Incorporating in China: Types of Business Structures (Plus a Smart Alternative)
Wholly foreign-owned enterprises, representative offices, and joint ventures. These are all common business structures companies may choose when expanding into China.
China has the biggest consumer population in the world and the second largest economy on this planet. It’s no secret that China is an attractive option for many entrepreneurs.
When it comes to expanding into China, there are a few ways to do it. The two most common methods relating to business structures are to incorporate a wholly-foreign owned enterprise or partner with a local company. But there are a number of other options you can consider as well.
In this article, our friends at New Horizons Global Partners cover the different business structures you can choose from. They also provide an alternative option to enter the China market without incorporating a new entity (i.e. enlisting the help of a Professional Employer Organisation).
Types of Business Structures in China for Foreign Businesses
Firstly, let’s walk through what incorporating a company in China might look like. There are several options and business structures available to foreign businesses who want to incorporate a new legal entity in China. The incorporation option that is best for you depends on the type of business you have, which business relationships you want to protect, and which business activities you plan to complete. So let’s take a look at the different types of business structures.
1. Wholly Foreign-Owned Enterprise (WFOE)
A wholly foreign-owned enterprise (WFOE) (sometimes mistakenly written as ‘WOFE’) is the most common type of business entity in China owned by foreign businesses. This type of business structure is available for all industries that are open to foreign investment, including manufacturing operations, investment in other companies, and international trade of goods and services. A WFOE may also be permitted to engage in wholesale and retail trade with customers in China, depending on the applicable regulations. In most respects, WFOEs are akin to the commonly understood limited liability company, and various types of WFOE exist, including:
- Food and Beverage
- Trading/FICE (Foreign-Invested Commercial Enterprise)/Retail
In general, WFOEs provide foreign businesses more opportunities. This is because the activities are not restricted like they are with other types of entity (see below). Additionally, you can compete with domestic businesses on a level playing field.
What You’ll Need to Set Up a WFOE
This type of company requires at least one investor from another country outside of China. Note that investors from Hong Kong, Macau, and Taiwan all qualify under this definition. One director or a board of directors must be appointed, and the foreign investor can be the director. Additionally, a general manager, legal representative and a supervisor (who is not the director, a senior executive, or legal representative) must be appointed.
You will also need a registered company address, which can be a virtual office address in some situations. Chinese authorities will typically request that you provide documentation to prove you have this address. This includes providing multiple copies of the lease contract and the housing ownership certificate for the registered address that is stamped with the holder’s official stamp.
You must also establish the business scope of your company. This will dictate the type of business activities in which you can participate.
You may declare minimum share capital. However, the Chinese government has eliminated the strict need for this capital as a means of encouraging foreign investment. Typically, businesses declare investment capital of around 1,000,000 RMB, which is roughly 140,000 USD. This capital need not all be injected at the outset. It should be invested over a period of two years to cover staff costs, office rental, and other costs.
20% of the registered capital must be paid up while the remaining balance must be deposited into an appropriate onshore Chinese bank account within two years. You can use registered capital to pay for administrative expenses, office rental, the purchase of goods or services, the salaries for staff, and other business expenses. Often, with minimal capital injection you can form a WFOE.
Registering and Maintaining a WFOE
To register this type of business, you will need to go through a complex approval process and receive approval from a variety of Chinese regulatory authorities, including the China National Development and Reform Commission, the People’s Republic of China Ministry of Commerce incorporation, and the State Administration of Foreign Exchange. You will need to submit a range of documentation.
Additional requirements may be necessary, depending on the region where you establish your business or the industry you work in. China’s laws vary considerably between cities, so it is important to check requirements for each operational area.
After you obtain the licence for your WFOE, you will still have several post-licensing procedures to complete. Your ongoing responsibilities include:
- Registering with the local public security bureau
- Applying for import and export licenses, if applicable
- Opening a corporate bank account in China
- Applying for general taxpayer status
- Creating your company stamps
You must translate and notarize your documents if you want Chinese authorities to accept them. Do not overlook this requirement.
A WFOE is subject to Chinese taxation. You may have to pay taxes every month and every quarter, depending on your business scale. You can work with a local accountant or tax expert to become familiar with the different forms of tax that you may have to pay, along with your potential tax liability for enterprise income tax, value added tax, and withholding tax.
For more information, here’s a complete guide on running a WFOE in China.
2. Joint Venture (JV)
A joint venture (JV) company is a type of foreign-invested enterprise that results when a local business and a foreign business merge. The businesses agree to share the profits and losses and manage the company in China.
