Company Formation in Mainland China
China opened its doors to foreign investors in 1979. Foreign investors can literally invest in all provinces of China provided they obtain the necessary registrations and licenses.
It is somewhat complicated for a foreign firm to setup a business in China. The three typical methods of doing so are Representative Offices (RO), Wholly Foreign Owned Enterprises (WFOE) and Joint Ventures (JV). The regulations, tax treatment, business categories, and requirements for each type of business are different. These differences are not only limited to the types of business, but are also specific to each province, city and sometimes districts
A Representative Office (RO) is the easiest and most cost-effective method to establish an initial presence in China. Foreign enterprises can set up one or more Representative Offices in high profile cities, such as Shanghai, Beijing, Shenzhen, Guangzhou, and Tianjin.
Representative offices are permitted to conduct non-profit making activities, such as liaison with clients, market research, quality control, technology exchange, marketing and sales administration, etc. Representative Offices are not permitted to conduct any profit making activities in China.
Applicants for setting up a Representative Office must show a record of being legally registered in their home jurisdiction for at least 12 months. The documents filed with the licensing authority must be translated into the Chinese language. A set of corporate documents has to be notarized / apostilled / authenticated by a China Embassy.
Depending on the province, city and/or district, taxation of Representative Offices is levied on declared expenses at the rate of 7% - 10%.
A Wholly Foreign Owned Enterprise is a Chinese limited liability company which is established with 100% foreign capital and is, therefore, totally under the foreign investor's control. The registered capital is usually paid up through a combination of equipment and cash. A Wholly Foreign Owned Enterprise's operations, including what it can or cannot do, capital structure, financial and accounting practices are governed by the articles of association. The minimum registered share capital, which has to be paid up within the initial twelve months of operations, is normally US$140,000. The amount depends on the nature of the Wholly Foreign Owned Enterprise’s business and the registered share capital can be significantly higher for certain "prohibited" areas of business.
The tax rate for Wholly Foreign Owned Enterprises varies based largely on where it is registered. Generally, a Wholly Foreign Owned Enterprise is subject to a business tax of 5% for selling goods or services in China. A rate between 15% - 33% on profits tax will be charged the provincial and city governments.
Many cities in China now offer advantages via special economic and free trade zones to Wholly Foreign Owned Enterprises primarily engaged in exporting and re-exporting. These zones usually provide attractive tax breaks to encourage foreign investment. The rates and terms are usually different from zone to zone and city to city. Certain areas of business, such as high technology, manufacturing and agriculture are favored.
For companies seeking to access the local market, one should understand that the China government defines foreign goods and services into three categories: “encouraged”, “limited” and “prohibited”. Each has its own requirements and regulations that guide the activities of the Wholly Foreign Owned Enterprise. In addition, it is important to mention that China’s internal reform of the legal, financial, accounting and tax standards is an ongoing and often confusing process that is designed to meet World Trade Organization requirements.
A Joint Venture (between resident Chinese and foreign investors) may be more suitable for business activities deemed “limited” and “prohibited” by the China government. These include, but are not limited to, restaurants, bars, construction, car production and cosmetics. These types of business activities would NOT be approved as Wholly Foreign Owned Enterprises by the Ministry of Foreign Trade and Economic Cooperation.
Typical fees for formation:
Jurisdiction fees $600 - $900 Fees vary depending on the province, city of the RO
Service Fee $3500 - $5500 + Subject to business activities
Other $350 - $1,000 Apostille + authentication fees
Wholly Owned Foreign Enterprises (WFOEs)
Jurisdiction fees $800 - $1500 Regional variance; Based on authorized capital. Assumes US $140,000 at $0.08%
Service Fee $12,000 + Subject to business activities
Will be quoted on a case by case basis.
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