Dezan Shira & The Russian-Asian Union of Industrialists and Entrepreneurs: Examining Growth Potential For Russian Businesses In China & Asia

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Extensive interview with Maria Kotova, Head of Russia Desk, Dezan Shira & Associates 

This week we spoke with Maria Kotova, the head of the Russian Chamber of the company Dezan Shira. Dezan Shira & Associates is a multifunctional company covering the entire Asian region and providing professional legal, tax, accounting and consulting business services to international investors. The company has been on the market since 1992 and has offices and personnel throughout China, Hong Kong, India, Singapore and Vietnam, as well as Indonesia, Malaysia, the Philippines and Thailand. The Russian Chamber near Dezan Shira helps Russian investors in the difficult regulatory climate inherent in the Asian continent, and also accompanies them in all aspects of creating, servicing and developing business and operations in the region.

maria-kotova

Covid-19 has made changes to the work of companies. What problems have you come to contact with the advent of global quarantine? How does Dezan Shira help solve them?

The main problems caused by the closure of Covid-19 around the world were problems with cash flows (due to a violation in the supply chain), inability to fulfill contractual obligations to customers and suppliers, personnel management and digitalization of work.

Regarding cash flow problems, companies in heavily affected industries (such as tourism and import-export) decided to temporarily stop their activities. In this case, Dezan Shira reduced the running costs of professional support for these clients in order to reduce their costs. On the other hand, companies with high levels of debt decided to either close or sell their entire business. There are positive examples of our clients, for example, in technology or electronic games. Their sales, on the contrary, have increased and require more support in the processing of transactions.

In terms of personnel management, Covid-19 caused disruptions in global supply chains, and as a result, companies could not get enough resources to maintain their production capacities. In this case, manufacturing and other industrial companies relying on workers agreed directly with workers to take leave, unpaid leave, and / or temporarily reduce monthly wages. This is a rather difficult process of negotiating with employees. Our lawyers must analyze the company’s labor obligations to each employee, propose the best options within the framework of the labor legislation of the country and negotiate with the employees. Some companies transfer employees to remote work due to quarantine in their country or employees simply cannot return to Asia because of the suspended flights. In this case, our lawyers should also help with all the formalities of organizing such a regime. Our clients’ employees themselves often also ask questions regarding personal income taxes and visas. This is particularly true for foreigners who cannot leave or vice versa return to Asia. Their tax status is subject to change and requires recalculation. who cannot leave or vice versa return to Asia. Their tax status is subject to change and requires recalculation. who cannot leave or vice versa return to Asia. Their tax status is subject to change and requires recalculation.

Many of our customers also have problems with contractual obligations to suppliers or customers. Due to a supply interruption, they cannot fulfill the terms of the contract and must pay large amounts of compensation. It is important to understand that the coronavirus pandemic can be qualified as force majeure, which removes the obligation to compensate. However, in order to be able to take advantage of this provision, it is necessary from the very beginning to document attempts to solve the problem and provide all related documents.

The last and perhaps most important thing that we continue to face actively is the digitalization of work by our customers. This requires new technology solutions to replace traditional financial mechanisms and accounting. For example, many companies are replacing (or strengthening) traditional sales channels with electronic sales through sites or platforms. As a result, a sharp increase in the number of online retail transactions requires our technology team, together with financiers, to optimize their ERP and warehouse management systems, then all the data will be sent correctly for financial reporting.

There are companies that need to provide a good platform for remote work and communication between employees. As a rule, companies already have some kind of system, however, during a pandemic, the workload on-line increases and new requirements appear. For example, it is not a secret for anyone that in China there is an “Internet wall” with the rest of the world and this makes work difficult and speed of work difficult. For example, if your team outside of China needs to enter information into the supply chain module of your ERP system in China online. Then our IT team works to ensure uninterrupted communication.

Dezan Shira helps establish foreign businesses in China and Asia. What are the most common mistakes new entrepreneurs make? What does someone need to know before entering the PRC market?

The Chinese market continues to hold leadership positions in Asia. First-time entrepreneurs, first of all, should understand that the process of entering the Chinese market will significantly differ from their experience in Western countries and gain patience. For example, opening a company may take from 2.5 months, depending on the activities of the company.

First of all, you should definitely think about registering your brand in China. This is important to understand for everyone who starts working with the Chinese market, regardless of whether you sell your services / goods from abroad, through distributors, online platforms, or open a company in the Middle Kingdom. Before you think about working with China, think about your brand.

