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The Ultimate Guide To
Employment in China

China Facts

Population size: 1,382,323,332
Currency: CNY Chinese Yuan
Capital city: Beijing
Languages spoken: Mandarin, Cantonese
Ease of Doing Business: 78

Employing in China: What You Need to Know

Chinese employment law

Chinese employment law appears complex and confusing when looking from outside view although in some ways there are many similarities to other countries. Other factors that complicate matters include the differences between regions and an inconsistent approach to adherence to laws in different cities. For example, there are differences between minimum wages and welfare contribution amounts in different cities. For these and many other reasons the following are only guidelines in the broadest sense, and professional legal services are recommended when employing in China.

Key Factors to Consider When Employing in China

There are several key areas to be aware of within China’s employment regulatory framework, especially for companies that plan to initiate a full local office and human resources department. These challenges can be mitigated by use of a locally sourced payroll provider who is familiar with all of the Chinese laws and rules for both Chinese employees as well as foreign nationals.

  1. Contracts

    China requires that workers have employment contracts that meet local standards, and companies must have a professional who can draft local employment contracts.

Employee Entitlements

Information Explanation
Medical Leave ?

For a work-related sickness or injury, the employee is generally entitled to up to 12 months’ sick leave with full pay. For non-work related sickness or injury, sick leave ranges from three to 24 months depending on the employees’ period of employment.

Annual Leave Accrual Entitlement ?

A minimum of five days of annual leave up to 15 days for long term employees.

Maternity Leave in China ?

Female employees are entitled to not less than 98 days of maternity leave, commencing 15 days prior to the projected birth.

Employment Termination in China

Information Explanation
Resignation / End of Service Payment ?

Non-competition period compensation
During the non-competition period the employee shall receive at least 30% of his/her previous salary per month. Previous salary means the average salary obtained during the last 12 months and this also includes bonuses or any other extra payments. The maximum time frame for the non-competition period is 2 years.
If the employer wishes to terminate the non-competition period before the official end, an additional three months compensation payment has to be paid.

Severance / Redundancy Pay ?

Severance pay also depends on whether it is termination with cause or termination without cause. If it is with cause, no severance pay is required. If it is without cause, severance pay is required.

Situations that require severance pay include termination due to restructuring, termination as a result of a mutual agreement or termination as a result of the expiration of a fixed-term labor contract. In case severance pay is required, employers are obliged to provide this amount to their employee in addition to other contractual arrangements that are in place. Any unlawful termination by the employer will result in reinstatement of employment or a punitive compensation equal to the doubled severance pay.

Severance pay is calculated at one-month salary for each year. Any working period of six months or above but less than one year must be counted as one year and for working periods less than six months, half a month’s salary must be paid as severance. For example, in case an employee worked for 13 months for the same company, he will receive severance pay that amounts to 1.5 month salary. The one-month salary is calculated – with certain limitations – at the employee’s average monthly salary during the last twelve months.

The formula for severance is one average month’s wages of the relevant employee for each year of service to the employer. For any period of service in this calculation that is less than six months, the employee is entitled to a half-month’s wages, while for any period of service between 6 months and one year, the employee is entitled to a full month’s wages.

Termination of Employment ?

If the employee is being terminated at the end of a fixed-term contract, no notice is needed. If the employee is not on a fixed-term contract, it depends if it is termination with cause or termination without cause. If it is with cause, no notice is required. If it is without cause, 30 days notice is required.

 

In the case of a first fixed-term employment contract, the employer has the right not to renew the contract upon expiration; however, the employer must pay economic compensation, or severance pay.

In other situations, the two main approaches for termination are:

  1. Termination through mutual agreement Where employee and employer mutually agree to end the employment.
  2. Unilateral termination  Where the employer cannot reach mutual agreement with the employee Unilateral termination must meet various requirements as outlined below. Termination for cause or termination resulting from the fault or misconduct of the employee can be executed on any of the following grounds and does not require notice or severance payment, when the employee:
  • Fails to satisfy the specified recruitment requirements
  • Has substantially violated the labor discipline or internal rules of the employer
  • Has committed an action of serious dereliction of duty
  • Has additionally established an employment relationship with another employer
  • Has invalidated the employment contract
  • Is subject to criminal liability

Probation

Information Explanation
Probation Period ?

The maximum term of the probationary period depends on the term of the employment contract. Only employment that is based on some fixed assignment cannot have a probationary period. All other probation periods are available from one to six months. For example:

  • Employment contract of three months to a year – probation up to one month
  • Employment contract between one and three years – probation up to two months
  • Fixed term contracts of three years or more – probation up to six months

Pension

Information Explanation
Pension Requirements ?
  1. The system of welfare and benefits is complex in China, and are enforced for Chinese employees in particular. There are requirements for both employee and employer contribution rates based on a percentage of salary
  • Pensions Employer contributes 20% of salary and employee contributes 8%
  • Medical Insurance Employer contributes 10% of salary and employee contributes 2%
  • Industrial Industry Insurance Employer contributes from 0.5% of employee’s salary and there is no employee contribution
  • Unemployment Insurance Employer contributes 1% of salary and employee contributes 0.2%
  • Maternity Insurance Employer contributes 0.8% of salary and there is no employee contribution
  • Housing Fund Employer contributes 7-12% approximately (varies by region) and the employee contribution is generally the same

Using Shield GEO EOR Services: How We Can Help You

Companies entering China can make a decision whether to use their own resources or to use a Global Employment Organization to handle employment and payroll responsibilities. A GEO solution is particularly beneficial when a company is looking to setup an office quickly with a manageable cost. The complexity of employment regulations in China makes the use of a GEO advisable to ensure full compliance with employment laws, including the drafting of local employment contracts for workers.

