In this six-part business guide to doing business in China produced by Hawksford, we’ll give an overview of what you need to consider before entering the market. Ranging from localisation, to the legal and banking systems, to type of company set up. This series is a great jumping-off point to understand the many nuances of doing business with China.
PART 6: Company set up
Types of foreign investment in China
Corporate establishment, registration or incorporation in China for foreign enterprises is usually possible via three main company types. These are the Wholly Foreign-Owned Enterprises (WFOEs), Joint Ventures (JVs) and Representative Offices (ROs). Each investment form has its own merits and drawbacks and the right choice for you will depend on your organisation’s goals and strategy for China market access.
Wholly Foreign-Owned Enterprises
Widely accepted as the most popular entity for doing business in China, WFOEs are investment vehicles entirely owned by foreign (i.e. not Chinese) natural and legal persons. WFOEs are limited liability companies (LLCs) with shareholders held liable for the company’s debts or liabilities only up to the registered capital under the PRC’s new Foreign Investment Law. They are the most viable option for foreign investors whenever revenues and profit-making activities have to be undertaken directly and without local partners involved at a shareholder level.
What is the minimum investment required to set up a WFOE?
Different industries have different registered capital requirements (equity and investment) for WFOEs, but since the Company Law update in 2014, minimum registered capital indications have been abolished, and there is now no minimum investment required to set up a WFOE, provided that activities do not involve a regulated industry (i.e. securities, insurance or banking). Even with the recent liberalisation, it’s highly suggested you evaluate the blueprint of similar investments in the same industry and consider the registered capital as the main financing wallet of the China venture, being the total amount dedicated to actual working capital.
Especially when venturing alone in China, it’s important to understand that different municipalities and regions suit different types of industries. For example, Shanghai is known to be famous for finance, automobile, chemical and logistics investments, whereas Shenzhen has recently developed itself as a hi-tech powerhouse for smartphones, IT equipment, home appliances, robotics and drones. Other factors to consider when finding the right place can be government regulations (especially in terms of environmental impact), infrastructure and trading routes, as well as your customer and distributor bases. Typically, in coastal provinces and large and first-tier cities like Shanghai, Suzhou, Guangzhou, Beijing, Shenzhen and Hangzhou, you’ll encounter authorities and a network of supporting services familiar with the challenges for FIEs.
What can you do with a WFOE?
Different types of WFOEs are required for different business activities.
With a WFOE you will be able to:
- Employ local staff directly and ensure their social insurance and housing fund contributions.
- Independently determine and oversee your group strategy for China without a Chinese partner.
- Issue invoices with VAT available for deduction and receive payments in RMB/foreign currency.
- Legally cover your China office premises, activities and operations with the business license required by the Chinese authorities.
- Access local grants and funds from government authorities and loans or financing in RMB from Chinese and overseas banks.
How easy is it to set up/incorporate a WFOE?
The standard process of setting up a WFOE takes 60 days, with two main sections of activities: pre-registration and post-registration. Pre-registration requires the submission of several business-related documents, including passport copies for individual investors or notarised documents of the controlling entity, while post-registration requires companies to formally register with additional Chinese governmental agencies using the business license issued by the local Administration for Industry and Commerce.
|Different Types of WFOE||Function||Incorporation process|
|Consulting||Consultancy and services||Three months|
|Trading||Trading, wholesale, retail, e-commerce||Within four months|
|Manufacturing||Manufacturing, assembling and reselling goods and products||More than five months|
There are two main types of JVs available in China: Equity Joint Ventures (EJVs) and Cooperative Joint Ventures (CJVs).
- An EJV is an independent legal entity with limited liability. Profit and risk sharing in an EJV are proportionate to the equity of each partner in the EJV.
- A CJV’s profits are allocated according to the terms of the cooperative venture contract rather than the proportion of their input in the registered capital, which offers greater structural flexibility over an EJV.
What is the minimum investment required to set up a JV?
There is no minimum investment requirement for Chinese partners in a JV project. Before, China’s EJV Law required that the foreign party contributes no less than 25% of the registered capital, but this requirement has been removed by the New Foreign Investment Law in force since 1 January 2020. So, currently, there is no minimum investment requirement for Foreign-Chinese partners in a JV project with the exception of certain industries that are restricted for foreign investment.
What can you do with a JV?
Fewer and fewer sectors now require a JV in exchange for market entry, as China has moved from an investment catalogue of industries open to foreign investors to a negative list with fewer and fewer closed-door exceptions every year. JVs are often a favourable option for innovative endeavours facing potential resistance, where having a Chinese counterpart might mean getting a stake of the local market and a partner that shares strategic goals and on-the-ground knowledge.
How easy is it to set up/incorporate a JV?
JV agreements and corporate governance structures to be completed and signed-off before pre-registration steps usually lead to a delayed time frame compared to that described for WFOEs.
Intellectual property, management blueprints, operational control in areas such as expected revenues and ROI, staffing and finance are all topics to be discussed and resolved beforehand in order to ensure a smooth process in terms of documental licensing.
An RO is established by a foreign company to represent in activities like market research, PR and visits to local clients and/or suppliers. Since it is not an independent legal entity, it cannot participate in any direct commercial activities generating revenue or profits, and it can only be set up by foreign entities with a minimum of two years’ existence in the relevant jurisdiction.
What is the minimum investment required to set up an RO?
There are no registered capital requirements for an RO, but local expenses need to be handled via overseas remittance from the foreign company. Set-up costs and timeframe are usually lower than those for a WFOE, however de-registration processes are just as complex and time-consuming. A physical address in a commercial building is still required just like for consulting and trading WFOEs.
What can you do with an RO?
Permitted activities include business development, establishing partners, rendering advice, preparation of market studies, and general collection of information and liaising with authorities and business partners. Foreign employees can be hired as chief representatives and general representatives of the local office, whereas Chinese employees cannot hold any direct labour relationship with the RO. In this case, a registered HR dispatching agency is needed to undertake contractual duties with local employees. In essence, an RO has a physical office and enables the foreign and Chinese staff to engage with distributors, agents, and suppliers of the parent company.
How easy is it to set up/incorporate an RO?
While this is perhaps the simplest to set-up because registration can often be completed within a few weeks, de-registration can be a very lengthy process, particularly where there are more complex structures involved.
|Company Types||Complexity||Cost of Setup||Setup Time Frame||Structure|
|Representative Office||Low||Low||4-6 weeks||No business operations|
|WFOE||Medium||Medium||2-5 months (depending on the business scope)||100% foreign investment|
|Joint Venture||High||High||5+ months||Local partnership|
To learn more about accessing the China market contact email@example.com for more information