Restructuring your business in China Federico Paolucci Associate

Restructuring your business in China Federico Paolucci Associate, International Business Advisory 20 May 2016 www. dezshira. com

What is Restructuring? Reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable or better organized for its present needs. Changing business scope Downsizing operations & divestiture M&A Changing address Changing entity type (conversion) De-registering Changes to labor Debt restructuring www. dezshira. com

Common causes that lead to restructuring Poor planning on establishment (wrong location, bad staff, narrow business scope) Labor Property costs Taxation & compliance (e. g. , new tax incentive) Desire for expansion New work/management methods (e. g. , processes automation/robotization) Change in the environment (e. g. , government policies, currency) www. dezshira. com

Pros and Cons of Restructuring � www. dezshira. com � Long terms benefits Bureaucratic nightmare Different angle of approach Time-consuming Increase efficiency & streamline operations Sets panic within employees Compliance Costly

Restructuring Options Opening a branch Moving your company Business scope changes RO/WFOE conversion Reduction in operations De-registration www. dezshira. com

Opening a Branch for greater geographic coverage Advantages Disadvantages Simple establishment • Does not require approval from MOFCOM -> directly with AIC • No registered capital requirement (assuming parent WFOE’s capital is enough) • Not necessary to open bank account (can use parent WFOE’s one) Limited business scope • Business scope must be within that of the parent WFOE • Cannot import or export (this needs to be done by the parent WFOE) Easy Maintenance • Must register with local Tax Bureau, but only operational branches (i. e. , issuing invoices) must declare (monthly) taxable items from locally produces invoices • Only operation branches need to have their own accounting system and undergo annual audit Not a legal entity • All liabilities are born by the parent WFOE, but can still sign contract www. dezshira. com

Changing Registered Address 1. Update with AIC (various docs to be prepared, including amendment to Ao. A) 2. New tax registration (might be very difficult if moving to a new district/city) Consider carefully: Ø Registered address and actual operational office: must be in the same office Ø Can’t have two companies in the same office – but there is a loophole Ø Landlords are generally problematic and do not follow/know regulations Ø Best to check if business scope is allowed in location first before signing lease Ø Certain building cannot host FIEs Ø Costs, timeframes and disruption to business www. dezshira. com 3. Update with bank

Changing Business Scope Brief paragraph describing the business a company is allowed to conduct Very strictly regulated (e. g. , Catalogue of Industries for Guiding Foreign Investment) Business scope Quite difficult and time-consuming to change www. dezshira. com Reviewed and approved by MOFCOM and AIC (every word will be closely scrutinized)

RO vs. WFOE RO a foot in the door WFOE a real company Investor (no natural person): at least 2 -year old Investor (can be natural person): no aging requirement Easy/fast to setup, no capital requirement Long to setup, require certain registered capital Easy to maintain Higher compliance burden Liaison activities only (market research, networking, etc. ) Wide business scope No legal personality – liabilities traced back to investor Fully legal entity – limited liability Cannot issue invoice & make profit Can issue invoice & make profit Heavily taxed on costs Taxed on profit only (if any) Cannot hire Chinese directly (need to use FESCO) Can hire directly Can hire up to 4 expats No limit on expats Cannot setup branches Can setup branches 2021/3/5 www. dezshira. com 9

Equity Transfer variable 1 week • Negotiation of transfer & asset evaluation • Contract registration with Tax Bureau 10 -13 weeks • Application with MOFCOM 4 -5 weeks • Tax assessment 3 -5 weeks • Application with AIC (new business license) 8 -10 weeks • Amendment of post-license registrations (e. g. , bank) www. dezshira. com

Deregistration “A company which fails to commence operations after twelve months from its incorporation or cease operations for more than twelve months after commencement of operations arbitrarily without any justification shall have its business license revoked by the company registration authorities”. • Lease contract • Liabilities • Employees termination • Assets & inventory • Depreciation • Tax payment status • Any alternative (e. g. , intercompany loan)? Preliminary Legal and Tax Assessment www. dezshira. com Tax Clearance and Liquidation Audit • Preparation of financial statements • Touch-base with tax & customs authorities • Liquidation audit report • Apply for tax clearance • Obtain tax clearance certificate • Liquidation plan • Application with MOFCOM • Appoint liquidation committee • Public announcement • Liquidation of assets • Liquidation report • Deregistration of all certificates • Bank account closure Deregistration of Legal Entity

Manufacturing in PRD: a balancing act FDIs still welcome? Time to market Advanced, integrat ed supply chain Automation and n ew industrial direction + www. dezshira. com Rising costs Skilled labor Labor disputes “new” workforce Competition Political direction - 5, 000 + manufacturing companies relocated from Guangdong to Vietnam from 2011 to 2014

RO/WFOE conversion timeframes

WFOE Setup Timeframe (1) 2021/3/5 www. dezshira. com 14

WFOE Setup Timeframe (2) 2021/3/5 www. dezshira. com 15

RO Deregistration Timeframe 2021/3/5 www. dezshira. com 16

Labor termination

Types of termination • With 30 days notice (ordinary) • Reasons: mutual agreement, employee cannot work due to sickness/injury, employee is incompetent (after training), job cannot be performed due to change in circumstances, expiry of contract, liquidation of business • Written notice 30 days prior to dismissal (or pay an additional month of wage) • Severance payment required: 1 month salary for each year of work capped at 3 times the local average monthly salary • At least 2 warnings (disciplinary measures) should be given before terminating the contract • Immediate termination (for cause) • Reasons: employee misconduct (e. g. , violation of company rules) or employee fail to meet the employment conditions during the probationary period • Takes immediate effect upon receipt of termination notice • No severance payment • Mass lay-off (over 20 people or 10% of total staff) • Reasons: company being restructured under Enterprise Bankruptcy Law, serious difficulties in production/operations; change in production; objective economic situation makes employment impossible • 30 days notice to the staff and labor union (if any), opinion of staff/labor union must be taken into account • Plans for the mass layoff must be reported to the local Labor Bureau • Severance payment required (as above) www. dezshira. com

Mass layoff flowchart www. dezshira. com

Employee termination www. dezshira. com

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