Turning Made in China to Chinese Capital: success for Chinese companies in America

Eighty percent of business anywhere is the same – business goals, negotiation skills and contracting issues are at the core of most transactions. The remaining 20% – culture, laws, government structures – is the difference between success and failure in international business. This article will address that 20%, to help our Chinese friends be even more successful when investing in or selling products in the United States.

Business Norms

There is nothing worse than losing an important cross border deal because of a miscommunication with your prospective partner. Consider the implications on your business negotiations of comparing these two sayings:

  • U.S.: "The early bird gets the worm."
  • China: "The first bird in the flock is the first to be shot."

The impact may be different in Shanghai and Los Angeles than they are in Beijing or Chicago, but that just highlights the importance of learning about your partner.

Understanding these differences can give each party advantages in negotiation as well. For example, Americans are uncomfortable with silence. Saying nothing in a negotiation may result in the U.S. partner making concessions just to avoid the silence. Additionally, money, deadlines and results are very important to American business people. A Chinese company delay could result in concessions as the U.S. partner gets closer and closer to a deadline.

People are people – we all have families and want to be happy. However, cultures can be very different. Understanding how those differences impact your business can increase the chances for successful cross border business.

Important Legal Considerations

Understanding the impact of U.S. law and regulation on your company is critical. For example, if you have no knowledge of how U.S. tax laws apply to non-U.S. owners of U.S. companies or real estate, your company could find that it has a large tax bill that it did not expect.

Setting Up a Wholly Owned Company or Joint Venture

Why is your company expanding to the U.S.? What are the company goals? If your company wishes to sell products in the U.S., purchasing a U.S. company may be best because you will buy a ready-made distribution network. If your company is interested in real estate investment, setting up a wholly owned subsidiary to own the real estate may be best. Or, if capital is your goal, an IPO or a reverse merger into a publicly traded shell company may best meet the company's needs.

Happily, it is easier to form a company in the U.S. than in China. A corporation can be formed to pursue any legal purpose – it is not limited by its original purpose. Initial capital requirements are minimal, unlike China which requires initial capital investment directly related to initial operating expenses.

For non-U.S. companies, it is usually best to form a "C-corporation", alone or with a joint venture partner, to avoid the U.S. 30% branch tax. You can form a corporation in any U.S. State. Many are formed in Delaware, because Delaware law favors corporations.

And, even though your corporation may be legally formed in one State, you can place your headquarters in any State. Lawyers in any State in the U.S. can help you decide where to legally form your corporation and where to best to place your headquarters for tax, labor and industry sector reasons. Nationwide law firms like Polsinelli can provide legal assistance across the U.S. no matter where your company decides to form its U.S. subsidiary or locate its headquarters.

U.S. federal taxation of non-U.S. investors depends on numerous factors. U.S. corporate income tax rates are currently 35%. The U.S. also taxes income from capital gains, dividends, interest, royalties, and compensation sourced whether the income was earned within or outside the U.S., and the rules relating to these taxes are complex. U.S. corporations may be required to withhold tax (at rates up to 30%) on dividends, interest, royalties and compensation paid to non-U.S. investors as well. And, a non-U.S. investor that does business in the United States is required to file a U.S. income tax return even if the business has no taxable income.

Each U.S. State also has its own laws and regulations, and imposes its own income taxes. Each State imposes its own sales and use taxes, and there are often local county and city fees that must be paid, and a variety of government registrations. It is therefore important to seek accounting and tax law advice when you expand to the U.S.

Intellectual Property Rights

Just as is true in China, the strongest means of protecting a unique idea in the U.S. is to file for patent protection. If you have a patent filed in China, you should already be considering filing those patents in the U.S. Make sure that you do not wait too long – there are deadlines that, once missed, are lost forever.

Companies do not file patents when the costs outweigh the benefits. In these cases, companies use trade secret law to protect unique ideas, methods and processes. Both the U.S. and China have laws banning the theft of trade secrets, which are considered confidential and proprietary information.

In the U.S., companies often sue each other in court if a former employee or another company has stolen trade secrets, and these lawsuits are often expensive and time-consuming. If you are doing business with a U.S. company, expect that company to be very protective of its confidential information. And, from the Chinese company perspective, make sure to implement procedures in your Chinese and U.S. facilities to protect the confidentiality of your trade secret information. If you make no effort to protect the secrecy of this information, neither courts in the U.S. nor China will not protect you even if that information is stolen.

The final intellectual property law of importance when expanding to the U.S. protects your brand – trademark law. With famous Chinese brands expanding globally – such as Haier and Alibaba ­filing for U.S. federal protection of your Chinese brand should be considered before you start selling products or services in the U.S.

Employment Issues

Most employees in the U.S. can be fired for any reason, without notice and with no severance. There are exceptions, for example if there is a negotiated employment agreement, or if there is a union.

Employers are also subject to U.S. federal, State and local laws that govern issues such as employee safety, family and medical leaves of absence, and wages and work hours. What can be more difficult in the U.S. is understanding and complying with U.S. and State anti-discrimination laws. Failure to understand these laws can expose employers to significant liability. Cultural and non-harassment training for overseas Chinese employees working in the U.S. is highly advised to reduce your company's risk.

Special Note – CFIUS

If your company is considering acquisition of a U.S. company, you should be aware of the Committee on Foreign Investment in the United States – otherwise known as CFIUS. CFIUS is made up of nine U.S. government agencies and reviews acquisitions by non-U.S. entities of U.S. businesses selling products or services related to national security or critical U.S. infrastructure. Deciding whether to file a CFIUS notice is based on the following factors:

  • Government control over or ownership in acquiring Chinese company;
  • Percentage of or actual "control" in the target U.S. company;
  • Type and potential uses of the target U.S. company's technology and products; and
  • History of U.S. government agreements or relationships by the target U.S. company.

Filing a CFIUS notice is voluntary and does not require a filing fee. The filing is made jointly by the seller and purchaser, and includes a copy of the signed purchase agreement. It is advisable to hire U.S. lawyers that have assisted with CFIUS filings previously, and to coordinate informal discussions with CFIUS before filing the joint notice. In addition, submit a draft of the final notice for review by CFIUS 5-10 days before the date you desire the 30-day review period to begin, in case CFIUS suggests changes to the notice.

Conclusion

We in the United States welcome Chinese companies to consider investing in and joint venturing with U.S. companies. Polsinelli has over 740 lawyers, and a full range of legal services, including one of the top 10 real estate groups in the U.S. We welcome the opportunity to serve you!

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