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TRANSCRIPT
Franchising and Distribution-
China
Operational Issues and Exiting China
Michael Brennan, DLA Piper, Chicago
Richard Wageman and Belinda Tang, DLA Piper, Beijing
January 7, 2015
Presenters
Michael Brennan, Partner Chicago
Richard Wageman, Partner Beijing
Belinda Tang, Senior Associate Beijing
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Operational Issues
Document Retention/Organization and Annual Reviews/Filings
Employment Issues
Data Protection Internal Protocols
Management of China Franchisees
Tax Issues
Trademark Protection Issues
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Document Preparation/Retention
/Organization and Annual Review/Filings
Important to document directors/legal representative actions
as required by Articles of Association to avoid evidentiary
issues in Chinese courts if disputes arise
Companies should have a defined protocol for use of the
company chop (seal) as affixing the chop to a document
creates legal obligations
Documents should be very well organized and retained in
accordance with China documentation retention regulations
With the increase focus on tax audits good document
management can save a company time and money
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Document Preparation/Retention
/Organization and Annual Review/Filings
Annual Review
Conducted annually but recent change in law changes review from
a detailed on site inspection to an online annual inspection through
the Administration of Industry and Commerce ("AIC") system
Can obtain inspection approval from online system rather than
having business license sealed (chopped) by AIC
Annual inspection period : March 1 to June 30
Joint annual inspection with MOFCOM: January 1 to April 30
Corporation income tax clearance by the local Tax Bureau:
January 1 to May 31
Foreign Exchange Bureau: before June 30
Regional government and industry specific agencies may have
additional local reviews-need to become aware of such annual
inspects/reviews
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Employment Issues
Big Picture: No Employment-at-Will
• Written employment contract with required information is required;
• Employer cannot determine terms and conditions to avoid its
statutory obligations, such as probation period, contract term, notice
period, overtime, etc.
• Change to terms and conditions of employment contract is subject
to employee's consent.
• Statutory grounds for termination (the only lawful causes for
unilateral terminations)
• Trade union involvement in establishing/revising internal policies,
lay-offs, collective negotiations on compensation and benefits, etc.
• Labor litigation/arbitration common, e.g. for reinstatement of
employment, overtime, etc.; no cost for employees and burden of
proof is on employer.
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Data Protection Protocols
What information should be protected and of concern in China
(e.g. employees' information, consumers' information)?
What are the key steps to protect data or personal information
in China?
Determine collection approaches
Determine disclosure scope, both internal and external
Determine the legal documents required
Determine the retention format and term
Localize data policy and related documents in China.
Where will the data center be located?
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Management of China Franchisee
Issues
Franchisees in China for most part inexperienced with
franchise concept/good practices.
Training programs need to be more robust for China
franchisees
Control subfranchise document preparation as China
master franchisee will normally use very simple/basic
franchise documentation
Important to have a higher number of onsite inspections
and training sessions
React quickly and directly if franchisee has problems
Having a secure supply chain in place is critical to
success
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Tax Issues
Cross Border Franchising
Potential PE risks associated with any expatriates dispatched to
work in China and the activities of foreign franchisor's agent in
China
Tax implications of the franchise fees obtained from Chinese
franchisees
Tax implications if a consulting WFOE structure is used by
franchisor
Tax concerns under onshore franchising
Turnover tax and income tax applicable to franchise fees and
consulting service fees derived by Chinese franchisor
Withholding taxes on the outbound payment of license fees to
foreign IP owner
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Tax Issues
Cross-border supply of materials
Customs duty and import VAT for imported goods
Dutiable value assessment
Transfer pricing
Related party definition
What constitutes related party transactions
Mandatory annual reporting requirements
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Trademark Protection
Protocols/Issues
First-to-file trademark system
Protection scope
be creative
defensive filings
Chinese marks
Trademark license
monitor your licensees' TM filings
cooperate with licensees against infringers
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Exiting China
Legal basis for shutting down a foreign invested enterprise:
WFOE
Joint Venture
Procedures
Timeline
