Setting-up a business in China
China offers three common entity structures for foreign companies, each with its own advantages and challenges. Understanding your company’s needs and the process of setting up each type will make the process much easier and save you time and resources.
1. Wholly Foreign-Owned Enterprise (WFOE, sometimes referred to as WOFE)
A WOFE may be a sole proprietorship of a foreign investor or several foreign investors jointly. 100% of the investment is owned by foreign investor(s). To set up a WFOE, you will need to meet these criteria:
- Company name,
- 1 shareholder (of a limited liability company or the name of the initiator of a joint stock limited company),
- 1 executive director,
- 1 legal representative,
- 1 supervisor,
- Registered company address,
- Business scope,
- Business term.
Required Documents of Shareholders, Legal Representatives, Supervisors and Executive Directors
- Shareholder of a registered foreign-capital company: passport for foreign personal investment or business operation certificate for foreign company investment,
- Legal representative, supervisor, executive director, etc.: passport.
Registered Company Address in China
Foreign companies must submit the following documents to local authorities:
- Copy of real estate certificate of registered address (the nature of the certificate must be commercial or industrial use),
- Lease agreement,
- Lease invoice.
You also need to hire a local finance team. The WOFE application requires identity card, copy of work license and photos of the financial manager.
China has strict requirements for registered capital. After the company is registered, its capital needs to be in place at the agreed time. Otherwise, you will violate the regulations of the People’s Republic of China on the Administration of Company Registration and the law of People’s Republic of China on Enterprises with Foreign Investment.
The registered capital of a foreign-invested company needs to be transferred to its foreign exchange account. A local professional accounting firm shall be employed to verify the capital and issue a capital verification report for the company to submit to local government authority.
Foreign investors can pay their capital contribution in instalments. The first phase of capital contribution shall be no less than 15% of the capital and be injected within 90 days from the issued date of the business license. The last phase of capital contribution shall be paid up within two years.
Advantages and Challenges of WFOEs
WFOEs have greater flexibility compared to other entity structures, such as:
- Full control of day-to-day operations
- Protects trademark and intellectual property
- Use local currency (CNY) to invoice, receive revenue and remit to the parent company outside of China
However, handling the process of setting up a WFOE on your own might take months and require significant capital. You will risk losing talents who cannot wait around for a job or timely market entry opportunity.
2. Joint Venture (JV)
Foreign companies setting up a JV, or a Sino foreign joint stock limited company, must conform to China’s industrial policy of utilizing foreign capital. Currently, this form of foreign-invested enterprise (FIE) is limited to industries where the State encourages and allows foreign investment, such as SaaS (Software as a Service).
The minimum registered capital is CNY30 million (50 million if it is to be listed), of which the shares subscribed by foreign shareholders shall not be less than 25% of the registered capital of the company.
A JV requires at least five promoters, one of which must be a foreign shareholder. If the JV is established by offering, at least one of the promoters needs to submit a record of continuous profits for the three years prior to the share offer.
Chinese shareholders are required to submit their financial reports of the past three years, audited by Chinese-certified public accountant. Foreign shareholders’ financial reports can be audited by local-certified public accountant.
The shares subscribed by the promoters cannot be transferred within three years from the date of the company’s establishment. At the end of the joint venture term, if the promoters transfer shares, they cannot violate the minimum 25% of shares held by foreign shareholders.
Advantages and Challenges of JVs
As a partnership between Chinese and foreign investors, foreign companies can leverage other parties’ expertise and intangible assets, such as brand awareness and marketing channels. The funds obtained from the joint venture can be used to expand the scale of the enterprise.
However, as investors share profits and losses, control over management is also shared. The differences in cultures might also pose as a challenge in management and operations.
3. Representative Office (RO)
A RO is a simple solution for foreign companies looking to conduct preliminary market research and build a network in the country before investing. With no registered capital required, the process of setting up a RO is relatively easy.
- 1 chief/general representative, in charge of the RO in China and manages operations. The representative can be Chinese or foreign. If he/she is a Chinese citizen, he/she needs to submit the labour contract signed with the local foreign-personnel agency.
- 1 accountant hired through a labour dispatch company because representative offices cannot directly hire employees.
- Registered address and office address must be the same and a foreign-owned real estate.
Challenges of ROs
A RO is not an independent legal entity and has limited business scope. Foreign companies with ROs in China cannot sign contracts nor charge for services. Representative offices can only carry out indirect business activities, such as market research, publicity, product display, and technology exchange. Hiring Chinese employees must also be handled through a labour dispatch company.
When your company expands to China, it can be challenging to navigate a new set of regulations and business culture. Regulations changes frequently, vary from city to city, and can be up for interpretation. International companies who tried to do it on their own often learnt it the hard way. You need a local team on-the-ground to support you. Langergroup can be that team. Our local experts act as an extension of your HR team to take care of your in-country employees. Our China dispatch license reduces your compliance risks and allows you to hire employees anywhere within China. Contact us today for free consultation and quotation.