The company that is expanding into China contracts with the GEO to employ and payroll their staff on their behalf. The GEO then assumes the legal responsibility for these employees, sponsoring them on work permits if necessary, complying with local employment law and running their monthly payroll. This is especially useful to fulfill all of the specific withholding requirements for pensions and benefits, as well as documenting termination, probation periods and leave requests.

A GEO EOR Solution vs DIY Employment in China

Companies entering China must make a decision whether to use their own resources for a DoItYourself (DIY) approach, or to use a Global Employment Organization to handle payroll and employment responsibilities. A GEO or China Employer of Record solution makes it faster, easier and cheaper to deploy staff if they don’t have a Chinese entity established that can run payroll.

A DIY approach will typically take 69 months until there is a properly incorporated WFOE ready to run payroll and cost up to 6 figures if registered capital is required. Shield GEO can deploy foreign staff in 46 weeks and local staff in 48 hours. Additionally Shield GEO is responsible for all compliance issues related to the employment.

Shield GEO

Shield GEO provides a fully outsourced employment service in China. Companies expanding into China can contract with Shield GEO to employ and payroll their staff on their behalf in China. Shield GEO then assumes the legal responsibility for these employees, becoming the Employer of Record, sponsoring them on work permits, complying with local employment law and running their monthly payroll.

Using Shield GEO Employer of Record Services in China

Payroll

Payroll China
Management Fee for Employer of Record Services / Monthly Payroll Costs

Please contact us for a quote

Notes

Shield GEO pays the employee on a monthly basis. Income tax and social security (where applicable) are deducted at source and paid to the China tax authorities. Expats are able to offset their taxable income with relevant business expenses.

China has 20% employers social security contribution and 8% employees contribution which covers pension, health insurance, maternity insurance, workrelated injury insurance and unemployment insurance. This varies by region and generally has a limit to the employer contribution where the maximum social security contribution cannot exceed three times the average monthly wage.

e.g. in Shanghai in 2012 the maximum social insurance contribution was RMB 11689 per month because the average monthly wage was RMB 3896. Since 2011 expats are theoretically subject to employer and employee social security however many states are still yet to enforce this requirement. The World Bank estimates it takes employers in China 192 man days to ensure compliance with payroll and labour taxes each year.

Currency ?

CNY Chinese Yuan

Tax Amount
Grossed income Tax Rate (%)
0 – 1,500 3
1,501 –4,500 10
4,501 – 9,000 20
9,001 – 35,000 25
35,001 – 55,000 30
55,001 – 80,000 35
Over 80,000 45

Expats are able to offset their taxable income with relevant business expenses

Tax Returns Supplied

Yes

Corporate Tax Requirements

5% business tax on invoices

Employers Social Security and statutory contributions

China has 20% employers social security contribution which covers pension, health insurance, maternity insurance, work related injury insurance and unemployment insurance. This varies by region and generally has a limit to the employer contribution where the maximum social security contribution cannot exceed three times the average monthly wage.

e.g. in Shanghai in 2012 the maximum
social insurance contribution was RMB 11689 per month because the average monthly wage was RMB 3896. Since 2011 expats are theoretically subject to employer and employee social security however many states are still yet to enforce this requirement

Employees Social Security and statutory contributions

China has 8% employees contribution which covers pension, health insurance, maternity insurance, work related injury insurance and unemployment insurance. This varies by region.

Since 2011 expats are theoretically subject to employer and employee social security however many states are still yet to enforce this requirement

Insurance requirements

Foreign nationals require private health insurance

Can supply private health care

Yes

Can assist opening bank accounts

Yes

Work Permits

Work Permits
Can Sponsor Work Permit

Shield GEO is able to sponsor foreign workers on Z visas / Work Permits which allow them to work in China. As the employer of record, Shield GEO handles all of the formalities and employment requirements in China. The client maintains responsibility for day to day employee management.

Work Permit cost

USD 800

Work Permit processing time

4-6 weeks

Work Permit process

Shield GEO applies through the Chinese immigration authorities in China, once the Employment License is issued the employee applies for the Employment/Work Visa (Z Visa) at the Chinese Consulate in their country of residence. On entry in China the employee and Shield GEO submit an application at the local Labor & Social Security Bureau which then takes a further 15 days. Once approved the employee will need to apply for the Residence Permit (done from within China).

Documentation required : passport, CV, employment contract, education certificates.

Can Work Permit be processed in country

No. Consultant can be in country whilst processed, but must return to home country to pick up the Z visa

Switch Business Visa to Work Permit?

Yes but not in country

Can Spouse work on dependent visa?

No

Business Visas

Business Visas
Can do Business Visa

Yes

Business Visa Cost

USD 300

Business Visa processing time

5–7 days

Payroll and Tax in China

There are specific rules for payroll and taxation in China, depending upon whether your company employs foreign nationals or local Chinese employees. The primary concerns for a foreign company that needs to comply with tax laws in China include: Individual income tax (IIT) for employees in China, social security costs, payroll tax, sales tax, withholding tax, business tax and permanent establishment concerns.

China has some unique rules regarding employment, for example foreign nationals must pay local Tax and Health Insurance and also carry their own Health Insurance. Additionally employers of Chinese nationals must register and make contributions, which vary by region, to China’s social insurance system, known as the “Five Insurances,” plus a housing fund. The Five Insurances comprise a pension fund, medical insurance, industrial injury insurance, unemployment insurance and maternity insurance. For many companies using a local specialist payroll provider will simplify this process and ensure full compliance with local laws.

Your Payroll Options in China

Information Explanation
Remote Payroll ?

A remote payroll in China is where a foreign company, i.e. a nonresident company, payrolls a resident employee in China. This is not possible in China. Under Chinese law only Chinese entities are allowed to have employees based in China. This applies to both local and foreign employees. The only option for a non resident company to payroll its employees (local and foreign) in China is to use a fully outsourced service like a GEO or FESCO (Foreign Enterprise Service Company which will employ and payroll the staff on their behalf.

Local Payroll Administration ?

