Is it worth it to register a company in China?
In this article you will discover that registering a company in China is not easy. The first question you must ask yourself is whether, in order to fulfill your objectives, it is really necessary to have a legal entity in China or, on the contrary, it is sufficient to use an “umbrella” company, an offshore entity (for example, a company in Hong Kong, which is much easier and cheaper to manage), a distribution agreement or a representative office.
In summary, if you intend to hire a large number of employees in China (say more than five), receive payments in the country without paying commissions to an intermediary company or open a factory or a company that needs specific infrastructure, you will have to register in China. In almost all other cases, there are simpler solutions (described in the next sections).
What is an “umbrella” company?
An umbrella company is a Chinese company that acts as a subsidiary of your service company in China (for example, sales, marketing or consulting agency – or any type of freelance work). Keep in mind that this solution is not available in case the intention is to work in a sector that can not be considered as a “service” (for example, a restaurant or a manufacturing company).
So, in case you are interested in working in the “services” sector, an umbrella company can:
- Hire a limited number of employees (say from 1 to 5) in your place ( and, if they are foreigners, provide them with a work visa );
- Pay salaries, insurance, contributions and / or maternity leave to your employees;
- Manage the complex administrative procedures necessary to start a business in China;
- Receive payments from your Chinese customers directly in China (to send them to your company’s foreign account later );
- Pay, on your behalf, suppliers or taxes related to the profits generated by your business in China;
- Rent an office for your employees or a warehouse for your products.
In practice, if it is important for you to start doing business in China in a simple and economical way, using an umbrella company is, without a doubt, the best option, at least to begin with.
When your business takes hold, you can create an independent company and thus not have to pay an umbrella company for the services described.
Keep in mind that this option is only viable for certain types of businesses, such as counseling. To open a factory or work in the industrial sector, a joint venture is necessary, so this option would not be appropriate.
What is a distribution agreement?
If you intend to make your products in China and sell them to Chinese customers, the simplest thing is to agree with the manufacturing company so that it is the company that deals with the distribution of the products with your brand.
A distribution agreement with a Chinese company can also be the right solution if you want to sell your goods produced abroad in China .
What is a representative office?
A representative office is, without a doubt, easier to create than a company; The problem is that this option involves a series of limitations, for example, it does not allow you to receive payments from your customers in China. It is only useful if you need a support office (for example, a marketing department or a sales department).
Since a China representative office cannot receive money from clients, the only way to pay expenses is to send money from abroad. Also keep in mind that, event without profits,you still need to pay taxes to the Chinese government, usually for a percentage of the expenses.
Establish a company in China: WFOE (100% foreign capital company)
Any company that is controlled by a quota equal to or higher than 25% by foreigners is considered a FIE (Foreign Invested Enterprise, a company with foreign capital).
The most common FIE is the WFOE (100% foreign capital company) , or, as the name suggests, a legal ‘entity’ that is wholly owned by foreigners.
The type of WFOE used in most cases is the LLC (Limited Liability Company) where the liability of each one of the shareholders is limited to the capital invested in the company.
Since the entry of China into the WTO, it is also possible to establish a WFOE that exclusively deals with purchases and sales in China (a “trading company” or “retail store”). These companies are a subcategory of the WFOE and are called Foreign Invested Commercial Enterprises (FICE).
Keep in mind that, depending on the sector (manufacturing, consulting, language school, services, trade, etc.) and the province where the company is registered, a social capital (or initial capital deposited in the bank account of the company) will be required.
Although today the minimum required social capital can be very low, it is advisable to estimate the expenses of the company before it can generate profits and choose a social capital that does not deviate too much from the estimates.
The reason is that, if the expenses are close to the amount present in the company’s bank account before the company begins to generate profits, an injection of foreign capital would have to be made to avoid bankruptcy. This implies a new registration procedure for the registered capital (for which a maximum of 8 weeks is necessary and the approval of the local government) or the taxes on the profits of the amount paid in order to avoid imminent bankruptcy. Both problems can be avoided, of course, by providing sufficient initial capital to cover expenses until the company is able to sustain itself .
If in the future you intend to sell your Chinese company, it may be convenient for you to own a “parent” foreign company or a company outside of China that holds, on your behalf, the shares of the Chinese company. In this case, at the time of the sale, you can leave the foreign parent company without incurring the long process necessary to transfer ownership of a company in China.
Finally, although a WFOE can pay dividends to shareholders, there is a restriction: dividends in a given year, for example 2019, can only be paid if the company is active that year. Another fairly common way of “withdrawing” the profits of a Chinese company is to pay consulting fees to a foreign company of which you are a shareholder.
