Doing business in Asia: Common challenges & misconceptions.

Written on . Posted in .

Despite the impact of Covid-19, Asia and ASEAN remain attractive regions in which companies can expand their business. Roughly 60% (4.4 billion) of the world’s population lives in Asia, with 650 million of those people living in ASEAN countries. The ASEAN region has one of the largest economies in the world, and it is believed that by 2050, it will have the 4th-largest economy in the world. It also has one of the largest labour forces in the world, falling only behind India and China.

The Asian Development Bank believes growth in China will fall to around 2% as a result of the combined impact of Covid-19 and the trade dispute with the US. In ASEAN, growth is predicted to fall to 1%. Despite the falls in growth this year, the region is expected to bounce back in 2021.

Some of the challenges of doing business in Asia

Challenge #1: Foreign ownership and restrictions in certain countries

In some countries such as China, Singapore, Hong Kong, Malaysia, Vietnam and Cambodia, 100% foreign ownership is allowed. Where 100% foreign ownership is allowed, sometimes a specific type of company is required, like in China.

In many other countries, a certain degree of local ownership is required, either for all industries or for certain sectors. In Thailand, some degree of local ownership in most sectors. For Indonesia, 100% foreign ownership is allowed only for certain industries. For instance for retail (Brick and mortar), it is 100% closed to foreigners. in some industries, foreigners can co-invest with locals. The parameters of what is permitted are set out in the Negative List published by the Government.

In some countries where 100% foreign ownership is allowed, there are still certain sectors where a local shareholder or business partner is required. It is important to have an advisor such as Acclime to advise you of the ownership restrictions as well as assist with the structuring of your investment to satisfy the local rules.

Challenge #2: Minimum capital requirements

Certain jurisdictions, where the company is owned by a local, have no minimum capital required – China, Singapore, Hong Kong, Malaysia and Indonesia do not require much capital. Other countries have a higher minimum capital, such as Cambodia (USD 1,000). In some countries in the case of foreign ownership, a larger amount of capital is required.

In Indonesia, for a foreign owned business, the authorised capital needs to be IDR10 billion but only 2.5 billion (USD 170,000) needs to be paid in prior the company commencing business. In Malaysia, for a foreign-owned company, the capital required is between RM500,000 and RM1,000,000.

Such capital requirements present challenges to setting up a business, which is why it is important to use Acclime to guide you through the process.

Challenge #3: Local directors needed in some places

Jurisdictions like Singapore and Malaysia require local directors to be appointed, whereas some other locations require an individual in-country to be responsible for various obligations of the company.  in Indonesia, the director can be a foreigner or a local, as long as he/she has a local tax ID (NPWP)

Acclime can assist with the provision of the necessary in-country resources to satisfy the local requirements.

Challenge #4: Physical office needed in some places

All jurisdictions in Asia require some type of office presence. This can range from merely having a registered office, where correspondence can be sent to having a physical presence that can be inspected by the relevant authorities.

Production of a lease agreement is sometimes required as part of the company registration process. Authorities will check on the office. For example, in Indonesia, the license to operate a business will be delivered in person to the physical office. In Cambodia, the tax registration of the company will be delivered to the company office.

Acclime can assist with office space, including a registered office, a virtual office or securing physical office space for your company.

Challenge #5: Local licensing

In most countries around Asia, local licensing is required to carry on a business. Even in fairly straightforward industries with low barriers to entry such as restaurants and bars, certain licenses are required to operate, such as food and liquor licenses.

As a general rule, those sectors of the economy where consumers need to be protected require licenses to operate such as in travel, banking and financial services, education, insurance and mining. In some countries, licenses are required for manufacturing and agriculture.

In most countries, there are a myriad of government institutions that are responsible for the granting of licenses. In seeking to obtain a license, it is imperative to engage an in-country specialist to assist you with the process and to make appropriate representations to the licensing authorities.

Challenge #6: Currency controls

Most countries in Asia and indeed around the world require reporting of cross border currency transactions above a certain threshold, which differs from country to country. The reason for this is to try to curtail money laundering practices. Generally, the reporting involves notifying the authorities of the transaction at the time, or shortly after, it takes place.

In certain jurisdictions, such as China, pre-approval from the relevant government authority is required before funds are remitted offshore. In these cases, the reasons for the transfer will be examined. Routine payments such as dividends and royalties usually constitute no problem. Applications to make investments offshore are scrutinised more carefully before approval is given (or not).

