Setting Up a Company in China 2024

This is the 2024 edition of our guide on setting up a company in China. In this updated version, our goal remains steadfast: to equip you with a comprehensive understanding of the intricate process involved in establishing a business entity in this dynamic market. We’ve meticulously revised and updated the content to ensure it reflects the latest insights and information, empowering you with the knowledge needed to navigate the complexities of China’s business landscape effectively.

Creating a More Appealing Investment Landscape

China stands as one of the largest and most promising markets globally, offering significant advantages for foreign investors. With the introduction of new regulations in 2024, the country is poised to further streamline its investment environment. This includes a reduction of the negative list for foreign investment access, the removal of restrictions on the manufacturing sector, and continued encouragement of investment in telecommunications and healthcare sectors.

Despite these advancements, navigating the process of setting up or divesting a company in China can still present challenges due to bureaucratic procedures and local regulations. This article aims to provide a comprehensive overview of the diverse types of companies available in China, offer insights into the registration processes, and highlight common pitfalls to be mindful of.

Types of Foreign Invested Enterprises in China

Foreign investors have three primary options for establishing a business in China: Wholly Foreign-Owned Enterprises (WFOE), Sino-Foreign Cooperative Joint Ventures (JV), and Representative Offices (RO). The table below provides a comparison of these options:

1) Wholly Foreign Owned Enterprise (WFOE)

WFOE refers to a limited liability company that is 100% invested, owned by foreign investors, and independently operated. Almost 60% of FIEs are WFOEs (Wholly Foreign Owned Enterprise), making it the most adopted business type. Famous multinational companies such as Apple, Amazon, Oracle, and General Electric are all examples of WFOEs.

Advantages

• Simplified Process: Establishing a WFOE is typically simpler than forming a JV but more complex than setting up an RO.
• Independence: WFOEs enable foreign firms to independently select business areas and apply directly, often involving sectors China aims to attract.
• Ownership Control: Foreign investors retain complete ownership, allowing conversion of RMB income into USD and remittance of profits abroad.
• Operational Flexibility: No restrictions on internal operating structure.
• Local Labor Access: Direct access to local labor pools.

Considerations

• Capital Requirements: While there is no minimum registered capital mandated by the new Company Law, practical requirements may be higher than other entity types.
• Market Understanding: Higher risk if foreign investors lack understanding of Chinese market dynamics and regulations.
• Sector Limitations: Some sectors classified as “restrictive” in the National Negative List or FTZ (Free Trade Zone) Negative List may require a Chinese equity partner for WFOE establishment.

2) Sino-Foreign Cooperative Joint Ventures (JV)

A Joint Venture (JV) is an enterprise wherein both a Chinese partner and a foreign partner collaborate, investing and sharing company stakes proportionally to their contributions. This business model is widely adopted among foreign investors, with over 35% of Foreign-Invested Enterprises (FIEs) in China operating under this structure. Iconic brands like SAIC Volkswagen, SAIC General Motors, and BMW Brilliance are prime examples of companies with local JVs (Joint Venture) in China.

Notably, in a JV, foreign investors typically contribute a minimum of 25% of the registered capital. If the contribution falls below this threshold, taxation and registration procedures are treated similarly to those of domestic enterprises by the State Taxation Administration.

Advantages

• Market Access: JVs are commonly used to enter government-restricted markets and industries, such as vehicle manufacturing (where foreign shareholding cannot exceed 50%), medical institutions, banking, shipbuilding, and others.
• Partner Support: Chinese partners can provide access to additional marketing channels, leverage business connections, enhance brand image, and offer investment support.

Considerations

• Conflict Management: Potential conflicts of interest and contribution imbalances may arise when foreign investors establish JVs with local Chinese partners.
• Regulatory Compliance: Thorough evaluation of local laws and regulations is crucial as JVs are subject to stricter scrutiny and reporting obligations.
• Establishment Complexity: JVs typically involve more complex establishment procedures compared to other business types, often requiring time-consuming negotiations and compromises to reach mutual agreements.
• Reduced Control: Foreign investors in JVs have less control over the business compared to WFOEs.

