How to Evolve Your China Business from an Idea to a Reality

Posted by Reading Time: 5 minutes

May 27 – While nowadays many investors find the lucrative Chinese market the ultimate choice for their next investment destination, they should be aware that operating successfully in the country is never easy.

They may encounter difficulty from the very start, when their business ideas are still in proposal form; they may confront distinct challenges when putting their companies in place for expansion; they may still get a huge headache even when they just want to end their investment and exit the market. Business owners will not be able to tackle all these potential issues and get their businesses on the right track for robust development if they do not fully understand the market – including its fiscal and regulative environment – or equip their businesses properly with the right hardware and software support.

A variety of business people gathered at the “Getting Your Start up Started” event co-hosted by Dezan Shira & Associates and Servcorp on May 19 to listen to speakers from both companies paint the big picture of evolving a business from only an idea. Richard Cant, legal service director of Dezan Shira & Associates (DSA), elaborated on the options for investors in China to set up businesses in different forms. Michaela Julian, senior manager of Servcorp, emphasized how a high-class office location and network availability can promote a business’ image and efficiency.

Testing the water
In his presentation, DSA’s Cant pointed out that it could be highly risky to set up a business without knowing exactly in which direction the business would go, due to the following reasons:

  • Investors will have to provide a precise business scope before going through tedious application procedures that could take months. Changes in business scopes could mean doing all those procedures once again from the start.
  • Investors will also have to decide on their investment scale and how much registered capital they want to input before registration. Wrong capital planning could lead to a capital shortage due to China’s strict limitation on foreign exchange flow in and out of the country.
  • Investors won’t find it easy to even close down their business – they will need to go through time-consuming deregistration procedures, otherwise they might not be able to take back any remaining assets of the company.

Therefore, it is essential for newcomers to “test the water” before registering a business in China. However, during the first several months of market experimentation, how do businesspeople who work from home, abroad or another location maintain the presence of a professional office in the local market and obtain necessary administrative support? Servcorp’s Julian has an answer to that with a cost-effective option – the virtual office. The virtual office provides the “market testers” with a local telephone number in their chosen location and a dedicated receptionist to answer all calls in their company name. All the messages can be forwarded to the service user instantly no matter where they are.

Setting up a company
Cant, who along with his DSA team has helped numerous customers establish their business in China, introduced the different types of legal structures in the country as well as their respective merits and drawbacks. It is worth noting that while many overseas business owners may think setting up a representative office (RO) in China is more efficient and less expensive, Chinese regulations have become less favorable to RO establishments. The government no longer allows RO tax exemption, has increased the minimum deemed profit tax rate, and has issued more stringent regulations related to accounting requirements and other taxable activities. Moreover, the limitation on RO’s RMB invoice issuance and direct employment will likely restrict further expansion for businesses.

A significant portion of foreign businesses operating in China choose to register in Hong Kong because, compared to the mainland’s complicated legal system and heavy tax requirements, Hong Kong is a place where investors can set their companies up more efficiently and at a lower cost. The tax liabilities there are lighter too, with the corporate income tax rate at 16.5 percent against the mainland’s 25 percent and no value-added tax compared with 17 percent on the mainland.

Those who choose to register a wholly foreign-owned enterprise or foreign invested commercial enterprise in the mainland need to gain a complete understanding of what they can invest in, what scope their businesses will fall in, their investment and the registered capital, as well as an exit strategy, Cant emphasized.

It matters where you locate your company
An investor cannot register his/her business without providing a company address, but the office location is not only critical during business registration, it is also essential for company image promotion. It is important for small and medium-sized start-up companies that which want to develop a wider customer base and expand their business rapidly in the market to have an address in a central business district (CBD), in a Grade A building, on their business cards.

One of the most cost-effective ways to locate one’s office in a city’s CBD is to rent a serviced or virtual office. In her presentation, Julian listed multiple advantages of such office – not only do they provide prestigious office locations that attract potential customers, they also offer daily office maintenance and strong IT support, so that business owners can always show their visitors a pleasant work environment, and have control over their business operation anywhere they are through borderless online access.

Office services backed up by a global network also show their advantages when contingencies happen. Julian told the story that when the catastrophic earthquake hit China’s Sichuan three years ago, Servcorp located in Chengdu’s CBD managed to reinstate the company’s internet and communications within 24 hours by re-routing traffic through Hong Kong, while many other businesses there were without internet and communications for almost two weeks.

Related Reading
Setting Up Representative Offices in China (Fourth Edition)
The regulations for the establishment, operations and scope of activities for representative offices in China underwent significant changes last year. This completely revised guide explains all the regulatory changes in full, how to cater for these, the financial implications and the new filings and tax calculations that now result. We also overview the limits of activities an RO can be involved with and provide details of alternative legal structures for businesses.

Doing Business in China
The successor to our “China Business Bible,” this new, completely updated 156-page book covers all aspects of business in China, from the different types of legal structure, the full tax implications, human resources and labor issues, including cost analysis, intellectual property matters, a complete overview of China’s free trade and development zones, and on-going compliance issues such as tax filings and license renewals, audit and closure issues.

Twenty Lessons in Managing an SME in China
Twenty practical lessons over SME development and management in China, gleaned from 20 years of first hand China experience. A must-read for all small businesses and new-to-China entrepreneurs.

Dezan Shira on China’s New Representative Office Regulations