It is no longer a question of “why China”, it is now the time to consider “how China”. South Australian businesses need to be China ready. Thanks to China Southern Airlines, Adelaide will receive direct flights from Guangzhou, for the first time ever, bringing approximately 1000 Chinese tourists per week to our doorstep. The economic and cultural benefits of this to South Australia will be unprecedented.
We are aware that China’s economic and geopolitical ambitions involve increasing offshore investment. The “One Belt One Road” initiative promoted by Chinese President Xi Jinping, involves building super road and sea routes across the globe to connect China with the rest of the world. This outward strategy gives rise to increasing positive inward absorption of international standards as currently reflected through dramatic changes in China’s financial market regulation, taxation and corporate governance. Australia features in both plans. We have much to learn from and share with China. In addition to trade, tourism, investment and migration offerings, we can play an important stabilising role in China’s global trade relationships. Our relative diplomatic and trading affability is likely to be heightened if the United States of America ramps up its protectionist trade and foreign policy.
In relation to local matters, achieving direct flights between Adelaide and mainland China is not a co-incidence but reflects long term policy and private investment success shared by China and Australia. The China Australia Free Trade Agreement, dedicated State government trade initiatives, Adelaide City Council’s sister-city relationship and tourism initiatives and the growing number of successful private ventures, each serve to build and enhance South Australia’s relationship with China. In 2016, Port Adelaide Football Club also made an outstanding contribution to raise South Australia’s profile through sporting cultural diplomacy achieving high level sponsorship deals. Now that South Australia is directly accessible from mainland China, we can compete more equally with the traditional gateways of Australia’s eastern seaboard.
Australia represents health and lifestyle to the Chinese consumer and tourist. In particular, South Australia is seen as a healthy lifestyle destination as well as a clean and green food bowl. Chinese people have confidence in the providence of our products. From an investment perspective, we offer China the benefit of “frontier” markets in areas of key interest such as agribusiness, tourism, education, healthcare, property and energy and resources. Market entry is not as inflated, nor as competitive as elsewhere in Australia.
It is noteworthy that Chinese tourists typically travel abroad for not only a holiday but also for the purpose of considering education, migration and investment opportunities. Coupled with the Federal Government’s plans to trial a 10 year multi-entrance tourist visa, South Australia must prepare for unprecedented increase in visitor numbers. Tourism growth will in turn lead to substantial increase in other economic sectors from which our whole State will benefit. The opportunities are equally beneficial to China, however there are many challenges involved in economic and cultural exchange. Local business and Chinese investors alike, need to be prepared to learn about the other in advance of entering into binding arrangements. Experienced, bilingual qualified professional advisors are essential.
The future success of Chinese and Australian commercial ventures is largely contingent on the parties acquiring a “working” appreciation of the other’s origin from both a cultural and compliance perspective. Through frank exchange of objectives and understanding of respective domestic requirements and restraints, all things are surmountable. The art of encouraging frank exchange is a role for experienced, specialist advisors.
The degree of exchange between the parties assists to inform financial structure and operational terms. In the absence of expert guidance, deals are likely to be dominated by contractual terms which lack flexibility to account for a Chinese party’s requirements. Such ventures will invariably fail and/or become subject of protracted dispute. It is better to plan for success from the outset.
There are some fundamental regular features of each parties’ country of origin which require early consideration. First, it is vital for Chinese investors to appreciate the different conventions of conducting business in Australia, wherein the rule of law is paramount. Considerations for Chinese investors looking at Australia, include appreciation of each party having independent advisors, the value of legal and financial due diligence, consideration of taxation consequences and the nature and role of relevant statutory approvals. The work required upfront to assess a deal can often be seen by Chinese and Australian parties alike as costly, time consuming and ultimately counter-intuitive to commerce. However, the better a project or deal is understood prior to negotiating and entering into rigid binding agreements, the greater its chance for success.
In China, it is common to appoint a single legal representative to advise and support all parties jointly. In Australia, this rarely occurs. Australian legal professional conduct rules insist that practitioners must act at all times in the best interests of the client and this in turn, necessitates avoidance of any conflict of interest. As the parties to a transaction do not share absolutely consistent and common interests, it follows that independent advice is required by each party. An experienced legal advisor will be able to identify risk and assist to negotiate appropriate commercial terms. The value of good advice and representation should outweigh the costs incurred. As with due diligence, independent legal advice will contribute to a party’s negotiating power and assist in the structuring of a deal. For investors, it will assist to determine whether to invest the entire business or simply components of it which offer the least risk and best returns.
