China.s recent law on franchising has clari.ed the obligations of franchisers and franchisees, but the structures open to foreign franchis-ers in China remains unclear, guests at a recent Chamber breakfast seminar in Beijing heard. Discussing how the new regulations, which went into effect in February, play with rules on Foreign- In-vested Commercial Enterprises (FICE), Ralph Vigo Koppitz, Partner at law firm Taylor Wessing.s Shanghai of.ce, said foreign franchisers are expected to oper-ate from a FICE registered in China. Chi-na, however, had committed to lifting all restrictions on multinational franchisors within three years of joining the WTO, Koppitz told the November 8 seminar.
The new law offers legal clarity on the obligations of franchisers and franchisees in China, said Koppitz, who suggested the main advantage of franchises over tra-ditional subsidiaries is the lower capital requirements. Franchisers entering China must .rst have two directly operated out-lets here for at least a year before fran-chising. Among the business structures open to franchisers, explained Koppitz, are the traditional franchising approach and a regional franchising model that allows the franchiser to franchise to re-gional subfranchisees who in turn could franchise the brand further. Less certain, however, was whether a franchiser could operate as an offshore entity and collect fees directly from franchisees in China. And while there have been improvements in enforcement of IPR protection for franchiser.s brands, getting reliable credit information on potential franchisees will remain dif.cult.
The new law has made things easier by allowing franchisers to enter China di-rectly, said Dominick Morizio, Franchise Development Director for Greater China at Yum! Restaurants. The company, which has opened 1,500 stores across China since 1987, operates its KFC brand on a refranchising model worldwide, with the firm establishing restaurants and transfer-ring them after 18 months to franchisees screened and trained by Yum!
China.s economic growth, said Morizio, means more sales but also a greater pool of franchisees and more outlets in two-tier cities. Demand for franchises is strong among Chinese busi-nesspeople, "cusually because they want to learn more about management." Future development is the best leverage to hold franchisees to brand standards. "They always want to have more than one restaurant." Choosing the right people as franchisees is paramount, cautioned Morizio. "Franchising is operating the brand... It has to be seamless." The Yum! executive predicted "huge potential" for fast food franchising in China but more competition is expected, he added, noting that UK-owned Burger King has recently opened two outlets in Shanghai.
A New Generation
Director General Schaub lays out plans for regulatory dialogue at Chamber dinner
By Jody Braverman --------
The European Chamber welcomed Alexander Schaub, Director Gen-eral of Directorate Generale Inter-nal Market of the European Commission, at a dinner held in his honor at the So.tel hotel in Shanghai on October 26. Guests included Chamber members and VIPs from the European business community. Schaub kicked off the dinner with a short speech about his reasons for coming to Shanghai and his plans for making con-tacts within the government.
Among the reasons Schaub gave for his visit to China, most important was the ambition to launch a regulatory dia-logue between China and the EU. This dialogue, he hopes, will create a more open relationship to .t in with what he referred to as the new "Global system," under which the EU must take into ac-count how rulemaking in Europe affects important trade partners like China. "You cannot do a decent job in the Euro market if you only look inside," he said. “Before we introduce new rules in Europe, we need to check what this means for our main partners. Are our new legislations compatible with our global partners?" He continued, "the charm of this [regu-latory dialogue] is we can anticipate dra-ma and avoid it." The .rst dialogue will focus on the .nancial services sector; subsequent dialogues will explore areas of intellectual property rights and public procurement.
Schaub's Shanghai visit was his .rst since 1982, and he commented on the re-markable change. "the Shanghai I saw in 1982 I can't rediscover," he said. "the people in '82 at top of state were older, venerable personalities. In European terms, they were already at an .advanced age.'" Schaub said that he is impressed with what he sees as "a really rejuvenated China" and "a new generation" of govern-ment of.cials and decision makers.
A dinner followed the speech, dur-ing which active round table discussions focused on IPR, procurement and the .nancial sector, among other important issues.
Changing Face
SME seminar hears tips on switching from representative of.ce to JV or WFOE
By Mark Godfrey --------
Organized by the Chamber's SME Working Group, an Oc-tober 25 seminar in Beijing heard the legal and tax implications of turning a representative of.ce into a joint venture (JV) or wholly foreign-owned enterprise (WFOE). Peter Thorp, Managing Partner at law firm Allen & Overy, described how WFOEs are now the most popular option for foreign in-vestors - 65 percent of foreign investors opted for WFOEs in 2004. But poten-tial investors should beware that certain industries remain restricted to foreign investors. While moving from a repre-sentative of.ce to a JV or WFOE allows firms to "Conduct real business," said Thorp, careful dealings with Chinese authorities and partners are essential on issues such as land use certi.cates.
Firms can keep their representative of.ce open while switching to a WFOE, Thorp stressed. While the process of closing an of.ce looks simple - “…you submit the application 30 days before the planned closing to the local Administra-tion of Industry & Commerce" - inves-tors should be ready for obstacles such as tax audits. Keeping on good terms with local authorities is useful, said Thorp.