The Chinese law on trademarks has adopted the principle of “first to file”, which grants exclusive rights to a trademark to the first party applying for registration of a mark in China. There are many sad stories, with further redemption of the rights to your own brand for large amounts, when the entrepreneur did not register the trademark on time, and someone else turned out to be more agile. Although the latest update of the trademark law has defined the provisions on the “unfairness” of the use of the trademark by the owner, which allows challenging the rights of the owner (for example, if the owner has not used it for 3 years), the process of returning his brand and litigation can take several years. The registration process is not expensive, but the consequences of the delay can cause the brand significant damage and financial consequences.

Also, when planning to enter the Chinese market, we advise you to make sure that foreign investors are allowed to enter the segment of the market that you plan to engage in (whether it is services or trade in goods). There is a special catalog that regulates foreign investment in China and defines allowed / encouraged, limited (for example, requiring additional licenses, a joint venture with a Chinese partner or a minimum capital threshold) and prohibited for foreign investment. This will help determine the structure and activities of the company, as well as the necessary licensing.

Another important aspect that is worth paying attention to is devising a profits repatriation strategy for China. The country from which the company’s shareholder (investor) invests will further determine the tax rate on dividends. By the way, Russia and China have concluded an agreement on the avoidance of double taxation on which the tax rate on dividends is 5%. That is, if your holding company is in Russia, then you can withdraw profit as dividends at a 5% rate, and if, for example, a holding company in the USA, then the tax rate will be 10%. Also, perhaps the entrepreneur plans to sell the Chinese company in the future or transfer to another holding company in the group, then it’s worth considering an intermediate holding company that will already be an investor in China, since the process of transferring a Chinese company to a new owner is much easier to carry out outside of China. If these issues are not initially taken into account, the further need for restructuring can be much more expensive than opening a company in China.

In addition to China, you actively provide services to help entrepreneurs who want to enter the market of Vietnam and India. What is common and what are the differences in the organization of business and work in these countries? Where are company registration and tax procedures less difficult?

Yes, indeed, in addition to China, we also help investors in India and seven ASEAN countries. Demand for investment in India and Vietnam has increased significantly due to the Sino-US trade war. Also, a pandemic in China that suspended supplies made many investors think about expanding supply chains in other Asian countries.

Labor costs, a large growing middle class and ease of entry into the market are all major benefits for investors considering India and Vietnam. Building on the efforts made over the past few years, India and Vietnam have actively improved their business and investment conditions for foreign companies. This can be seen from their jump in the World Bank’s rating “Ease of Doing Business”.

Both governments urge entrepreneurs to seize opportunities in different priority sectors in two economies, including hydrocarbons, electricity, renewable energy, energy conservation, infrastructure, textiles, shoes, pharmaceuticals, machine tools, agriculture and agricultural products, tourism, chemicals, ICTs and other areas of services.

Some of the key benefits that make India an attractive destination for foreign investors:

  • India is one of the most digital countries in the world. Processes such as setting up a company and tax administration have gone from offline to online, making it easier to do business.
  • With digitization, corruption and bureaucratic processes and procedures have been significantly reduced. Human interactions have been reduced with the advent of automation. However, proper documentation is needed for quick approval.
  • Stimulating the government to improve the country’s infrastructure and supply chains. In the next 5 years, 1.43 trillion will be invested in infrastructure. Doll.
  • Reforms have been carried out for the MSME in the country, including, inter alia, free secured loans, partial guarantee schemes, and a revision of the definition of the MSME.
  • India has one of the most liberalized FDI policies in the world, with most sectors listed under the Automatic Approval Route.
  • India’s huge population of 1.37 billion and a growing middle class provide an extensive local market for foreign companies.
  • Promoting India’s manufacturing sector for foreign investors by offering incentives and creating land pools for distribution.
  • In addition to the central government, provincial governments are also making significant efforts to attract foreign companies to their regions, thereby providing even greater ease of doing business.

In India, foreign companies can enter the market through unincorporated or corporate types of organizations. Each type has its pros and cons. Key considerations are to understand the limitations of each structure and balance the advantages and disadvantages of entering the Indian market.

The Government of India has simplified the process of registering a company by putting it online. The government has replaced the existing SPICe form (a simplified form for registering a company electronically) with a new web form called SPICe + earlier in February 2020.

This is a composite form that provides 10 different services from 3 different ministries and departments, which saves time and costs for registering a company in India. It offers on-screen data storage and real-time verification for the smooth establishment of companies.

India and Vietnam are emerging economies and the process of entering these markets is significantly different from each other.

The registration process in Vietnam takes from 2 to 3 months, depending on the business and place of investment. Investors may decide to register their company in the form of a limited liability company or joint-stock company (at least 3 shareholders). The first has a simple structure and – even if the registration procedure is the same – a constant check of the joint stock company reliability requires more paper work, and its management is a little more complicated. Thus, a joint-stock company is advisable if the company is registered in the stock market or if it is necessary to ensure and maintain a balance between shareholders.