In some cases, a company will register their business in China under one of the forms available, (RO, WFOE or JV) but prefer to have another company administer its payroll. This can be accomplished through a payroll provider. It is important to note that the company, as the Employer of Record, is still fully responsible for compliance with employment, immigration, tax and payroll regulations. But the payroll calculations, payments and filings can all be outsourced to the payroll provider

Internal Payroll ?

Larger companies with a commitment to China may wish to run their own local payroll for all employees, foreign and local. In order to accomplish this, they will have to complete incorporation, register the business and then hire the necessary staff. There will be a need for incountry human resources personnel who have the background needed to manage a Chinese payroll, and can fulfill all tax, withholding, and payroll requirements.

This approach carries significant cost and requires some knowledge of local employment and payroll regulations. The company will need a local accounting firm and potentially legal counsel to ensure full compliance with Chinese employment and tax laws.

Fully Outsourced Payroll & Employment ?

Companies can outsource the employment and payroll of their staff in China to a GEO, like Shield GEO. This is possible for both foreign workers and Chinese nationals. This is the easiest, fastest and safest way to payroll staff in China.

Shield GEO manages all aspects of payroll for workers in China, including taxes, withholding, social security payments and other statutory requirements. Shield GEO becomes the Employer of Record and employs the staff on behalf of the client.

Staff are paid monthly with tax and social security deducted at source and paid to local authorities. Shield GEO will invoice the client monthly in advance of the payroll date. The invoice consists of the Total Cost of Employment (Base salary + Employers Statutory Contributions + Additional statutory contributions) and a Management Fee. Shield GEO provides the employees with payslips.

Read more about outsourced payroll and employment through Shield GEO.

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Setting up payroll in China

Information Explanation
National Currency ?

CNY Chinese Yuan

Employee Information Required ?

The employment contract absolutely has to contain:

  • Name, address & legal representative of the company
  • Name, address, ID number of the employee
  • Time limitation (if applicable) & probation period
  • Remuneration
  • Social insurance
  • Description and location of the employment
  • Regulations concerning working hour, rest & leaves
  • Working conditions, including safety & protection measures
Documentation Required for New Employees ?

A written labor contract is absolutely necessary in China in order to protect both the employee and employer. The law has special regulations on what happens if a written contract is not provided within a month after starting work. If this is the case, the employer has to pay double the salary for every month the employee worked without a contract. Furthermore, if the employee works for 1 year or more without any written contract, the contract then becomes an open-ended one.

Tax Figures

Information Explanation
Corporate Income Tax ?

25%

Income Tax Rate ?
Grossed income Tax Rate (%)
0 – 1,500 3
1,501 –4,500 10
4,501 – 9,000 20
9,001 – 35,000 25
35,001 – 55,000 30
55,001 – 80,000 35
Over 80,000 45

Expats are able to offset their taxable income with relevant business expenses

Payroll Tax ?

N/A

Sales Tax ?

17%

Withholding Tax ?

10% for non-resident companies

Time to prepare and Pay Taxes ?

259 hours

Time required to start a Business ?

28.89999962 days

Payments

Information Explanation
Payment Mode ?

Usually paid monthly. Can be paid by bank or cash.

Frequency of Salary Payment ?

12 monthly payments

Invoice / Payslips required ?

It is not very clear but there are sources that are implying that payslips are required.

Minimum Wage ?

As of 1 June 2014, the highest monthly minimum wage was in Shanghai (1,820 yuan), closely followed by Shenzhen (1,808 yuan). The lowest minimum wage was in the south-western province of Guizhou (1,030 yuan).

China Immigration and Work Permits

Foreign workers are required to have the proper visas and work permits in China, as established by immigration laws. Work permits must be secured for employees, and sponsored by a locally licensed and incorporated entity, which can be a problem for companies just entering the Chinese market. If you have yet to complete the incorporation process you can use Shield GEO to sponsor the employee for the necessary permits. Most expatriate workers will require a Z visa / work permit.

Your Options

Use your own company?

It is possible for companies that have established a Rep (Representative) Office or WFOE (Wholly Foreign Owned Enterprise) in China to arrange Z Visas. It takes around 6 weeks. It is highly recommended to utilise a Chinese Immigration specialist to assist with the application and processing.

Documentation Required (Employer)

Copy of business license, copy of business registration certificate, copy of code certificate, copy of certificate of approval

Documentation required (Employee):

Passport copy, CV, employment contract and educational degree certificates. Health certificate (can be obtained after arrival in China)

The process for obtaining a Z visa is as follows:

  • The Employer and the employee sign a local employment contract (labour contract)
  • The Employer applies for an Employment License through the relevant trade authorities (4 days)
  • The Employer is issued with an Employment License, valid for 6 months, for the employee
  • The Employer submits documentation to the regional office of foreign affairs to get the Letter of Z Visa Notification (5 days).
  • The Employee applies for the Employment/Work Visa (Z Visa) at the Chinese Consulate in their country of residence. (4 days)
  • Within 30 days the Employee must travel to China on the Z Visa. It is a single entry visa.
  • Within 15 days of the employee entering China, the employee and The Employer submit an application at the local Labor & Social Security Bureau to apply for the Employment / Work Permit (3 days).
  • Once the Employment / Work Permit is approved, and within 30 days after entering China, the

Use the Shield GEO Employer of Record Solution?

It takes around 4 to 6 weeks to secure a work permit, and costs $1000 USD through Shield GEO

Documentation required (Employee):

Passport copy, CV, employment contract and educational degree certificates. Health certificate (can be obtained after arrival in China)

The process for obtaining a Z visa is as follows:

  • Shield GEO and the employee sign a local employment contract (labour contract)
  • Shield GEO applies for an Employment License through the relevant trade authorities (4 days)
  • Shield GEO is issued with an Employment License, valid for 6 months, for the employee
  • Shield GEO submits documentation to the regional office of foreign affairs to get the Letter of Z Visa Notification (5 days).
  • The Employee applies for the Employment/Work Visa (Z Visa) at the Chinese Consulate in their country of residence. (4 days )
  • Within 30 days the Employee must travel to China on the Z Visa. It is a single entry visa.
  • Within 15 days of the employee entering China, the employee and Shield GEO submit an application at the local Labor & Social Security Bureau to apply for the Employment / Work Permit (3 days).
  • Once the Employment / Work Permit is approved, and within 30 days after entering China, the employee will need to apply for the Residence Permit.

