China Law and Tax – Myriad Issues, a Multitude of Innovations
Chris Devonshire-Ellis began Dezan Shira & Associates before China’s legal services industry was codified, and when business and foreign investment laws were rudimentary. The practice is now a multinational business with 17 Asian and 2 liaison offices spread across 6 countries. This episode deals with some of the more innovative solutions the practice has dealt with when dealing with investments into China.
Op-Ed Commentary: Chris Devonshire-Ellis
Jun. 15 – While Dezan Shira & Associates certainly had humble beginnings, our concentration on foreign direct investment enabled the practice to develop sensibilities that foreign businesses alone possess when investing into China. In my view, spreading the practice too far by also going after domestic clients – regardless of the huge amounts of potential business out there – was going to interfere with receivables issues (as discussed here) and would diminish our focus on solving the problems of foreign investors. However, dealing with foreign investors in China can be complicated and adds additional layers of competency – and this costs more money. For example, all of our Chinese staff must speak and write fluent English – an educational bonus that adds another 30 percent on top of standard salaries. Several also speak additional languages such as German, Spanish, French and so on – Dezan Shira & Associates has always been a multilingual practice. For example, we also publish China Briefing in Spanish, French, German, and Italian.
Along with that has been the hiring of many expatriate lawyers and accountants – our China headcount today includes expatriate legal and tax staff from America, Australia, Britain, Canada, France, Germany and Italy, in addition to the several hundred bilingual Chinese staff we employ. Both attracting and maintaining that talent base over the years has proved beneficial and has ensured that we remain at the forefront of some of the most innovative solutions to legal structuring, deal making and tax planning for foreign investors in China.
For example, we were one of the first firms in China to completely restructure a foreign investment in China with multiple entities – mergers elsewhere in Europe had caused a large Belgian diamond drill manufacturer to end up with four separate operations across different Chinese cities, with differing legal structures and with differing tax breaks. At the time, their operations in Xiamen (an RO), Shanghai (one RO, one WFOE) and Changchun (WFOE) were to be merged into one brand-new WFOE in Xiamen. Dealing with differing tax issues, movement of HR, movement of already-imported equipment, and getting that injected into the new investment and so on – this was ground breaking work and not many mergers of that type had occurred before. We recently revisited these issues in the current issue of China Briefing concerning relocating a business in China.
Another example was when the chief representative of Germany’s largest pharmaceutical company came to see me – they wanted a 17 office sales structure in place in just three months. Could we deliver? We could, and 17 offices were duly established – all by our own staff and with none of the subcontracting that has regrettably become so prevalent today – from Gansu to Kunming, Taiyuan to Wuhan, and way beyond.
The firm was also involved in what, at the time, was probably one of the more complex projects we had ever handled – the first ever purchase of bankrupt Chinese assets by a foreign company at auction. One of America’s largest poultry farms was the client, and the target acquisition a bankrupt slaughterhouse in Anhui. It had never been done before, and even items such as lodging a bid in cash in China, while getting SAFE approval to withdraw the money if it failed, took some considerable work and effort to satisfy. Procedurally, the system wasn’t fully in place at the time to completely protect the client – but we got it done after months of work and effort.
We were also responsible for the complete tidying up of a large wine importing business in China prior to their acquisition by a large European quality goods manufacturer. Like many entrepreneurial and organically-grown companies, the client needed some structuring along more corporate lines and that was provided – the sale then going through and making the owners very wealthy men indeed. We were also responsible for the due diligence, among many others, of Cyrille Eltschinger’s IT United prior to their multi-million dollar acquisition by Softtek.
But not all the many deals we have been involved with went through. I recall a proposed joint venture project between one of Italy’s largest auto manufacturers and FAW in Changchun, where along with our client’s finance director, we just could not make a business case out of the demands FAW put on the table. There just wasn’t money in it for the Italian foreign partner, and FAW wouldn’t budge. We walked away from that, and the financial director sent me Christmas cards for several years after that in full knowledge that if the deal had gone through – it would have ended up costing them a lot of money. I wish a lot more managing directors were so savvy when it comes to China investments. I once had the managing director of a medium-sized listed U.S. corporation tell me to stop going on about due diligence on his proposed China JV partners as he had experience with that in a previous investment in Haiti and didn’t need my advice. We didn’t get the job to assist them and the JV lasted a year before going broke. Sometimes, even though it would have been in our best interests to approve the deal (more billing for legal services work in relation to the JV establishment and so on), it pays to be honest. We’ve never encouraged clients to get into China deals where it is obvious there are untenable risks. I’d rather be poor on the back of a bicycle than crying on the phone to an angry client!
