Looking to do business with a Chinese company?

Looking to do business with a Indian company?

Want to know whether that foreign company is worthy of your business and your trust?

Solution : Due Diligence

Why Due Diligence is critical :

• The significant value involved in buying a business both in time and money
• The quality of financial information can vary significantly
• The brevity of information provided in the negotiation phase of the sale & purchase transaction

Our Commercial due diligence services allow corporate clients to make confident business decisions before dealing with country party :

• We conduct deep due diligence into 1) market segments, 2) organizations, and 3) key individuals in China, Hong Kong and India
• Our methods rely heavily on fieldwork in addition to open source research
• Our due diligence investigations cover strategic, commercial, financial and operational issues
• Our deliverables answer key strategic questions such as whether to acquire a company or enter into a business relationship with an organization or individual

We offer due diligence support in the following situations:

Due diligence in connection with investments:

• Acquisition due diligence
• Joint venture partner due diligence
• Private equity due diligence
• Vendor due diligence

When a foreign investor chooses to enter the China market, they will first need to decide whether to launch their business by establishing a legal entity with a capital investment in China or to start more cautiously by testing the market, building networks and/or hiring local representatives.

If a legal entity is the preferred route, the foreign investor will have to consider, in addition to the general commercial and strategic considerations: the business sector, the amount to be invested and whether a Chinese partner is desirable or even mandatory. Government rules for specific industries may affect the size and form of the investment. For instance, media, automotive and telecom industries are all industries that may require foreign invested enterprises to have local partners.

Representative Office (RO)
A Representative Office (RO) can represent the interests of a foreign investor by acting as a liaison office for the parent company. ROs can conduct market research, develop partnerships and business channels and, since they do not have a minimum investment requirement, ROs are not considered to be a Foreign Invested Enterprise (FIE). ROs are the least complicated way for a foreign firm to have a legal presence in China and were, at one time, the first choice for foreign companies with little or no previous experience in the country. However all business transactions, including the issuance of invoices, must be managed by the parent company and ROs can only hire a maximum of four foreign employees. Any local employees must be hired through government-authorised employment agencies. ROs are usually taxed on a proportion of gross monthly expenses. Given the restrictions on transactions, employment and the taxation on expenses, WFOEs are generally now considered a better option for entrants seeking to develop their business in the China market.

Wholly Foreign Owned Enterprise (WFOE)
A WFOE is a limited liability company (LLC) that is fully invested by one or more foreign investors. Along with the rights afforded to a RO, a WFOE may also legally conduct business transactions within China and hire local employees on its own accord. However, foreign investors do have to make an investment into the company and, depending upon the business activity, there may be a minimum capital requirement. WFOEs have begun to outpace joint ventures as the most popular vehicle for a China presence.

Joint Ventures (JVs)
There are two types of joint venture structure in the China market:

• Equity Joint Venture (EJV) – EJVs have capital investments from both local and foreign firms. The percentage of the capital investment determines the amount of profit and risk that both the foreign and local company assumes. Foreign firms entering business sectors where WFOEs are prohibited often use EJVs, although this is becoming less prevalent as more and more sectors are being opened up to WFOEs.
• Cooperative Joint Venture (CJV) – CJVs are also partnerships with a local company; however, the amount of risk and profit shared by each party is not determined by capital investment but is agreed upon at the beginning of the partnership. CJVs were used more frequently in the 1990s when the Chinese economy was not as developed. International companies often injected funds, while local Chinese companies provided equipment and other necessities. Laws, regulations and procedures for establishment can vary substantially between sectors. The common risks associated with entering into partnerships also apply in China but this is often exacerbated by disparities in the culture and business practices between the foreign and local partners. Foreign companies should enter into JVs only when both parties have established a clear understanding of the business objectives and appropriate exit strategies have been developed.

Mergers and Acquisitions (M&A)
M&A has become an increasingly popular route to invest in China in recent years. There are many options for M&A in China, including equity and asset acquisitions, as well as mergers. As a form of foreign direct investment, the general rules on establishment of FIEs also apply to any M&A.

A business plan is a formal statement of business goals, reasons they are attainable, and plans for reaching them. It may also contain background information about the organization or team attempting to reach those goals. A business plan is also a road map that provides directions so a business can plan its future and helps it avoid bumps in the road. Effective business planning can be the key to your success. A business plan can help you secure finance, prioritise your efforts and evaluate opportunities.