Types of visas in China

Category Description of Visa
D Category Visa

Issued to those who intend to reside in China permanently

F Category Visa

Issued to those who intend to go to China for exchanges, visits, study tours and other activities

J1 Category Visa

Issued to resident foreign journalists of foreign news organizations stationed in China. The intended duration of stay in China exceeds 180 days.

J2 Category Visa

Issued to foreign journalists who intend to go to China for shortterm news coverage. The intended duration of stay in China is no more than 180 days.

M Category Visa

Issued to those who intend to go to China for commercial and trade activities.

R Category Visa

Issued to those who are highlevel talents or whose skills are urgently needed in China.

Z Category Visa

Issued to those who intend to work in China

Setting up a company in China

When setting up a company you may want to consider these factors:

  1. Business Factors

    China requires that workers have employment contracts that meet local standards, and companies must have a professional who can draft local employment contracts.

    • The industry and type of business
    • Nationality of the headquarters/individual(s) and
    • Presence of existing trade agreements or relationships
  2. Location

    Separate cities and regions may have different rules, costs and availability. It is always recommended to seek advice from relevant professionals, such as business or legal advisors, accountants and others depending on your needs.

  3. Regional Language

    Although Mandarin is the national language, different locations in China use different languages, such as Cantonese, meaning some terminology may be different in various regions. Cantonese is the major language in the southwest part of China. Major centers of Cantonese are Hong Kong, Shenzhen and Guangzhou in the Guangdong Province.

Your Options

There are three types of business forms available to foreign companies in China. Each of these business forms has distinct advantages and disadvantages, as well as differing scope of business activities, registration requirements and minimum capital requirements. In most cases it will depend on the degree of commitment a company has to China and the planned business activity.

Registered capital requirements for foreign invested enterprises (FIEs) in China have been partially relaxed under recent amendments to China’s Company Law that became effective in 2014. FIEs are now no longer subject to a minimum required capital amount. However, in practice, the Ministry of Commerce (MOFCOM) and its local branches are likely to continue requiring an FIE’s total investment to be commensurate with its planned business.

Representative Office (RO)

This is the easiest and least expensive type of foreign investment structure to set up and has no registered capital requirements. The defining characteristic of an RO is its limited business scope. An RO is generally forbidden from engaging in any profitseeking activities, and can only legally engage in market research, publicity, sales and service activity.

Steps Required:

  • Post Registration Procedures.
  • Register Business License
  • Obtain Certificate of Approval,

Time: 4 months

Cost: 3000 RMB

When a foreign company decides to try and sell to the Chinese market, there are several options – working through an agency or distributor, or registering a Representative Office (RO). Whereas an agent or distributor may have limited loyalty or little interest in end-user satisfaction, an RO is an effective way for foreign investors to get a feel for the Chinese market while demonstrating commitment to the market. From 2010 on, foreign companies that intend to register a RO must be at least two years old, and the registration certificate for an RO stays valid as long as its foreign parent company legally exists. (According to the revised “Administrative Regulation on the Registration of Permanent Representative Organizations of Foreign Enterprises” which came into effect in July, 2013).

It is the easiest type of foreign investment structure to set up and, unlike the wholly foreign-owned enterprise, has no registered capital requirements.

A point to note is that, even if you have set up a WFOE in a city where your manufacturing facility is based, you may want to consider having a representative office in your target sales cities to facilitate business operation. On the other hand, a good distribution partner with regional coverage can also help to rectify this problem.

ROs are usually taxed on gross expenses with the overall tax burden around 11.75 percent of total monthly expenses. However, these rates may be increased by the relevant tax bureau depending on the industry. If the chief representative is a foreign national, whether they stay in China or not, they shall be subject to individual tax based on the income derived from the RO.

Note: As a general guideline, setting up a representative office in China can take up to 4-5 months.

Limited Business Scope of ROs

The defining characteristic of an RO is its limited business scope – an RO is generally forbidden from engaging in any profit-seeking activities, and can only legally engage in:

  • Market research, display and publicity activities that relate to company product or services; and
  • Contact activities that relate to company product sales or service provision and domestic procurement and investment according to chinabriefing.com.

While an RO is relatively easy to establish and maintain, they are fairly limited in terms of operational scope since they cannot actually issue invoices (i.e., fapiao, the basis for obtaining tax deductions in China) or sign contracts.

A RO’s primary function is to conduct China market research, and to coordinate parent firm’s activities in China.

This includes liaison with local contacts, contract negotiations, warranty and after sales service, as well as import, export and distribution services. A representative office may, however, negotiate contracts that are later signed in the name of the home office located outside China.

A RO has no legal personality, meaning it does not possess the capacity for civil rights and conduct, cannot independently assume civil liability, and is limited in its hiring ability. Chinese staff working for an RO, although not limited in number, must be employed through a human resources agency that will sign a contract with the RO on the one hand and with the Chinese staff on the other in order to ensure social security and housing fund contributions are paid on a regular basis. No more than four foreign employees can be hired per RO. Foreign staff working for ROs should have an employment relationship with the parent company abroad, and any disputes should be settled under the laws of that country.

Advantages of establishing an RO

  • No registered capital required.
  • Easy to control than others business type in Hr or Tax issue
  • The quickest, relatively inexpensive and easy to set up.

