The People’s Republic of China is the world’s fourth largest country with over 1.3 billion people and is one of the fastest growing economies in the world. In recent years China has enjoyed a high economic growth to become the second largest economy in the world and the biggest recipient of direct foreign investment among developing countries.
As China becomes progressively liberalized it is increasingly seen as a dynamic and exciting business environment. Investment in China may be made through either a Wholly Foreign Owner Enterprise (WFOE) or a Joint Venture (JV) Company or a Representative Office.
Establishing a presence in China can be a challenge but Eltoma has the experience to assist you in the registration of business entities in China. Eltoma can provide professional advice tailored to your individual requirements to ensure that the best solution is made available.
China – Key Benefits
China’s entry into the World Trade Organisation marked the beginning of a significant change for investors and enterprise in China. The government of China has allowed entry into the market through the formation of Wholly Owned Foreign Enterprises (WOFE), Joint Ventures (JV) and Representative Offices.
China is one of the world’s fastest growing economies and is an exciting jurisdiction in which to incorporate a company however it must be remembered that China also has disadvantages associated with emerging markets. These include an immature legal system and poorly enforced laws. Before proceeding with the formation of a WOFE company you should seek expert advice from Eltoma in order to formulate the best possible structure for your situation.
On January 1st 2006 China implemented a new Company Law. This Company Law revolutionized foreign investment in China, abandoning the rigidity of the old law and promoting a more flexible approach to company management. The Articles of Association are now structured to meet the specific needs of each company and provide for management of the company by directors and shareholders. In summary, the new Company Law provides a modern, flexible approach in which to conduct business and improve corporate governance. When considering incorporating a company in China it is imperative to have a thorough understanding of the legal framework.
In China foreign investors can establish a business presence in one of the following modes; Wholly Foreign Owned Enterprise(WFOE), Representative Office or through a Joint Venture (JV). Also Eltoma can advise whether to use a Hong Kong Company as part of the company structure to aid efficiency of the operation in China and to minimize costs.
Wholly Foreign Owned Enterprises (WFOE)
A Wholly Foreign Owned Enterprise is a limited liability company wholly owned by foreign investors. WFOE’s are the primary means of investing in China and are business entities formed entirely with foreign capital.
WFOE were originally conceived to encourage an increase in western technology and to encourage manufacturing activities that were export orientated although due to liberalization WFOE’s are now used for service providers (such as consulting and managements services), the technology industry (such as software development) and trading. A WFOE requires registered capital and can generate income and pay tax in China. Profit can be repatriated back to the investor’s home country.
The main benefits of WFOE are as follows:
- Freedom to implement the strategies of its parent company without having to consider the involvement of a Chinese partner
- Able to formally carry out business rather than just be a representative office
- Can convert profits to any currency for remittance to its parent company outside of China
- Protection of intellectual property rights
- No import / export licenses required
- To set up a WFOE the investor doesn’t have to have been established for 2 years unlike when setting up a Representative Office
Representative Offices are an ideal way in which to establish a presence in China and gain an understanding of the Chinese market. The main purpose of a Representative Office is to act as a liaison between the home office and the various trade organizations in China. They are used for market research purposes and to establish contacts in China. A Representative Office is not a separate legal entity it is an extension of the parent company and may only engage in non-profit making activities.
A Representative Office may engage in the following activities:
- Conducting research and providing data for its potential clients and partners
- Conducting research for its parent company in the local market
- Liaising with local contacts
- Acting as coordinator for parent company in China
- Making travel arrangements for parent company representatives in China
A Representative Office however must not engage in any profit making activities, receive any fees for services it provides or sign contracts on behalf of the parents company. In summary, a Representative Office is only to be used to for research purposes and to establish a presence in the marketplace.
The main benefits of a Representative Office are:
- Enables a company to conduct thorough market research into an emerging market prior to committing funds for a fixed term
- A Representative Office serves as a presence in China, to establish a brand / product
- Demonstrates a long term commitment to the Chinese market thereby promoting trust in prospective business partners
Joint Venture (JV)
A Joint Venture is a limited liability company formed between a foreign investor and a Chinese Company Investor. In some instances WFOE’s cannot be used for investment into some sectors of the Chinese market. In some restricted areas such as mining, healthcare, education and construction a Joint Venture Partnership is the only way to invest. Even when a WFOE is possible, some companies choose to establish a Joint Venture due to the fact that they will be better placed to take advantage of the local Chinese market and have an insight into customs and procedures.