Closing a WFOE is easier than shut-ting a JV, said Thorp, but investors switching from a representative of.ce to a JV need to devise suitable exit strat-egies for later. Since it can be very dif-.cult to demonstrate to local authorities that a joint venture has no future, inves-tors ought to insert into the contract the right to review the JV periodically, giv-ing the foreign partner the right to exit. “But beware that this cuts both ways, a foreign partner could be cut out of a pro.table JV," warned Thorp, who sug-gested investors should get Chinese partners to agree to foreign-based arbi-tration in the case of dif.culties. Inves-tors would also do well to look at the option of investing indirectly, through offshore locations such as the Cayman Islands, said Thorp.
Stressing the relative dif.culties of closing a representative of.ce in China, Gwennie Chen, Senior Tax Manager at PricewaterhouseCoopers advised inves-tors to inform the Administration of In-dustry and Commerce and local as well as state tax authorities upon deciding a closing date. While the state tax bureau collects Foreign Enterprise Income Tax (FEIT), local tax of.ces have to be satis-.ed that all business, individual and stamp tax payments are complete. It is essential, said Chen, to carefully comb records to avoid penalties. “Be prepared for running around between of.ces and individual tax of.cials," she warned. Investors who un-derpay taxes should approach the bureau on a voluntary basis to seek a settlement, advised Chen.
Powering On
Changing the oil supply and forming environmental partnerships are part-and-parcel of China's new energy policy
By Alex Monro --------
On November 15, the Chamber held a breakfast seminar on en-ergy issues at the So.tel Hyland hotel in Shanghai.
David Stanway, Shanghai Editor of Russia-based news agency Interfax, spoke on China's oil needs. Consumption last year was 288 million tons, he said, but Sinopec predicts a hike to 350 million tons by 2010.
China's imported oil currently has to pass through the Malacca straits. For ten years, China banked on a Siberian pipe-line but after that project fell apart, they began to pursue diversi.cation.
"the crucial point is that China no lon-ger wants to be dependent on the Middle East," said Stanway, "So they are vying with western powers in these regions." Their long-term plan is the pan-Asian pipeline which, in theory, will connect Iran to China via Kazakhstan.”
Stanway said that China had suffered failures in Central Asia, notably in its bid for Kashagan oil.eld in Kazakhstan, but said that it was making good progress.
Mr Cecchini, from Italy's Ministry for the Environment and Territory, spoke on a Sino-Italian cooperative program estab-lished to monitor the quality of the envi-ronment, sustain agriculture and reduce greenhouse gas emissions.
He argued for China's development of hydrogen power, saying it was too reliant on coal, and short of oil. The program had provided fuel cell cars, by-wire mini cars, mobile refueling stations, and fuel buses and stations - a wind-power project was underway. There would be a hydrogen exhibition and a fuel cell power station on display at Shanghai's 2010 Expo, he said.
Dr Winkler of Ecobuild, Shanghai, spoke about energy ef.ciency in construc-tion. He cited .sick building syndrome' - buildings emitting radiation after they ab-sorb the sun's heat. Suf.cient insulation, sun-shaded windows and a central air con-ditioning system were his answer. Several eco-buildings, including two in Pudong, will showcase in Shanghai in 2006.
Taxing Business
Chamberfs Trade and Distribution Working Group addresses regulatory and tax changes in Waigaoqiao
By Alex Monro --------
On October 26, more than 150 EU business people gathered at the Jing.an Hilton for a breakfast seminar called "New developments in Waigaoqiao" . the bonded free trade zone 20 kilometers north of central Shanghai, which opened in 1990.
The event was a meeting of the Cham-ber.s Trade and Distribution Working Group, which represents the interests of more than 140 EU companies . the group pays particular attention to China.s imple-mentation of its WTO commitments.
Martin Ng, KPMG Shanghai.s senior tax manager, explored the tax implica-tions of new regulations on trading opera-tions in Waigaoqiao. Ng highlighted the July 2005 law that allowed foreign in-vestors to set up FICEs (foreign-invested commercial enterprises) in China.s 16 free trade zones. He said that in the past "goods need[ed] to have left China to get the tax rebate," and logistics parks had of-fered the only loophole. "The new 5-year plan may provide alternative means," said Ng. "Pudong will issue [its plan] .rst, then Waigaoqiao, but you can choose the best one."
Simon Tan of Deloitte Consulting spoke on tax-ef.cient distribution mod-els. He said full distributors (FDs) prof-ited from transferring expenses like ad-vertising and promotion to their Chinese intermediary, but risked high start-up losses and, later, mainland taxation. For FDs with start-up costs and those with offshore IP ownership, there were other worries: "If you expect two years-plus losses c prepare documentation to per-suade the tax authorities from the trans-fer-pricing perspective," said Tan.
For limited risk distributorships, fewer assets are at risk and a tax audit is less likely because you are pro.table through-out and your IP properties remain outside China, said Tan. Yet you must pay Chinese taxes . perhaps even a 5 percent business costs tax. Tan also explored the risks in converting from full to limited, "Explain to the tax authorities that you are transfer-ring some risk overseas, therefore you are naturally seeing fewer Chinese pro.ts."
An active Q&A session followed, but many questions must wait on publication of the 5-year plans of Waigaoqiao and Pudong later this year.