3) Representative Office (RO)

An RO, or Representative Office, serves as a liaison agency representing the parent company established by a foreign-invested enterprise in China. It is the easiest and simplest structure to set up. However, ROs (Representative Office) are not recognized as independent legal entities, which means they cannot engage in standard business operations, generate profits, or transfer funds abroad. Their business scope is limited to conducting market research, handling public relations activities related to the parent company’s products or services, and facilitating contact activities relevant to product provision, domestic procurement, and investment.

Other considerations include:

• The parent company must have been established for a minimum of two years.
• It cannot directly hire local employees but must engage an official Chinese employment agency.
• The current RO’s license period is three years, yet ROs can extend their license unlimited times.
• An RO is not permitted to transform into a more comprehensive form of foreign direct investment enterprise.

Therefore, a RO can be considered as a market-entry option with fewer initial risks. Foreign investors commonly use ROs to study the Chinese market and build business connections, to “test the water” before entering the market with full force. This is possible as enterprises have no capital limits when investing in and registering ROs in China.

Corporate Registration Procedure

Embarking on the formal procedure of corporate registration is a pivotal phase, following the determination of the company type. Below unfolds a systematic overview of the steps involved, spanning from preliminary decision-making to document preparation and business application.

Step 1: Determining Company Type and Pre-Approval of Corporate Name

One of the primary tasks for foreign investors is selecting the appropriate company type for establishment. Subsequently, brainstorming several suitable corporate names tailored for the Chinese market ensues. This step is critical to secure pre-approval and forestall any potential duplication issues.

Step 2: Preparation of the Required Documents

• Verified company name
• Preferred company scope
• Office/facility space lease
• Registered capital and total investment
• Other pre-requisites

Step 3: Application for Approval Certificate

Liaison with two key departments, the State Administration of Finance (SAIC) and the Ministry of Commerce (MOFCOM), becomes imperative. These authorities review the application details and subsequently convey the approval or rejection of the certificate.

Step 4: Application for Business License

Upon obtaining the approval certificate, proceeding to register with the local Administration for Industry and Commerce (AIC) and applying for the business license becomes the next logical step. This varies based on the industry of operation; sectors such as construction, manufacturing, telecommunication, and hospitality may necessitate additional licenses.

Step 5: Registration with the Public Security Bureau (PSB)

This phase involves the registration process with the Public Security Bureau, during which company chops are carved. These chops hold equivalent significance to signatures in Western countries and are indispensable for contract validation.

Step 6: Opening a Bank Account

Facilitating business operations necessitates the opening of a connected bank account. A Chinese business bank account enables the receipt of payments, payment of expenses, and is crucial for filing returns when necessary.

Step 7: Registration with the Tax Bureau

Adherence to tax regulations is mandatory for all businesses operating in China. Initially registering the company’s fundamental financial and operational details, including CFO verification and category, is advisable.

Additional Considerations:

For manufacturing WFOEs, submission of an Environment Impact Assessment report to the local environmental protection bureau before Step 3 is required to regulate and mitigate environmental impacts.

Trading WFOEs must obtain a customs registration certificate and an import-export license before Step 7. This facilitates foreign currency exchange to RMB and enables refunds for sales or VAT on imported or exported products. Additionally, trading WFOEs must undergo foreign trader operator filing with MOFCOM, quality inspection registration with the Entry-Exit Inspection and Quarantine Bureau and acquire an E-port IC card.

Key Considerations

1. Free Trade Zones (FTZs)

Free trade zones (FTZs) represent a specialized type of special economic zone where goods can be imported, handled, manufactured, and exported without direct intervention from Customs.

Setting up a Foreign-Invested Enterprise (FIE) within China’s Free Trade Zones offers numerous advantages. It provides increased openness to foreign investment market access, with FTZs Negative Lists being less restrictive compared to the national version. Additionally, companies can benefit from preferential tax policies, streamlined customs clearance processes, and simplified business registration procedures. This is especially advantageous for trading and manufacturing companies involved in importing or exporting goods. In FTZs, when goods arrive in China and are registered, companies are not required to pay import duties until the goods leave the zone and enter the domestic market, significantly improving cash flow.

However, FIEs need to exercise caution regarding their eligibility and the application procedure, as they must be on the list of FTZ encouraged sectors and meet revenue thresholds simultaneously. Furthermore, supervision is stricter in FTZs, posing more challenges for companies to remain compliant. Additionally, preferential policies may change unexpectedly in the future.

