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Setting Up a Business in China

Investing in a market as complex and expansive as China comes with legal, regulatory, and cultural challenges. Choosing the right corporate structure for setting up a company in China is paramount and can mitigate unnecessary business constraints, costs, and official scrutiny.  


Choosing a corporate structure 

Foreign investment can be made via one of several types of investment vehicles. Choosing the appropriate investment structure for your business depends on several factors, including its planned activities, industry, and investment size. 

It is crucial to take into account various aspects of the target entity types before deciding which kind of business to launch. These include differences in structure, legal liability, statutory compliance requirements, time needed to set up the business, the kinds of activities the business can engage in, and more. These factors aid in determining the proper business costs, requirements, risks, and limitations needed to support the company's future development, growth, and intended capabilities.

In the table below, we’ve described these factors for each primary entity type that can be established in China. 

Comparison of Different Investment Options 

Investment Options 

Common Purpose(s) 

Pros 

Cons 

 RO 

  • Market research 
  • Liaise with overseas headquarters 
  • Easiest foreign 
    investment structure to set up 
  • Paves the way for future investment 
  • Cannot invoice locally in RMB 
  • Must recruit staff from local agency; no more than four representatives 
  • Heavily taxed if expenses are high 

 WFOE* 

  • Manufacturing 
  • Servicing 
  • Trading (if a FICE) 
  • Greater freedom in business activities than RO 
  • 100% ownership and management control 
  • Minimum Registered capital requirement (for select industries) 
  • Lengthy establishment process 

JV 

  • Entering industries that, by law 
    require a local partner 
  • Leveraging a partner's existing facilities, workforce, sales/ distribution channels 
  • See common purposes 
  • Split profits 
  • Less management control than a WFOE 
  • Technology transfer/IP risks 
  • Inheriting partner liabilities 

FIP 

  • Investment vehicle 
  • Servicing 
  • Allows for domestic and foreign ownership 
  • Easier setup 
  • Unlimited liability of the general partner 
  • Newness of structure (potential challenges with taxation or foreign currency exchange) 

M&A 

  • Expanding business presence in a new market without establishing operations from scratch 
  • Simplify the tedious details involved in a greenfield investment 
  • Leverage the market share and established framework of the target company 
  • Help the investing company acquire capabilities it cannot or does not want to develop internally 
  • Subject to all FDI restrictions and rules 
  • Higher scrutiny from the authority 
  • Antitrust review and potential security review 
  • Post-merger integrations may require additional resources 

VIE 

  • Getting access to sectors that are restricted or prohibited to foreign investment 
  • See common purpose 
  • Breach risks of the contractual arrangement 
  • A vague attitude of the Chinese authority toward VIE structure 

Alternative options for entering the China market

  • Market research
  • Selling into or source from China
  • Cost efficient
  • Greater flexibility
  • Mitigated risks
  • Limited capabilities
  • Temporary arrangements rather than a long-term strategy

*Under the FIL, the terms of the WFOE Law and the JV Law are no longer binding. Nevertheless, we still use WFOE and JV to refer to relevant investment forms for consistency and easier communication 

  See table: Comparison-of-Different-Investment-Options 

For details about these investment options, click on the entity type to read from more from our Types of Business in China guide section. 

Requirements for setting up a business 

Business scope 

Overseas enterprises should ensure that the registered business scope appropriately reflects the actual in-country corporate operations. The intended scope of a business must be specified when it is established.  

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Business scope is a list of the commercial activities that a company is permitted to engage in. It is stated on its company license and other registered information, including its name, registered capital, and legal representative. It is managed by the local Administration for Market Regulation (local AMR)1. 

Failing to keep the company's commercial operations within the limit of its registered business scope can be damaging to a company's capacity to issue official invoices (fapiao) to its clients. While a firm can occasionally provide fapiao for non-business activities, frequent disparities may result in tax inquiries. Therefore, companies must carefully plan their company scope prior to initial incorporation or risk going through the onerous and time-consuming procedure of amending this afterward. 

Depending on the business scope, foreign-invested enterprises (FIEs) can be classified as a manufacturing company, a service company, a foreign-invested commercial enterprise (i.e. a trading company), a regional headquarters, an R&D center, an investment company, or several others. The capital requirements will frequently differ depending on the type of company that is being formed.