We provide full support from the preliminary investment stage (business case, market research, business comparison, identification of the best location, etc.) to the registration of a local legal entity (by conducting and performing all administrative procedures to obtain the relevant certificates and sublicenses). Further, we provide full support for the current compliance (accounting and bookkeeping, tax returns, personnel and payroll, etc.).

What are the key requirements for complying with Chinese law? And which in India and Vietnam?

In China, a fiscal year corresponds to a calendar year. Companies in China should start filing a monthly financial statement with a tax report from the first month they receive a business license. Taxes are paid monthly and quarterly. The company also undergoes annual reporting including 3 stages: audit, reconciliation of corporate income tax and annual audit. According to the results of the annual audit, the status of the company is updated in the register.

In Vietnam, taxes are levied at the provincial level, and, like in China, taxpayers must pay company corporate taxes and income taxes on behalf of employees.

In both countries, companies also have to pay social insurance, health insurance and unemployment insurance for their employees on a monthly basis. In Vietnam, this 2/3 is paid by the company and withhold the remaining 1/3 on behalf of its employees. In China, the percentage of social payments in the so-called “five houses” depends on the city. Shanghai is the only place where foreigners can choose not to pay social benefits.

Vietnamese companies with more than 10 employees must prepare and register a directory of their personnel with the state labor agency at the provincial level. The minimum content is working time and rest time, order at the workplace, labor protection and hygiene at the workplace, asset protection, technological and business secrets, intellectual property, violations on the part of employees, the form for considering violations and material obligations.

In addition, Vietnamese companies with foreign investment should audit financial statements and submit periodic reports on FDI.

A company incorporated in India must enforce the Companies Act 2013. The law establishes the following provisions:

  • Appointment, qualifications, remuneration and retirement of company directors
  • Holding meetings of the board of directors and meetings of shareholders.
  • Preparation and submission of annual reports and ledgers along with periodic registrations in the Companies Register.
  • Tax compliance includes the annual submission of an income tax return, audit report in accordance with the Income Tax Act of 1961, and a transfer pricing certificate.
  • It is also necessary to file a tax withholding tax return and their monthly deposit.

The Law on Shops and Establishments of Each State in India regulates businesses in areas such as working hours assigned to employees, annual leave with wages, salaries and compensation, employment for women and children, and other aspects.

It is worth noting that some investors in India (depending on the business of the company) may also need to comply with such laws as the law on trade unions, the law on compensation for workers, the law on reserve funds and other provisions of workers, the law on environmental protection.

What can you advise novice exporters to enter the China market? What should they pay attention to first of all? Which export documentation is the most difficult and the longest to complete?

There are several business models for beginner exporters, depending on what stage they enter the Chinese market. I will try to briefly describe the main ones.

The first model is direct sales , that is, the exporter sells the goods to the final buyer in China from Russia. This is a relatively simple business model that does not include any operating expenses in China.

However, it is worth paying attention to the lack of a legal presence in China, buyers in China are required to pay VAT and duty for the goods, inability to pay in RMB, inability to hire workers in the country and lack of control over the method of delivery of goods.

The second model is sales through a distributor. The exporter also does not bear any operating expenses in China, the distributor is engaged in logistics and customer accounts, which allows us to expand sales in China without significant upfront investments.

The disadvantages include the loss of control over the sales process, the limited loyalty of the distributor, the lack of local employees, and the difficulty in organizing marketing.
The third model for exporters is online trading. It can serve as a test platform for understanding consumer demand in China. Possible business models for online trading: sales through an external website (outside of China), sales through online stores on the basis of B2C (Tmall Global, JD Worlwide, Suning Global), sales through online stores on the basis of B2C2C (Kaola, JD Worldwide, Tmall Global, Beibei, VIP.com), sales through the WeChat Store.

Several factors contributed to the explosive growth of cross-border online trading in China. First of all, this is the spread of smartphones and the growth of Internet penetration, as well as the rapid growth of disposable income and increasing demand for high-quality foreign products. Famous Russian brands that work on the Tmall site are Alenka chocolate, Jockey coffee, Nevskaya cosmetics, Splat toothpaste, Lukoil motor oil.

