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Investing in a market as complex and expansive as China comes with legal, regulatory, and cultural challenges. Choosing the right corporate structure for setting up a company in China is paramount and can mitigate unnecessary business constraints, costs, and official scrutiny. Financial Projection Statement
Foreign investment can be made via one of several types of investment vehicles. Choosing the appropriate investment structure for your business depends on several factors, including its planned activities, industry, and investment size.
It is crucial to take into account various aspects of the target entity types before deciding which kind of business to launch. These include differences in structure, legal liability, statutory compliance requirements, time needed to set up the business, the kinds of activities the business can engage in, and more. These factors aid in determining the proper business costs, requirements, risks, and limitations needed to support the company's future development, growth, and intended capabilities.
In the table below we’ve described these factors for each of the primary entity types that can be established in China.
Comparison of Different Investment Options
* Under the FIL, the terms of the WFOE Law and the JV Law are no longer binding. Nevertheless, we still use WFOE and JV to refer to relevant investment forms for consistency and easier communication
See table: Comparison-of-Different-Investment-Options
For details about these investment options, click on the entity type to read from more from our Types of Business in China guide section.
Overseas enterprises should ensure that the registered business scope appropriately reflects the actual in-country corporate operations. The intended scope of a business must be specified when it is established.
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Business scope is a list of the commercial activities that a company is permitted to engage in. It is stated on its company license together with other registered information including its name, registered capital, and legal representative. It is managed by the local Administration for Market Regulation (local AMR)1.
Failing to keep the company's commercial operations within the limit of its registered business scope can be damaging to a company's capacity to issue official invoices (fapiao) to its clients. While a firm can still provide fapiao for non-business activities on occasion, frequent disparities may result in tax inquiries. Companies must therefore carefully plan their company scope prior to initial incorporation, or risk having to go through the onerous and time-consuming procedure of amending this afterwards.
Depending on the business scope, foreing invested enterprises (FIEs) can be classified as a manufacturing company, a service company, a foreign invested commercial enterprise (i.e. a trading company), regional headquarters, an R&D center, an investment company, or several others. The capital requirements will frequently differ depending on the type of company that is being formed.
There is no minimum registered capital required for corporation establishment except for areas like banking, finance, insurance, etc. However, the foreign shareholder should ensure that a company's registered capital is enough to sustain its business activities for at least a year, including rent, employee salaries, and office expenses.
Did You Know The registered capital does not need to be paid completely up front. China now follows a subscribed capital model, under which a schedule of contributions must be declared in the Article of Association and be registered with the local AMR in charge. The government will check whether the investors follow the capital injection plan.
If the FIE chooses to follow the ratio between registered capital and total investment as shown in the chart below, the registered capital can affect the amount of offshore debt the FIE can borrow from other investors or foreign banks. The maximum amount of offshore debt is the difference between total investment and registered capital.
Registered capital is the fund to which all shareholders contribute or promise to contribute when they apply to the local Administration of Market Regulation (AMR) for company establishment. The registered capital's size is influenced by a number of variables, such as the area, industry, business scope of the company, anticipated operational scale, etc. A company's business license will include this information, which the general public can see and use to get a general idea of how strong its financial position is.
Investment to Capital Ratios
Registered capital contributions can be made in cash, as a lump sum, or in installments. However, locally obtained RMB cannot be injected as registered capital – it must be contributed from outside China by the overseas investor. The company’s payment schedule for contributions must be specified in its Articles of Association, and once paid, the amount cannot be freely wired out again.
When establishing a company in China, costs must be incurred prior to the company being formally incorporated. The question then becomes how much of these expenses can be deducted from the company's tax bill. This is especially important when the investment is a large one, such as establishing a factory and purchasing machinery, where the costs incurred prior to incorporation can be significant.
A Representative Office (RO) in China is taxed on its expenditures. As a result, it is in the investor's best interest to keep expenses allocated to the RO as low as possible and advisable to direct the RO's pre-incorporation expenses to the foreign headquarters.
Meanwhile, a Foreign Invested Enterprise (FIE), as an independent legal entity registered in China, is taxed on its income and may deduct expenses from tax. Even though pre-incorporation expenses are by definition incurred prior to the FIE formally existing, only a portion of these expenses can be borne by the FIE. Only the pre-operation costs ( 开办费 ) may be allocated to and deducted from all expenses incurred prior to formal incorporation. The time when pre-operation costs occurred is critical in defining them.
In practice, the beginning of this period is regarded as either the date of establishment on the business license or the day on which the investor receives confirmation of the company name from the AMR . The pre-operation cost period concludes when the company issues its first invoice or generates its first revenue.
Further, office rent is the only cost incurred prior to the pre-operation cost period. Allocation to the FIE is permitted because an office lease is a necessary step in the incorporation process.