A Joint Venture works by both parties agreeing to the entity by contributing equity and then sharing the expenses, revenue and control of the company.
The benefits of setting up a Joint Venture Company in China are:
- A Joint Venture allows access to restricted sectors of the market
- A Joint Venture reduces risk by exploiting market knowledge, gaining preferential market treatment and generally benefiting from local expertise and know-how
- A Joint Venture benefits from Chinese authority assistance enabling low labour costs, low production costs and a potential share of the Chinese market
A Hong Kong Company (SPV)
Formation of a Hong Kong Company can be used as a Special Purpose Vehicle (SPV) to invest in mainland China. Although a Hong Kong Company is not a legal entity in mainland China it can be an advantage to set up a Hong Kong Company from a tax perspective and also with regards to making the process of incorporating in China slightly easier. Many investors from Europe and North America choose this option.
The benefits of setting up a Hong Kong SPV are:
- Hong Kong is a major gateway to mainland China
- Hong Kong is one of the top twenty trading economies and the world’s third largest financial centre which means it is a well established and credible jurisdiction in which to incorporate a company
- Hong Kong Incorporation Documents are in English and Chinese which helps with any processes that are undertaken in China
- Lower tax rates by using a Hong Kong Company Operation Offshore with its WFOE in China
- Hong Kong has no currency control restrictions, no restrictions on capital transfer in / out of Hong Kong
- Easier to change the structure of a company if necessary. For example a reallocation of shares may take 2 months in China whereas in Hong Kong this would take 1 week
Tax and accounting regulations
A coherent offshore tax planning strategy is essential to maximize the effectiveness of offshore companies. Eltoma can assist by structuring the most tax efficient strategy to satisfy your requirements. Eltoma will guide you as to which jurisdictions offer the best tax structure by identifying the types of tax payable as well as applicable exemptions and incentives. Eltoma will provide tax planning advice that will identify which is the most favourable tax efficient jurisdiction in which to incorporate.
The tax system in China has undergone massive changes in recent years and the Chinese Government. Keeping up to date with compliancy in such a dynamic environment is highly challenging.
Below is a summary of the main taxes to be considered although this is just an basic overview. For a detailed information package regarding tax and accounting regulations in China please contact Eltoma and we can provide the appropriate information for your situation.
There are 2 main taxes for WFOE and Joint Venture Companies in China:
- Turnover Tax (this includes Business Tax and VAT etc)
- Business Tax: Based on Turnover Tax the rate of 5-6% applies to the service orientated business.
- Based on the value added part of the products and applied to trading and manufacturing businesses. The rate is around 17%
Income Tax (Corporate Income Tax, Individual Income Tax etc)
- Corporate Income Tax – based on gross profit. Stands at approximately 25% nationwide.
- In the Special Economic Zone high technology business are entitled to tax incentives.
- As of January 1st 2009 industries in middle-western China can now qualify for tax incentives.
- Currently stands around 20%. The rate however is much lower under the DTA signed between China and other countries such as Hong Kong.
Representative Office Tax:
- This tax rate is based on expenses and not profit since it is prohibited for Representative Offices to undertake business activities which generate income. From March 2010 the rate is approximately 11%.
Enterprise Income Tax:
- This is 33% although the rate can be reduced to between 15-24% dependent on the location of the business
- WFOE – After tax clearance the profit is allowed to remit out of the country but prior approval from the State Administration of Foreign Exchange is require. Repatriation of the Registered Capital is forbidden during the agreed business term.
International Aspects of Taxation:
- Double Taxation Treaty – China provides numerous preferential treatments with regards to foreign taxation and has concluded tax treaties with more than 60 countries including; the UK, the USA, France, Australia, Cyprus, the Netherlands, Singapore, Germany, the UAE, Australia and New Zealand amongst others.
Annual Reporting Requirements:
- Any limited company in China is required to submit an annual audit report to the relevant authorities and an annual examination is required.
