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Doing Business in China via the Cayman Islands (2006 Update)
Many companies doing business in China are using a structure that includes a company formed under the laws of the Cayman Islands (CI). Chinese technology and Internet companies listed on NASDAQ ' such as Actions Semiconductor, Baidu, CTrip, China Medical Technologies, Focus Media, Shanda, Suntech Power and Tom Online ' are actually CI companies. The primary business reasons for an offshore structure are flexibility in an exit strategy, whether in connection with an initial public offering (IPO) or an acquisition; the possibility of reducing U.S. taxes; and reducing the impact of China's currency exchange restrictions.
In the simplest form, the structure is a CI company with a China subsidiary. Investments are made in the CI company and the subsidiary is the operating company. The next simplest form is when the CI company is the parent company of two subsidiary corporations ' one in China and the other in the U.S. A U.S. corporation is needed only if the U.S. is a market for the business. The most complex structure is required when the China business is in a restricted industry such as an Internet business (see, “Investment and Operating in Restricted Industries in China,” www.fenwick.com/docstore/Publications/Corporate/Invest_Operating_In_China.pdf.) Other variations include delaying the formation of a U.S. subsidiary until or if U.S. operations are needed and adding a company from a jurisdiction having a tax treaty with China (such as Mauritius) between the CI and Chinese corporations. Global venture capitalists have become comfortable with these CI structures and many U.S. venture capitalists also understand and use these structures.
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