There have been many stories and many clients over the years. Possibly one of the more intriguing being when a famous upmarket diamond jewelry house’s China director came to see me over a problem with millions of dollars’ worth of diamonds stuck in a bonded warehouse and subject to a dispute over customs. “We could pay you in diamonds!” he jokingly suggested. Much to the eternal shame of my romantic side, I insisted on RMB invoicing, a much less glamorous method of payment.
In fact, Dezan Shira & Associates’ foreign-invested clients in China currently touch almost every sector of daily life in the country. From flying into the country (aircraft bodies and engines) to arriving at the airport (we did a lot of work with contractors in China at both Beijing Capital Airport and Shanghai Pudong Airport), getting luggage (baggage handling equipment), hiring a taxi (various auto brands) and putting the gas in it (several oil processing companies and refiners), paying for the ride (one of our clients makes the green/red crystals in RMB banknotes) to checking in the hotel (numerous clients) to eating at restaurants (some of Shanghai and Beijing’s most upscale restaurateurs, as well as a certain global fast food brand of restaurants, and many many others). Shopping for luxury items (many Italian and French brands have been and remain retail clients of ours, as well as a famous American jeans brand) and, of course, all the nuts and bolts that make daily life go around. Placing a call on your mobile? That goes through base stations set up by one of our clients. Eco-friendly green energy? Wind turbine farms. Want a cigar? Cuban cigar manufacturers. And so on.
None of this would have been possible without of course Dezan Shira & Associates’ excellent legal, tax and auditing staff. My role has merely been to hire them, give them a decent working environment and legal structure to base that on, provide direction, and step aside to let them do their jobs. To conclude, it’s rather more their hard work than mine, but I can provide a few more tips for business development:
- Provide a decent work environment with artwork, plants and decent, airy offices. Employees have to spend hours there so make it pleasant for them.
- If you want to conduct global business properly, you need multi-lingual staff.
- Hire staff that can do the job better than you can.
- Don’t over-manage. Let them get on with their work while maintaining a discreet eye on the quality and the security of it.
- Invest in IT. It is no longer possible to run a business in China with dubious licenses, pirated software and dodgy servers. You must spend money on securing your business platform. Our firm has just committed a tremendous amount of money on IT for the next three years. It is an investment into the business. As a guideline, if you’re spending less than 5 percent of your turnover on IT then you’re not spending enough.
- Invest in marketing. Online and social media is not enough, there are other channels. An appropriate figure is also about 5 percent of revenues.
- Don’t just stick to one local market. By that I mean in China, if you’re say German (for example), don’t just stick to the German business community for income. If their economy tanks – and Europe isn’t too clever at present – you’re fully exposed. Dezan Shira & Associates has several thousand clients from over 100 countries. Our country risk is spread wide.
- Don’t just focus on China. Growth is happening elsewhere in Asia as well. I wrote about the shortcomings of concentrating purely on China here.
- If you’re going to use consultants for China advice, make sure they really have a presence in the country. Many online-based firms who market themselves do not have a China office and are cagey about their real status (if this is the case, it’ll be sub-contracted, meaning you’re just paying for a middle man).
- Many people will tell you “it can’t be done” or try and ridicule or knock your business plan or development. Don’t let them. If you believe your project or development plan can succeed, you’re probably right. Gut feelings matter. But be sure to talk to experienced people who can help you knock your concept into shape and help you with how to get there. Both myself personally, as well as my colleagues, are always happy to assist with getting the ball rolling over a friendly chat or email.
Chris Devonshire-Ellis is the founding partner and principal of Dezan Shira & Associates, and established the firm in 1992. Since then, Dezan Shira & Associates has grown into one of Asia’s most versatile full-service consultancies with offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States. Chris regularly contributes to China Briefing as well as our associated titles India Briefing and 2point6billion.com. The firm celebrates its 20th anniversary in November this year and will be hosting a series of commemorative events for clients and friends of the firm across China.
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