New Material Enterprises Venturing into the Malaysian Market: How to Establish "Rule-backed Mutual Trust" for Both Parties in Non-controlling Joint V

Introduction:

Looking at the global market to explore the second growth curve has become an established direction, but the path to expand overseas still tests the wisdom and courage of every Chinese enterprise. Brand globalization, supply chain globalization, cross-border e-commerce... there are numerous paths yet no one-size-fits-all answer; North America, Southeast Asia, the Middle East, Latin America... the markets are vast yet full of respective challenges. Behind every expedition is the down-to-earth exploration of Chinese enterprises; on every distant coastline, more Chinese presences are emerging.

The "Global Trailblazers" column aims to find benchmark enterprises that have expanded overseas in different sectors, dissect practical cases from a professional perspective, precipitate methodologies through consensus, and discover new possibilities amid differences.

Focusing on the full life cycle demands of enterprises' overseas expansion covering "early-stage planning, mid-stage implementation, and late-stage operation", Zhejiang Enterprises Globalization Comprehensive Service Port has introduced more than 40 leading service institutions in fields including law, finance and taxation, finance, and human resources, realizing one-stop handling for enterprises' overseas expansion. 

To provide more practical and referable samples for more enterprises that are planning to go global, we will showcase successful cases of how excellent service providers support enterprises' overseas expansion. In this issue, we bring the case of U&I GROUP (U汇智集团) serving a new material manufacturing enterprise to build a joint venture factory in Malaysia.

01

Enterprise Case Display

A leading domestic company in the new material manufacturing sector plans to build a joint venture factory with a local partner (natural person) in Malaysia, with main businesses covering metal material manufacturing and metal packaging. The total investment ranges from RMB 30 million to 100 million, with the Chinese party holding a 40% stake.

The enterprise faces three key issues under the joint venture model: first, how to ensure the safety of its technology input and capital when it does not hold the controlling stake; second, how to reduce the tax cost of profit repatriation in the future; third, how to exit in an orderly manner if disagreements arise in the cooperation. 

In response to the core demands of the enterprise's overseas expansion, U&I GROUP, combining the local business environment of Malaysia, bilateral tax rules and cross-border investment compliance requirements, has delivered a complete set of implementation plans including four major measures: 

[Three-tier Structure Design] It is recommended to adopt the structure of "Hong Kong company - Singapore company - Malaysia joint venture company". The domestic company first sets up a Hong Kong company, the Hong Kong company then sets up a Singapore company, and the Singapore company establishes the Malaysian company through a joint venture with the local partner.

[Tax Path Optimization] The core consideration of setting up the intermediate layer in Singapore is to make use of the bilateral tax agreement between Singapore and Malaysia to legally and reasonably control the cost of dividend withholding tax for future profit repatriation. If the Malaysian company is directly held by the Hong Kong company, it cannot enjoy the treatment under this tax agreement.

[Rights and Interests Protection Mechanism] In the joint venture agreement and articles of association, we assisted the enterprise to embed key clauses such as veto power over major matters, pre-emptive right, and tag-along right, to ensure that the Chinese party will not be sidelined in core decision-making, and clarify the exit path in the future.

[Full-process Accompaniment] We provide one-stop services ranging from the Malaysian national industrial analysis report, to the relevant procedures for outbound investment, and then to the company registration in three regions.

Finally, with the professional support of U&I GROUP, the new material enterprise successfully set up the three-tier equity structure of Hong Kong - Singapore - Malaysia, completed the relevant outbound investment procedures, solidified all rights and interests protection clauses into the joint venture legal documents, and the Malaysian joint venture project is advancing steadily.

02

Service Provider Dialogue

What is different about the way this new material enterprise goes global?

U&I GROUP: This enterprise plans to build a joint venture factory in Malaysia with a local partner, with the Chinese party holding 40% of the shares. The core problem is that we are not the majority shareholder, so how to ensure the safety of technology input and capital? How to exit if the cooperation does not go smoothly in the future?

What is the structure suggestion you put forward?

U&I GROUP: We recommend adopting the three-tier structure of "Hong Kong - Singapore - Malaysia". Specifically: the domestic company first sets up a holding company in Hong Kong, the Hong Kong company then sets up a Singapore company, and the Singapore company and the local partner jointly establish the Malaysian joint venture company.

Why add a layer in Singapore in the middle?

U&I GROUP: It is mainly based on two considerations.

The first is taxation, there is a bilateral tax agreement between Singapore and Malaysia. When the Malaysian joint venture company distributes dividends to the Singapore company in the future, the cost of dividend withholding tax can be legally and reasonably controlled. If the Malaysian company is directly held by the Hong Kong company, it cannot enjoy the treatment under this tax agreement.

The second is regional management, Singapore can serve as the regional headquarters for Southeast Asia. If the enterprise wants to continue its layout in Indonesia, Thailand, Vietnam and other regions in the future, all the layout can be extended downward by the Singapore company, with a clearer structure and more centralized management.

Then at the joint venture company level, what protection measures have you taken?

U&I GROUP: We assisted the enterprise to embed several key clauses in the joint venture agreement and articles of association:

The first is the "veto power" over major matters, to ensure that the Chinese party will not be sidelined in core decision-making.

The second is "pre-emptive right" and "tag-along right", if the Chinese party wants to exit in the future, it can ensure that the shares are sold at a reasonable price, or if the foreign party wants to sell its shares, the Chinese party has the right to sell its shares together.

We assisted the enterprise in reviewing and revising the legal texts of these clauses, which were finally implemented in the official documents.

03

Service Provider Introduction

U&I GROUP is headquartered in Hong Kong, which is a professional service group focusing on cross-border and supporting business, legal, financial and tax services. It holds licenses and professional teams of CPAs, lawyers, secretaries and registered agents in cross-border relevant jurisdictions. As one of the earliest domestic professional teams engaged in cross-border comprehensive services, we have been deeply involved in the overseas development demands of enterprises and entrepreneurs for 20 years. Relying on more than 20 branches at home and abroad and a service network covering more than 160 countries and regions around the world, we provide cross-border professional services for clients with an international vision and professional spirit.

* All views contained herein are from the interviewed institutions or individuals, for reference only.

This article is from the WeChat official account "Zhejiang Enterprises Globalization Comprehensive Service Port".