Setting up a Company in China

Setting up a company in China requires in-house counsel teams who are tasked with ensuring the correct documentation is in place, to essentially forgo their Western sensibilities regarding how they believe that things ‘should’ work and understand and embrace Chinese corporate culture. Little things make such a difference when working in China. For example, a business card should be handed to the recipient using both hands, with the writing facing them. Also, Chinese people are very concerned about losing/saving face, so it is imperative to keep this in mind when negotiating.

The documents required to set up a company in China can also cause confusion as can the type of entity status you should use to incorporate your venture.

When looking to put a team on the ground in China, the following are the most common corporate structures that organisations consider:

Joint ventures

Joint ventures involve a business partnership between a Chinese citizen and foreign business owner.  A joint venture structure can often lead to failure, as communication and cultural differences can lead to miscommunication and subsequent breaches of contract.  It can also be difficult to protect IP rights and trade secrets under this model.  

Representative offices

Setting up a representative office in China is relatively inexpensive.  The advantage is that it allows a foreign company to have a physical presence anywhere in mainland China and send foreign staff here to undertake business activities that may be beneficial.  However, by using this model, you will be severely restricted as to the type of business activities you can carry out.   The representative office cannot partake in any profit-generating activities.  This type of set-up works best when a company needs staff on the ground to build relationships with suppliers, clients, and potential collaborative businesses.

Wholly foreign owned enterprise

A Wholly Foreign Owned Enterprise (WFOE) is the most common type of entity.  It will provide you with maximum control over your business activities within the country.  A WFOE can engage in profit-generating activities and issue local invoices in RMB to its customers, which is crucial as invoices are the basis for obtaining tax deductions in China.  Under this model, you can recruit both foreign and local talent and set up subsidiaries if expansion so requires.

Chinese law will not allow a WFOE to expand beyond the initial scope of its business.  The scope of commercial activities and the investment must be set out and approved by the Chinese government before the WFOE can be established.  It is crucial therefore that you strategise the business scope you plan to adhere to carefully, well before you submit your application, in addition to any plans for expansion so the entity can grow according to commercial needs.  A five-year business plan is a must.

Multiple authorities are required to approve the establishment of a WFOE, and 15% of the investment will be required within the first three months.

Unlike many other countries, the relevant Chinese authority must approve the project before a WFOE can be registered.

Documents required to support your project include:

• Articles of association – as mentioned above, the scope of the project must be set out in its entirety, and all information about it and the company must be included on the understanding that it cannot be changed at a future date.
• Feasibility study – You will need to show your project will work by supplying a business plan for the first year and a budget (in Chinese).
• You must provide all of your lease agreements (it is custom in China to pay rent a year in advance).
• You must provide details and the salary/benefits package of any positions (even if they have not yet been filled).  Chinese authorities are tough on foreign employers when it comes to paying employee benefits. The required initial investment includes a sum that will cover basic wages for a reasonable period of time whilst the company gets off the ground.
• More complex projects will require additional documentation and lengthy negotiations made need to take place with local authorities to achieve approval.

Concluding comments

When submitting documentation to authorities in China with the aim of setting up a Chinese entity, corporate counsel, and business owners need to be prepared for the unexpected.  Save yourself time and money by cooperating fully with requests.  Keep in mind that relationships are key to doing business in China; they take time to develop and be prepared for uncertainty.

To find a solicitor who has experience in establishing foreign corporate entities, please search through Solicitors Guru today.