Create a partnership in China: Joint-Venture
After the WFOE, the most common FIE (Foreign Invested Enterprise) is the Joint Venture, or a company controlled by both foreign and Chinese partners.
Keep in mind that a Joint Venture usually involves a transfer of technology. Due to the problems related to intellectual property that plague China, foreign companies that intend to manufacture or sell a product with high added value (such as a patented product or software) prefer to opt for a WFOE.
If you want to operate in a “restricted” industrial sector (for example, SaaS, Software as a service), the Joint-Venture is your only option. For more information on the restricted industrial sectors, read point 2 of the next section.
For the rest, the WFOE and Joint Venture are quite similar.
Complete procedures to set up a company (WFOE) in China
Do not forget that the procedure we are going to describe is for “WFOE of services”, that is, a 100% foreign capital company with service activity. For “Manufacturing WFOEs” (that is, companies that manufacture products) and Joint-Venture, the procedure is similar (although some of the details may be different, depending on the case).
1. Choose a legal agency that will help and advise you during the process of formation and management of company
If you think you can do it alone, you’re wrong. By reading this section, you will realize that to open and manage a partnership in China it is essential to have a professional who speaks fluent Chinese and is competent in legal and tax matters.
2. Choose the scope of business in which you want to operate and determine if it is incentivized, restricted or prohibited to foreigners
In China there are certain sectors for which the government encourages foreign investment (usually through tax incentives), some restricted for foreigners (or for which a foreign partner can only operate through a Joint Venture with a Chinese counterpart, that can usually own up to 49%) and others totally prohibited, and therefore inaccessible to foreigners.
You can consult this information online in the Catalog for the Guidance of Foreign Investment Industries.
This catalog is updated periodically . In general, the most encouraged sectors are those that promote innovation in areas such as environmental protection, export or development of the poorest areas of the country. Just to give an example, in 2015 the creation of asylums was encouraged, probably due to the fact that China has an increasing need for this type of services. An example of a restricted sector is that of industries that have a negative impact on the environment. Prohibited sectors include those considered politically sensitive or that may cause harm to the country.
Remember that if your sector is not mentioned in the catalog, it means that it is simply not encouraged or restricted or prohibited. In that case, it is simply “allowed” (permitted).
The choice of business scope (or industrial sector) is very important.
If you choose a business scope that is too broad, you run the risk of being denied the opening permit if the sector in which you want to operate falls into the category of restricted or prohibited.
If, on the other hand, you choose a business scope that is too “limited” (or too “specific”), it is likely that you will approve your application but you run the risk that the government will force you to close the company as soon as you operate outside the declared scope.
Does it seem complicated? I explain it to you with an example. The easiest business is consulting: obtaining permits is easier and the expenses and terms of establishing the Chinese company are undoubtedly lower.
For this reason, many agencies specialized in helping foreigners to open companies propose to open a consultancy, although in reality you want to do something different (for example: manufacture and / or sell products in China).
The problem is that, as I have said, as soon as the government realizes that you are operating outside your area (“consultancy”, in this example), it will force you to close. And believe me when I tell you that lately, discovering foreign companies that operate outside their business scope is one of the favorite pastimes of Chinese officials.
3. Make sure that all foreign investors have the approval to own shares of a Chinese company
As already mentioned, foreign investors often choose to control Chinese company through a foreign company. In that case, you must make sure that the foreign company has been approved by the Chinese government. In most cases, it is only a mere formality, although it is important to check that there are no problems and provide all the necessary documents such as the business license of the foreign company, a letter of recommendation from a bank in which the company has opened an account, etc.
4. Prepare all the necessary documents to obtain the necessary government permits to operate legally in China.
To obtain permission to register your company and operate legally in China, you must submit the following documents (most of which must be written in Mandarin Chinese, which is why it is imperative to trust a professional in the sector before proceeding):
- The name of the company, in Chinese, that you want to use. Keep in mind that if the name you have chosen for your company is already in use or for any other reason can not be used, you must request prior approval of the name of the company before the competent authority or AIC (Administration of Industry and Commerce) of the city in which you want to establish a company. This can take between 2 and 15 days, depending on where you have to request it;
- The list of partners of the parent company that, as stated in the previous section, must have been pre-approved;
- The management structure , that is, the name of the members of the board of directors, the general director, the supervisor and the legal representative (which often coincides with one of the directors), and color copies of the passports of all those involved;
- The legal address of the company (including name, e-mail and telephone number of the owner of the land or building). The company’s address must be “exclusive” (you can not share an office with another company or have a virtual office in order to reduce costs) and “adequate” to the business scope of your company (for example, if you have a manufacturing company , you can not register it in an office in the center of the city, it has to be a suitable space for the type of production). Keep in mind that it is absolutely necessary to submit a rental or purchase contract.
