Starting Business in China

Attitude to foreign investment

The People's Republic of China (PRC) has welcomed investment from abroad since 1978, the year of the introduction of economic reform policies. The principal objectives of the “open door” policies are the development of the country using advanced foreign technology and know-how, earning foreign currencies and increasing exports. Technology transfers are sought to advance the state of economy to meet international standards.Doing business in China requires deep understanding of the local business environment such as social system, human culture, economy, policy and etc.. As we know, making the best strategy to set up the legal structure for your business and establish a real presence is a critical issue. One should consider many questions such as How much does it cost? Who do I contact? Do I need a partner? What restrictions are there? How do I obtain the proper visa and residence permits?

Forms of business organizations available to foreigners
Generally, enterprises can choose to set up in the PRC one of the following forms of business organizations available to foreigners, namely
Representative Office (RO)
Wholly Foreign Owned Enterprise (WFOE)
Manufacturing WFOE
Consulting & Business Service WFOE
Trade WFOE
Joint Venture (JV)
Representative Office
A representative office of foreign company may be established in China to provide business information, business liaison and similar services on behalf of the head office. This needs the approval by the appropriate authorities. The representative office must also be registered with the local administration bureau of industry and commerce as well as the local tax bureau.
Depending on the actual circumstance, such representative office may be exempted from business tax and foreign enterprise income tax. The representative office of a foreign company is not technically permitted to perform profit-making activities. Any other services performed beyond the approved scope of representative office’s business will render it subject to business tax and foreign enterprise income tax on actual income or deemed income basis. The deemed income approach such as cost-plus taxing basis is strongly preferred by the tax authorities for most of the representative offices as it is much easier to use than the actual income approach. For representative office engages in business consultancy, legal, taxation, accounting or auditing services, it is required to keep proper books and accounts and compute the actual taxable income for tax filing purpose.
Wholly Foreign Owned Enterprise
Wholly Foreign Owned Enterprises are established exclusively with the foreign investor’s capital. They are limited liability companies, the profits and losses of which are borne solely by the foreign investor.
The following activities are still not open to Wholly Foreign Owned Enterprises despite the accession of China to WTO:
Press, broadcasting, television, film industries
Life insurance
In the meantime, several industries under restricted category will be opened to Wholly Foreign Owned Enterprises in accordance with the timetable as specific in the Revised “Catalogue for the Guidance of Foreign Investment Industries” published in Year 2007:
With China’s accession to WTO, foreign investors are permitted to establish wholly foreign-owned trading companies (wholesaling or retailing) since 11 December 2004.
Joint Venture
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to their joint control.
Equity Joint Venture
A foreign company wishing to establish a business in the PRC can do so by means of a Foreign Equity Joint Venture Enterprise in partnership with a Chinese partner.
This is a form of Chinese limited liability company between a Chinese and a foreign party and is therefore a separate legal entity. Each participant contributes to the venture in financial terms by way of an investment of capital and therefore has a stake in the business. This is similar to the holding of shares in a limited company.
However the foreign participant is not able to recover the investment until the termination of the joint venture. The joint venture also brings together the respective skills and technologies of each party.
The participants share profits, risks, and losses in proportion to their respective contributions to the registered capital of the joint venture. All equity joint ventures are governed by the Law on Joint Ventures using Chinese and Foreign Investment promulgated in 1979 and amended in 2001. There are also a number of other laws and regulations which affect the joint venture's operations relating to such matters as taxation, employment and foreign exchange.
Co-operative Joint Venture
A more flexible way of operation with a Chinese partner is a Co-operative Joint Venture which is governed by the Law on Chinese Foreign Co-operative Enterprises promulgated in 1988 and amended in 2000. This legal framework allows individual agreements such as profit sharing, which need not be restricted to the equity contributions. It differs mainly with the equity joint venture in that the foreign investor may repatriate his original investment prior to the expiration of the joint venture.
This kind of partnership structure has limited applicability between foreign individuals or entities and Chinese entities.
Contracting out management
Contracting out management is an arrangement to satisfy the demand of foreign investors under the joint venture to assume greater control of the management of their projects. Normally, the management of a joint venture is contracted out to the foreign investor for a fixed term at a guaranteed fee. The foreign contractor must guarantee that at the expiry of the contract term, the joint venture will become profitable or that there will be marked improvement in its operations. The fee for contracting out the management operations of a joint venture may be calculated based on the after-tax profit of the joint venture.
Company limited by shares
The Company Law promulgated in 1993 and amended in 1999 governs all limited companies including FIEs. It also creates a new form of company which is limited by shares if future listing is anticipated.
Investors can form a company limited by shares like those in the West. Whe n specific conditions are fulfilled, the company can openly issue to the public for shares and debentures upon approval by relevant authorities.
The minimum capital requirement to set up a company limited by shares with foreign investment is RMB 30 million. The foreign party shall hold at least 25% of the registered capital. Shareholders can agree among themselves on the composition of the board of directors in the management of the company. The profit and loss are distributed according to the ratio of the investor’s respective shareholdings.
Chinese holding companies
With the approval of relevant authorities, a foreign company can set up a Chinese holding company to hold its joint ventures and FIE investments in China. The minimum capital requirement for setting up a Chinese holding company is US$30m. The main advantages of setting up a Chinese holding company are it is allowed to centralize the management / financial functions of various investee FIEs such as sales and marketing, legal, human resource, financial and information technology, etc. Pursuant to the recent business regulations on Chinese holding companies, the PRC holding company can extend lending to its PRC investees, subject to the approval of the competent governmental bodies. Through holding of a Chinese holding company, multinational companies could manage their Chinese investments more efficiently and effectively in operational point of view.
Other arrangements
Processing and Assembling Trade
Activities in China may be done without setting up any kind of enterprise. If relatively cheap labor is the main purpose of making a step into the Chinese market, a contract processing arrangement may be the right choice. Under this kind of arrangement the foreign party consigns raw materials and equipment to the Chinese party free of charge while the Chinese party contributes the factory premises and workers. The Chinese party manufactures and hands over the goods and receives the agreed processing fee. Terms and conditions of a co-operation arrangement should be agreed in detail and have to be submitted to the local MOC for approval. All products have to be exported. The foreign party remains the owner of machines and other equipment. Verification and cancellation of “production contracts” with PRC Customs and Foreign Exchange Bureau are required.
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