In a many countries outside the US, national governments try to protect their citizens and economic interests with requirements that businesses operating within that country must be majority owned by citizens of that country. This presents a challenge for non-citizens of the country trying to set up a business in which they will have control. In Mexico and China, we have seen this requirement successfully (and legally) circumvented using the following strategy:
For example, an American entrepreneur seeking to set up a manufacturing facility in mainland China recruited 4 Chinese nationals as partners who each owned 12.75% thus meeting the requirement that Chinese citizens owned at least 51%. The American entrepreneur then set up a Cayman Islands management company where he owned 60% and his 4 Chinese partners each owned 10%. As a condition of setting up the two companies and in exchange for the American entrepreneur’s contributions to this enterprise, the management contract gave management authority over the Chinese company to the Cayman Island company. The Cayman Island company then transferred to itself tax-free most of the profits of the Chinese manufacturing company through a management fee charged to the Chinese company. Since the American entrepreneur controlled the Cayman Island Company, he was able to favor 1 of his Chinese partners over the others with respect to economic benefits from the Cayman Island Company in the form of a high salary and perks. This insured that the favored Chinese partner would vote with him in the Chinese company giving him his 49% and the favored partners 12.75% for a total of 61.75% voting his way. It all comes down to math, structure and politics.
Please join me on The Big Pitch on Biz Talk Radio Monday – Thursday 3pm ET/Noon PT as we discuss topics like this and many others to help entrepreneurs like yourself with common challenges in today’s business world. The following link will take you directly to the internet player, so just click the link and you are ready to go.