It is worth noting that there are international platforms, for example Tmall Global, JD Worlwide and Chinese platforms, Tmall China, JD China. Through international platforms, you can start trading from Russia and it is enough to have a registered company and brand somewhere abroad. A fairly easy way to test the market with minimal cost. However, the ultimate goal of all exporters is, of course, to enter the Chinese platform since the traffic on them is several times higher. To enter Chinese platforms, you will need to register a company and a trademark in China.
Finally, the fourth model is export through its company in China. This is a separate legal entity with limited liability allowing the expansion of sales channels, control over logistics and quality, conducting operations and issuing invoices in RMB. Exporters will also be able to form their own team and hire local workers, develop marketing, provide control over pricing and the security of intellectual property.

Exporters need to obtain the necessary licensing for a trading company, as well as draw up documentation for exported goods. For the company: registration of a license to carry out import-export activities, certificate of registration with the customs authorities, registration of an application for a “Foreign Trade Operator” in the Ministry of Commerce of the People’s Republic of China, registration for quality control in the Administration of Quality Control, Inspection and Quarantine (ACCQ), registration of an application to a card reader with a Chinese electronic port. For all goods, except for documents exported from / imported to China, a mandatory indication of the harmonized codes of goods in the customs declaration is required. The number of documents required for exported goods will depend on the category in the catalog of imported goods.

Representatives of what sectors of the Russian business are most likely to contact you? What services do you most often provide: advise when a business is just about to enter the PRC or provide assistance in solving existing problems?

We are contacted by Russian representatives of various industries. Most of them are trading companies, but lately more and more service companies, for example, specializing in software or new technologies.

We provide full service for companies from A to Z. This includes consulting on strategies for entering the Asian markets, full licensing and legal assistance in opening a company, and further support in accounting, taxes, personnel, IT and technology.

Please tell us about the features of employee management in a crisis. What procedures exist for transferring employees to a remote mode of work in China? What are the rules for layoffs and layoffs? What rules should an employer comply with?

Several hundred people work at Dezan Shira, like many other companies with foreign investment in Asia. We also had experience during the SARS pandemic back in 2002 (our company has existed since 1992). This important experience allowed us not only to successfully organize the work of our offices during the new pandemic, but also to advise our customers working with China.

From previous experience, we understood that the main thing is to take care of your Chinese staff so that your employees feel useful and necessary, rather than abandoned in this difficult time.

At the moment, companies in China have resumed work in offices and in factories. Inside the company, in order to help with the return of offices to work, we have put in place additional steps in all our offices in China / Vietnam / Hong Kong / India and are still valid. This may seem like extreme steps, but they are either recommended or mandatory for use by local authorities, and also give our employees the much-needed support that they need in these uncertain times

Office Rules:

  • A mandatory temperature check for all employees, sellers and customers who come to the office in a special room at the entrance;
  • Providing disposable masks and portable disinfectants to all personnel
  • Daily cleaning of office premises by professional specialists;
  • Provision of hand sanitizers in the reception area, pantries;
  • Internal alcohol disinfection of printers and cooler buttons every day;
  • In order to reduce physical contact in the office, we have introduced a mobile application / attendance system. This helps GPS-based staff to eliminate physical clicking / reading of attendance machines for security reasons; Some customers follow suit;
  • Laptops and integrated IT networks and tools helped our teams work remotely and fully function throughout this time. We help customers do the same.
    Rules for staff:
  • Clear office rules for wearing masks in the office, keep windows open for ventilation (where possible), meetings, etc.

Keeping the correct distance while eating, avoid talking to each other during lunch

  • Work from home until the infection is confirmed in the following situations:
    • If you have a cold or symptoms of fever and / or cough;
    • If you are in zones X or in neighboring places and are faced with travel restrictions, as announced by the local government;
    • If you had a personal contact with friends or relatives traveling from X;

For the same companies that cannot yet resume work from offices in China (and Asia in general) or company employees who cannot return to the country due to border closures, remote work can be organized.

Remote work raises a range of logistics and security issues for enterprises in China. Unreliable international Internet connections have become an even more visible problem than usual, while ensuring network security – especially for remote workers – is now an urgent problem. In addition, the sudden introduction of new video conferencing technology as part of the transition to remote work has created new security and productivity challenges for employers. In this regard, the employer must provide proper IT support for employees “in the distance”.

With regard to layoffs and layoffs, the Chinese government has specifically enacted a law governing labor relations, “Provisions for Stabilizing Labor Relations during an Epidemic to Support Enterprises in Resuming Work and Production.”

In short, I can explain that the law is aimed at democratic negotiation of issues with employees. However, companies that are in a difficult situation and want to reduce staff costs now have the opportunity to find more flexible schemes for organizing work using this guide.