Disadvantages of establishing an RO

An RO is limited in the nature of the business activities in which it can engage, cannot receive any fees for its service or engage in any profit-making activities.

Restricted activities include:

  • Rendering services to any persons other than its head office
  • Soliciting, concluding or signing business contracts with any customers or issuing invoices in China.
  • Warehousing and managing inventor conduct in China for trading purposes
  • Other business trade or activities; whatever direct or conduct on behalf foreign parent company. Any activities other than of a liaison nature (e.g. quality control services and installation and testing services).

RO Registration Steps

1. Pre-approval Stage for an RO – Certificate of Approval

Once you have decided to base your representative office in which city, the next thing is to approach the local Ministry of Commerce (MOFCOM) for contacts of a local designated foreign enterprise service company (FESCO) who will be in charge of your representative office application process.

An application letter should contain, in part, the following:

  • A description of the company’s history, business and scope;
  • The names of the Chairman of the Board, the General Manager and directors;
  • Incorporation documents of the head office;
  • The names of its major trading partners in China;
  • Its business volume;
  • The proposed name of the representative office;
  • The purpose for setting up the representative office and the scope of its activities;
  • The duration of the office and its chief representative.

 

Head office incorporation documents include certified copies of the company’s business registration certificate, the certificate of incorporation, the memoranda and articles of association. In addition, a signed lease agreement is one of the pre-requisites for approval; therefore it is vital to secure a lease for a “grade A” office space before submitting the application.

Generally your application approval will be processed by MOFCOM, but if your industry is specific to banking, insurance, law, accounting and media, you may have to approach the relevant authority that has jurisdiction over your industry sector.

Once approved, you should have the Certificate of Approval certifying your legal presence for the next 3 years, which can be further extended.

 

Agency: MOFCOM (via a FESCO)

Time: Approximately 1 Month

Cost: Approximately US$800 to $1000 to a designated FESCO

2. Register Business License for the RO

The next stage is to register for your representative office’s business license, which must be renewed annually.

It is important to note that you must complete the registration within 30 days of receiving your approval from the previous stage. The application together with the supporting documents is required to be submitted to the local State Administration of Industry & Commerce (SAIC) and the process normally takes about 1-2 months time.

Agency: State Administration of Industry & Commerce

Time: 1-2 months

Cost: Covered as part of the USD$800-1000

3. RO Post Registration Procedure

After completing the previous steps, it is expected for your representative office to do some ‘post-registration’ steps. Generally, the FESCO should notify you of which steps you need to take and basically ask for appropriate documentation and then take care of the process directly.

  • Register the office location with the local police (Public Security Bureau)
  • Register with local and national tax bureaus.
  • Organise financial and corporate seals
  • Assist you in recruiting of Chinese staff

Agency: Various (through FESCO)

Time: 1 month

Cost: Covered as part of the USD$800-1000

Wholly Foreign Owned Enterprise (WFOE)

WFOEs are limited liability corporations organized by foreign nationals and capitalized with foreign funds. WFOEs are often used to produce the foreign firm’s product in mainland China for later export to a foreign country. The WFOE must go through the entire registration and incorporation process, and is the most costly business structure to setup.

Steps Required:

  • Prepare all legal documents i.e. articles of incorporation, bank references, China legal representative, audit reports and letters of authorization
  • Obtain Required Registered Capital
  • Register with PRC Sponsor

Time: 6-7 months

Cost: 17,000 RMB

A Wholly Foreign-Owned Enterprise (WFOE, sometimes incorrectly written as WOFE) is a common investment vehicle for mainland China-based business wherein foreign parties (individuals or corporate entities) can incorporate a foreign-owned limited liability company.

WFOEs are limited-liability corporations organized by foreign nationals and capitalized with foreign funds. This can give greater control over the business venture in mainland China, and avoid a multitude of problematic issues which can potentially result from dealing with a domestic joint venture partner.

Such problems often include profit not being maximized, leakage of the foreign firm’s intellectual property and the potential for joint venture partners to set up in competition against the foreign firm after siphoning off knowledge and expertise.

WFOEs are often used to produce the foreign firm’s product in mainland China for later export to a foreign country, sometimes through the use of Special Economic Zones which allow the importation of components duty-free into China, to then be added to Chinese-made components and the finished product then re-exported. An additional advantage with this model is the ability to claim back VAT on the Chinese manufactured component parts upon export. In addition, WFOEs now have the right to distribute their products in mainland China via both wholesale and retail channels.

The FICE Option: Another recent variant (the Foreign Invested Commercial Enterprise / FICE) of the WFOE has also come into effect, and are used mainly for trading and buying and selling in China. The registered capital requirements for a FICE are lower than for a WFOE as the FICE does not need to fund plant and machinery acquisitions.

The unique feature of a WFOE is that involvement of a mainland Chinese investor is not required, unlike most other investment vehicles (most notably, a sino-foreign joint venture)

There are three distinct WFOE setups:

1. Service (or Consulting) WFOE;

2. Trading WFOE (or Foreign-invested Commercial Enterprise, “FICE”); and

3. Manufacturing WFOE.

Advantages of Establishing an WFOE

WFOEs are among the most popular corporate models for non-PRC investors due to their versatility and structural advantages over a Representative Office or Joint Venture:

  • The ability to uphold a company’s global strategy free from interference by Chinese partners (as may occur in the case of joint ventures);
  • A new, independent legal personality;
  • Total management control within the limitations of the laws of the PRC;
  • The ability to both receive and remit RMB to the investor company overseas;
  • Increased protection of trademarks, patents and other intellectual property, in accordance with international law;
  • Shareholder liability is limited to original investment;
  • Easier to terminate than an Equity Joint Venture
  • Simpler establishment than a Joint Venture.

Disadvantages of Establishing a WFOE

The disadvantages of establishing a WFOE include the inability to engage in certain restricted business activities, limited access to government support and a potentially steep learning curve upon entering the mainland Chinese market.

