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

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:

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.

Table of Costs:

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