I note right away that there are currently no clear provisions in Chinese national legislation on the suspension of an employment contract, but on the basis of civil law, both parties can temporarily suspend an employment contract due to special circumstances, such as force majeure or by consensus. During the suspension of an employment contract, wages and social benefits may be determined by both parties through negotiations. However, it is not recommended that the company unilaterally suspend the implementation of an employment contract with employees in order to avoid labor disputes.

The dismissal process has remained the same and the employer will have to fully comply with China’s labor law when dismissing employees. This is because the government is trying to avoid layoffs (rising unemployment) and compensation that the company will have to pay. In exchange, under the new law, a number of measures are proposed to reduce staff costs. For example, payroll for effective working hours.

Employees working remotely from home may be less productive due to industry specifics. Given this situation, the company can create a telecommunication system. In accordance with the system, the employer can pay employees hourly in accordance with the effective time that employees invest in their work.

What promising areas of Asia does Dezan Shira plan to develop? Are you going to expand the geography of presence? Is there a demand now for certain services that require the preparation of an individual product? What new products does Dezan Shira plan to introduce?

At the moment, we have a fairly extensive geography of presence in Asia: 12 offices in China, Hong Kong, Singapore, India (2 offices), Vietnam (3 offices), Malaysia, Indonesia, the Philippines and Thailand. Our company recently opened a new office in Indonesia and a third office in Vietnam. We also opened a liaison office in Brazil as we see opportunities for South American businesses exporting to Asia. I know our Founding Parter & Chairman, Chris Devonshire-Ellis has eyes on Vladivostok in the Russian Far East as that is close to China and China-Russia trade is increasing, and that he is also eyeing a presence in Africa due to the African Continental Free Trade Agreement that kicked in last year. Overall we follow free trade routes potential and that means paying attention to China’s Belt & Road Initiative, as well as what is going on with the BRICS and other institutions such as the Shanghai Cooperation Organisation.

Closer to home, most likely, the growing interest in ASEAN countries as an alternative to China will only increase and we will need to increase the number of offices in order to provide our customers with local support. A pandemic slows down development a bit, and we are compelling it to weigh the need for expansion more carefully.

As for new products and the demand for certain services, in addition to traditional services, there is a great demand for technological solutions and for this we have created a new team that for several years has prepared and tested technological solutions for financial support of companies, conducting personnel reporting, internal control, ERP systems, etc. We understood that traditional accounting and other reporting with primitive systems or Excel does not have a future and the pandemic only strengthened this trend, since most have switched to digital format, which requires just new technological solutions.

Now many entrepreneurs are interested in which channels are best used to attract customers. What channels does Dezan Shira use? Which have proven to be the most and least effective?

Our company has been in the Asian market since 1992, so a rather extensive marketing and business development structure has formed. One of the main communication channels in our audience is our Asia Briefing publishing house . It includes 6 influential brands at the top of their respectuve markets (major markets where Dezan Shira has offices): China Briefing , ASEAN Briefing Russia Briefing , Briefing on the Silk Road , India Briefing  , and Vietnam Briefing.

To access any of these and receive free weekly updates, magazines, and invitations to webinars and so on, all people need to do to just go to one of the websites and complete a simple subscription form clickable on the top right. The process is free of charge.

These publications produce hundreds of articles, reports and business analytics guides, drawing on the experience of the Dezan Shira team in market entry and doing business in China and South Asia. This is especially true during a pandemic, when many of our customers have remained locked at home. We were ready for this, since all materials were originally released electronically on well-organized platforms, for example, on our Asiapedia library . This channel has only increased its relevance now. We have also translated all business development activities online, for example, dozens of our seminars are now available online in live communication mode from anywhere in the world. It is clear that international trips for developing markets due to restrictions on movement have become less effective in the new realities, but we have replaced these with very successful webinars. until the situation improves and we can get back to formal events with institutions such as the RASPP, Chambers of Commerce and so on. Chris for example had been lecturing at the Higher School of Economics in St. Petersburg until the Covid-19 virus hit. Dezan Shira is very committed to assisting Russian companies expand their investment and business portfolio into Asia.

How does membership in RASPP help Russian and Chinese companies? How did it help Dezan Shira develop a wider profile?

I think the RASPP has created an excellent platform for the informative exchange and development of relations between Russian and Chinese companies. Within the firm, my main task is helping Russian entrepreneurs planning to enter Asian markets in matters of legal structuring, entering the market and supporting their businesses in accordance with local laws. It is often difficult for investors to find answers to all questions in one place while in Russia. RASPP helps us to convey our knowledge and experience to them through various channels, and we are glad that we can help investors in a timely manner and facilitate their already difficult way to enter new markets.

This article originally appeared in Russian on 19th June 2020 at the RASPP website here.

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About Us

Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact Maria Kotova at russia@dezshira.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.

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