China has become one of the major driving forces of the world’s economy and after testing the water for many years, a lot of foreign companies are setting up their own establishments in China. The purpose of this factsheet is to provide the various options available to foreign investors to set up their business in China.
Foreign investors are generally welcome to invest in most businesses in China except specific industries such as media, broadcasting, internet related and some other forbidden or controlled industries. Companies established in China by foreign investors are collectively referred as Foreign Investment Enterprises (”FIEs”).
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Foreign Investment in China
Most Popular Forms | WFOE and RO |
---|---|
Wholly Foreign-Ownd Enterprise (WFOE): | |
Registered Capital | Must fulfill specific requirement |
Business Scope | Must operate within its approved scope |
Shareholder | At least one shareholder |
Legal Representative | At least one legal representative |
Representative Office(RO): | |
Registered Capital | Not necessary |
Business Scope | Only engage in business liaison |
Chief Representative | Should have one |
Setting up a company in Peole’s Republic of China (”China”)
Part I: Setting up a business in China
There are three common forms of FIEs:
- Wholly Foreign-Owned Enterprises (”WFOEs”) which are legal entities established in China and are wholly owned by one or more foreign investors;
- Foreign Equity Joint Ventures (”EJVs”) which are legal entities incorporated with limited liability jointly owned by local and foreign investor;
- Foreign Cooperative Joint Venture enterprises (”CJVs”) which are similar to EJVs but differ in the rights and obligations of each party which are governed by a joint venture agreement.
Foreign enterprises can also set up representative offices (”RO”) in China, but note that a RO is prohibited from engaging in actual business activity. However, if the main activity in China is pure business liaison, setting up a RO is a comparatively simple and more straight forward option.
Wholly Foreign-Owned Enterprise (WFOE)
Definition
Limited liability company incorporated in China owned by foreign investor(s).
Choice of Company Name
The incorporation procedures normally start with name pre-approval. The name must be in Chinese, and generally ends with “Limited”. Company name is usually comprised of “administrative area + company name + business nature + Limited”. The company name generally is a combination of two or more Chinese characters, and the word “China” cannot be used.
Registered Capital
The government laid specific requirement to register capital of a WFOE in accordance with the scope of business and place of incorporation:
- Register capital of a WFOE requires actual payment.
- Initial capital injection can be done within the valid period of WFOE which is generally 20 years.
- After each injection, a capital verification report by a Certified Public Accountant in China shall be prepared.
Business Scope
WFOE must operate within its approved scope of business. The scope of business must be determined at time of incorporating the WFOE and approved by the relevant Industrial and Commercial Administration Bureau.
Registered Address
All WFOE in China must have a physical office. Note that only a portion of the commercial building are eligible to register a WFOE. A proper rental agreement, duly filed with the local Housing Administrative Bureau, is required.
Shareholder
Shareholder can be at least one foreign individual over 18 years old or a foreign Company. Shareholder is the legal owner of the WFOE. For choice of shareholder, generally we recommend using a corporation for the purpose of mitigating risk exposure of the beneficial owner. The choice of country for incorporating this holding company would generally be companies incorporating in countries that offer more efficient tax incentive, such as Hong Kong or Singapore whereas Double Tax Treaty with China exist.
Legal Representative
Legal representative can be an individual of any nationality who is over 18 years old. Legal representative can concurrently be the director. The chief representative is responsible to represent the WFOE in all legal aspects.
Supervisor
At least one supervisor is needed, and the supervisor can be individual of any nationality over 18 years old. A WFOE should set up a board of supervisors including at least three individuals. Note that supervisor and legal representative cannot act concurrently. The role of supervisor / board of supervisor is to monitor the action of the director(s) and report to the shareholder for any misconduct of the director(s).
Director
At least one director is needed, and the director can be individual of any nationality over 18 years old. Director can be the same individual as the legal representative and shareholder. Director shall be responsible for the day-to-day operations of the WFOE.
Bank Account
Basic account: receiving income and paying expenses such as employee salary in CNY.
Capital account: injecting capital fund from shareholder(s) and paying expenses such as goods payment in a foreign currency.
Foreign Enterprises Representative Office(RO)
Definition
Legal extension (in China) of a limited company incorporated outside China.
Choice of Name
The name of a RO shall follow the name of the holding company and must be in Chinese. Pre-approval procedure for name is not necessary.
Registered Capital
Registered capital is not necessary.
Business Scope
Representative office can only engage in business liaison and shall not engage in any other business activity.
Registered Address
All RO must have a physical office. A proper rental agreement, duly filed with the local Housing Administrative Bureau, is required. Note that only a portion of the commercial building are eligible to register a foreign RO.
Parent Company
The Parent Company of a RO can be a company incorporated in any country except sensitive country such as Iran, Iraq, etc.
Chief Representative
Each RO should have one chief representative, and he or she can be of any nationality over 18 years of age. A secondary representative is optional. The chief representative is responsible to represent the RO in all legal aspects.
Bank Account
RO can open and operate a bank account in China for the purpose of receiving funding from the parent company and payment of local expenses.
Part II: Accounting and Record Retention
Accounting
Every company in China should maintain sufficient accounting records regarding their income and expenditure to enable its taxable profits to be readily determined. In practice, all documents related to business operations of the company including bank statements, sales and purchase invoices, receipts and invoices for expenses and all contracts signed by the company should be properly kept. Proper management account including balance sheet,profits and loss account and general ledger should be prepared on a monthly basis in accordance with “Accounting Law of the People’s Republic of China”, “Enterprise Accounting Standards” and “Enterprise Accounting Principles”.
Audit Requirement
FIEs are required to compile audited financial statements at the end of each fiscal year in accordance with relevant laws, regulations and administrative requirements. The audited financial statements should be prepared by a Certified Public Accountant in China. The State Tax Bureau requires all enterprises to provide a verification report of the annual enterprise income tax on a yearly basis.
Record Retention
The accounting records of a company required to be retained for at least 15 years.
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