China is one of the fastest-growing economies around the world with an annual gross domestic product (GDP) growth of 9.5% through 2018. There is an increasing number of foreign investors that are attracted by China’s strong economic growth and are seeking to expand their business to China. With that, China is known as a land of rising business opportunities. China also develops a business-friendly environment as the government supports investors to set up a business in China. Since December 2004, China has become a member of the World Trade Organization, and thus, starting a business in China is relatively simple. In this article, our team at Tetra Consultants has highlighted the things that you need to know about company formation in China once you decide to register company in China.
1. Types of companies in China:
If you are a foreign investor who wishes to start a business in China, here are three types of entities that are suitable for you:
1. Wholly Foreign-Owned Enterprise (WFOE)
- WFOE is the most preferred option by foreign investors who wish to start a business in China.
- WFOE is a limited liability company (LLC) that is fully owned by foreign investors. As a LLC, it means that it is a separate entity with limited liability limited to its contributed share capital. Owners have the authority and control over the decision-making of the company.
- At least 1 investor (from any country except China, including Hong Kong, Macau and Taiwan regions), 1 director or a board of directors in which the investor can also be the director, 1 legal representative, 1 general manager, 1 supervisor, and a registered company address is required.
- There is no minimum registered capital required.
- The business is allowed to engage in activities for which it is registered for.
- By setting WFOE in the Shanghai Free Trade Zone, investors can enjoy a shorter and more simplified procedure to register business in China.
2. Joint Ventures (JV)
- JV is a special form of business registration with a requirement of a partner who is a resident of China. This partner is required to have controlling shares of over 50% of the company. Unlike WFOE, you will have lesser authority and control over the business operations of the company.
- With JV, it is easier to expand your business into the Chinese market by using the pre-existing knowledge of established firms, their distribution networks and sales channels.
- There are 2 types of JV namely Equity Joint Ventures (EJV) and Cooperative Joint Ventures (CJV).
- Equity Joint Ventures (EJV) is a form of LLC where it is a separate entity with limited liability limited to its contributed share capital.
- Cooperative Joint Ventures (CJV) is a Sino-foreign joint venture where companies in China would often provide labour, land use rights and factories. Whereas, the foreign companies will bring in the required technology, key equipment and capital. There is also no minimum foreign investment required.
3. Representative Office (RO)
- RO is the simplest type of business formation where it is formed by a foreign enterprise and is not a legal entity in China. The operations are conducted in China on behalf of the foreign parent company.
- Unlike WFOE and JV, RO only allows engagement in non-profit-making areas.
2. Company Formation Rules:
In 2020, the new Foreign Investment Law was put in place in China where the 3 old acts that restricted foreign capital were abolished. With the newly pre-establishment national treatment, foreign investors were allowed to register a company with greater ease.
3. Time Taken for Incorporation:
The incorporation process is complex and takes around 2 to 3 months as it involves transactions with several government bodies.
4. Annual Filing Requirements:
The filing requirements include monthly, quarterly and annual income tax returns, audited accounts to the tax department. This applies to all companies.
WFOEs are required to submit an annual audited report to the government authorities for annual inspection.
5. Tax Obligation:
The corporate tax rate of 25% is notably higher than in other countries. However certain smaller companies and technology companies are taxed at a lower rate of 20% and 15% respectively.
The transaction tax, also known as turnover tax, is about 3-5% of business sales.
The custom duties are charged on exports from and imports to China.
The value-added tax (VAT) which is a consumption tax levied on prices of goods and services is 3%, 6%, 9% and 13% depending on the industries the business operates in.
6. Business Formation Process:
If you have decided to set up business in China, you may proceed with the process of company formation in China:
Step 1: Planning of your business idea
Step 2: Choosing a suitable corporate entity
- After accessing your business goals and activities, you can choose the most suitable corporate entity for your business.
- The three types of entities are WFOE, JV and RO.
Step 3: Reserving of the company name
- Upon deciding the name of the company, you may proceed to seek approval from the Administration of Industry and Commerce.
- It is important to ensure that your company name is not the same as others that are already in operation.
- The approval of the company name can take 2-15 days depending on your business location.
Step 4: Registration of the company
- After preparation of the Memorandum and Articles of Association, you may proceed to file your application with the Ministry of Commerce (MOFCOM) and State Administration of Industry and Commerce (SAIC).
- After review by the relevant authorities, you will be notified if the certificate has been approved or denied.
- If approved, you will be issued with an approval certificate and operating license.
Step 5: Application of business license
- You may apply for a “5 in 1” business license from the local Administration of Industry and Commerce (AIC).
- The application covers the main business license, tax registration certificate, organization code certificate, social security registration certificate, and statistical registration certificate.
Step 6: Registration with the Public Security Bureau (PSB)
- In order to get company chops that are used to validate contracts, you will have to register with the PSB.
Step 7: Corporate bank account opening
- A WFOE requires minimally two accounts, a local currency account and a capital contribution account.
Step 8: Staying compliant
- This includes the annual filings and tax obligations.
The process of company formation in China may seem intimidating. If you wish to start a business in China but are unsure what to do, you may engage the service of Tetra Consultants. With Tetra Consultants by your side, the registration process of your business in China will be smooth and hassle-free. Our comprehensive service package includes planning and strategizing with our clients to select a suitable business entity, completing the registration process, obtaining required licenses, opening a corporate bank account, and ensuring your compliance with the government regulations.
Contact us to find out more about how to register business in China and our dedicated and experienced team will revert within the next 24 hours.