Market Entry
A market entry study is the first recommended step when looking to start business in China or Hong Kong. At this stage we can help our clients to provide following sector specific services:

• Market research and market analysis;

• Individual preparatory consultations;
• Customs information and service;
• Trade show participation preparation, support, and follow-up;
• Preparation of business trips and company visits.

Business Strategy
In any business venture it is important that you figure out what you want. Having a clear strategy which defines what you expect of your adventure in China/Hong Kong makes every step you take easier. Besides the standard reasons to write a business plan or perform a thorough market feasibility study it is especially important in negotiations with Counter party. Knowing what you want is the difference between success and failure when looking to start business in foreign country. Our team at has the extensive knowledge and experience needed to do so, and therefore we are able to assist our clients to successfully plan and expand their business operation in China or Hong Kong.

At this stage our team will guide you on following important things :

Company Structure

• Organizational Structure (Directors, Managers and other senior level staff)
• Local Partner Sourcing and Selection

Physical Set-up
Our team will help you to select office premises and we will assist you in lease rent agreements or sale deed for outright purchase of office premises.

Company Registration
CTS offer a full range of consulting and services on the establishment, changing or closing of Wholly-Foreign Owned Enterprises (WFOE or WOFE), Pvt. Ltd. or Public Ltd or Joint Ventures (JV) and Representative Offices (RO).

• Advice on the procedure and process with respect to the establishment of the business entity;
• Preparation all documents and other necessary reference files for establishment of the business entity;
• Registering of all necessary documents and completing administration procedures with legal authorities
• Opening a company bank account in China and Hong Kong, as well as conduce the capital injection and capital verification of the business entity.

Business Laws and Regulations for Hong Kong
Hong Kong Companies Ordinance provided by the Department of Justice, Hong Kong SAR Government. Bilingual Laws Information System provided by the Hong Kong Department of Justice, Hong Kong SAR Government

Business structures
Business in Hong Kong can be conducted through limited companies, limited partnerships or by individuals acting as sole traders. To incorporate a company or to set up a business can be done through the appropriate Hong Kong government departments.

Types of businesses in Hong Kong:

• Public limited company. Can offer shares to the general public on the stock exchange. “Limited” means that shareholders potential losses are limited to their share holdings only.
• Private limited company. Provisions are similar to applicable provisions of the Companies Act, 2013 in India. Such companies are not allowed to trade shares on the stock exchange. “Limited” means that shareholders potential losses are limited to their share holdings only.
• Limited partnerships. Two or more partners can form a business. In a Limited partnership” there must be one partner who has unlimited liability for the partnerships’ debts while the other partners’ exposure to debt is limited to their initial investment in the partnership. (Similar to LLP in India)
• Sole trader. Is a single owner who sets up a business and must pay profit tax on that business. The owner is liable for all debts incurred by his/her business.

Taxation
Hong Kong has a very simple system of taxation with low rates making it easy to conduct business. There is no capital gains tax, no tax on dividends, estate duty or inheritance tax, no payroll tax, no VAT tax and no tax on profits derived from outside of Hong Kong. Some indirect taxes such as vehicle registration fees and duties on tobacco and liquour are in place.

Trade regulations
Hong Kong has an open door policy on trade and does not charge tariffs on exporting or importing goods. Import and export licencing is kept to a minimum.

Labour laws
Hong Kong’s labour legislation is in line with those of international laws and it has implemented many conventions from the ILO (International Labor Organization). It has legislated policies to facilitate the entry of highly skilled financial professionals. A statutory minimum wage was introduced in May 2011.

Foreign investment
Foreign investment is strongly encouraged. All industry sectors with some exceptions are open to foreign investment and it is not uncommon to have 100% foreign investment in an industry. There is no discrimination between foreign and domestic investors.

Corporate governance

Hong Kong has in place high standards to ensue effective corporate governance. A Draft Code on Corporate Governance Practices and Corporate Governance Report issued by the government in 2004 has become the standard for corporate governance in Hong Kong.

For More details Read our Guide on Doing Business in Hong Kong

Download Presentation on Doing Business in Hong Kong