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Be cautious approaching Chinese market

|Written By kirsten McMahon
There''s no question China is the hottest market in the world right now for commodities and services, but a slow, cautious approach should be taken before jumping into business there.
Wilfred Tsui says setting up shop in Hong Kong first helps ease companies into doing business with mainland China.
Of course, wherever there is opportunity for joint ventures, foreign-owned companies, and licensing, there is plenty of work generated for corporate counsel.

However, along with this growth and opportunity come tricky tax laws and banking systems, cultural and language barriers, different legal systems, and even a different fee structures.

Before one dips one's toes into business in mainland China, Hong Kong lawyer Wilfred Tsui of Gallant Y.T. Ho & Co. recommends using Hong Kong as a corporate centre and port.

Tsui was part of a panel on doing business in China at a recent Meritas conference held in Toronto. Meritas is an international alliance of small to medium-sized commercial law firms in 60 countries.

"I've been to going to China for 20 years," says Dennis Unkovic of Pittsburgh's Meyer Unkovic & Scott LLP. "My very brief story is that the first time I went to China I was brilliant. When I came back I understood the Chinese people, I understood Chinese business, and I knew I couldn't make a mistake.

"In my 25 trips since then I've become increasingly more stupid. So every time I go to China I really understand that I know nothing. China is an enormously interesting, complex place in which to do business."

He says a huge number of Western companies have gone to China in the last 20 years. Until about five years ago, most of them lost money, but there's been an evolution in the acceptance of the Chinese dealing with the West.

"I guess we all know China is perhaps the most talked about nation among the business and legal communities," says Beijing lawyer Felicia Chao of Beacon Law Firm. "The economy has grown at a very dramatic pace in the past seven years or so with GDP growth at 10 per cent a year, and the volume of trade has also expanded."

It's little wonder that companies are chomping at the bit to get into China, especially when you take into account its tax holidays of two to five years and tax refunds that could be as high as 100 per cent if you are operating, for example, a high-tech import/export business.

Tsui says that Hong Kong can act as a springboard into the mainland, and also has some enticing features of its own, including a high degree of autonomy, a common law system, English as one of the official languages, no restriction on foreign investment, and a 17.5-per-cent profit tax.

"I think one of the advantages of doing business in Hong Kong is that we charge only income sourced in Hong Kong. So when you establish a company in Hong Kong but you are going to use that company to business in China and you earn a profit in China and you remit the dividends or the income or the profit out of China to Hong Kong, in general, it is not chargeable," Tsui explains.

Hong Kong can also act as buffer, Tsui says, because the liability of shareholders in a China-foreign joint venture is still ambiguous. You can avoid these claims by going through a corporate structure that is based in Hong Kong, he says.

As well, he says in his experience Chinese partners are more comfortable dealing with a Hong Kong company.

Unkovic says that no matter where you decide to set up shop, it's very important to find a suitable local person to join the company, which will help with the integration into a new market.

"I think it's a mistake to take a foreign expat and set them down in either China or Hong Kong and expect that they are in fact going to run your joint venture," says Unkovic.

"I think the best thing to do once you've gone through the steps . . . you need to find a quality Chinese person to become part of your staff, and the understanding of the culture really comes through that man or woman in China who is working for you."
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