Since China is becoming a global economic power and a hub for investors and start-ups following the 70s economic reform, China has continued to gain 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 Businesses in China?
Yes, foreigners can own businesses 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 to every option. 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 the article you will be able to decide which business type suits you best, whether it is WFOEs, Joint Ventures, or a representative office!
Main Forms of Opening a Business in China for Foreign Investors:
- Representative Office (RO)
- Joint Venture (JV)
- Wholly Foreign-Owned Enterprise (WFOE)
Representative office (RO):
Unlike other company structures, representative offices merely serve as an extension to the parent foreign enterprise and does not form an individual legal entity. Setting up a company via a Representative Office is not always the most optimal mode of entry. It is limited in its business scope as it is forbidden from engaging in any profit-seeking activities. RO’s are 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 RO 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’s allows companies to execute market research in China and will be able to manage marketing and promotions within China.
- RO’s provide an 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 RO may only be located in commercial buildings.
- Setting a RO in China is restricted to conducting any business that gains profits, including signing contracts, making sales, issuing invoices.
The Process of Setting up a RO in China:
- 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 receive a business registration certificate.
- Apply for an Organization Code License by the Technical Supervision Bureau.
- Handle the tax registration by the local tax bureau.
- Gain visas for foreign employees (a RO is allowed to set up visas for four employees).
- Open a Chinese bank account.
Joint Venture (JV):
A JV (Joint Venture) in China is a limited liability company created through a partnership between a foreign-invested enterprise (FIE) and Chinese investors that is jointly funded and operated, with shared profits and losses by two or more foreign investors. Unlike RO’s and WFOE’s, a joint venture company involves at least one Chinese partner, which can be either an individual or a corporate company.
Equity Joint Ventures (EJV):
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 (CJV):
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, the 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 the local partner’s existing workforce and the ability to gain insights from it.
- Gaining entry into industrial sectors, which exclude WFOE investments.
- Access to the 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 of different business and management cultures.
- A costly and complex process, and potential difficulty in finding the right local partner.
- Conflicting interests with partners.
- Division of profits.
The Process of Setting Up a JV in China:
The procedure of setting up a JV in China is divided into two sections: before obtaining a license for your business and after obtaining a license for your business.
Pre-License:
- A letter of intent must be written and signed by all partners.
- Approval for your JV name by the AIC.
- Pre-approval by the NDRC (National Development and Reform Commission) for your JV location.
- A certificate of approval for the establishment of JV from the MCC (Municipal Commission of Commerce).
After-License:
- Apply for an 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 into 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. Contact us today to discuss strategies.