Enterprises, particularly manufacturing firms, which frequently have a lengthy pre-operation period, should carefully consider when their pre-operation period ends. These businesses, in particular, must ensure that any costs incurred can be carried forward as a loss over the next five years.
FAQ: Other Considerations When Setting Up a Business in China How can I choose the right entry model for China? How can I choose the right entry model for China? Start With the Right Plan and Support. As with any foreign country, China’s set up requirements, options and processes are unique, and establishing a legal entity requires the various costs of such an investment, time, and can bear other investment risks. Once investments are made, reversing strategies can be more challenging so it is vital that a company avoid missteps from the outset. To optimize the chances for success, a business would do well to have better: Well-defined business scope; Informed and guided business model; Selection of business partners or suppliers to work with; Options for initial service lines, products, and pricing models; and Options to set up in the right locations and more. Obtaining on-the-ground information and practical experience in the market, can significantly help in these areas, and help position an enterprise for successes in China. Besides researching this Doing Business in China guide thoroughly, it is advisable to leverage professional assistance for further guidance with pre-market entry, investment decisions, entity set up, and all business, operational and financial factors that will arise along the path to achieving your investment objectives. In this respect, the contributors of this Guide are available to provide this expertise, via the Chat or Contact us link buttons. What government agencies are involved and how long will it take? What government agencies are involved and how long will it take? Establishing a foreign investment structure in China generally takes between three and six months and involves the following government authorities: Ministry of Commerce (MOFCOM) and its local branches; State Administration for Market Regulation (SAMR) and its local branches; State Administration of Foreign Exchange (SAFE) and its local branches; State Taxation Administration (STA) and its local branches; and General Administration of Customs (GAC) and its local branches. The establishment process varies based on one’s chosen investment structure and planned business scope. For example, setting up a manufacturing FIE requires an environmental evaluation be completed, setting up a trading FIE must comply with the customs/commodity inspection requirements, and setting up a simple service FIE may require neither. How can I protect my intellectual property? Many Chinese FIEs have transitioned from a manufacturing focus to a model in which their true business value is now bound up in intellectual property. Unfortunately, violations of intellectual property rights (IPR) continue to be a problem in the country, including infringements of copyrights, trademarks, patents, and designs. To be enforceable in China, IPR must be registered with the appropriate Chinese agencies and authorities. Most FIEs protect their IPR by proactively searching the internet for violations, as well as sending staff to corporate functions and trade fairs. Companies can also request that Chinese customs monitor their trademarks and contact them if any violations are discovered. Read more Learn how to tackle violation of IP rights in our guide. How do I open a bank account? How do I open a bank account? Before incorporating the company, the foreign investor may open a temporary bank account in China. The investor can deposit foreign currency into this account and use it for pre-operational and other expenses. After the company is formed, a capital account must be opened. The funds from the temporary account can then be transferred to this account via wire transfer. Once obtaining a business license in China, the newly established FIE must choose a specific bank to open the bank account, without which the entity will not be able to carry out its daily operation. When opening a Foreign-Invested Enterprise in China, there will be a need to establish at minimum two bank accounts: RMB Basic Account and Foreign Currency Capital Contribution Account. Foreign investors can establish the above accounts in China through international banks with a local presence, or through a local Chinese banking institution. Read more Different options to open a bank account in our guide. How can I close a business in China? How can I close a business in China? To legally close a business in China, the investors need to go through a series of procedures to liquidate and deregister the company, which involves dealing with multiple government agencies, including the respective industrial and commercial bureaus, market regulatory bureaus, tax departments, and banking authorities. It may take time for executives to become fully aware of the responsibilities they can face in dissolving or liquidating a company, but they are somewhat extensive. Despite the onerous process, investors are highly recommended not to just “walk away” without following the prescribed procedures. Simply walk-away results in very serious consequences for the legal representatives and the company’s future in China. Here is a very brief summary of the procedural stages required to close a business, such as a WFOE or JV, in China: Form a liquidation committee and prepare an internal plan; File a record with SAMR; Inform creditors separately and through public announcement; Clear outstanding business and creditor’s debts; Terminate employees; Disposal of company’s remaining as sets; Tax clearance and deregistration; C ustoms deregistration; SAMR deregistration; Bank account closure and SAFE deregistration; and Cancel company chops. The steps for closing an RO are simpler than for a JV or WFOE and may slightly differ from the above. Read more Here’s our step-by-step guide to closing a business in China. Can I do business without setting up an entity? Can I do business without setting up an entity? In the absence of on-the-ground market knowledge and practical experience, it is easy to make avoidable mistakes. However, changing strategies after investments have been made is more expensive, time-consuming, and can even harm the company's reputation. Given these factors, an increasing number of companies today may find it more advantageous to first test the waters or target a smaller or shorter-term presence in China. Fortunately, a lesser-known model for businesses to hedge against market entry risks exists and is available in a number of Asian markets. As an alternative, a new market entry model called Global Staffing enables foreign investors to do business in China for short-term durations without having a legal entity of their own. Global Staffing Solutions (GSS) is a market entry strategy and suite of services that can make it easier for businesses to operate internationally. Key within the GSS suite, is the Permanent Employer Organization ("PEO") service. Under the GSS service, foreign companies can enjoy the benefits of hiring full-time staff working in overseas markets and remaining compliant with local laws, without the time and investment required to set up and operate an overseas legal entity. Read more Learn how to do business in China without an entity in our guide.
