Insight
Going Global: taking your business further
September 2020
Globalisation is not a new phenomenon but a continuation of developments that started in the nineteenth century. Globalisation is also not restricted to large multinational businesses; many small-and-medium-sized enterprises (SMEs), enabled by modern IT and communications, now look to expand overseas. However, before you consider going global, there are many areas to consider.
Legal considerations
What is allowed in your local jurisdiction may be restricted to local businesses in another country. Governing laws and regulations may also differ significantly from what you’re used to at home.
Therefore, it is vital that you understand the local legal framework applying to your industry and confront any barriers before you enter. For instance, China has a Special Administrative Measures (Negative List) for Access of Investment (often referred to as the National List), and a Special Administrative Measures (Negative List) for Access of Foreign Investment in the Pilot Free Trade Zone (often referred to as the FTZ List). For activities on the Negative List, businesses may need to consider using local partners.
Trusted domestic partner
Expanding into new territories can be both exciting and challenging. While globalisation has heightened awareness of different cultures around the world, different languages, religions, and printed matter can create obstacles. Forming trusted partnerships with local businesses can help you achieve greater returns with less effort. Travel restrictions caused by the Covid-19 pandemic have made this even more important.
The Chinese private securities market is a good example. Until recently, foreign stake-holdings in fund management companies were limited to 49%. Although market liberalisation removed this limit completely in April 2020, most foreign investors (including well-known international investors) use local partners to help drive growth and market penetration.
For SMEs new to the Chinese market, it is worth considering using a trusted domestic partner to set up a locally owned entity instead of a wholly foreign-owned business. This can reduce compliance costs that apply to foreign-owned businesses, while repatriating profits overseas through a profit-sharing arrangement.
Local compliance requirements
While striving for economic success when expanding globally, local compliance requirements are not something you can ignore until the last minute. It is vital when expanding into a different jurisdiction to understand all local compliance requirements and the associated costs. In China, these considerations include:
• registration with the State Administration for Industry and Commerce (SAIC)
• annual reporting to SAIC
• registration with and reporting to customs
• registration with and reporting to state and local tax bureau
• registration with the social security bureau
• opening a bank account
• foreign currency controls.
Help from local service providers
In China, the comprehensive requirements and different business environment often lead to foreign entities breaching regulations through ignorance rather than intent.
The Chinese authorities frequently invent, implement, and alter regulations and policies. Further, implementation of guidelines often employs local discretion and judgement, resulting in regional differences. Consequently, it is difficult to see policy changes coming, understand those policies, which are primarily communicated in Chinese, and ensure your business stays compliant.
You may find it helpful to seek help from locally based service providers so your business can focus on what it’s good at. When choosing your service provider, it is essential you partner with someone who:
• is professional
• has employees who both understand the local language and can communicate in English or your referred language
• understands the cultural differences and can explain and manage the expectation gap while ensuring compliance
• understands your business and your strategy.
The ever-changing globalised business environment has highlighted the advantages of using mediumsized accounting firms with international affiliation. SMEs expanding globally may not wish to pay the high professional fees the large accounting firms charge; however, they all need advice from someone with both local and international expertise who can make the connection between their home country and their overseas destination.
With the assistance of a network member firm, you will have everything you need in one place: multi-skilled resources and an international team of professionals. This way you will be set to succeed in the globalised business market.
About the author
Erica Xiong
Hong Kong, China
Erica has over 10 years of experience in providing Hong Kong and regional tax advisory and compliance services to multinational organisations in a wide range of industries. She is experienced in advising on tax efficiency structuring, cross-border transactions, pre-IPO tax planning, tax due diligence and representing clients in handling tax field audits and investigation cases.
ericaxiong@russellbedford.com.hk