standard Monthly Q & A – Richard Cant

Every month, Regional Director of Ningbo and Shanghai offices of Dezan Shira & Associates Richard Cant answers your China business questions. Have a question of your own? Send an email to ningbo@dezshira.com

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Dear Richard,

I am the director of a medical device company in the U.S. and I am looking to further expand and invest in the medical device industry in China. What is the most viable way to go about doing this given the current industry climate?

There are a few options for you when looking to invest in this industry.. China relies heavily on foreign imports for its medical supplies and devices, this is especially true for high-tech, high- price items, for which the U.S. serves as a major exporter. However the imports of mid-to-high end products have decreased in recent years, due to foreign companies moving their production plants to China. This is commonly attributed to the high entry barriers for the higher- end medical device market. Therefore faced with lack of financing, many firms are unable or unwilling to make investments necessary for moving into the higher ranges of the market.

In China, there is also a general perception that foreign products are of better quality and worth paying a premium for. Thus, imported devices are graced with higher brand recognition. Even public hospitals would rather purchase foreign products over locally produced products. This trend has recently led the China National Health and Family Planning Commission to announce the launch of a policy favoring local producers of medical devices. The policy includes a list of locally produced medical devices that are to be given preferential treatment by public hospitals. This new policy targets the larger “Tier-3” hospitals to up their procurement of locally produced devices. Since these larger hospitals also frequently purchase for smaller hospitals, foreigners in the medical device industry may want to look into a different business model than just a purely distribution-based approach to the Chinese market.

Dear Richard,

I own a business consultancy which is mainly based Singapore. I am looking to deregister our office in Shanghai, but I haven’t had the company audited. Is this a necessary step before closing my representative office?

Yes it is, without auditing, a registered office (RO) may not be able to close its doors. This is because the State Administration of Tax keeps a close eye on the activities of RO’s, and is especially concerned to ensure that prior to closure they have satisfied all on- going expenses, taxes due, salaries and welfare payments, including any compensation payments due as part of the closure. Once complete, the audit can be submitted to the local Chinese tax authorities and other interested government agencies. If the RO is not closed, financially responsibility will continue to rest on the foreign investor until the audit is complete and the closure ratified. Failure to do so, and just ‘walking away’ can result in the legally responsible person being banned from investment in China. Fortunately, conducting the audit is relatively easy.

Dear Richard,

I am running a mid-tier engineering company in Australia and I am looking to set up a company in China. What are my options for renting an office space?

In fast-paced Asian markets like China serviced offices (also known as “executive suites”) may be a more suitable option for expanding a company to China. They are rentable office spaces that come fully furnished and equipped with technology and service amenities. For example, a premium serviced office in China might provide tenants with secretarial services, state-of-the-art IT infrastructure and conference space. Not only does this make it slightly less of a hassle, leases can be signed for terms as short as one month with significantly reduced deposits and virtually no fit- out costs for incoming tenants. A number of staffing costs are also eliminated by the use of serviced offices, including those incurred by reception, IT, and HR functions.

The downsides of serviced offices, while existent, can largely be mitigated through advanced planning. Additional fees, for example, are often charged on a pay-per-use basis, such as for conference rooms and other amenities. For this reason, if you can estimate your need ahead of time to determine whether a serviced office will be the most economical option.

While a traditional lease may be better suited for any long-term investment in the country, the flexibility of serviced offices makes them much less committal than even the most basic of China investment vehicles, a representative office.

Dear Richard,

I own a branding consultancy in Ningbo I am looking at taking on local interns in my design department, what are the laws on this in China and how would I go about doing this?

Only students who have not yet obtained their graduation certificate can enter into an internship agreement with a company. In the case on an internship, no employment relationship is constituted, nor does the Labor Contract Law apply; thus it is unnecessary for an employer to sign a labor contract with a student. However, employers are strongly recommended to sign an internship agreement with their Chinese interns to clarify the issues such as confidentiality, the intern’s obligations and terms of payment.

The company is not to be regarded as an employer and therefore does not assume the relevant liabilities of one. Therefore as the Labor Contract Law does not apply, minimum wage standards are not applicable to interns. It is suggested to explicitly clarify that payments to interns are an allowance and not a salary.

These exceptions cease to apply after the intern graduates and the relationship is now considered an employment relationship and covered by Labor Contract Law.

The answers to your questions on foreign investment in China are provided by Richard Cant, Regional Director of the Shanghai and Ningbo offices of Dezan Shira & Associates. Although this information is considered accurate as of the time of writing, it is not to be construed as legal, tax, or financial advice. To ask Richard a question about setting up or running a business in China, please email Ningbo@dezshira.com.

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