- The Articles of Association that contain vital information about the business scope in which you are going to operate (whose importance has been amply reflected in this article), the management structure, the method of repatriation of the benefits, etc .;
- The number, citizenship, salary and benefits of the employees (in case you have not yet decided who to hire, you must specify the positions);
- The social capital (or registered capital, that we already saw in one of the previous sections of this article) and the total investment (which includes both the social capital and future loans by the investors of the company or a third party , such as a bank);
- A feasibility study is appropriate to present a business plan and an investment budget (following the standard format provided) to convince the authorities to approve the opening of your company of the viability of your business. Otherwise, the project will not be approved. Needless to say, social capital and business scope play a fundamental role in the approval process. If, for example, you want to start a mobile factory, you can not propose a social capital of 20,000 US dollars, which will obviously be insufficient to finance such a project. In the case of a consultancy, a much smaller amount would suffice because it does not require a huge investment;
- Other documents required : the list of documents to be submitted may vary depending on the business scope of your company, the city or province of residence (which will depend on the legal address you propose) and the sudden changes to which they are subject the Chinese laws.
As you have already understood by the last point, although the list presented is an optimal starting point, it is not exhaustive at all. My advice is that, once again, you can consult a legal agency that will advise you on the steps to follow according to your situation (business scope, address, etc.).
If you do not have all the documents in order, it is very likely that your application will be rejected and, after the first rejection, obtaining all the permits will be more difficult.
5. Request approval from the competent authorities
To obtain the approval certificate and the business license, you must deal with two different governmental entities: The Ministry of Commerce (MOFCOM) and the State Administration of Industry and Commerce (SAIC). In case of a “modest” investment, it will be the local branches of the same.
Those of MOFCOM bear the name of COFTEC (Commission of Foreign Trade and Economic Cooperation) or BOFCOM (Bureau of Foreign Trade and Economic Cooperation). As for the SAIC, the names of the local branches vary depending on the city. For example, Shanghai AIC or Hangzhou AIC.
Do not forget that depending on the city or province, the forms and / or documents to be submitted can vary a lot.
As I said, one of the crucial points of the approval procedure has to do with the business scope (or business scope) of the company. If the competent authority decides that your business scope falls into a “restricted” or “prohibited” industrial sector (as it appears in the Guide for Foreign Investment), the scope of business will be modified or in more extreme cases, you will be denied the approval request.
Keep in mind that to obtain approval in an “incentivized” industrial sector, which, as we have said, has tax advantages, you must obtain the approval of the National Development and Reform Commission (NDRC) or, for investments that are not so high, that of a Provincial branch of the NDRC, called the Provincial Development and Reform Commission.
With regard to deadlines, the competent authorities must notify you if you have obtained the approval (and delivery of the approval certificate) within 90 days from the date you requested it. Keep in mind that, in the case of “particular” circumstances (which are not clearly defined by Chinese law), that period may be extended to allow a “more comprehensive evaluation”.
6. Obtain the business license
After obtaining the approval certificate, you will have 30 days to enroll in the AIC and apply for the business license.
Next, the list of necessary documents:
- An application form;
- The statutes of the company;
- The newly obtained approval certificate;
- The name of the company in Chinese, pre-approved by the AIC;
- Copy of the business licenses of the investment companies (also pre-approved);
- Letter of recommendation from the bank in which the investor company has an account;
- List of the members of the board of directors, the general director, the supervisor and the legal representative of the company;
- Other documents requested by the AIC (once again, it will depend on the city where you want to set up the company).
The date of foundation of the company will correspond with the day of issuance of the business license.
7. Opening of the bank account and deposit of registered capital
Once the business license has been obtained, in order for the company to work, you must pay the amount corresponding to the capital registered in the bank account of the company, which you must open in the Bank of China or in any other bank designated by SAFE, the State Administration of Foreign Exchange ( list of the main Chinese banks ).
The difference between the total investment and the registered capital can be paid in the future and, as we have already mentioned, it can be a loan from the shareholders of the company or a loan from a third party, such as a bank.
Finally, keep in mind that there is a close correlation between total investment and social capital. For a WFOE that, for example, dedicates itself to manufacturing and declares a total investment of less than 3 million US dollars, the minimum social capital is 7/10 of the total investment.