2. Registered Capital

According to the Company Law enacted in March 2014, most companies in China no longer have a minimum registered capital requirement, except for those involved in financial services or insurance. Shareholders have the discretion to decide the amount, timing, and method of their capital contributions. Although there is no official minimum, the local Administration for Market Regulation will assess if the registered capital is sufficient to cover initial operating expenses for 6-12 months.

The actual registered capital varies depending on the type of business. For example, a small consulting company typically requires much less registered capital than a complex manufacturer. Therefore, setting an appropriate registered capital level is crucial. If it is too high, funds may be tied up that could be used elsewhere. If it is too low, any additional funds must be taxed as income, and although further investment is possible, the approval process is time-consuming.

It should be noted that the new Company Law (effective from July 1, 2024) mandates that shareholders must contribute their entire subscribed capital within five years from the date of incorporation.

3. Importance of Stamps and Business Licenses

While business licenses and stamps may have less significance in other countries, they hold considerable power in China. Stamps carry more weight than signatures, and it is essential to have a standardized process in place for stamp usage to mitigate risks of misconduct. This includes designating a specific individual responsible for stamp custody and implementing a strict approval process for their usage.

4. Application Documents Notarization

In some cases, the Industry and Commerce Bureau may struggle to identify the authenticity of foreign applicants’ documents, leading to delays in the application process. It is advisable to notarize documents locally in advance to avoid such issues.

5. Time Coordination

Foreigners often face challenges coordinating document shipments due to passport usage during the application process, leading to multiple document shipments. Understanding the process beforehand and effectively coordinating document shipments, including passports, is crucial.

6. National Enterprise Credit Information Publicity System

The Chinese government operates an online platform where businesses can access information related to business credit, abnormal/illegal operations, and other company information. This platform is valuable for companies’ seeking insights into potential Chinese business partners and helps identify untrustworthy business activities. Companies should ensure compliance with reporting deadlines to avoid negative consequences and protect their reputation in the Chinese market.

How ARC Consulting Helped a European Client in Setting Up a Company in China

A Swedish retail company engaged ARC Consulting to assist in establishing a third-party logistics framework in China. ARC Consulting provided holistic support throughout the project, including the establishment of the necessary legal entity.

To ensure the successful establishment, a thorough analysis was conducted, encompassing the client’s business model, industry sectors, business scope, strategy, and anticipated future demand. This analysis facilitated the identification of the most suitable investment structure for setting up a company in China, with careful consideration given to the potential utilization of free trade zones.

Throughout the project duration, ARC Consulting offered extensive support to the client. This support ranged from researching local regulatory requirements to preparing application materials, translating documents, and aligning formats, among other tasks. Our local presence proved to be invaluable as it enabled us to liaise directly with relevant agencies on-site, thereby enhancing the efficiency and effectiveness of the entire process.

In collaboration with the client, ARC Consulting successfully facilitated the establishment of a Chinese legal entity. This was achieved through the development of a comprehensive company analysis, meticulous evaluation of local regulatory requirements, and efficient submission of all necessary documentation.

Summary

In summary, before embarking on the journey of setting up a company in China, it is essential to grasp the regional and provincial advantages across the country. Foreign investors should meticulously examine the Catalogue for the Guidance of Foreign Investment Industries. Through thorough research, one can uncover Chinese economic zones, preferential policies for foreign-owned entities at provincial and regional levels, as well as industry-specific incentives that can be capitalized on.

While this article provided a brief overview of the company setup process in China, it is highly advisable to enlist the services of company formation consultancy firms to streamline the process and minimize time and costs such as ARC Consulting. Without adequate knowledge of company types and setup procedures, the processing time can extend over several months, necessitating additional efforts such as visiting local registration offices and verifying documents.

Furthermore, with various regional benefits accessible at provincial, district, and economic zone levels, Foreign-Invested Enterprises (FIEs) can avail themselves of tax discounts, financial incentives, and benefits for foreign employees. Thus, leveraging these regional benefits can significantly enhance the overall competitiveness and success of foreign ventures in China.

Overall, the section on Corporate Registration Procedure provides a good starting point, but it could benefit from further elaboration to ensure clarity for readers. Could we expand on the specific steps involved in each type of company registration, such as manufacturing WFOEs and trading WFOEs, including more detailed explanations of tasks like environmental impact assessments and customs registration?

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