Local advice is imperative when moving funds between countries, particularly in Asia.

Challenge #7: IP protection

There are a number of international treaties regarding the protection of intellectual property and trademarks, the most prominent ones being the Paris Convention for Intellectual Property Protection and the Madrid Agreement on the Registration of Trademarks. Most countries in Asia are signatories to one or a number of these agreements.

What is universally common from country to country is that IP protection of a company’s intangible property requires the IP rights to be registered in the country in which protection is being sought. Companies need to examine the use of their trademarks, patents, copyrights, or other IP rights, in the countries in which they operate and determine if registration is required. A local expert should be engaged to assist the company with their analysis and if required, register the valuable intangible property.

Challenge #8: Monthly/quarterly/annual compliance burdens

Compliance burdens vary in each country. The most common are monthly or quarterly VAT/GST filings with the local tax authorities and the annual filing of a tax return. Some countries (Cambodia and Indonesia) require monthly filing of income tax statements, others like China require quarterly income tax filings.

All countries across Asia require the preparation of annual accounts. In some, such as China, Hong Kong, Malaysia, Thailand and Vietnam, an audit of those accounts is required. In other countries such as Singapore and Cambodia, an audit is only required if the company is of a sufficient size. The filing of an annual return with the corporate regulator is also a feature of many jurisdictions across Asia.

In order to ensure that your company adheres to all of the compliance laws in the countries you operate, it is important to engage a corporate services specialist such as Acclime to take this burden away from you so you can concentrate on running your business.

Challenge #9: Labour laws

There are labour laws in each country, and the degree of worker protection consequently differs in each country. It is important to be on top of the local laws governing the registration of your company, working conditions and hours, social security and insurance obligations, minimum pay and the like. Acclime can help you stay on top of the requirements and abreast of any changes that need to be implemented in the workplace. Breaching labour laws can be accompanied by substantial penalties.

Opportunities in Asia

Not only are there challenges in operating in Asia, but also great opportunities. A huge market of consumers to be tapped and Asian countries are at the forefront of using incentives to attract business to their country. As natural traders, most Asian countries embrace the benefits of trade agreements, whether they be bi-lateral or multi-lateral.

Opportunity #1: Free trade agreements

The two main multi-lateral treaties that Asian countries are a party to are the ASEAN trading block, which allows the movement of most goods and services amongst the member countries at tariff rates of between 0% and 5%. There is also a Free Trade Agreement amongst ASEAN, Australia and New Zealand, further enhancing the trade free block in the region.

The other more recent agreement is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). This agreement deals with small and medium enterprises getting access to overseas markets in a cost-effective and tariff-free manner. Signatories in Asia to the treaty include Japan, Singapore, Vietnam, Malaysia and Brunei. Also a part of the agreement are Australia, New Zealand, Canada, Mexico, Chile and Peru. The agreement eliminates or reduces tariff and non-tariff barriers across substantially all trade in goods and services, and covers the full spectrum of trade, including goods and services trade and investment, so as to create new opportunities and benefits for businesses, workers, and consumers in the signatory countries. The agreement is designed to admit other countries on the basis that they agree to adhere to the high standards set out in the agreement.

Opportunity #2: Tax holidays and special economic zones

Across the Asian region, governments have embraced incentives to attract new business to set up in their country. From tax holidays that are granted to specific companies that set up manufacturing operations to Special Economic Zones where incentives are available to all that set up a business there, governments have been very creative in enhancing the value proposition of setting up in their country. Examples of this are the tax holidays that have been given to car manufacturers to set up in Thailand, investment incentives and tax holidays given to oil refining and chemical manufacturing companies to set up in Singapore, the Iskandar area in southern Malaysia where businesses benefit from state of the art infrastructure and tax breaks, tax reductions and tax holidays on certain industries in China and reductions in tax rates on certain businesses set up in Vietnam’s special economic zones.

Other countries provide accelerated tax write-offs for various types of expenditure, particularly research and development expenditure in order to encourage innovative industries to their shores.

In certain countries, dedicated government bodies oversee the tax incentive schemes, such as the EDB (Economic Development Board) in Singapore and the BOI (Board of Investment) in Thailand. Acclime can assist your company in navigating its way through the incentives offered to ensure you make the most of your investment opportunities in the region.

