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Types of business presence in China:

Last Updated: Jan. 3, 2012

Foreign Investors generally establish a business presence in China in one of five ways: 1. WFOE, 2. Representative Office, 3. Joint Venture, 4. Partnership Enterprise (PE) and 5. Hong Kong company. The differences between each of these are summarized below, you can also check the Comparison Chart.

WHOLLY FOREIGN OWNED ENTERPRISE (WFOE) is a limited liability company wholly owned by the foreign investor. A WFOE requires registered capital and its liability is limited to its equity , it can generate income, pays tax in China and its profit can be repatriate back to the investor's home country. Any limited liability enterprise in China which is 100% owned by a foreign company, individual(s) or companies can be called as WFOE.

REPRESENTATIVE OFFICE (RO) is a liaison office of its parent company. It requires no registered capital. Its activities are limited to : product or service promotion, market research of parent company's business, quality control or contact liaison in China. A RO is generally prohibited from generating any revenue nor entering into contracts with local businesses in China.

JOINT VENTURE (JV) is a limited liability company formed between a Chinese company investor and a Foreign investor. The parties agree to create a entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise. A JV has usually been used by foreign investors to enter the restricted in industries such as: Education, Entertainment, Mining, Hospital etc.

HONG KONG COMPANY, it's often be used as a Special Purpose vehicle (SPV) to invest in Mainland China. Hong Kong is one of the quickest locations to Incorporate a business. Although a HK company is not a legal entity in mainland China (see Wiki 1 country, 2 systems), many foreign investors, especially investors from Europe and North America choose to form a Hong Kong company as a SPV to invest in China.

PARTNERSHIP ENTERPRISE (PE) for foreign investor is a new type of business presence in China (since March 1, 2010). It refers to: a) 2 or more Foreign enterprises or individuals establish a Partnership Enterprise (PE) in China; and b) Foreign enterprise(s) or individual(s) with Chinese individual or company establish a Partnership Enterprise (PE) in China. It's a new type of business entity in China, and this might take some time for local authoritie to determine how these structures fit in with other types of business entity establishment.

CHART:

Comparison Chart for 5 businesses structures in China

Comparison of Business Operations in China: Shanghai, Beijing, Hangzhou,Shenzhen, Hong Kong

(*1) WFOE/ Joint Venture can only conduct business within its approved business scope, which ultimately appears on the business license. Any amendments to the business scope require further application and approval. Please check point 5 at www.wfoe.org for more details.

(*2) Check the details of residence permits in China at www.pathtochina.com/visa.htm

(*3) There are 2 major taxes for WFOEs and Joint Ventures in China: Turnover tax (which includes Business tax, VAT tax etc.), Income tax (corporate income tax, individual income tax) For Business tax: Based on turnover, it's 5-6% applies to the service oriented business; VAT tax: based on Value added part of the products, applies to trading and manufacturing businesses; Corporate income tax: based on gross profit, it's 25% nation wide (since Jan. 1st, 2008) except High technology businesses with tax incentives in special economic zone, and encouraged industries in middle-western China (starts from Jan. 1st, 2009). Other taxes include dividend tax: it's 20%. As for public listed company, the dividend tax is: 10% since June 13th, 2005.

(*4) Rep. office's tax used be based on 9% on expenses. Since March 2010, it has been changed over to approx. 11% according to new regulation from local taxation bureaus in Shanghai, Beijing and Shenzhen.

(*5) Some local Chinese companies do not have foreign currency account and cannot send money abroad (including to Hong Kong) Make sure your China clients can send money to Hong Kong.

(*6) :According to State Administration of Industry and Commerce's new rules on Foreign Representative offices in China, that: (since March 11, 2011), it's mandatory that PARENT COMPANY be established for more than 2 years; Maxium number of foreign employees in Rep. office is 4. .

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