A JV is one of the business structures most often used when the government has placed limitations or restrictions on foreign ownership in an industry, such as the automotive industry, tobacco products, and legal consulting services. These industries may not restrict all foreign investment, but they may limit foreign investment to a certain extent. The JV may also be a good choice if you want to benefit from a local specialist’s knowledge or leverage their existing network.
Setting up a Joint Venture in China
A JV must appoint a resident company secretary, obtain approvals from the same authorities that a WFOE must obtain approvals from, and open a local bank account. The process to establish a JV is often longer than establishing a WFOE. There may also be higher share capital requirements. This type of entity is considered the most difficult types of entity to form in China because of the administrative complexities involved in the process. There must be clear legal agreements between the domestic and foreign businesses. To establish this type of entity you need such documents as:
- Shareholder meeting resolutions
- Merger and acquisition agreement
- Capital increase agreement
- Description of the shareholders and companies
- Audited financial reports
- Company appraisal reports
3. Branch Office
A branch office expands the geographical coverage of a business by giving it another location from which it can complete core business activities. This type of establishment may also be used when a company wants to register the office in order to bid for regional or provincial projects.
A company outside of China typically cannot establish a branch office. Instead, foreign investors can only register a branch office for their existing WFOE or JV in China.
4. Representative Office (RO)
A representative office is one of the other common business structures. A representative office (RO) need only register for approval from the State Administration for Market Regulation (SAMR) because this type of office only engages in limited business activities. It cannot engage in productive or profit-generating activity. Instead, staff here are only allowed to work on advertisement and market research activities. For this reason alone, ROs are not the common choice of entity set up in China.
Setting Up a Representative Office in China
To set up this type of office, you will need to submit information related to your in-country office, including your office rental agreement (that has a duration of at least one year) and a copy of the certificate of real estate ownership. The parent company must have been in business for at least two years prior to establishing a representative office.
You will also need to submit information from the parent company, including:
- Passports of the representative office representatives
- Resumes for the representative office representatives
- Copy of the certificate of incorporation
- Copy of the articles of association
- Letter from an authorized signatory from the parent company’s director authorizing him or her to serve as a signatory of the representative office
- Bank reference letters
- Definition of the scope of the parent company’s activity and the representative office
Using a Professional Employer Organisation (PEO) as an Alternative to Setting up a Company in China
Entering any new market is difficult. You compound those difficulties by dealing with the vast complexities of the applicable legal, tax, and regulatory systems. In places like China these things vary depending on the region and city.
What is a Professional Employer Organisation (PEO)?
A PEO hires staff directly and takes on all legal responsibilities of the employment relationship. It acts as, and is treated as, the Employer of Record. It then leases the employees back to the foreign company so that the foreign company can manage the daily activities of the staff members.
By using a PEO, a foreign business can delegate the responsibilities of employing a local team to a third party – instead of opening a company in China directly. This offers several advantages, including having a local expert ensure compliance with ever-changing regulations and being able to avoid liability for employment relationships. Depending on the nature of the project, a PEO can handle numerous important functions related to the employment relationship, including:
- Drafting of compliant employment contracts
- Human resources management
- Local payroll
- Bookkeeping and accounting
- Tax declaration and management
- Preparation of fapiaos (official invoices for goods and services issued by Chinese Tax Bureau via sellers)
- Accounting reports
- Termination procedures
When is hiring a PEO a better choice than incorporating a company?
Incorporating an entity in China means taking on the vast complexities of legal, tax, and regulatory systems in place. These vary from city to city. PEOs can offer businesses greater flexibility and cost-efficiency when it comes to entering China.
Choosing to go with a PEO could be right for:
- Businesses that want to test the market or complete a soft launch before fully investing in a WFOE or other entity
- SMEs that don’t have the resources to devote to setting up and maintaining a Chinese company, and covering full employee packages plus social benefits
- Businesses that want to scale up quickly in China
- Businesses that have concerns over understanding and adhering to China’s complex regulations. In particular regarding foreign laws involved in the incorporation process.
As Pierre Pradier, co-founder and Head of Strategy at New Horizons Global Partners explains:
‘When companies are looking to enter markets for the first time, they have a long list of things they need to do and deadlines by which everything must be completed. This is not only stressful and costly, but if the company executives are not competent in the applicable regulations of the new country, there is a considerable risk of falling foul of the law. PEOs are an excellent solution in this regard, as they handle everything from start to finish.’
The more established PEOs like New Horizons Global Partners also provide additional services, such as legal assistance, company incorporations, and visa consulting. This full-service end-to-end option allows businesses to outsource almost all aspects of their administrative work in China. This simplifies their business procedures and allows them to focus on the bigger picture.