Registering a Company in China
Foreign investors interested in seeking expansion opportunities in China need to understand the processes associated with establishing an entity in the country.
When deciding whether to incorporate an entity, the laws and regulations that govern company establishment need to also be considered in the process, with the selection of an optimal investment vehicle that is aligned with the company’s strategic goals. This article will discuss the various company structures and investment vehicles used, and the specific steps taken to most effectively register a company in China.
The Incorporation of Investment Vehicles
One of the most important decisions that foreign businesses exploring market entry into China have is deciding on the appropriate market entry or investment vehicle. Deciding on the optimal mode of entry is highly dependent on the intended scope of business activities of the company as well as operating industry. The 3 primary investment vehicles used, in accordance with the new Foreign Investment Law, are Wholly Foreign-Owned Enterprises (WFOE), Joint Ventures (JV), and Representative Offices (RO). Branch Offices are also a useful way for companies to expand once they have an entity established in China.
Investment vehicle 1: WFOE
A Wholly Foreign-Owned Entity also known as WFOE (or WOFE) is often the most common investment vehicle used to incorporate an entity in China. Through exclusive leverage of capital from the side of foreign investors, control over the company’s operations, strategy and human resources is largely maintained by investors. Distinguishable industries in which WFOEs are registered include consulting, trading and manufacturing.
Investment vehicle 2: Joint Venture
A joint venture involves shared ownership of an entity amongst multiple stakeholders as compared to a WFOE. In the process of establishing a joint venture, an agreement and constitutional document specifying the rights, responsibilities and limitations of each shareholder is required. Joint ventures are advantageous when the intended industry or business area faces a degree of regulation, in addition to the networks and knowledge of local partners which can be leveraged.
Investment vehicle 3: Representative Office
A representative office is not a separate legal entity, but rather an extension of its head office. Therefore, there are no registered capital requirements, and the RO has a limited business scope. A representative office is beneficial for foreign investors who wish to support the strategic development of its core business at its headquarters through market research and marketing activities conducted in China. Representative offices are not allowed to engage in any commercial activities, issue fapiaos or hire local employees in China independently.
These types of vehicles function as an extension of an existing subsidiary in China rather than a separate legal entity, branch offices allow investors to engage in business operations outside its place of residence. As a foreign company, it is required that an existing subsidiary already be established in China before setting up a branch office. Activities are limited by the business scope from its parent company, and a branch office cannot import or export goods independently.
Faced with relatively fewer compliance requirements, establishing a branch office allows foreign companies to expand their presence in China, while remaining compliant and effectively limits set-up costs when compared to establishing an entirely new subsidiary.
3 Main Phases to Set Up a Company
Once a preferred mode of entry is decided on, company investors can begin the process of officially establishing a legal entity in China. There are 3 broad phases to setting up a company and becoming fully operational.
The first phase focuses on solidifying the formal structure of the foreign invested enterprise and preparing legal documents. This is followed by a series of application stages aimed at obtaining a company business license to officially establish a legal Chinese subsidiary. Finally, upon issuance of a business license, the company will go through a series of registration processes such as carving company chops, opening bank accounts, filing tax registrations, and obtaining other licenses which may be necessary for operation.
How do you make an entity operational?
In order to establish a foreign-invested entity in China the correct registration procedures need to be adhered to. The process of establishing a fully operational legal entity can take between 2 to 5 months, depending on the operational activities of the business and the investment vehicle chosen.
After a legal entity is officially incorporated, there are a number of registration procedures necessary to operationalize the entity. Here are the essential registration processes following the stage in which the structural details of the Chinese subsidiary is decided upon.
