Setting up a new company in any country has its rules and regulations, and China is certainly no exception. Breaking through the red tape may seem impossible when starting out. But with sound advice and planning, you can enjoy a prosperous and successful business in one of the world’s most exciting markets.
Foreign-invested enterprises (FIEs) in China are categorized into three models: joint ventures, wholly foreign-owned enterprises and representative offices, all of which are governed by different laws and regulations.
Types of enterprises
The most common way for a foreign firm to invest in China is through a joint venture (JV); a partnership between a foreign partner and one or more Chinese partners who share capital, expenses, resources and profits.
Despite the potential problems – cases of unreliable or malicious partners are well documented – JVs are the Chinese government’s preferred foreign investment mode because they assist the transfer of foreign technology and business practices to local firms.
Select your Chinese partner wisely. They may show you the way in terms of understanding the Chinese market and providing crucial guanxi (connections), but be aware of differing business goals and potential conflicts of interest.
Wholly foreign-owned enterprises (WFOEs) are set up entirely with foreign capital and are completely controlled by the owners, which can potentially make them easier to run than JVs. But capital requirements are higher than JVs and some industries are closed to WFOEs. Niche markets suit this model because they don’t require the market knowledge and distribution support a Chinese partner in a JV can offer.
Setting up a representative office costs less but it cannot participate directly in profit-making activities. The office can only be used to conduct market research and to coordinate between Chinese customers and the foreign partner.
Registering your company can take as little as four weeks in Beijing or Shanghai, and six to seven in other parts of China. WFOE applications tend to receive more scrutiny than JVs. Necessary documents may include a proposal, feasibility study report and a firm’s articles of association. Once approved, the FIE must apply for a business license – this requires proof of a bank account.
The next question is where to locate your business. Some areas are designated as special economic, industrial or development zones that offer tax breaks and policies for specific industries. Land and rental rates can also be much cheaper. The Lujiazui financial district in Shanghai is a prominent example.
Authorities in the commercial centers of big cities are more likely to strictly enforce regulations and perform regular inspections. This applies less in outlying urban areas where local governments are eager to encourage foreign investment.
The quickest way to get workspace in China is through a serviced office. The number of serviced office providers – who offer bilingual secretarial support, courier services, etc – in Beijing and Shanghai has boomed in recent years.
FIEs are subject to five taxes: corporate income tax, VAT, business tax, consumption tax and stamp duty. Tax rates vary greatly, depending primarily on the FIE’s location and what sector it lies in. Foreign investors in development zones are given preferential tax treatment, but it is worth looking at the rates most suited to your business as some are only provided to enterprises engaged in long-term investment.
Changes drawn up in corporate tax laws last year focused on providing incentives to foreign R&D-focused companies, the high-tech industry, large-scale energy-efficient projects and firms looking to invest in China’s rural infrastructure.
A good law firm helps, as Chinese laws can be complex and frustrating to work through. A number of international law firms, such as Clifford Chance, have offices in Beijing and Shanghai and some have even expanded into cities like Tianjin, Qingdao and Chengdu.