Since a WFOE is a type of limited liability company, it requires the injection of foreign funds to make-up the registered capital; something unnecessary with a Representative Office. It is important to note that regional differences in regulations and practical differences in the application of Chinese legislation can also apply.

Important Factors when Choosing a WFOE

1. Business scope

One of the most important issues in WFOE application is business scope. Business scope needs to be defined and the WFOE can only conduct business within its approved business scope, which ultimately appears on the business license. Any amendments to the business scope require further application and approval. Inevitably, there is a negotiation with the approval authorities to approve as broad a business scope as is permitted. Generally business scope includes:

  • Investment and international economic consulting
  • Trade information, marketing and promotion consulting
  • Corporate management consulting
  • Technology and consulting

With China’s entry into WTO, more and more business is open to WFOE especially in Trading, Wholesale and Retail business.

2. Minimum Capital Requirements

Since March 1, 2014, no minimum registered capital is required for WFOEs with scope of business in consulting, trading, retailing or information technology in China. However there is still a minimum registered capital required for some industries such as Banking and Forwarding.

Below is a short list of cities that have detailed information about registered capital, required documents and procedures to establish a WFOE:

First tier cities:

SHANGHAI BEIJING SHENZHEN GUANGZHOU

2nd tier cities

: HANGZHOU CHENGDU CHONGQING TIANJIN WUHAN

3rd tier cities

: NINGBO SUZHOU XI’AN

Side note: Since China still maintains foreign currency control policy, it’s still advisable to choose registered capital within RMB 100,000 ~ RMB 500,000 as the minimum registered capital for a Consulting WFOE, Service WFOE, or Hi-Tech WFOE registration in Shanghai, Beijing, Shenzhen, Tianjin, Guangzhou, Hangzhou, Ningbo, Suzhou, Chengdu, Chongqing, Wuhan, Xi’an and many other cities of China. (Investors can inject the capital within 2-10 years)

3. Registered and Paid up Capital

Registered capital is the amount that is required to run the business until it can break even – the ‘minimum registered capital’ is a guideline only. If you do looking for a minimum registered capital, for instance RMB 30,000 (which is impossible to run a WFOE in China) this means you will run out of money fairly soon, which leads to increased costs in applying for permission to increase capital, additional licensing fees and renewals of business licenses and so on. The WFOE needs funding via its registered capital until it’s able to support itself from its own cash flow.

However the amount of registered capital needed is also dependent upon factors like scope of business and location. In reality, local authorities will review the feasibility study report (and check the lease contract) approve the investment on a case-by-case basis; reduced registered capital can be negotiated in some cases.

Summary of Recommended Registered Capital Amounts:

USD$140,000 is a decent investment capital for many types of WFOE. (With USD$ 140,000 investment it’s easy to get approved).

RMB 100,000 ~ RMB 500,000 (Approx. USD$15,000- 75,000) is the advisable as minimum investment capital to be approved for Consulting WFOE, Service WFOE, Hi-Tech WFOE registration in China. After the approval, initial paid-up capital should be injected within 3 months, which could be 20% of the registered capital, and the balance should be remitted within 2 years.

The minimum registered capital guides for various industries in China, for instance Beijing, Shanghai, Guangzhou, Shenzhen, Ningbo & Hangzhou are given below:

Consulting WFOE RMB 100,000 ~ RMB 300,000 (Approx. USD$ 15,000- 50,000)
Service WFOE RMB 100,000 ~ RMB 300,000 (Approx. USD$ 15,000- 50,000)
Hi-Tech WFOE RMB 100,000 ~ RMB 300,000 (Approx. USD$ 15,000- 50,000)
Trading WFOE / FICE RMB 300,000 ~ RMB 1 million (Approx. USD$ 75,000- 140,000)
Food & Beverage WFOE RMB 500,000 ~ RMB 1 million (Approx. USD$ 75,000- 140,000)
Manufacturing WFOE RMB 500,000+ (Approx. USD$ 75,000+)

Note: FIEs may benefit from china’s new registered capital regime as stated above in the Executive Summary

Registration Steps

A. Gather and prepare appropriate documents

The following documents will be required before creating a WFOE:

  • 2x Certificate of Incorporation, Articles of Formation or equivalent, certified by Chinese embassy or Chinese consulate overseas
  • For individual investor : 2x Passport copies of Investor need be certified by Chinese embassy or consulate. If individual investor is currently in China some cities will allow individual investor to submit with their original passport.
  • 2x Bank Reference Lettersfrom investor’s bank (declare a good standing)
  • Passport copies of: (i) Parent company’s director (ii) China company’s Legal Representative and (iii) China company’s supervisor
  • China Legal Representative provides: 6 photos (2 inches size), brief resume
  • Registered capital; Business Scope; 8 proposed Chinese names of China company
  • Office address in China, 2x leasing contracts, 2x certificate of real estate ownership and 2x landlord identification
  • 4x Letter of Authorization
  • For Trading WFOEs only: The latest annual audit report copy from the parent company: provided by a Certified Public Accountant (CPA) and Customs HS Code of proposed Import/Export products in China

The above documents are enough to register a Trading WFO, a Service WFOE & Consulting WFOE.

Manufacturing WFOE’s will also need:

  • Purpose and estimated investment
  • WFOE’s operational structure and number of employees
  • Permission for land use, environment evaluation report
  • Products, size of production, detailed list of equipment, and business plan
  • Environmental protection measures
  • Requirement for utilities such as power and water supply

Time: n/a

Cost: n/a

B. Register through a PRC sponsor

Foreign investors are not permitted to directly submit the application documents of incorporation of a WFOE to the relevant authority in China (e.g. local Ministry of Commerce / MOFCOM). They must instead retain a PRC entity that is authorized or permitted by relevant authorities to act as a sponsor, such as a local designated Foreign Enterprise Service Company (FESCO) who will be in charge of your representative office application process. The sponsor will submit all the documents prepared in the first step to the examination and approval authorities on behalf of the foreign investor.

