The essential China checklist for Italian investments

Today, China companies are increasingly leading industry fields. The 14th Five-Year Plan 2021-2025 set forth China’s objective to become a leading innovation country by 2035. For Italian companies, the modernised China presents both new investment opportunities and compliance risks.

Moving forward from low-cost manufacturing, China is focused on attracting high-quality foreign investments, especially in industries which support the technological and eco-sustainable movement in China.  Equally, regulation reforms in the last years coupled with the digitalisation of business administrative and taxation procedures require greater management in legal and financial compliance. Companies seeking to enter the China market shall be aware of not only the changing market trends, but the current legal and financial obligations for foreign investors. Overall, companies should implement an essential China checklist before entering China to ensure the business can thrive and scale in China.

Webinar Focus China

At Horizons Corporate Advisory, we have navigated clients through the regulation reforms and collaborated with the Industrial Federation of Canavese (Italy) this Summer to present an insight. Through a joint webinar “Focus China: the new foreign investment landscape” hosted on 17th June 2021, our experts provided the essential China checklist for Italian investments today.

Dr. Lucia Myriam Netti, Regional Partner in Horizons Italy – Head of the Group’s consulting activities in Europe, and Dr. Pier-Domenico Peirone, Executive Director of Pathways (partner of Horizons Group), were called to lead the webinar. The webinar attracted over numerous local Italian companies from various sectors including packaging, textiles and mechanics with plans to enter the China market.

The successful collaboration also paved a long-term partnership between Horizons and the Industrial Federation Canavese. Specifically, Dr. Gianfranco Franciscono, Head of the Economic Service of Industrial Federation Canavese comments on investing in China.

“We are well aware that investing in a China business project today is the most promising. However, it is never free from risks -the risk shall never be an impediment. On the contrary, the risks are evaluated in a rational way, it can be managed and leveraged sucessfully. Starting your business in an attractive market such as China, we want to provide companies with information and suggestions for the correct approach and expansion strategy”.

China: current investment landscape for Italian companies

“Despite the ongoing pandemic, China did not abdicate the role as an economic leader -especially in the manufacturing sector. In 2020, China’s GDP grew 3%, whilst the rest of the world contracted. For Italy, China is an important trade partner, with a commercial exchange of 44 billion euro – noted Dr. Patrizia Paglia, President of the Industrial Federation Canavese.

“In the uninterrupted flow of trade relations with China, the sectors include not only traditional Made in Italy brands fashion, agri-food and mechanical engineering – Dr. Paglia continued – but also innovative companies working environment and sustainable energy. For example, smart urbanisation, infrastructures, and transport, and space technology. As a result, the current investment landscape is increasingly broadening and offers opportunities for companies to seize with the adequate legal and financial tools to both protect the investment and comply with the local regulations.

The essential China checklist

Dr. Peirone explains in the webinar “expanding to China today opens very different perspectives compared to the previous years”.  The digitalisation and speed in China offer Italian businesses new perspectives to enter the market, however, companies should understand the legal and financial responsibilities and activate the legal protection, before speeding ahead. In the below, we provide three aspects of the essential China checklist.

Pre-investment stage: trademark and patent protection

Companies should ensure trademark and patent are registered in China before entering the China market. Dr. Netti pointed ‘Despite the preconception in Italy (rooted in prejudice), investors shall proceed in a correct and protective way. We advise companies to start immediately with the appropriate legal tools set by the local legislation. Intellectual property rights (‘IPR’) are strongly recognised in the Chinese Law and enforced. However, many Italian companies do not proactively protect trademarks and patents with the provisions of the Chinese Law. ”

For more information on trademark protection, Partner and IPR Head of Horizons (Shanghai) Corporate Advisory Co Ltd Dr. Angela SU Qi discusses the IPR reforms in the article  Dr. Angela Su, Horizons Partner and IPRS Head, provides insight on trademark protection for the foreign community in Shangha

Working with Chinese companies: cultural nuances in contracts

The word ‘contract’ in Chinese is written with the two characters 合同 (hétóng).  合(hé)  means to join and 同 (tóng) means to be the same together. The two characters combined signifies the parties to the contract are unified with the same objectives. It represents the unification of the parties’ intent. Therefore, parties shall negotiate the terms of the contracts and work together to achieve common objectives. The unification of the intent and negotiation are fundamental to the contract.

Contract Law defines a contract as an agreement between equal parties and emphasises that the parties shall be of equal footing. Such aspect shall not be neglected when drafting a contract since it may cause prejudicial consequences in the event of a dispute.

 ‘At Horizons, we encounter many contracts drafted without the mandatory clauses – notes Dr. Peirone – or drafted in English. In such cases, without taking the reasonable steps to ensure the contacts have be drafted properly and accordingly to the Chinese Law, the contract may not provide significant protection  during a contractual dispute.’

“Our goal as lawyers and consultants is to support companies in drafting contracts that become real tools of protection in full legal certainty – continued Dr. Netti – In this approach, we believe that companies will receive concrete support in the Chinese market”.

For more information on contracts in China, we penned the Do’s and Dont’ of Contracts in China.

E-commerce; legal and tax obligations for Italian businesses    

“In China, online sales are achieving absolute success – explained Dr. Netti – Already sales have increased by 27.5% in 2020, rising by 21.0% in 2021 and accounting for 52% of retail transactions – demonstrating China at the forefront for e-commerce”.

For companies selling products through Chinese online retail platforms, there are both legal and tax obligations to observe. Specifically, many companies neglect the withholding tax obligation for the income generated in the territory of China. Equally,  E-commerce Law adopted on 1 January 2019, requires companies selling online to be legal entities in China and strengthens consumer protection by forbidding fictitious deals and fabricated user comments, especially negative ones.

For more information on withholding tax and the E-commerce Law in China, please see the articles China business: cross-border withholding tax 101 and China’s first e-commerce law to go into effect from 1 January 2019

Whilst, there are ample opportunities in China for Italian and other companies, legal and tax responsibilities cannot be neglected. Many companies may be tempted to find cost-saving alternatives, but this often lead to larger risks and costly. As Dr. Netti mentioned in the webinar, succeeding in China requires an understanding of the laws and regulations in China, if you do not have professional experts in China, it’s impossible to navigate through the legalities or protect your investment.

If you would like to discuss investing in China, please contact Horizons at country.partners@horizons-advisory.com and our Partner in charge will be in touch.