Business entities in China
As the largest market in the world by the size of its population, the People’s Republic of China is an attractive place for business setup by foreigners. Starting a company in China is however complex and time-consuming, due to i) rapidly evolving and inconsistent regulations ii) the need to contact different administrations and agencies and iii) restrictions to foreign investment in several industries. Healy Consultants will however make it easier for our Clients to invest in China by advising them on the appropriate location and legal entity for their venture in China and then completing on their behalf all procedures required to establish their business.
Doing business in China with a local entity
The China wholly foreign owned enterprise (WFOE)The most popular entity in China is the China wholly foreign-owned enterprise (WFOE), that is to say a Chinese limited liability company wholly owned by foreign investor(s). A Chinese WFOE can generate income from all industries opened to foreign investment, and is also subject to Chinese taxation. The following information will help you determine whether registering a WFOE in China is the optimum corporate structure to fulfil your business objectives in this country:
- A Chinese WFOE can conduct manufacturing operations in China, invest in other companies and also trade products, services and raw material internationally. Unlike local companies, conversion of RMB earnings to US dollars by a WFOE for remittance to its parent company outside of China is not restricted by Law nor penalized by withholding tax;
- A Chinese WFOE can also be allowed to engage in wholesale and retail trade with Chinese customers, in which case such entity is sometimes also known as a “foreign invested commercial enterprise” (FICE), subject to minor differences during the registration procedures.
Main requirements to form a Chinese WFOE:
- Depending on the city of registration, the minimum share capital required ranges between US$15,000 and US$140,000. To optimize the probability of timely China WFOE registration, Healy Consultants recommends our Clients to have a registered capital of US$140,000. The paid-up capital required before registration 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;
- All foreign-invested enterprises in China (including WFOE) 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.
- 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 free zone company
- Foreigners can form a wholly foreign owned company and register it in one of China’s numerous special economic zones (SEZ), provided that their business is export-oriented. Minimum requirements will vary from one zone to another and usually include a minimum number of job created, minimum capital requirements and, in some cases, technology transfers. Some SEZs provide a one stop shop for registration of the entity, while others follow standard WFOE procedures;
- For further information on special economic zones’ advantages and business setup requirements, refer to our China free zone page;
- Best uses: A China free zone company is an optimal entity for an export-oriented manufacturing business.
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 company established by i) one foreigner (our Client) and ii) one Chinese joint venture 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;
- Best uses: the registration of a joint venture company 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.
Doing business in China with a foreign entity
The China branch office
- Practically, 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;
- Best uses: the use of a branch office is to expand the geographical reach of their existing business entities in China. Investors may register a branch office to bid for local provincial projects.
The China representative office
- Chinese 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;
- Best uses: A representative office can be used when our Client is not seeking to conduct any productive or commercial operations in China.
The China offshore company
- A China offshore company is a Hong Kong company. As Hong Kong is part of the Chinese territory but subject to a different taxation system, registering a company in Hong Kong can assist our Client to oversee his productive and commercial activities in China. See this page for further details on how this corporate solution can assist to do business in China;
- Best uses: A Hong Kong company can be used as the international trading arm of a mainland Chinese business, as well as a holding vehicle facilitating investment in China and repatriation of earnings overseas.
Table comparing different business entities
|Operations and logistics||WFOE||Free zone company||EJV||Branch||RO||Offshore|
|Doing business in China permitted?||Yes||Yes||Yes||Yes||No||No|
|Allowed to sign contracts with local Clients?||Yes||Yes||Yes||Yes||No||Yes|
|Allowed to invoice local Clients?||Yes||Yes||Yes||Yes||No||Yes|
|Must rent local office premises?||Yes||Yes||Yes||Yes||Yes||No|
|Allowed to import raw materials?||Yes||Yes||Yes||Yes||Yes||No|
|Allowed to export goods?||Yes||Yes||Yes||Yes||Yes||No|
|Accounting and tax|
|China corporate tax on local income?||25%||25%||25%||25%||N/A||N/A|
|Corporate tax on foreign income?||25%||25%||25%||25%||N/A||N/A|
|Corporate bank account?||HSBC China||HSBC China||HSBC China||HSBC China||HSBC China||HSBC HK|
|Statutory audit required||Yes||Yes||Yes||Yes||Yes||Yes|
|Annual tax return to be submitted?||Yes||Yes||Yes||Yes||Yes||Yes|
|Access to DTAAs?||Yes||Yes||Yes||Yes||No||No|
|Issued share capital required?||US$15,000||US$15,000||US$400||None||None||US$1|
|Resident director required?||No||No||No||No||No||No|
|PRC shareholder required?||No||No||Yes||No||No||No|
|Minimum number of directors?||1||1||1||1||1||1|
|Minimum number of shareholders?||1||1||2||Parent company||Parent company||1|
|Individual shareholders allowed?||Yes||Yes||Yes||No||No||Yes|
|Corporate shareholders allowed?||Yes||Yes||Yes||Yes||Yes||Yes|
|Public register of shareholders and directors||Yes||Yes||Yes||Yes||Yes||Yes|
|Can the entity hire expatriate staff in PRC?||Yes||Yes||Yes||Yes||Yes||No|
|How long to get work permit approved||3 months||3 months||3 months||3 months||3 months||N/A|
|Estimate of engagement costs||US$17,650||US$16,650||US$16,650||US$18,350||US$18,650||US$7,910|