When setting up a company you may want to consider these factors:
China requires that workers have employment contracts that meet local standards, and companies must have a professional who can draft local employment contracts.
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.
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.
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.
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.
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.
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:
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.
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:
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:
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
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
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.
Agency: Various (through FESCO)
Time: 1 month
Cost: Covered as part of the USD$800-1000
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.
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.
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 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.
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:
With China’s entry into WTO, more and more business is open to WFOE especially in Trading, Wholesale and Retail business.
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:
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)
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.
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
The following documents will be required before creating a WFOE:
The above documents are enough to register a Trading WFO, a Service WFOE & Consulting WFOE.
Manufacturing WFOE’s will also need:
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.
|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|
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.
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.
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.
The JV model presents a variety of options for management and financial structures broadly divided into the following two groups.
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.
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.
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:
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.
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
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 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.