I am planning to set up a new trading company in Guangzhou of the PRC. Could you tell me more about the legal and practical issues involved?

The current policy of Guangzhou allows a Hong Kong resident to set up a trading company (conducting wholesale businesses without any import and export rights). Such a company would be categorized as an "internal investment" enterprise rather than a "foreign investment" enterprise. A Hong Kong resident can be the shareholder and/or Legal Representative of such a company.

In the normal course of events the process of setting-up such a trading company in Guangzhou can be completed in about three weeks' to one month's time after all necessary supporting documents are submitted.

Such a company would be liable to pay several kinds of tax in the PRC. For example:

	Value Added Tax (VAT):	This is payable by all companies engaged in wholesale businesses in the PRC, the amount of which is fixed at 17% of the difference between the total income generated by goods sold and the total costs of purchasing those goods in each financial year.
	Sales Tax:	This is only payable by companies engaged in retail businesses in the PRC, the amount of which should be about 5% of the amount of gross sales value of the goods in the financial year.
	Profit Tax:	This is payable by non-FIE companies in the PRC, the amount of which is fixed at 33% of the companies' taxable profit in each financial year (but 15% only for companies in the PRC Special Economic Zones).

Furthermore, such a company would be liable to pay a fee to the relevant PRC authorities in their "Annual Registration" exercise. Such a fee should be in the region of HK$2,000 per year for each company.

Our company is a local agent representing an overseas customer. We would like to enter into a manufacturing/tooling agreement with an OEM (Original Equipment Manufacturer) with factories in mainland China. What kind of information do we have to supply to our solicitors if we were to ask them to draft the agreement on our behalf?

In order to ensure that the manufacturing/tooling agreement is legally enforceable and that it can be relied upon to protect your interests, you should, among other things, try to ensure that you can provide the following information (which should be correct, accurate and complete to the best of your knowledge and belief) to your solicitors: -

	1.	Details of any relevant previous negotiation(s), agreement(s)-in-principle, statement(s) of intent, or of any other relevant correspondences or documents, including: - (a) Details of the OEM¡œs factories in China (including but not limited to their names, locations, ownerships and management structures, etc). Details of the relationship(s) between the OEM and its factories; (b) A full description of the products to be produced (or the tools to be supplied), the corresponding quantities and qualities required and/or expected; (c) The intended consideration (i.e. the intended price) and the intended arrangements regarding payments; (d) The proposed date, time, venue and method of delivery of the relevant products/tools; (e) The proposed point at which the relevant products/tools to be produced or supplied become the property of your company. The proposed point at which the risks associated with the products/tools pass from the OEM to your company; (f) Whether your company would like to hold time to be of the essence of the contract and whether it would like to insert any specific penalty clause(s) for delays and/or defaults on the OEM¡œs behalf; (g) Whether your company would like to place any specific restriction(s) or limitation(s) on the information to be communicated to the OEM, or on the products or tools to be produced or supplied; (h) Whether you would like to have any future dispute(s) with the OEM resolved by arbitration or litigation, in Hong Kong or in another jurisdiction; and (i) Whether your company would like to have the proposed contract governed by Hong Kong laws or the laws of another jurisdiction.
	2.	Full names of the two parties to the proposed contract (i.e. your company and the OEM).
	3.	Full names of the persons authorized to execute the proposed contract and their positions in their respective companies.
	4.	Details of your company's overseas customer.
	5.	Details of the relevant agency agreements(s) between your company and its overseas customer.