Starting a Business in China
China, as an emerging market is undoubtedly a highly important country for opportunistic foreign companies looking to expand their operations globally. Despite the potential for growth, doing business in China can be a considerable challenge, due to its complex regulatory environment and processes with regards to set-up and maintenance.
Moreover, recent geopolitical tensions and the strict measures imposed regarding pandemic restrictions have increased the level of burden for China-based businesses as well as the overall degree of uncertainty for companies interested in doing business in the country.
Nevertheless, the long-term trajectory and future outlook of economic development in China remains promising and reinforces its position as a worthwhile location to establish business activity. This article will summarize important areas of consideration in helping businesses effectively navigate the ever-changing Chinese market and to facilitate a successful adaptation.
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Doing Business in China
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Business culture in China
On track to becoming the largest economy in the world in the coming years, China has sustained stable growth since the country opened its economy for foreign investment in the 1970s.
Best characterized economically as a socialist system, China merges elements of a market economy with state planning, while the country aims to progress beyond its historical prowess in the manufacturing sector towards a more consumer-oriented economy.
With a shift in economic policy, geared towards investments in innovation and local consumption, annual GDP growth has gradually slowed down in recent years but remains progressive.
With dynamic developmental goals, an enhanced focus on technological advancements, a thriving consumer population, sophisticated networks in global trade and increased governmental support for entrepreneurial activity, China maintains its place as a highly attractive destination to establish a business.
Who can start a business in China
In consideration of a renewed framework governing foreign investment into China, the new Foreign Investment Law (FIL) of 2020 aims to enhance foreign investment into the country through fair treatment of both foreign and domestic enterprises.
The new principle of National Treatment, states that local authorities are to treat foreign and domestic investors on an equal basis, subject to requirements pursuant to the Negative List for foreign investment into China. The so-called ‘Negative Lists’ provide further regulation and administration for industries, placing operational restrictions and limits for certain sectors.
As governed by provisions of the new FIL and stipulations of the ‘Negative List’, foreign investors belonging to specific sectors may face prohibitive measures and restrictions with regards to their choice of investment vehicle, use of legal structures and scope of business activities. In contrast, notable industries such as high-end manufacturing and production-based services are encouraged to engage in foreign investment, through incentivizing measures such as tariff exemptions and preferential tax treatments. Foreign investors planning on establishing a business in China will need to consider the administrative effects of the Foreign Investment Law and Negative List.
Legal structures for businesses in China
To ensure legal compliance throughout the business set-up process, it is important for foreign investors to understand the market entry vehicles available in China. Selecting the most favorable company structure and investment vehicle in which to start their business is a critical decision.
The 4 primary investment vehicles in China are known as: Wholly Foreign-Owned Enterprise (WFOE), Joint-Venture (JV), Representative Office (RO), and Variable Interest Entity (VIE). The scope of business activity and intended industry of operation are important consideration factors when selecting the optimal mode of entry.
A Wholly Foreign-Owned Enterprise or WFOE (sometimes spelled WOFE) is equivalent to an LLC in China and is generally preferred investment vehicle of foreign investors. A WFOE is a Limited Liability Company (LLC) which is fully owned by the foreign investor and thus provides the investor(s) full control/independence in matters of operations, strategy and HR.
Companies looking to maintain control of their entity when they start or expand operations in China commonly opt for the WOFE option. This option has various advantages and allows for greater freedom as opposed to the other entities available.
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WFOE in China
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Joint Ventures in China
Similar to a WFOE, a Sino-Foreign Joint Venture (JV) is a Limited Liability Company. However, in a JV structure, a foreign investor partners with a Chinese company or individual (hence the name Sino-Foreign JV). Generally, there are two main reasons why companies want to establish a Joint Venture in China:
- In order to access a restricted industry sector in which foreign investment is only permitted through a Joint Venture.
- Utilizing the existing network of a Chinese partner, who has expertise on the local market and established has contacts who are beneficial to their business interests.
Management of Joint Ventures can be more complex for companies with limited international experience. Within the Chinese corporate environment, shareholders are not always able to exercise direct influence on the activities of their Chinese subsidiary, and instead the Board of Directors and in particular the Legal Representative of the Chinese subsidiary holds the authority to make principal decisions.
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Joint Venture in China
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A China Representative Office
A Representative Office (RO) is not a separate legal entity but rather a type of “branch” of the head office (“liaison office”). Although a Representative Office does not have any registered capital requirements, a defining characteristic is its limited business scope. They are only allowed to conduct marketing & research activities for the headquarters, thus meaning they cannot engage in any commercial activities, they cannot issue fapiao and cannot independently hire local Chinese staff. In addition, Representative Offices are required to pay Corporate Income Tax based on their expenses, which they are unable to offset as they are not allowed to engage in any commercial activities.
Variable Interest Entity
Another option for foreign investors to invest into a restricted industry is through a so-called Variable Interest Entity (VIE) structure. A VIE is a structure where a foreign business enters into a contractual relationship with a Chinese domestic company which has the necessary approvals and licenses to operate in a specific sector, where control over the operations and management relies on the contractual agreement(s) in place between the foreign business and the domestic Chinese company. It is important to note that the VIE structure is not officially approved according to PRC law and regulation, yet thus far its operations have been permitted by Chinese authorities.
How to start a business in China as an expat
After a company has decided on the preferred investment vehicle to enter the Chinese market, it can then commence with the corporate establishment procedures.
The establishment of a Foreign-Invested Entity in China is subject to various laws, regulations, and governmental authorities. On average, the procedure to establish a fully operational legal entity in China takes 2 to 5 months to complete but depends in part on the chosen investment vehicle and planned business activities.