8. Other possible procedures to carry out after obtaining the business license
Apart from opening the bank account and depositing the social capital, here is a list, not at all exhaustive, of the approvals (or registrations) that you must obtain (or effect) after obtaining the business license:
- Approval by the PSB (Public Security Bureau) of stamps (or chop), which in China are important, since the signature alone is not enough, the stamp is also required;
- Registration in the Tax Office;
- Registration at the customs office;
- Registration in SAFE (State Administration of Foreign Exchange);
- Hiring an accountant (accounting books are mandatory in China);
- Other requests or approvals required, which may vary according to the type of WFOE and / or the city where you have opened the company.
In what city or province to open your company
To choose the city or province in which to have legal address and operate, you must take into account the following factors:
- Presence of qualified managers, employees and operators : although it is true that in important cities such as Beijing or Shanghai you will have more possibilities to choose, you will also have to offer higher salaries;
- Proximity of infrastructure, suppliers and customers : it does not make sense to open an electronics factory in Beijing if all your suppliers of raw materials and components are in Shenzhen; as it does not make sense to open a factory in Sichuan as the savings for the lowest wages will be lost due to the transportation costs of the merchandise in the absence of a nearby international port;
- The legal system: although things are changing, in more important cities like Shanghai or Beijing the laws are more transparent. That said, local governments in second and third tier cities are much more willing to receive foreign investment; therefore, they are more likely to help you obtain all the necessary permits to start your business;
- Incentives for foreign companies as reductions of the tax on profits or import / export rights: these incentives are easier to obtain in the so-called special zones such as the Special Economic Zones (SEZ) , the Economic and Technological Development Zones (ETDZ) , High-tech Industrial Development Zones (HIDZ), Free Trade Zones (FTZ) or Export Processing Zones (EPZ). It must be said that the local government can propose advantageous incentives even outside these special zones, depending on the interest that they have in your investment.
Business taxation in China
Here is a list of the taxes to consider for a WFOE or Joint-Venture:
- Corporation Tax : This is a tax on profits (gross margin minus expenses of the company), of 25%. But there are several ways to achieve a reduction of corporation tax (for example, if the business scope of your company is “incentivized”, you will have to pay only 15%);
- Tax on Transactions: It is a tax on turnover, which can vary from 3% to 5%, depending on the type of company (except for entertainment companies, for which the rate varies from 5% to 20%);
- Customs duties: These are customs tariffs on merchandise exported and imported from China (also in this case there are several ways to obtain a reduction or exemption of the rights if, for example, your company is located in a Free Trade Zone);
- VAT: China’s VAT is usually 17%. As in Europe, it is a consumption tax;
- Individual Income Tax : is the tax on the dividends received by the shareholders of the company and on the wages of the workers.
Some of the most common mistakes when registering a company in China and how to avoid them
- If you can, avoid opening a company in China . As you will have read at the beginning of this article, there are other options, such as using an umbrella company or a distribution agreement;
- If after carefully evaluating the situation you decide that it is necessary to create a company in China, use a professional in the sector . Do not trust the agencies that seem “too cheap to be true”, or those who agree to help you open a company before evaluating whether it is really necessary and, as we have said, who advises you to open a consultancy company even if in reality you business scope is totally different;
- Do not expect to register a company in China and be operational in a month. The minimum term is 4 months (if you are lucky);
- China is a continent: weigh well what city is the most appropriate to set up your company;
- Consider the scope of business well to avoid restricted sectors, know if you have the right to incentives and not prevent future expansions;
- Regardless of the minimum social capital required, think about what kind of initial investment will be necessary for your company to be self-sustaining before spending all the initial capital;
- Give importance to the statutes of the company ; it is not a formality ;
- If your company owns intellectual property such as a patent or trademark, make sure it has the same legal protection in China ;
- Do not underestimate the expenses you will have , such as distribution problems, frequent change of employees, legal inquiries and other quite common difficulties when doing business in China.
Additional resources and analysis
- China Law Blog – A blog dedicated to the practical aspects of Chinese laws and how these aspects influence your business;
- Setting Up Wholly Foreign Owned Enterprises in China – A very practical book on how to open and manage a WFOE in China, written by the authors of the China Briefing site;
- China Briefing – Another great blog dedicated to the Chinese legal system, with special attention to the fiscal and operational aspects for those who carry out business in China;
- Doing Business in China for Dummies – A book that, like most books in the collection for dummies, offers a practical introduction to what you need to know to conduct business in China.
Chinese Company Registration Services by YBD
If you are interested in registering a company in China (or other similar services), please contact firstname.lastname@example.org.