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.
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.
China requires that workers have employment contracts that meet local standards, and companies must have a professional who can draft local employment contracts.
|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.
|Resignation / End of Service Payment ?||
Non-competition period compensation
|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:
|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:
|Pension Requirements ?||
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 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.
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.
|Management Fee for Employer of Record Services / Monthly Payroll Costs||
Please contact us for a quote
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.
CNY Chinese Yuan
|Tax Returns Supplied||
|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
|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
Foreign nationals require private health insurance
|Can supply private health care||
|Can assist opening bank accounts||
|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||
|Work Permit processing time||
|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?||
|Can do Business Visa||
|Business Visa Cost||
|Business Visa processing time||
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.
|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.
|Employee Information Required ?||
The employment contract absolutely has to contain:
|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.
|Corporate Income Tax ?||
|Income Tax Rate ?||
|Payroll Tax ?||
|Sales Tax ?||
|Withholding Tax ?||
10% for non-resident companies
|Time to prepare and Pay Taxes ?||
|Time required to start a Business ?||
|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).
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.
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.
Copy of business license, copy of business registration certificate, copy of code certificate, copy of certificate of approval
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:
It takes around 4 to 6 weeks to secure a work permit, and costs $1000 USD through Shield GEO
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:
|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
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.
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