Although there are some variations in the establishment procedures depending on the chosen investment vehicle, such as with a manufacturing WFOE where an environmental impact assessment must be performed, the procedures generally include structural decision-making, document preparation, and pre- and post-business application procedures.
A general overview of the common course of action for establishing a legal entity in China
- Document preparation & legalization in country of shareholder
- Deciding on the structural details of the Chinese subsidiary
- Pre-approval and registration of the name
- Application with the Administration for market regulation
- The carving of company chops
- Opening of a Chinese bank account
- Tax registrations
- Application for an import/export license (if applicable)
- Application for other licenses (if applicable)
How much does it cost to set up a business in China?
The capital investment for setting up a business is largely dependent on the company structure, type of business and type of industry. Foreign investors need to ensure that costs linked to obtaining a registration certification, office rental and hiring employees are covered as primary costs.
In terms of registered capital, a WFOE is now required to contribute the full amount within 30 years of establishment, as opposed to the previous position where 20% had to be deposited within 90 days and the remainder within 2 years. Foreign-invested companies are able to issue loans through a parent company, to be brought into China as registered capital in setting-up the business.
Companies will need to specify the total registered capital contributions in accordance with the Articles of Association, which is to be approved by the government. The declaration of an appropriate amount of capital investment will also impact tax liabilities.
As previously mentioned, investment amounts vary based on the chosen investment vehicle. For example, a WFOE will require a substantial capital investment as opposed to a Representative Office.
Considerations for foreign companies opening a subsidiary or branch in China
When establishing your legal entity, some important considerations to make include appointing a legal representative, board of directors, supervisors and a general manager as key personnel in charge of administration and operations.
The legal representative bears complete responsibility of the firm’s actions and has complete authority over the company chops. This means that this person is entitled to engage in any business activity on behalf of the company. The downside to this is that the person is held responsible by Chinese governmental authorities in the case of any discrepancies (if a legal representative resides outside China this will reduce such a risk, as authorities will not be able to hold this individual directly accountable).
Furthermore, a foreign-invested enterprise in China can be either managed by a Board of Directors or through a single Executive director. The board of directors must be comprised of no fewer than 3 and no more than 13 members, and full details regarding these individuals must be filed with the AMR. It is up to the discretion of the investor to decide the management structure and thus the investor may choose to have a single Executive Director if the company operates on a small scale and has few shareholders.
In terms of business administration needs, the day-to-day activities of a company in China are managed by the General Manager. This person can be either a member of the Board of Directors or another independent individual. Again, there is no requirement for this individual to have a certain nationality or to be a resident of China. The General Manager has the authority to sign and chop agreements on behalf of the company, but usually requires prior approval from the Legal Representative by means of delegation.
Lastly, a supervisor is responsible for supervising the conduct of the Board of Directors/Executive Director in order to protect the rights and interests of the shareholder(s). In practice, the supervisor of a company has no direct authority or responsibility, and usually serves a ‘symbolic function’ within the company
How to obtain a working visa in China for employees
Foreign enterprises who wish to relocate employees to china for trade and commercial purposes will need to obtain a working visa (Z visa). Applicants for the Chinese business visa must have:
- A valid passport
- A completed application form
- A colored passport photo
- A photocopy of their passport
- Any additional supporting documents
Employees eligible for the working visa must also have a valid job offer, 2 years of related work experience in a relevant field and a clear criminal record verified through background checks.
Applicants can apply for the visa through the Chinese Embassy or Consulate in their home country or can have a 3rd party to assist them in the process. Processing time for the z visa in normal circumstances is 4 working days and will remain valid for three months.
Insuring your business in China
Although not mandatory, it is recommended for foreign investor to secure a general liability insurance, employer’s liability insurance, errors and omissions insurance and property insurance.
Hiring staff for your business in China
For foreign investors who want to establish or are already running an entity in China, it is important to have a comprehensive understanding of Chinese laws, regulations and processes related to human resources and payroll administration.
Firstly, a signed written employment contract between an employer and employee is a requirement for a labor relationship to be valid. The employment contract should be signed by no later than the end of the first month of employment. Labor contracts must contain the following information:
- Relevant details of the employer
- Relevant details of the employee
- Period of employment
- Working hours, leave periods and rest policies
- Job description and place of employment
- The amount and terms of remuneration
- Working conditions, relevant insurances and labor protection
Other policies not specified in the aforementioned list of clauses include training policies, insurance benefits and probationary period.
Foreigners who wish to be employed in China need to obtain a Residence Permit and Work Permit, to be eligible to work. Foreign employees are able to enjoy the same rights and responsibilities as local employees.
Employees are required to adhere to policies outlined by the employee handbook, specifying rules and procedures around the obligations and rights of employees as well as company regulations.
Supporting advice for starting a business in China
Despite an ever-changing market landscape, China’s business environment offers valuable opportunities for growth and expansion. As a foreign investor, it is critical that you familiarize yourself with the local business culture, current regulatory procedures and appropriate practices before setting up your business.
Whether you are considering incorporating a WFOE or a joint venture, an experienced service provider based in China, with a strong track record will enable you to navigate the barriers associated with doing business in China.
Moore MS Advisory has supported foreign enterprises in China with business setup for over a decade. With specialized services in accounting, financial advisory and corporate set-up, Moore MS Advisory consultants uphold the highest standards of service to ensure your business remains compliant and on track for success. Contact us now to learn more about our services and how we can help you in growing your business in China.
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