Pre-approval
Liquidation process
Issues
Practical issues during the liquidation process
HR considerations
Creditor issues
Financial audit requirements
Document retention
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Exiting China-Legal Basis to Shut
Down Foreign Invested Enterprise
Voluntary Exit-Authority comes from Articles of Association
Involuntary Exit-PRC Bankruptcy Law
WFOE Exit
Control over the process by the offshore investor(s)
Needs to be well planned to proceed efficiently
If funds needed to satisfy creditors, funds can be easily provided
by investor
Joint Venture Exit
Need unanimous approval if the process is to go smoothly
Usually joint venture contract deals with priority to assets between
the joint venture partners
Can be very time consuming and expensive
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Exiting China-Procedures (using
Shanghai as an example)
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Step 1: Pre-approval by the MOFCOM
A. Key documents
i. Employees' Settlement Plan (compensation to be paid to employees
needs to be detailed)
ii. Shareholder Resolutions (board resolutions may be also required
according to Articles of Association or local practices in some cases)
iii. Copy of the Latest Verification Report of the Registered Capital
iv. Copy of the Latest Annual Audit Report (if close to year end, the financial
report of the latest month)
B. Time period:
I. 10-20 business days after filing for pre-approval
II. Company must pay all current tax payments and employee payments
III. If the company operation is large/well-known brand, this process may
take longer as MOFCOM may encourage company to continue
Exiting China-Procedures (using
Shanghai as an example)
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Step 2: Liquidation Team Recordal with the AIC
A. Shareholder(s) to establish liquidation committee.
Number of committee members – not specified in PRC Company Law and the
requirement varies in different areas; in Shanghai, normally 3 liquidation committee
members are required.
Composition – any person(s) designated by shareholder(s); normally
the legal representative is the head of the committee;
Function and power
to examine the property of the company and prepare a balance sheet and
property list;
to notify creditors by notice or announcement;
to dispose of and liquidate assets and to complete unfinished business of
the company;
to pay all outstanding taxes and taxes incurred in the course of liquidation;
to clear up claims and debts;
to dispose of the property remaining after full payment of the company's
debts;
to participate in civil litigation activities on behalf of the company.
Exiting China-Procedures (using
Shanghai as an example)
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Step 3: Notify creditors and newspaper announcement (to
notify the creditors who cannot be reached)
An announcement period of no less than 45 days is required
Step 4: Accounting Firm Issues An Audit Report
The audit report shall be issued at least 45 days after newspaper
announcement
Step 5: Tax De-registration
The tax deregistration is the most complicated part in the de-
registration process and the time period varies very much from case
to case. The normal course is around 3-6 months, but for some
companies it can be as long as two years if there are tax issues.
Exiting China-Procedures (using
Shanghai as an example)
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Procedures-Additional Required National Procedures
(Example-Shanghai/Steps 6-15 may have some local variations:
Steps Authority Items Time Period
Estimation
Step 6 Economy and Trading Bureau Deregistration with Import and
Export Registration 5 business days
Step 7 Entry-Exit Inspection and
Quarantine Bureau Deregistration with CIQ
Registration 5 business days
Step 8 Financial Bureau Deregistration of Financial
Certificate 5 business days
Step 9 Customs Deregistration with Customs 10 business days
Step 10 Foreign Exchange Bureau Foreign Exchange Deregistration 5 business days
Step 11 Bank (s) Close Bank Account 10-30 business days
Step 12 MOFCOM Cancel Approval Certificate 5 business days
Step 13 AIC Deregistration with AIC 5 business days
Step 14 Bureau of Quality and
Technical Supervision Organization Code Deregistration 1 business day
Step 15 Statistics Bureau Statistics Deregistration 1 business day
Exiting China- Issues
Practical approach to some issues that arise during the
liquidation process
change of director
tax verification
corporate records
HR considerations
mutual termination with employees
additional severance requirements
Creditor issues
Financial audit requirements
Document retention
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Franchise Operational Issues and
Exiting China
Thank You
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Franchise and Distribution in China
Michael G. Brennan
Partner-Chicago
203 North LaSalle Street
Suite 1900
Chicago, IL 60601-1293
Phone: 312.368.4000
Fax: 312.236.7516
Richard L. Wageman
Partner-Beijing
and
Belinda Tang
Senior Associate-Beijing
20th Florr, South Tower, Beijing Kerry Center
No. 1, Guanghua Road, Beijing, PRC
Phone: 86 10 8520 0600
Fax: 86 10 8520 0700
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