Phase 1: Preparation Phase
Structuring the Details of the Foreign Invested Enterprise
The following structural details of the company must be decided upon before proceeding with application procedures with Chinese authorities:
- Company name in Chinese
- Company name in English (optional)
- Business scope
- Registered personnel
- Registered address
- Registered capital and total investment
Legalization and Preparation of Documents
Evidence of the investor’s personal details must be provided through several documents when establishing a legal entity. Specifically, details on the incorporation and status of the shareholder’s company will be required. Individuals can sign documents on behalf of the company and identification of a key registered personnel. The method to legalize documents in China normally follows the standard steps below:
- Notarization by a public notary
- Legalization by Foreign Affairs authority of the foreign country
- Legalization by Chinese embassy/consulate in foreign country
Chinese authorities will thoroughly and critically review all structural details provided, especially the provided Chinese name and business scope. The process of procuring documents and completion of legal procedures should begin as soon as the decision to establish a subsidiary in China has been made.
2. Pre-Business License Phase
Pre-approval and Name Registration
An online pre-approval for company’s official name registration and structural decisions can be filed after the structural details of the business are decided upon.
The company is required to upload copies of official documents of identification regarding the registered personnel and lease agreement. Each structural component of the pre-application will be considered, and until approved, the company cannot move onto the following stage of name registration. The official application documents will then need to be printed and signed by registered personnel.
Application with the Administration for Market Regulation (AMR)
The official application with the Administration for Market Regulation can be lodged once the receipt of signed application documents and legalized documents is received from the investor.
Upon approval from the AMR, the company’s official business license will be issued, marking the legal existence of the Chinese subsidiary. The company can apply for an electronic business license after receiving the physical version of the business license, which is required for tax registrations throughout numerous regions in China. Similar to the paper version in terms of validity, the electronic business license can be used through issuing a QR code on the phone or other digital device.
Issuance of Business License
Following the submission of an application with the AMR, estimated to take around 5 working days, investors can proceed with issuing a Company Business License. The Chinese subsidiary will legally exist after the business license has been issued.
3. Post-Business License Phase
Carving of Company Chops
The company chops of the company can be carved once the business license has been issued. Company chops are essential to operations, serving as signatures on behalf of the company to make documents binding.
Bank Account Opening
Capital must be injected into two different bank accounts in order for a Chinese subsidiary to be operational. The first one is a RMB Basic Bank Account, which will be used for processing daily transactions.
The second bank account, namely a Foreign Capital Account will be used to receive capital injections for the company. The full amount of registered capital can be injected within a period of 30 years for the company.
Within 30 days following the legal existence of the corporate entity, foreign investors must begin any basic tax registrations and meet compliance requirements for tax filing.
Once a company completes its tax registration, it is required to complete tax filings on a monthly and quarterly basis. A company must comply with multiple tax registrations including:
- Registration with National and Local Tax Authority
- Registration for General VAT Taxpayer Status- required to deduct input VAT from output VAT – or Small- scale Taxpayer Status
- VAT invoice “Fapiao” registration – required for the ability to issue fapiaos
- Company registration at the Social Security and Housing Fund
License Applications for Import/Export (if applicable)
An import/export license must be obtained through application with the customers authority if the company wishes to import and export goods. The company is required to register with the State Administration for Foreign Exchange (SAFE) in order to receive funds or pay for goods that have been imported or exported, respectively.
Other licenses may be required for operations in certain industries such as a food and beverage license or professional services license (e.g. accounting).
How MS Advisory Can Help with Company Registration
While the process seems straightforward, there are often a number of challenges a business may face in the company registration process. This is why having a partner who both understands your needs and understands the regulations and processes is so important.
Moore – MS Advisory has supported foreign-based businesses for over a decade with full support on company registration in China. Our clients have received high quality assistance and communication when setting up their business in China. Get in touch with us so that we can give you a head start in successfully incorporating your business in China.
Download our business guide
CONTACT OUR EXPERTS
Cibes Lift Group AB
“Moore is our advisor of choice for complex tax and financial advisory with respect to our China operations. Moore’s team of experts has supported..."
“For our fast-growing business we need a reliable partner taking care of all our payroll related matters which we found in Moore. They helped..."
Lotus Bakeries NV
“Moore has been our trusted service provider since the establishment of our operations in China. With a profound understanding of Chinese compliance requirements and..."