Doing business in China is complex and requires investors to consult with their professional advisors to obtain a detailed understanding of the legal, regulatory, and cultural context. Rupert Gerald, commercial director and head of APAC Sales Desk, Donald Tsang, executive director and head of Corporate Services Greater China, and Jack Yan, general manager of Shanghai, provide an overview.
When setting up a new investment in China, the first key decision is to choose the right entity type for your circumstances. In China, these take three primary forms for foreign investors: a wholly foreign-owned enterprise (WFOE), a joint venture (JV), in which a Chinese partner has a controlling interest, and a representative office.
A WFOE in China is a limited liability company that is 100% owned by the foreign shareholder. It’s the most popular vehicle for market entry for overseas investors. Investors have full control over the WFOE’s operations, management, and strategy. It operates as a standalone, limited liability entity. Although the JV option can offer rapid early expansion for market entrants who can capitalize on the existing infrastructure and experience of their Chinese partner, it does involve handing over a considerable portion of control and ownership. You’ll need to determine if this would be a more advantageous arrangement.
Contrast this with a WFOE, where you’re able to hire employees, raise invoices, and engage in commercial contracts. You can also convert Renminbi (RMB) profits into foreign currency and United States dollar (USD) for outbound remittance and during the profit repatriation process.
A WFOE can also offer more flexibility in business activities than a representative office in China, which—although it has relatively low set-up costs and no minimum capital requirements—can have restrictions in conducting profit-generating activity and in hiring employees.
We boil down the WFOE incorporation process into five stages:
- Pre-incorporation: where the scope and objective of your WFOE are decided
- Incorporation: including pre-approval of the Chinese name of your business and the business license application
- Treasury and funding: including bank account opening, foreign exchange registration, capital injection, and verification
- Tax registration: tax registrations and value-added tax (VAT) status confirmation
- Hiring employees and setting up social insurance and housing funds
Decisions made during the incorporation process are extremely important to ensure the smooth running of the WFOE during its lifetime and it’s highly recommended to consult with professional advisors regarding these decisions. Although you can engage in business once the license for your WFOE is officially granted, there’s still a considerable amount of work to be undertaken before the entity is fully established.
Three types of WFOE in China can be set up—consulting, manufacturing, and trading. When you have defined the business scope of your WFOE, that will dictate the future activities it’s allowed to carry out. Getting this stage wrong can have serious consequences and you potentially run the risk of operating illegally.
It’s also important to choose an appropriate Chinese name under which the WFOE will be registered. You may need up to five possible options as your original choice may already be taken. You’ll also need a physical office for your registered address.
Chinese rules dictate that registered capital should be sufficient to cover the funding requirements for one year of operations. However, Chinese government reforms mean foreign businesses now have more flexibility and liquidity to plan their cash flow and capital requirements.
There are two common forms of management structure in China—one that has a small group of controlling persons involved, and one that has a large number of management roles but offers an enhanced corporate governance structure. Whichever you choose, you must appoint a legal representative. They must be a key executive, individually responsible for performing duties and powers on behalf of the company in accordance with the country’s laws and the Articles of Association.
The legal representative will need to carry out a number of duties in person. Although this individual is not legally required to be a local resident in China, if they’re based overseas, it may be useful for them to be located within easy traveling distance—for example in Hong Kong or Singapore.
Regarding the WFOE’s banking arrangement, you’ll need to set up both a capital account and a basic account. The bank you choose—whether Chinese or international—needs to have auto-pay channels with the relevant government agencies, such as the tax authority and social contribution authority, to ensure contributions and remittances are paid correctly. It’s worth checking in advance with your bankers to ensure they have a license to operate both types of accounts.
When choosing your bank, bear in mind that the physical branch network is still important. Because China still has foreign exchange controls, some of those transactions—especially payments and overseas remittances—have to be completed over the counter at the bank.
The success of your WFOE in China depends on the five key stages for incorporation listed above. Working with an experienced and trusted partner can help you maintain best practices and steer clear of regulatory or legal pitfalls.
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This document is provided by CSC for information purposes only and does not constitute an offer, invitation, or inducement to contract. The information herein does not constitute legal, tax, regulatory, accounting, or other professional advice, and therefore, one should seek appropriate professional advice before considering a transaction as described in this document. No liability is accepted whatsoever for any direct or consequential loss arising from the use of this document.