Registered capital requirements 

No minimum registered capital is required for corporation establishment except for areas like banking, finance, insurance, etc. However, the foreign shareholder should ensure that a company's registered capital is enough to sustain its business activities for at least a year, including rent, employee salaries, and office expenses. 

Did You Know
The registered capital does not need to be paid completely upfront. China now follows a subscribed capital model, under which a schedule of contributions must be declared in the Article of Association and be registered with the local AMR in charge. The government will check whether the investors follow the capital injection plan.

If the FIE chooses to follow the ratio between registered capital and total investment, as shown in the chart below, the registered capital can affect the amount of offshore debt the FIE can borrow from other investors or foreign banks. The maximum amount of offshore debt is the difference between total investment and registered capital. 

The registered capital is the fund to which all shareholders contribute or promise to contribute when they apply to the local Administration of Market Regulation (AMR) for company establishment. The registered capital's size is influenced by a number of variables, such as the area, industry, business scope of the company, anticipated operational scale, etc. A company's business license will include this information, which the general public can see and use to get a general idea of how strong its financial position is. 

Besides, the registered capital amount will be used by authorities to assess the size of the company. Consequently, the registered capital amount can impact the company's eligibility for various preferential treatments, including tax incentives, funding opportunities, and participation in bidding projects.

Investment to Capital Ratios 

Total investment (US$) 

Minimum registered capital 

3 million or less 

7/10 of the total investment 

3 million - 4.2 million 

US$2.1 million 

4.2 million - 10 million 

1/2 of total investment 

10 million - 12.5 million 

US$5 million 

12.5 million - 30 million 

2/5 of total investment 

30 million - 36 million 

US$12 million 

36 million or greater 

1/3 of total investment 

Registered capital contributions can be made in cash, lump sum, or installments. However, locally obtained RMB cannot be injected as registered capital – overseas investors must contribute from outside China. The company’s payment schedule for contributions must be specified in its Articles of Association, and once paid, the amount cannot be freely wired out again. 

Expense and tax planning 

When establishing a company in China, costs must be incurred prior to the company being formally incorporated. The question then becomes how much of these expenses can be deducted from the company's tax bill. This is especially important when the investment is a large one, such as establishing a factory and purchasing machinery, where the costs incurred prior to incorporation can be significant. 

A Representative Office (RO) in China is taxed on its expenditures. As a result, it is in the investor's best interest to keep expenses allocated to the RO as low as possible and advisable to direct the RO's pre-incorporation expenses to the foreign headquarters. 

Meanwhile, a Foreign Invested Enterprise (FIE), an independent legal entity registered in China, is taxed on income and may deduct expenses from tax. Even though pre-incorporation expenses are, by definition, incurred prior to the FIE formally existing, only a portion of these expenses can be borne by the FIE. Only the pre-operation costs (开办费) may be allocated to and deducted from all expenses incurred prior to formal incorporation. The time when pre-operation costs occurred is critical in defining them. 

In practice, the beginning of this period is regarded as either the date of establishment on the business license or the day on which the investor receives confirmation of the company name from the AMR. The pre-operation cost period concludes when the company issues its first invoice or generates its first revenue. 

Further, office rent is the only cost incurred prior to the pre-operation cost period. Allocation to the FIE is permitted because an office lease is necessary in the incorporation process. 

Enterprises, particularly manufacturing firms, which frequently have a lengthy pre-operation period, should carefully consider when their pre-operation period ends. These businesses, in particular, must ensure that any costs incurred can be carried forward as a loss over the next five years.

FAQ: Other Considerations When Setting Up a Business in China

How can I choose the right entry model for China?  

Start With the Right Plan and Support. As with any foreign country, China’s setup requirements, options, and processes are unique, and establishing a legal entity requires the various costs of such an investment, and time, and can bear other investment risks. Once investments are made, reversing strategies can be more challenging, so it is vital that a company avoid missteps from the outset. 

To optimize the chances for success, a business would do well to have better:

  • Well-defined business scope; 
  • Informed and guided business model; 
  • Selection of business partners or suppliers to work with; 
  • Options for initial service lines, products, and pricing models; and 
  • Options to set up in the right locations and more. 