Agency: MOFCOM (via a FESCO)

Time: Procedures and time frames for setting up a WFOE in China are covered in the following table.

Note: Anecdotal sources recommend that one should expect 2-3 months to have all documents organised and prepared, about 1 month to submit all documents. Furthermore, it has been advised to be prepared for different cities on a case-by-case basis to expect more than the official requirement.

Step Time
1. Name registration with State Administration of Industry and Commerce (SAIC). Completed on the same day
2. Certificate of Approval by Ministry of Commerce or Foreign Economical Cooperation Bureau 5 business days
3. Apply for Business License with SAIC 5 business days
4. Chops (Seal/Stamp) made by Public Security Bureau (PSB) 1 business day
5. Organization Code License by Technical Supervision Bureau (TSB) 5 business days
6. Tax Certificate by Taxation Bureau 7 days
7. Registration and Approval with State Administration of Foreign Exchange (SAFE) 5 Business Days
8. Open foreign currency and RMB bank account 1 day
9. Inject capital from investor/s’ overseas bank account n/a
10. Capital Verification Report by Certified Public Accountant (CPA) 2 business days
11. Apply for Permanent Business License with SAIC 5 business days
12. Financial certificate registration 10 business days
13. Statistics license registration 1 business day
14. Import/Export license (applicable for Trading & Manufacturing WFOE) 1 business day

Table of Costs:

WFOE type: Approx. government fees
Consulting company 1,000 USD
Service WFOE, Software company 1,000 USD
Trading Company with Import/Export license 1,000 USD
Freight Forwarding company 2,000 USD
Food & Beverage WFOE 2,500 USD
Manufacturing WFOE 4,000 USD

Joint Venture

A joint venture (JV) is a form of foreign invested enterprise (FIE) that is created through a partnership between foreign and Chinese investors, who together share the profits, losses and management of the JV. It is used most often when there is a need for a local business partner who can offer distribution channels, government relationships or significant market knowledge. Despite this the JV structure can bring challenges and risks by entering a business relationship with Chinese investors.

Steps Required:

  • Register Business License
  • Obtain Certificate of Approval
  • Name Internal Supervisor
  • Lease Office Space

Time: 4-6 months

Cost: 6,500 RMB

A joint venture (JV) is a form of foreign invested enterprise (FIE) that is created through a partnership between foreign and Chinese investors, who together share the profits, losses and management of the JV. As a foreign investor, there are two major reasons to create a JV:

(1) when entering a certain industry requires a local partner according to the restrictions outlined in the PRC Foreign Investment Industrial Guidance Catalogue,

(2) when a local partner is able to offer tangible benefits such as well established distribution channels, government relationships or significant knowledge of the local market.

As with any partnership, in addition to the advantages of working together, JVs also face serious challenges. It is strongly recommended that prior to choosing this form of investment vehicle you consult with the foreign partner of an existing JV in order to better understand the advantages and disadvantages of the JV structure.

A JV is a limited liability company, where the liability of the JV’s investor(s) is generally limited to the assets of the JV.  The “total investment” of a JV is the amount of capital required to start-up the business until it becomes self-sufficient from its investors.

Summary of JV Investment Capital Requirements

Total investment is made up of two components: the registered capital portion, and the non-registered capital portion. “Registered capital” refers to the equity investment in a JV.  This amount is fixed in the articles of association of a JV, and constitutes an investment commitment on the part of the investors to the JV (subject to any increase or decrease of registered capital approved by the government).

The non-registered capital portion of the total investment of a JV is essentially the amount of debt financing which the JV is permitted to obtain. Unlike registered capital, there is no commitment to finance the non-registered capital portion of a JV’s total investment (such debt financing may be obtained at the JV’s discretion).

The JV’s investors must pay 15% of the registered capital of the JV within the first three months after issuance of the business license (similar to a certificate of incorporation under Canadian law), with the balance due within the first two years.

The minimum legal requirement is 30,000 RMB if the JV has two or more foreign investors, or 100,000 RMB if the JV has only one foreign investor.  Despite these minimum amounts, the authorities will approve the amount of registered capital on a case-by-case basis depending on the intended business activities, scale of operation and location of the JV.  The amount is then written into the company’s articles of association.

Advantages of a Joint Venture

  • The use of local partner’s existing workforce and facilities
  • Existing channels for sales and distribution
  • Use of a partner’s network to build good relationships, avoid red tape and other bureaucratic complexities
  • Entry into industrial sectors which exclude wholly foreign-owned investment

Disadvantages of a Joint Venture

  • Cost & complexity of establishment – authorities carefully inspect all documents presented to them and may ask for clarification or changes
  • Conflicting interests with partners
  • Merging different management styles
  • Liability associated with inheriting staff
  • Risks with technology transfer and intellectual property management
  • Division of profits

The JV model presents a variety of options for management and financial structures broadly divided into the following two groups.

Additional JV Structure Options

Equity Joint Venture (EJV)

An Equity Joint Venture (EJV) is an enterprise created with capital investments from both foreign entities and domestic companies, where profits are distributed according to the ratio of contributions.  A minimum of 25% of the investment must come from the foreign partner. An EJV is a limited liability company, holding an independent legal identity.

EJVs must have a two-tiered management structure made up of a board of directors and a management team (general manager and deputies) that is contractually appointed and legally responsible for the daily operations of the company. The EJV structure is much more rigid than that of the CJV, particularly with respect to profit sharing.

Cooperative Joint Venture (CJV)

A Cooperative Joint Venture (CJV) is similar in form but more flexible than an EJV. CJV is an enterprise created with capital investment from both foreign entities and domestic companies, where profits are distributed between the investors in a proportion that may differ from the proportionate ownership interest of each investor.