Start With the Right Plan and Support. As with any foreign country, China’s set up requirements, options and processes are unique, and establishing a legal entity requires the various costs of such an investment, time, and can bear other investment risks. Once investments are made, reversing strategies can be more challenging so it is vital that a company avoid missteps from the outset.
To optimize the chances for success, a business would do well to have better:
Obtaining on-the-ground information and practical experience in the market, can significantly help in these areas, and help position an enterprise for successes in China. Besides researching this Doing Business in China guide thoroughly, it is advisable to leverage professional assistance for further guidance with pre-market entry, investment decisions, entity set up, and all business, operational and financial factors that will arise along the path to achieving your investment objectives. In this respect, the contributors of this Guide are available to provide this expertise, via the Chat or Contact us link buttons.
Establishing a foreign investment structure in China generally takes between three and six months and involves the following government authorities:
The establishment process varies based on one’s chosen investment structure and planned business scope. For example, setting up a manufacturing FIE requires an environmental evaluation be completed, setting up a trading FIE must comply with the customs/commodity inspection requirements, and setting up a simple service FIE may require neither.
Many Chinese FIEs have transitioned from a manufacturing focus to a model in which their true business value is now bound up in intellectual property. Unfortunately, violations of intellectual property rights (IPR) continue to be a problem in the country, including infringements of copyrights, trademarks, patents, and designs.
To be enforceable in China, IPR must be registered with the appropriate Chinese agencies and authorities. Most FIEs protect their IPR by proactively searching the internet for violations, as well as sending staff to corporate functions and trade fairs. Companies can also request that Chinese customs monitor their trademarks and contact them if any violations are discovered.
Before incorporating the company, the foreign investor may open a temporary bank account in China. The investor can deposit foreign currency into this account and use it for pre-operational and other expenses.
After the company is formed, a capital account must be opened. The funds from the temporary account can then be transferred to this account via wire transfer.
Once obtaining a business license in China, the newly established FIE must choose a specific bank to open the bank account, without which the entity will not be able to carry out its daily operation.
When opening a Foreign-Invested Enterprise in China, there will be a need to establish at minimum two bank accounts:
Foreign investors can establish the above accounts in China through international banks with a local presence, or through a local Chinese banking institution.
To legally close a business in China, the investors need to go through a series of procedures to liquidate and deregister the company, which involves dealing with multiple government agencies, including the respective industrial and commercial bureaus, market regulatory bureaus, tax departments, and banking authorities.
It may take time for executives to become fully aware of the responsibilities they can face in dissolving or liquidating a company, but they are somewhat extensive. Despite the onerous process, investors are highly recommended not to just “walk away” without following the prescribed procedures. Simply walk-away results in very serious consequences for the legal representatives and the company’s future in China.
Here is a very brief summary of the procedural stages required to close a business, such as a WFOE or JV, in China:
The steps for closing an RO are simpler than for a JV or WFOE and may slightly differ from the above.
In the absence of on-the-ground market knowledge and practical experience, it is easy to make avoidable mistakes. However, changing strategies after investments have been made is more expensive, time-consuming, and can even harm the company's reputation. Given these factors, an increasing number of companies today may find it more advantageous to first test the waters or target a smaller or shorter-term presence in China. Fortunately, a lesser-known model for businesses to hedge against market entry risks exists and is available in a number of Asian markets.
As an alternative, a new market entry model called Global Staffing enables foreign investors to do business in China for short-term durations without having a legal entity of their own.
Global Staffing Solutions (GSS) is a market entry strategy and suite of services that can make it easier for businesses to operate internationally. Key within the GSS suite, is the Permanent Employer Organization ("PEO") service.
Under the GSS service, foreign companies can enjoy the benefits of hiring full-time staff working in overseas markets and remaining compliant with local laws, without the time and investment required to set up and operate an overseas legal entity.
More guides for setting up a business Types of Businesses Comparison of Entity Types Opening a Bank Account Intellectual Property Protection Closing a Business Doing Business Without an Entity
Senior Manager, Business Advisory Services
The incorporation and structure of your investment define the early stages of your Asia expansion and impact your future success. A well-planned legal structure can help to make the difference.
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Doing Business in China 2023 is designed to introduce the fundamentals of investing in China. Compiled by the professionals at Dezan Shira & Associate...
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