Business entities in China
The People’s Republic of China is the largest market in the world by the size of its population and the second largest by the size of its economy. Starting a company in China is however also complex and time-consuming for foreigners, due to i) rapidly evolving and inconsistent regulations ii) the need to contact different administrations and agencies iii) restrictions to foreign investment in several industries. Healy Consultants assists our Clients by advising them regarding to the optimal corporate structure and them completing on their behalf each phase of China business setup.
The China wholly foreign owned enterprise (WFOE)
The most popular entity in China is the China wholly foreign owned enterprise (WFOE), which is a Chinese limited liability company wholly owned by the foreign investor. A China WFOE can generate income from all industries opened to foreign entrepreneurs in China. It is also considered as resident by the Chinese authorities for taxation. The following information will help you determine whether registering a WFOE in China is the optimum corporate structure to fulfill your business objectives in this country:
What can a Chinese WFOE do?
- A foreign investor setting up a China WFOE company can control it without the involvement of a Chinese partner;
- A WFOE is allowed convert RMB profits to US dollars for remittance to its parent company outside of China. The funds repatriation process is neither hampered by exchange controls nor penalized by withholding tax;
- The WFOE company can issue invoices to customers in RMB and receive revenues in RMB. The company can invest in other Chinese companies and also trade products, services and raw materials internationally.
Main requirements to form a Chinese WFOE
- Depending on the city of registration, the paid up share capital ranges between US$15,000 and US$140,000. To optimize the probability of China WFOE registration, Healy Consultants recommends our Clients to have a registered capital of US$140,000. The immediate paid-up capital would then be 20% (US$28,000) of the registered capital, while the balance must be deposited to the bank account within 2 years. Healy Consultants will advise our Clients regarding the optimum paid up share capital strategy;
- Such China company setup requires i) one shareholder ii) one director;
- All foreign-invested enterprises in China (including WOFE) must go through a complex approval process by the authorities including: i) pre-approval of a business plan by the China National Development and Reform Commission ii) incorporation approval by the PRC Ministry of Commerce and iii) foreign exchange registration with China’s State Administration of Foreign Exchange;
- A feasibility study must be submitted to the State Administration of Industry and Commerce (SAIC). This document includes a basic first year business plan and budget. The project will not be approved unless the local authorities are convinced it is a feasible business. Government approval of the project/business activities is an integral part of the incorporation process. If the project is not approved, incorporation is disallowed;
- Before China WFOE company setup, the foreign investor must rent an office or manufacturing space. Healy Consultants will assist our Clients with a virtual office until the preferred office location is chosen;
- After setup of the Chinese company, all businesses must register for i) corporate income tax ii) VAT and iii) social security (if they have employees). They are thereafter required to file i) corporate income returns and provisional payments each quarter ii) VAT returns and payments usually each quarter and iii) social security contributions each month.
- Furthermore, after incorporation, all Chinese companies (foreign-invested or not) are required to report to the Tax Administration Department monthly, quarterly and annually. If needed, Healy Consultants assists our Clients minimize the burden constituted by reporting requirements, by taking care on their behalf of accounting and tax reporting obligations.
The China joint venture company (equity joint venture)
- A China joint venture company (also known as a China equity joint venture or an EJV) is commonly a standard limited liability established by i) 1 foreigner (our Client) and ii) 1 Chinese joint venture partner. Such legal structure usually corresponds to a Government requirement limiting foreign ownership in companies operating in a list of around 35 industries, notably including i) the automobile industry ii) legal consulting services and iii) tobacco products. Joint venture company setup may also be requested by some of our Clients, willing to benefit from the specialist local knowledge of their PRC partner;
- Like foreign-owned China LLCs, China EJVs will be required to i) appoint a resident company secretary ii) open a corporate bank account with a local bank and iii) obtain approvals for all registrations required by a China WOFE. Setting up a China joint venture company will however be more complex than an LLC, as our Client will face i) higher share capital requirements and ii) longer licensing delays.
The China branch officePractically, companies registered outside of China are not permitted to establish branch offices. Foreign investors are only allowed to register branch offices for their wholly foreign owned entity or equity joint venture in China. Healy Consultants recommends the usage of branch office to expand the geographical reach of their existing business entities in China. Investors may register a branch office to bid for local provincial projects. However, major disadvantages of a branch office are that i) parent company is liable for all debts of the branch office and ii) the scope of activities is limited.
The China representative officeChinese regulations allow foreign companies to open representative offices in China. While representative office registration follow simpler procedures than LLCs and branches as they usually only require approval from the State Administration for Industry and Commerce, they are not allowed to pursue production-related or commercial activities in China.
Table comparing different business entities
China LLC Branch office China rep office Hong Kong LLC Total company set up costs US$15,650 US$18,350 US$17,650 US$6,550 Subsequent annual costs (excl accounting and tax fee) US$550 US$550 US$550 US$7,750 How long to set the company up? 4 months 4 months 4 months 1 week How long to open company bank account? 4 weeks 4 weeks 4 weeks 4 weeks Issued share capital required US$15,000 None None US$1 Allowed to sign sales contracts with China Clients Yes Yes No Yes Allowed to invoice China Clients Yes Yes No Yes Corporate tax payable in China 25% 25% None None Corporate bank account HSBC China HSBC China HSBC China HSBC HK Can rent office premises Yes Yes Yes No Tenancy agreement required before incorporation? Yes Yes Yes No Allowed to import raw materials? Yes Yes No No Allowed to export goods from China? Yes Yes No No Can the entity hire expatriate staff? Yes Yes Yes No Do you visit China for company incorporation? No No No No Resident director required? No No No No Resident shareholder required? No No No No Minimum number of directors 1 None None 1 Minimum number of shareholders 1 None None 1 Resident company secretary No NA NA Yes China tax registration certificate required Yes Yes No No Individual shareholders allowed Yes No No Yes Corporate shareholders allowed Yes Yes Yes Yes Corporate director(s) allowed No No No No Public register of shareholders and directors Yes No No Yes Employment visa fees US$3,950 US$4,950 US$4,950 US$7,950 How long to get work permit approved 3 months 3 months 3 months 3 months Statutory audit required Yes Yes No Yes Annual tax return to be submitted Yes Yes No Yes Access to China double tax treaties Yes No No No Draft invoice