Additionally, the CJV structure can allow for the recovery of the foreign partner’s capital to be accelerated, though new regulations make this difficult to achieve.  CJV was a more common model in the past, when Chinese partners supplied land and labour, while the foreign partner supplied technology and capital.  A CJV can be structured as a limited liability company or a non-legal person (similar to a partnership formed by contract).  Where established as a non-legal person, the liabilities of the CJV flow through to the investors of the CJV.

CJVs require the same two-tiered management as EJVs.

 

Pre-Licensing Stage for All Joint Ventures

The JV must be approved by the Municipal Commission of Commerce (MOC). The process to establish a JV will generally take between 4 to 6 months. Foreign investors may wish to engage a consulting company to represent their interests while establishing the JV, benefiting as well from their long standing relationships with local authorities and procedural know-how.

All applications must be submitted in Chinese and, in addition, may be written in a foreign language. Documents in both languages shall have equal validity.

  • A letter of intent or memorandum of understanding must be written and signed by all partners.
  • Submit JV name for approval by the local Administration for Industry and Commerce (AIC);
  • AIC requires one name and two alternates to be submitted.
  • A JV contract and articles of association must be written and signed by all partners.
  • Where the JV will be acquiring land or other fixed assets, or where the capital investment in the JV will be significant, pre-approval from the National Development and Reform Commission (“NDRC”) may be required.
  • Certain other government ministries may need to be consulted and to provide approval where the JV is to do business in a relatively regulated industry (for example health or education) or where the collateral impact of the JV’s proposed business activities require review (for example pollution, heavy energy usage).
  • Obtain a certificate of approval for the establishment of the JV from the Municipal Commission of Commerce (MOC). The MOC application should include the following documents:
    • Name pre-approval from AIC;
    • Project proposal briefly describing the JV;
    • Feasibility study setting out the JV’s investment size and purpose, operational and management structure, number of employees, utility requirements such as power and water, brief description of supply and distribution network, brief estimate of revenues and expenses.
    • JV contract and articles of association.
    • Certificate of incorporation or equivalent of the corporate investor(s) (certified by the Chinese Embassy or equivalent overseas).  For individual investors a passport copy is required (certified by the Chinese Embassy)
    • Capital credit certification from each investor’s bank
    • Copy of passport for (i) JV’s director, (ii) JV’s legal representative, and (iii) JV’s supervisor
    • Leasing contract for office space in China, certification of real-estate ownership, landlord’s identification
    • Letter of authorization (authorizing the JV to accept service in China on behalf of the investor(s))
    • In some cases, latest annual audit report from the foreign investor provided by a certified public accountant
    • Any prior reviews or approvals from government branches (for example land-use rights if required).
    • Standard MOC filing forms

 

Licensing Stage For Joint Ventures

Once the approval certificate has been received, investors must apply and register for a business license with the AIC. AIC requires most of the same documents as MOC, plus its own standard filing forms.

Once a business license is issued, certain post-registration formalities must be completed including:

  • Record establishment of the business and official seal engraving with the Division of Entry & Exit Administration of the local Public Security Bureau;
  • Obtain certificate with the organization’s code number from the Technical Supervision Bureau;
  • Register with and obtain certificates from both the state and local tax authorities;
  • Tax reports should be submitted to the Tax Administration Department on a monthly, quarterly and annual basis
  • Register with the Administration of Foreign Exchangeto create a foreign currency account;
  • Open a local bank account;
  • Register with and obtain a certificate from the Bureau of Statistics;
  • Obtain certificate of financial registration from the local Finance Bureau; and
  • Obtain an import-export license from the Customs House.

 

Internal Supervision

JVs are also required to appoint at least one individual (of any nationality and residency) as the supervisor of the JV. The supervisor’s primary role is to monitor the affairs of the JV and the directors of the JV, and to report any irregularities to the board of directors of the JV and to the investor(s) of the JV.

 

Arrange Office Lease

Before beginning the application process investors must lease office space for their future business. It is recommended that a clause be added to the lease voiding the contract without penalty should the JV application be rejected. Office relocation requires a tax clearance declaration report, essentially an audit of the company.

Registering changes: despite any agreements that may be made between JV partners, it is important to register any changes in business scope or investment with the appropriate authorities as the documents that are registered with authorities will be those upheld in the event of a legal dispute between partners.

 

Agency: Municipal Commission of Commerce (MOC) and Administration for Industry and Commerce (AIC)

Time: The process to establish a JV will generally take between 4 to 6 months.

Time to form a JV will also depend on the negations stage, which can be quick or can take years to establish.

Cost: Estimated to be approx RMB 6,500, plus RMB 100,000~ RMB 500,000 for minimum investment capital

Outsourcing Employment Through a GEO Employer of Record Service

Whether to incorporate in China, and what sort of entity to setup are just two of the many choices companies must make when expanding into a new market.

If the company intends to have staff in China they must also decide whether they will administer that employment internally or use a Global Employment Organization to handle payroll and Employer of Record responsibilities. A GEO Employer of Record solution is an attractive alternative where

  • the company is looking to setup an office quickly
  • the company wants to work within a defined budget
  • the company wants to limit its initial commitment in China
  • the company needs help with tax, employment, immigration and payroll compliance in China

The complexity of employment regulations in China makes the use of a GEO advisable coupled with local legal counsel to ensure full compliance with employment laws, for example the drafting of local contracts for workers.

Shield GEO provides a comprehensive service in China allowing companies to deploy their staff quickly with reasonable, clearly stated costs and timeframes. The company contracts directly with Shield to employ and payroll their staff on their behalf in China.

Shield GEO then becomes the Employer of Record. Shield GEO assumes the legal responsibility for these employees, sponsoring them on work permits, complying with local employment law and running their monthly payroll. Using Shield GEO is the fastest and most cost effective way to deploy local and foreign workers into China. Read more about outsourced employment through Shield GEO.

  • Tax Compliance : What is FATCA and who is affected?

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