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Types of business presence in China:

Last Updated: July 22, 2010

Foreign Investors generally establish a business presence in China in one of four modes: WFOE, Representative Office, Joint Venture, Partnership Enterprise (PE) and Hong Kong company, the defination difference between each of these are summarized below, you could also check below the Comparison Chart.

Wholly Foreign Owned Enterprise (WFOE) is a Limited liability company wholly owned by the foreign investor. WFOE requires registered capital and it's liability of equity , can generate income, pay tax in China and it's profit could be repatriate back to investor's home country. Any enterprise in China which is 100% owned by a foreign company or companies can be called as WFOE.

Representative Office (RO) is a Liaison Office of it's parent company. It requires no registered capital. It's activities would be: product or service promotion, market research of it's parent company's business, Quality Control liaison office etc in China. RO generally is prohibited to generate any revenue nor generating contracts with local businesses in China.

Joint Venture (JV) is a Limited liability company formed between Chinese company investor and 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. JV usually been used by foreign investor to engage the so called restricted in areas such like: Education, Mining, Hospital etc.

Hong Kong company usually been used as a Special Purpose vehicle (SPV) to invest 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 (MainlandChina and Hong Kong, See Wiki 1 country, 2 systems), lots foreign investors, especially investors from Europe and North America still chose to setting up a Hong Kong company as SPV to invest China.

Partnership Enterprise (PE) for Foreign Investor is a new type of business presence in China, it's carried out 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, 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 authority to finger it out how to compliance with other types of business entity establishment.

CHART:

Comparison Chart for 4 businesses modes in China

Comparison Of Business Operations in China: Shanghai, Beijing, Hangzhou, 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 permit in China at www.pathtochina.com/visa.htm

(*3) There are 2 major taxes for WFOE and Joint Venture in China: Turnover tax (which including Business tax and 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% national wide (Since Jan. 1st, 2008) except High technology businesses with tax incentives in Sepcial economic zone, and encouraged industries in middle-western China (Starts from Jan. 1st, 2009). Other taxes including 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 don't have foreign currency account, can't send money abroad (including to Hong Kong) Make sure your China clients could T/T to Hong Kong.

(*6) :According to State Administration of Industry and Commerce's file: Gong Shang Wai Qi [2010] No.4, PARENT COMPANY must be established for more than 2 years.

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