What type of business entity to choose for your business in China

What type of business entity to choose for your business in China

If you are considering starting business in China, the first and most important question to ask yourself is whether you really need a company in the Mainland. China is notorious for its constantly changing laws and cumbersome red tape. Sometimes, entering China via a local partner or via a Hong Kong company will save your time, money and peace of mind.

If, after evaluating all pros and cons, you are still adamant about your decision to set up in China, you have a choice of these three company forms open to foreign investors:

Wholly Foreign Owned Enterprise

Wholly Foreign Owned Enterprise (“WFOE”), 外商独资企业 in Chinese, is a limited liability company, 100% owned by one or more foreign investors and established entirely with foreign capital. This gives foreign investors a higher level of independence, control and security over their business activities.

WFOE is a suitable option for any business project, except certain restricted industries, such as media, where partnering with a Chinese party is obligatory.

A WFOE can engage in approved business activities and issue tax invoices on its own.

Three types of WFOE:

  1. Manufacturing WFOE
  2. Consulting (or Service) WFOE
  3. Trading WFOE or FICE (Foreign-Invested Commercial Enterprise)

Trading WFOEs and Manufacturing WFOEs must derive the majority of their revenue from that main business, but can also provide associated services. Meanwhile, some Service WFOEs can also conduct trading activities related to their services. When applying to set up a WFOE, the business scope must be specified in the application. The business scope is a one sentence description of the business activities in which a business will engage, and will appear on your business license.

The application process to open a WFOE generally takes 3 to 6 months. The establishment process varies based on the WFOE form and business scope. For example, a Manufacturing WFOE will require an environmental evaluation report, and a Trading WFOE will need to undergo customs/commodity inspection registration.

The application process can be divided into two parts:

  1. Pre-registration – what happens before your company formally exists:
    • Verification of the proposed company name with local Administration of Industry and Commerce (AIC)
    • Issuance of approval certificate and temporary business license by the local office of the Ministry of Commerce (MOFCOM). Upon issuance, you’ll have a 30-day limit for registering the company with the AIC, which then issues temporary business license
  1. Post-registration – what happens after the company formally exists:
    • Registration with local tax authorities
    • Application for carving various seals (or chops) in order to authorize documents on behalf of your company
    • Opening an RMB bank account for managing daily operating expenses
    • Opening a foreign capital bank account for receiving foreign currency

WFOE is currently the most popular form of incorporation for foreign companies and is the safest choice if you wish to engage in profit making activity.

Representative Office

Representative Office (“RO”), 代表处 in Chinese, is another entity that represents the foreign company in China. The major difference is that ROs are not allowed to engage in any profit making activities including manufacturing, production and sales. Therefore, RO can’t sign contracts, buy or sell products or services and can’t issue invoices. However, a RO may perform market analysis and coordinate marketing activities. RO is the best option if you prefer to take one step at a time: perform market analysis, liaise with local businesses and, in general, make yourself known in China before proactively engaging in revenue generation.

Also, a Representative Office can employ Chinese citizens (via a designated Chinese recruitment agency) and up to 4 foreigners.

Registration procedure is relatively simple and inexpensive. RO should be registered with Administration Bureau for Industry and Commerce, at the same time you may apply for Permanent Representative Office Certificate. As a rule, it takes 2-3 months to obtain the certificate.

Nowadays, ROs are becoming increasingly rare, as foreigners prefer to incorporate WFOEs.

Joint Venture

Joint Venture (“JV”), 合资 in Chinese, is a special entity with both a mainland Chinese party and a foreign party.

When China just started to open up to foreign investments JV were extremely popular. However, JV often imply transfer of intellectual property and taking into account China’s reputation for poor IP protection, more and more foreigners go for a WFOE.

The valuable reasons to opt for JV are:

  1. You operate in an industry restricted by the PRC Foreign Investment Industrial Guidance Catalogue (media, oil & gas exploration, education or medical institutions, etc.)
  1. A local partner can bring you significant benefits, such as good connections with local authorities, knowledge of local market and established sales and distribution channels. In particular, JV may be interesting to those seeking to export goods from China or to sell their goods to Chinese customers

Usually, JV involves a clear division of profits in accordance with the equity investment (in cash or in-kind) contributed by the parties. Foreign investment must normally account for at least 25% of the registered capital. However, there are some more flexible forms of JV that allow foreign party to withdraw invested capital before the dissolution and don’t stipulate clear requirements about profit distribution.

Comparison chart

 

WFOE

Representative Office

Joint Venture

Setup time

3-6 months2-3 months3-6 months

Minimum capital

Vary by industry and region. The absolute minimum are RMB 30,000 for multiple shareholder companies and RMB 100,000 for single shareholder companies, in cash or in-kindNot requiredRMB 30,000 RMB if the JV has two or more foreign investors, RMB 100,000 RMB if the JV has only one foreign investor, in cash or in-kind

Business scope

Trading, Consulting or ManufacturingMarket research, quality controlTrading, Consulting or Manufacturing

Office

A physical office location is required (office building)Office building/Virtual addressA physical office location is required (office building)

Hiring capacity

Can recruit directlyOnly via local recruitment agency, up to 4 foreignersCan recruit directly

Taxation

VAT, Enterprise Income Tax, Transaction taxes e.g. stamp duty, real estate tax, land appreciation tax, etc. (where applicable), local taxes & levies (where applicable), and other applicable taxes/duties depending on the entity’s business operationsVAT, Enterprise Income Tax, local taxes and levies (where applicable)VAT, Enterprise Income Tax, Transaction taxes e.g. stamp duty, real estate tax, land appreciation tax, etc. (where applicable), local taxes & levies (where applicable), and other applicable taxes/duties depending on the entity’s business operations

Bank account

RMB and foreign currency accounts for receipt of payments, bills payment and cash withdrawalCan’t engage in profit-making activities, so bank account serves mostly for paying RO’s own expensesRMB and foreign currency accounts for receipt of payments, bills payment and cash withdrawal

Invoicing

Invoicing from ChinaNot allowedInvoicing from China

Receiving payments

AllowedNot allowedAllowed

Local variation in practice is not uncommon in terms of the above requirements, procedures, etc. for setting up the entity.

 

Regardless of your choice, be ready for a long and complex bureaucratic procedure that doesn’t always follow guidelines. Also, be prepared to visit China several times, some authorities require your physical presence for documents submission. It’s advisable to engage a professional local party who will help to prepare documents for company registration in China and monitor all the process. Please contact us to find out more how we can assist.