Overview of popular jurisdictions in Asia

China 🇨🇳Cambodia 🇰🇭Hong Kong 🇭🇰Indonesia 🇮🇩Malaysia 🇲🇾Singapore 🇸🇬Thailand 🇹🇭Vietnam 🇻🇳
100% foreign ownership allowedYes, for a Wholly Foreign Owned Enterprise (WFOEYesYesAllowed only for certain industries. Local shareholders are needed in many industries which are set out in a Government published negative list.YesYesUsually need to be 51% Thai owned, but structuring can achieve 100% foreign ownership.Yes, allowed in most sectors. Some businesses require local investors.
Minimum Capital requiredUSD 30K-USD 75K for a WFOE. Otherwise, no minimum capital.USD 1,000No minimum capitalIDR10 billion (USD680,000) for a foreign owned company, of which 25% must be paid up. No minimum capital for a local company.RM 500K to RM 1 million for foreign company, depending on the industry. No minimum for local company.SGD 1. If Employment or Entre Pass is sought, capital should be appropriate for the business.THB 15, though in practice it should be enough to be able to run the business.No minimum for most sectors, but in practice investors should consider an appropriate amount commensurate with their chosen activities.
Local Directors requiredNoNoNoAt least 1 with a local tax ID. Can be local or a foreigner.YesYesNo, unless company subject to specific laws.No, but needs one resident legal representative.
Physical office requiredLease of business premises required for WFOEYes, physical premises requiredRegistered office can be outsourcedYes, physical premises requiredRegistered office can be outsourcedRegistered office can be outsourcedRegistered office can be outsourcedYes, physical premises required
Is local licensing requiredYesYesOnly for some sectorsRequired or most sectorsRequired for most sectorsOnly for some sectorsRequired for most sectorsRequired for most sectors
Currency controlsYes, approval required for offshore remittancesNo, but reporting required over USD 10,000No but reporting required over HKD 120,000No but reporting required over IDR 100 millionNo but reporting required over RM 30,000No but reporting required over SGD 20,000No but reporting required over USD 20,000Remittances must be through bank account at an authorised institution
IP Protection laws in placeYes, IP needs to be registered locallyLimited, but protection laws are improvingYes, IP needs to be registered locallyYes, IP needs to be registered locallyYes, IP needs to be registered locallyYes, very strong protection. Local registration requiredYes, IP needs to be registered locallyYes, IP needs to be registered locally
Auditing of local accountsRequiredRequired if not a small companyRequiredRequired if handling public funds or turnover/assets >IDR 50 billionRequiredRequired if not a small companyRequiredRequired
Tax filingsIncome tax quarterly and annually. VAT monthlyIncome tax monthly and annually. VAT monthlyIncome tax annuallyIncome tax monthly and annually. VAT monthlyIncome tax annually Sales and services tax monthlyGST return quarterly, Estimated Chargeable Income and income tax return annuallyVAT monthly, income tax half yearly and annuallyIncome tax annually
Government IncentivesPreferential tax rates available in certain regions and for certain sectorsTax deferral available on projects approved by Council of Development of Cambodia. Import and export duty exemptions also availableLower tax rates available for qualifying activities in certain sectors5-20 year tax holidays available depending on industry. Special Economic Zones offer incentives to companies set up thereA range of tax incentives from partial to full exemption from tax available to companies in certain sectorsLower tax rates available for certain sectors. Some exemptions availableBoard of Investment administers income tax and import duty incentives for certain industriesTax holidays and lower rates of tax available in special zones for qualifying industries
Member of ASEAN?NoYesNoYesYesYesYesYes

Conclusion

Each country is different, and Acclime have experts to guide you through the process of establishing your business. We have answers to many of the challenges that you will face. Speak with Acclime about your business expansion into Asia.

Doing business in Asia: Common challenges & misconceptions
Did you find this article useful?

Share it with your friends or colleagues.

About Acclime.

As a regional expert provider of corporate services, Acclime helps corporates and private clients seamlessly advance their businesses and interests in difficult-to-navigate markets in Asia and beyond. Our years of in-market experience and deep knowledge helps our clients to avoid pitfalls and make progress faster.

© Acclime 2020 | Privacy policy