses-industrial, commercial and residential. If you commit to the wrong type of location, you will be unable to proceed with your desired business license application at a later stage.

· Under budgeting for staff welfare costs

When calculating the salary of employees, pay attention to the social insurance and housing funds. These are also mandatory along with pension and unemployment funds. Some investors seem to have no idea about these.

· Corporate name translations

It is important to spend time to obtain an appropriate translation of the company name, and to try to use it as a uniform translation when applying for business registration, trademark registration and so on. It is your corporate identity in China. A uniform Chinese name will be good for marketing and will also avoid later troubles with on-going documentation and application procedures.

· Underestimating additional licensing requirements

Certain FIEs have other specific licenses that they may need to obtain in order to operate. These can often be far more difficult to process and obtain than the FIE license. Matters that involve importation and sale of consumable products, for example, trading of certain items in metals, rare earth wares, fuel and pharmaceuticals, all require additional licensing applications and need a full understanding of their respective processing procedures. This will ensure you dovetail all regulatory demands into your business operations in a timely manner.

Chris Devonshire-Ellis is a senior partner of Dezan Shira & Associates, Business Consultants www.dezshira.com

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