Due diligence is an essential tool used to identify issues prior to structuring and or entering a deal. In Australia, it is accepted as a valuable convention. Legal jurisprudence arising out of common law doctrines including the likes of “caveat emptor” or “buyer beware”, coupled with a lengthy precedent on the enforcement of contractual rights means that the benefits of due diligence are widely recognised. In China, it is common for deals to be struck (either with or without documentation) before analysis of the assets and liabilities, or the means of the investing party, can commence. Failures are expected to be remedied by the responsible party, however this is difficult to enforce in circumstances where there is a power inequality between the parties and or a dispute arises.
The purpose and benefit of due diligence is to identify and manage risk inherent in the detail of a proposal. Due diligence is the process of forensic investigation which discovers aspects which may impact negotiation of the commercial or operational terms and structure of the deal. A proposal may look healthy at first glance, but there are invariably issues which can only be identified through close analysis. The resulting identification and assessment of a proposal serves as a useful negotiation tool. It not only provides a basis for a counter offer, but will help to avoid poor investments and/or structure good investments in a way to maximise success.
Taxation advice is another vital component of the independent advice required by a party in consideration of a deal. The taxation obligations of a resulting new or restructured entity will be an additional and discreet issue to the taxation obligations of each of the parties to the deal. Again, taxation advice will assist to structure the deal in a compliant and advantageous manner. Australian companies should seek warranties to ensure that any inbound funds are compliant within the complexities of Chinese regulations. Some of the common issues that arise for Chinese investors include repatriation of profits made in Australia back to China, customs duty, goods and services tax on imports and mitigating the risk of double taxation. Specialist legal taxation advice should be sought to ensure that appropriate corporate structures are established from the outset.
Australia’s Foreign Acquisitions and Takeovers Amendment Act 2015 requires notification and review of direct foreign investment proposals on a case by case basis to ensure that each proposal is consistent with national interests such as national security, competition, government policies including taxation, impact on the economy and the community, and the investor’s character. The Foreign Investment Review Board (FIRB) has broad discretionary power to block foreign investment and is not bound by precedent, nor required to provide detailed account of its reasoning. There is a degree of political and legal uncertainty in relation to some FIRB notifications which means parties will benefit from specialist advice.
FIRB cited “national security concerns” as the reason for recently blocking the sale of Australia’s single largest pastoral lease holding of “S Kidman and Co”, and State of New South Wales’ electricity infrastructure giant, “Ausgrid”, to Chinese investors. Seeking FIRB approval is a prerequisite to foreign acquisition of land including smaller proposals for the purchase of residential property in Australia.
FIRB related issues should be identified early in the due diligence process and all parties should take independent advice about options to structure the deal in a manner to ensure that either FIRB approval is given or not required at all. The triggers for the requirement of FIRB approval or the categories which are routinely approved without conditions, should be considered in property deals to assess the best way to secure an interest.
Foreign investment is generally permitted in the case of certain exceptions, such as new dwellings, where an exemption certificate is held by the developer, vacant land acquired for residential development, or in established dwellings purchased for the purposes of redevelopment, so long as the redevelopment increases the housing stock. Approval will be provided subject to conditions aimed at completion of redevelopments within four years and/or evidence that the project has been completed and the existing dwelling cannot be rented out during this period. Foreign non-residents are only able to purchase established dwellings in very limited circumstances, as they cannot purchase established dwellings as homes, for use as a holiday home or to rent out.
The restrictions mean that applications for permanent residency or other permissible means of acquiring security in assets may be worth considering. This underscores the importance of the parties having a mutual understanding of what they are each trying to achieve.
The future for South Australia and China is astoundingly bright. There are clear political, economic and cultural benefits for China and South Australia to seek out opportunity to work together. The upward trend of Chinese investment and joint enterprise will continue to increase exponentially. To overcome the many hurdles involved in such exchange, parties from both sides require local but expert professional support. The considerations must ensure satisfaction of all legal and regulatory requirements, but also include capacity for cultural exchange. Establishing the basis for strong cross-cultural rapport is essential to the enduring success of joint enterprise.
Our China team at DWFT provides business migration services and advice on all aspects of China related business, including tax, structuring and investment advice to inbound investors. We have the depth of local expertise and knowledge and a wealth of experience dealing with Chinese interests across many industry sectors. We provide all range of commercial legal services and business advice under one roof to local South Australian businesses and to Chinese investors.
This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.