Chinese Incorporation

Optimal Structures and Business Models in China

There are three different corporate structures which can be utilised to do business in China. These are:
1. Representative Office (RO)
2. Joint Venture (JV) with a Chinese partner
3. Wholly Foreign Owned Enterprise (WFOE)

All these corporate vehicles are described in these pages, including their benefits and disadvantages. This information should provide some basic knowledge to facilitate the decision making process and help to avoid unnecessary risks when doing business in China.

In these pages we offer our point of view on how businesses can successfully navigate uncertainties and built themselves a solid base. China’s long term prospects are positive. The present economic situation is constantly improving with strong productivity gains, inclusion in the World Trade Organisation, fewer regulations and more privatisation, decreasing red tape, reduction of trade barriers, and excellent labour force development. There is no doubt there is excellent business potential in China, however businesses should be acutely aware that China has a quickly changing and developing business environment. Therefore it is of paramount importance to implement a corporate structure that is flexible enough to react and adapt accordingly. Most of the challenges discussed relate to the task of organising your corporate vehicle for a transitional environment in order to secure and maximise your gains.


Representative Office (RO)

A Representative Office is a subsidiary of a foreign company in China. If your company needs a local presence to manage services or coordinate outsourcing business activities or to research the developing Chinese market, then a Representative Office is a useful and inexpensive vehicle for establishing a presence in China. Other main tasks include conducting market research, monitoring purchasing activities, marketing and administration of sales conducted between China and the parent company. Representative Offices cannot bill their clients in China for services or sales. However, it can act as liaison office in matters pertaining to ordering, shipping, collecting money and so on.

Benefits and Disadvantages
Benefits:
  • Low set up costs. No paid up share capital is required.
  • Easy to register with the Chinese government.
  • Represents the parent company.
  • Coordinates business activities.
Disadvantages:
  • Limited in its business scope, no trading or invoicing permitted.
  • Must hire local staff via a government organisation.
  • Business licenses are usually issued for two to three years, but are renewable.
  • Still subject to taxation on its running costs at a rate of roughly 10%.
  • Tax filing has to be submitted monthly. Annual audits. There are statutory audit requirements with respect to operational expenses as well as foreign currency bank accounts.
Summary:

A Representative Office is a useful and relatively inexpensive first step to establish your business in China. But it is not a self-governing entity with all attached rights and responsibilities. Responsibility remains with the parent or offshore company. Since it only handles liaison and co-ordination work, its business scope is very limited. A Representative Office provides the opportunity to explore China as a market and to analyse its potential and viability for your business. As a low-cost introductory presence it’s a perfect solution.

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Joint Venture

Joint Venture is a corporate structure formed between a foreign firm and one or more local Chinese partner(s). Usually a Joint Venture is established to combine and use the market knowledge, preferential treatment, and manufacturing capability of the Chinese with the technology, manufacturing know-how and marketing experience of the foreign partner(s).

Chinese Incorporation
Chinese Incorporation
Benefits and Disadvantages
Benefits:
  • Good market access, local contacts, local knowledge.
  • Bringing first-class workforce and facilities.
  • Committed to the protection of the Joint Venture Company’s Intellectual Property Rights (IPR).
Disadvantages:
  • Lack of information about the prospective Chinese partner.
  • Need to retain comprehensive control.
  • Sharing the profits of the business.
Summary:

For many years Joint Venture was the second most common method of investing in China, and investment regulations were heavily weighted in favour of the local Chinese partners. Most recently, the investment environment has changed significantly and most foreign investments are now in the form of Wholly Foreign Owned Enterprises (WFOEs). However, for some companies it’s still necessary or sensible to be set up as a Joint Venture.

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Wholly Foreign Owned Enterprise (WFOE)

These are 100% foreign owned companies, originally introduced to encourage foreign investment exclusively in the export-orientated manufacturing industry of Special Economic Zones (SEZs) in China. First they were prohibited from selling their products to the Chinese domestic market. Since a change in regulations WFOEs can trade and sell their goods within China. The capital requirements for such companies have also been dramatically reduced.

Benefits and Disadvantages
Benefits:
  • 100% foreign ownership means total independence from a Chinese partner, complete control over the business and its direction.
  • Full trading rights within China, including retailing or wholesaling wholly foreign manufactured goods.
  • RMB profits can be converted into USD and remitted to the foreign parent.
  • Intellectual Property Rights are protected.
  • Greater efficiency in operations and management.
Disadvantages:

A foreigner with no China experience may lack the knowledge and contacts a partner would bring. In order to be successful strong relationships with the local authorities where the enterprise is located as well as along the supply chain are essential, and the cultural and administrative difficulties experienced may be quite significant.

Setting up a WFOE is very laborious procedure that can take up to six months, many meetings and a mountain of paperwork. If you can’t face all that form filling and bureaucracy we will be happy to help with any or every aspect:

  • Selecting a location that best suits your needs and offers the best tax incentives.
  • Finding the right premises.
  • Introducing you to the local authorities.
  • Preparing preliminary application.
  • Advising on business name regulations.
  • Preparing your business plan.
  • Preparing project proposals.
  • Preparing feasibility study.
  • Preparing formal applications.
  • Establishing management, production, financial, HR and sales structures.

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Chinese Incorporation Summary:

WFOE is the most versatile business structure available to foreigners wishing to do business in China. Currently it represents an ideal structure for the outsourcing of manufacturing etc to this low cost environment. But there are considerable bureaucratic hurdles in setting up a WFOE (Chinese Incorporation though things are getting simpler all the time).