Obtaining on-the-ground information and practical experience in the market can significantly help in these areas and help position an enterprise for success in China. Besides researching this Doing Business in China guide thoroughly, it is advisable to leverage professional assistance for further guidance with pre-market entry, investment decisions, entity setup, and all business, operational, and financial factors that will arise along the path to achieving your investment objectives. In this respect, the contributors of this Guide are available to provide this expertise via the Chat or Contact Us link buttons. 

What government agencies are involved, and how long will it take?  

Establishing a foreign investment structure in China generally takes between three and six months and involves the following government authorities: 

  • Ministry of Commerce (MOFCOM) and its local branches; 
  • State Administration for Market Regulation (SAMR) and its local branches; 
  • State Administration of Foreign Exchange (SAFE) and its local branches; 
  • State Taxation Administration (STA) and its local branches; and
  • General Administration of Customs (GAC) and its local branches. 

The establishment process varies based on one’s chosen investment structure and planned business scope. For example, setting up a manufacturing FIE requires an environmental evaluation to be completed, setting up a trading FIE must comply with the customs/commodity inspection requirements, and setting up a simple service FIE may require neither. 

How can I protect my intellectual property? 

Many Chinese FIEs have transitioned from a manufacturing focus to a model in which their true business value is now bound up in intellectual property. Unfortunately, violations of intellectual property rights (IPR) continue to be a problem in the country, including infringements of copyrights, trademarks, patents, and designs. 

IPR must be registered with the appropriate Chinese agencies and authorities to be enforceable in China. Most FIEs protect their IPR by proactively searching the internet for violations and sending staff to corporate functions and trade fairs. Companies can also request that Chinese customs monitor their trademarks and contact them if any violations are discovered.

How do I open a bank account? 

Before incorporating the company, the foreign investor may open a temporary bank account in China. The investor can deposit foreign currency into this account and use it for pre-operational and other expenses. 

After the company is formed, a capital account must be opened. The funds from the temporary account can then be transferred to this account via wire transfer. 

Once obtaining a business license in China, the newly established FIE must choose a specific bank to open the bank account, without which the entity will not be able to carry out its daily operations. 

When opening a Foreign-Invested Enterprise in China, there will be a need to establish at minimum two bank accounts: 

  • RMB Basic Account and 
  • Foreign Currency Capital Contribution Account. 

Foreign investors can establish the above accounts in China through international banks with a local presence or through a local Chinese banking institution. 

How can I close a business in China? 

To legally close a business in China, the investors need to go through a series of procedures to liquidate and deregister the company, which involves dealing with multiple government agencies, including the respective industrial and commercial bureaus, market regulatory bureaus, tax departments, and banking authorities. 

It may take time for executives to become fully aware of their responsibilities in dissolving or liquidating a company, but they are somewhat extensive. Despite the onerous process, investors are highly recommended not to just “walk away” without following the prescribed procedures. Simply walk-away results in very serious consequences for the legal representatives and the company’s future in China.  

Here is a very brief summary of the procedural stages required to close a business, such as a WFOE or JV, in China: 

  • Form a liquidation committee and prepare an internal plan; 
  • File a record with SAMR; 
  • Inform creditors separately and through public announcement;
  • Clear outstanding business and creditor’s debts; 
  • Terminate employees; 
  • Disposal of the company’s remaining assets; 
  • Tax clearance and deregistration; 
  • Customs deregistration; 
  • SAMR deregistration;  
  • Bank account closure and SAFE deregistration; and 
  • Cancel company chops. 

The steps for closing an RO are simpler than for a JV or WFOE and may slightly differ from the above.  

Can I do business without setting up an entity? 

In the absence of on-the-ground market knowledge and practical experience, it is easy to make avoidable mistakes. However, changing strategies after investments have been made is more expensive, time-consuming, and can even harm the company's reputation. Given these factors, an increasing number of companies today may find it more advantageous to first test the waters or target a smaller or shorter-term presence in China. Fortunately, a lesser-known model for businesses to hedge against market entry risks exists and is available in a number of Asian markets.  

As an alternative, a new market entry model called Global Staffing enables foreign investors to do business in China for short-term durations without having a legal entity of their own.

Global Staffing Solutions (GSS) is a market entry strategy and suite of services that can make it easier for businesses to operate internationally. Key within the GSS suite is the Permanent Employer Organization ("PEO") service. 

Under the GSS service, foreign companies can enjoy the benefits of hiring full-time staff working in overseas markets and remaining compliant with local laws without the time and investment required to set up and operate an overseas legal entity.

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