- WFOE - A monthly tax report is required to be submitted to the relevant tax authorities and within 3 months of the end of each calendar year the WFOE must undergo an annual inspection prior to which a local accounting firm must have conducted an audit.
- Representative Office – A quarterly tax report is required to be submitted to the relevant tax authorities
Requirements and administration guidelines
As mentioned previously, due to the differences in the types of companies that can be formed the below is only a very basic overview of the company administration guidelines. Eltoma can advise on an individual basis providing you with specific information tailored to your requirements.
- WFOE Minimum Registered Capital – RMB 100,000 – RMB 500,000 (approx. US$15,000 – US$75,000) is the minimum capital requirement
- WFOE – Between 1 – 50 shareholders allowed. Public offering of shares are prohibited
- JV Minimum Registered Capital - A minimum of 25% of the capital must be contributed by the foreign partner
- JV - Drawn up by agreement dependent on capital invested
- WFOE – The WFOE must designate a single director or a board of directors who will act for the initial term of office, as set out in the Articles of Association
- JV- Directors appointed by the parties in general proportion to the investors respective equity shares
- All companies in China must have a physical office address at which the company is registered. They are prohibited from using a virtual address.
- WFOE - At least one individual who is not a Director must act as a WFOE Supervisor
- WFOE – One individual must be designated as the legal representative in the formation of documents.
- JV - A legal representative is required
- This is dependent on the complexity of the business and the negotiations required.
Procedure of company registration
The procedure of registering a company in China is often complicated however Foreign investors are not allowed to directly submit the application documents in order to register a WFOE to the relevant authorities in China. They must retain a PRC Entity to submit all documentations and co-ordinate the process. Eltoma will manage this process on your behalf ensuring you are kept informed every step of the way.
Registering a Wholly Foreign Owned Enterprise:
The procedure for registering a WFOE can be divided into three distinct phases; the approval phase, registration phase and post establishment phase. Below is a brief summary of the process and what documents may be required:
In the first instance it must be determined if the proposed WFOE will conduct business that will be approved by the Chinese Government. If it is deemed that the business is likely to be accepted then the following documentation is required:
- Certificate of Registration, or equivalent, certified by the Chinese Embassy or Consulate
- Passport copy certified by Chinese Embassy or Consulate
- Bank reference letter
- If applicable; passport copy of director of parent company, Legal Representative of China Company, Supervisor of China Company
- Business Scope – One of the most important documents required as a WFOE can only conduct business as defined in the business scope which ultimately appears on the Business License.
- Registered capital and list of proposed names of China Company
If the above documentation is in order and the Chinese Government approves the business scope then the process of incorporation can begin. The following documents are required in order to incorporate:
- Articles of Association – including details of the management and capitalization of the company
- Feasibility Study – including Year 1 Business Plan and Budget
- Leases – Office rental agreement / factory lease etc
- Proposed personnel costs
- Any other documents associated to the specific company
The time frame for incorporation depends on the complexity of the business and the negotiations required. However, Eltoma will guide you through the process providing an informative, smooth and efficient service.
The Opening of a Representative Office:
The opening of a Representative Office in China can provide many opportunities. The summary of the process of establishing a Representative Office is laid out below:
Depending on the type of business that the Representative Office is proposing to represent the Chinese Government will need to provide approval. Once this has been granted the following documents are required:
- An application letter signed by the Chairman of the Board
- Registering documents of head office
- Original bank reference letter regarding the company’s financial standing
- A letter appointing the Chief Representative to the Representative Office plus CV
- A copy of the lease agreement for office space
Once approval has been granted and an Approval Permit issued then the foreign investor must apply to the State Administration for Industry and Commerce. If the application is approved then an approval permit is usually issued within one month.
Registering a Joint Venture Company:
Setting up a Joint Venture can be a complicated and lengthy process and the documentation and timescale is dependent on the type of Joint Venture being formed. Each case is assessed on an individual basis. Eltoma can manage this process negotiating the complex procedure and keeping you informed every step of the way.
Hong Kong Company:
For details regarding the incorporation of a Hong Kong Company please see the pages opposite. Eltoma can advise whether it is advantageous and efficient to register a company in Hong Kong in order to fulfill your Chinese ambitions.