How to Set Up a Company in China?

doing business in China

How to Set Up a Company in China?

Since China is becoming a global economic power and a hub for investors and start-ups, following the 70s economic reform, China has been gaining exceptional growth in its businesses. The fast-growing middle class and huge consumer market are a few of many reasons to do business in China. However, there are some challenges and peculiarities one must know before entering the Chinese market.

Can foreigners own business in China?

Yes, foreigners can own business in China. However, if a foreign company or investor wants to set up a company in China, they have three options, or to be more precise, three types of business forms. Like everything in life, there are advantages and disadvantages in every option that the foreign investor can choose.

In this article, we will explain and discuss these three options to set up a company in China. 

We are hoping that by the end of this article, you will be able to decide which business types suit you best if it’s a WFOEs, Joint Ventures, or a representative office!

 

Businessman from China conceptual image

Main forms of opening a business in China for foreign investors

· Representative Office.

· Joint Venture.

· Wholly Foreign-Owned Enterprise.

Representative office:

Unlike other company structures in that, it merely serves as an extension to the parent foreign enterprise and does not form its separate legal entity. Setting up a company via a Representative Office is not always the most optimal mode of entry. Since it is limited in its business scope, as it is forbidden from engaging in any profit-seeking activities, RO is only allowed to conduct Marketing and Research activities for the overseas head office.

Although RO’s have no registered capital requirement, the company is still required to pay Corporate Income Tax based on their expenses (based on tax bureau calculation method). If companies want to engage in actual business activities and send invoices to their clients in China, a Representative Office would not be the most effective choice to access the Chinese market.

Advantages and disadvantages of establishing a representative office:

Advantages:

· Setting up a Representative Office doesn’t require registering capital; it means you have access to many foreign companies.

· Setting up a RO is a faster and simpler process than a WFOE; a RO can be set up in several months less than WFOE.

· A RO can’t hire staff directly. The Chinese Government authorizes a 3rd party HR agency that will arrange and hire staff for the office.

· Since the RO doesn’t sell or export anything, there’s no complicated tax process here.

· You can set up a RO in just two weeks; since the RO is very limited in scope, the process of establishing it is relatively easy and quick.

· RO allows companies to execute market research in China and will be able to manage marketing and promotions within China.

· The opportunity to exchange ideas and technology with local organizations easily.

Disadvantages:

· The parent company of the RO must have been established for at least two years.

· The business address of the office may only be located in commercial buildings.

· Setting a RO in China is restricted to conduct any business that gains profits, including signing contracts, making sales, issuing invoices.

Setting up a RO in China process:

· Gain approval for your business name

· Obtain space for your business and sign a lease

· Apply for the (local Administration for Industry and Commerce) to get a business registration certificate

· Apply for Organization Code License by the Technical Supervision Bureau

· Handle the tax registration by the local tax bureau

· Gain visas for foreign employees (RO office is allowed to set up visas to four employees)

· Open a Chinese bank account

Joint Venture:

A JV (Joint Venture) in China is a limited liability company created through a partnership between a foreign-invested enterprise (FIE) and Chinese investors, jointly funded, operated, shared profits and losses by two or more foreign investors. Unlike RP (Representative Office) and WFOEs, a joint venture company involves at least one Chinese partner, which can be either an individual or a corporate.

Equity Joint Ventures:

An Equity Joint Venture is a less flexible type of JV in which three or more parties can set up a separate legal company to act as the vehicle for carrying out the project. The EJV Law is between a Chinese partner and a foreign company. It is incorporated in both Chinese (official) and in English (with equal validity), with limited liability.

Cooperative Joint Ventures

Cooperative joint ventures are permitted under the Sino-Foreign Cooperative Joint Ventures, which allow for more flexible agreements between the JV parties. In cooperative joint ventures (CJV), companies have the choice to recognize themselves as a limited liability company (LLC) or as a non-legal person in which the partners are subject to unlimited liability. This means that the partners who share this company are entirely liable for losses the joint venture may incur.

The other main difference between a cooperative joint venture (CJV) and an equity joint venture (EJV) is that, in a CJV, profits can be allocated according to the partners’ discretion and do not have to be proportional to the partners’ investments. The parties may also agree that one party recovers its investment through an accelerated repayment structure, whereas the other party will become the owner of the joint venture’s assets after the termination of the joint venture.

The Advantages and Disadvantages of Establishing a Joint Venture (JV):

Advantages:

· Access to the local partner’s existing workforce and gaining insights from it.

· Gain entry into industrial sectors, which exclude WFOE investments.

· Access to partner’s existing channels and distribution.

· Access to the partner’s network to build strong and growing relationships.

Disadvantages:

· IP (Intellectual property) projection and property management.

· Merging different business and management cultures.

· A costly and complex process, and finding the right local partner.

· Conflicting interests with partners.

· Division of profits.

Setting up a JV in China process:

The procedure of setting up a JV in China is divided into two sections. Before obtaining a license for your business and after.

Pre-License

· A letter of intent must be written and signed by all partners

· Gain approval for your JV name by the AIC

· Pre-approval by the NDRC (National Development and Reform Commission) for your JV location

· Gain a certificate approval for the establishment of JV from the MCC (Municipal Commission of Commerce)

After License

· Apply for Organization Code License by the Technical Supervision Bureau

· Register and obtain certificates from the tax authorities

· To create a foreign currency bank account, you need to register your JV at the Administration of Foreign Exchange

· Register and gain a certificate from the Bureau of Statistics

· Open a local Chinese Bank account

· Gain an import-export certificate from the Customs House

Setting up a company in China – how can we help

It is not easy to set up a company in China. However, with the right local experts and a comprehensive, pre-determined plan, the transition to the Chinese market can be smooth. Xinergy Global provides all the necessary services needed to set up a company and operate in a complex but very highly rewarding Chinese market.

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byNiv Schwartz

Global Business Strategist Entrepreneur, Author, Speaker, Tech-savvy with rich experience in Technology business in APAC Region. Founder & CEO of Xinergy Global Ltd.

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