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Types of business presence in China:

Last Updated: Oct. 16, 2017

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. 6. Shanghai Free-Trade Zone company. The differences between each of these are summarized below, you can also check the Comparison Chart. and ( doing business in ChinaDownload our contributed article to a famous London-based publishing house about the options)

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.

FOREIGN INVESTED PARTNERSHIP ENTERPRISE (FIPE) 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 with very little capital, partners could start a business in China easily, there's no minimum registered capital required for FIPE. Same as WFOE, FIPE could generating revenue, hire local and foreign staffs and entering into contracts with local and overseas 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.

NEWSHANGHAI FREE-TRADE ZONE COMPANY (FTZ) The Shanghai free-trade zone is one of the first in mainland China.This free-trade zone including three bonded zones: Waigaoqiao port, Yangshan Deep-Water Port and Pudong International Airport, covering a total of 28 square kilometers

Customs formalities within the free-trade zone will be simple and convenient that the entry of goods will only require registration of the variety and value of the goods without any inspection and intervention, there will be no declaration process for goods coming in and out of the zone.according to Mr. Huang Shengqiang, director general of Shanghai Customs.

Iit was establishing a pilot zone in Shanghai to test some of the government’s financial overhauls, including interest rate liberalization and full convertibility of China’s currency, the renminbi.

 The zone will take more than 10 years to construct. Upon completion, the free trade zone will provide world-class transport and communications facilities, as well as a tax-free environment for domestic and foreign enterprises who consider Shanghai to be a major hub of their supply chains across Asia.

The pilot program includes several steps. It will create tax-friendly facilities for trade and investment within the free trade zone, promote China's interest-rate liberalization and, eventually, Renminbi convertibility. It will also encourage financial product innovation and promote the development of offshore businesses. The program is set to play an important part in the negotiations for the Trans-Pacific Partnership Agreement (TPP) and become the first open window to help China join the TPP.

Statistics released by the Shanghai Municipal Office for Port Services showed that Shanghai's foreign trade cargo handling capacity accumulated to 306 million tons in 2012, an increase of 5.9 percent over the same period during the previous year, ranking first in the world in terms of cargo and container management capacities.

The creation of a Shanghai free trade zone is the Chinese government's latest major initiative in adapting to global economic development trends and furthering its opening up to the outside world. It is conducive to cultivating new advantages for China in the face of global competition. Moreover, it will help build a new platform for its cooperation with other countries and regions, develop new space for economic growth and build an “upgraded version” of the Chinese economy.

 

CHART:

Comparison Chart for 5 businesses structures in China

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

ITEMS WFOE/ JOINT VENTURE REPRESENTATIVE OFFICE HONG KONG COMPANY PARTNERSHIP ENTERPRISE
Minimum Capital Starts from 100K RMB(*1) Not register capital 1 HKD No minimum capital required
Business Scope Specific Industry: Trading WFOE; Consulting WFOE, Manufacturing WFOE(*2) etc. Liaision; Quality Control; Factory Visits All business activities offshore; General Trading Specific Industry according to Foreign Investment Industrial Guidance Catalogue
Office In an office building which can register business Office building/Virtual address Virtual address in HK In an office building which can register business
Working Visa 1 year multi-entry Visa(*3) 1 year multi-entry Visa Couldn't have work visa in China and HK 1 year multi-entry Visa(*3)
Recruiting Staff recruits staff directly Through Local HR agency: FESCO, CIIC Can't recruit staff in China recruits staff directly
Taxation Turnover tax; Income tax, Dividend tax (*4) approx. 10-15% (*5) on expenses; individual income tax Corporate income tax: 16.5%. No dividend tax Turnover tax; Income tax, Dividend tax (*4)
Maintenance Monthly; Quarterly; Annually Monthly; Quarterly; Annually Annual license renewal; Annual audit Monthly; Annually
Bank Account Access & receive money; pay bills; issue cheques; withdraw cash in China; RMB account and foreign currency Can only receive money from parent company; Can only pay for expenses; Can't pay for products Online banking; withdraw cash in HK; withdraw cash with debit card in China if applicable access & receive money; pay bills; issue cheques; withdraw cash in China; RMB account
Invoicing Official invoice in China Can't issue invoice or receipt Customized A4 size receipt Official invoice in China
Receiving payments World Wide Not allowed to receive payments from clients World Wide (*6 ) World Wide
Liability of equity participants Limited to amount of registered capital Parent Company must be established for over 2 years (*7) Limited to amount of equity participation Unlimited liability or limited liability in a limited partnership enterprise

(*1) [Since March 1, 2014] No. minimum registered capital is required for WFOEs with scope of business of consulting, Trading, retailing, information technology etc. in China. It's advisable to choose a registered capital within RMB 100K- 500K for most WFOEs. There are minimum registered capital still required for some industries for instance: Banking, Forwarding etc.

(*2) 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.

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

(*4) There are 2 major taxes for WFOEs and Joint Ventures in China: Turnover tax (which includes Business tax for service and consulting business, VAT tax for trading and manufacturing business etc.), Income tax (corporate income tax, individual income tax) For Business tax: Based on turnover, it's 3-5% 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.

FIPE: No corporate income tax required if partners are individuals. The individual partners shall pay their respective share of the partnership income. Corporate income tax applies if partners are companies

(*5) Rep. office's tax used be based on 9% on expenses. Since March 2010, it has been changed over to approx. 13% according to new regulation from local taxation bureaus in Guangzhou, Shanghai, Beijing, Ningbo and Shenzhen etc.

(*6) 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.

(*7) new: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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