Establishing a Business in China
Creating a method to enter China in a way that is beneficial, can be a strenuous task considering the different social and political system. One must take into account several factors such as the cultural difference, administrative policies before making an investment. Also, marketing your services or product must be done in a manner that it proves worthwhile and appeals to the target audience. We provide services to help foreign businesses understand the market first and certain business rules that persist in the country and the investor must be aware of them. First, let us see the three types of business strategy that can be used to enter the trade market of China i.e. Wholly Foreign Owned Enterprise (WFOE), Joint Venture (JV) and Representative Office.
- Wholly Foreign Owned Enterprise (WFOE)
- A Wholly Foreign Owned Enterprise (WFOE) consists of a foreign company establishing a business in a manner where the Chinese government has no authority over the running of the business, unlike typically seen in a Joint Venture (JV) where the government exercises some control over the business. This type of entry provides a unique opportunity for foreign businesses to operate freely.
- A WFOE is by taxed according to law and acts as a limited liability with a minimum paid up shared capital starting from ten thousand renminbi.
- We would be happy to extend our services to any foreign business looking to register as a WFOE in China.
- Joint Venture (JV)
- In China, some sectors are legally controlled by the government and any business looking to invest in that particular sector must share some form of control with the Chinese government. This is known as a Joint Venture (JV) and acts as legal agreement between the government and the foreign business.
- Through a Joint Venture (JV), China forms a kind of trade with the business with the business offering its technology and practices to be learned by China and the business in return gaining higher profit through cheap labor and production. Some sectors that enters as Joint Ventures are restaurants, construction, cosmetics etc.
- Representative Office or China Market Entry Strategy
- A Representative Office of a foreign business does not set up its production or business entirely in China rather a representative of the business is assigned for business related purposes. Normally, a representative office is set up to research the market, secure sales, introduce new products etc. Foreign businesses setting up representative offices do not need to be recognized as legal persons and can set up multiple offices.
- It should be noted that businesses set up as representative offices should be legally registered in their own countries for 1 year before applying for registration in China.
Benefits of China Market Entry Strategy
- A foreign business setting up shop in China is recognized as being a legitimately running business rather than an offshore company formed to evade taxes;
- Foreign businesses structured as such are not subject to local taxes on international profits earned in China;
- The banking facilities available to foreign businesses in China are of an international standard and provide benefits such as setting up accounts for handling multiple currencies. China banks also provide one of the best online banking services for the convenience of the foreign business and are regarded as such throughout Asia. A business possesses the opportunity to setup its bank account through the convenience of the internet.
Drawbacks of China Market Entry Strategy
- Every company registered to do business in China must submit annual financial reports along with being subject to an audit;
- China currently does not have a good structure for treaties of double taxation;
Effective Usage of a China-based Company
- If executed in the right manner, a company based in China provides the perfect opportunity to earn profits internationally without being subject to local tax laws;
- With China being the world’s second largest economy, a foreign business based in China looks good when trying to secure capital from investors or venture capitalists;
- Setting up a business in the form of a virtual office can help businesses save costs and earn profits in China. This technique provides an excellent method to enter the local market.
The Process of Registering your Business in China
Our firm provides services include helping your business register in China without going through the needless process of unimportant paperwork, along with helping your company develop a market strategy. The process of getting your company registered takes 30 days after which it is recognized under law as a China entity. Our company also provides you the opportunity to get your company registered without the need to visit China. We shall look into all the documents that need to be filed along with providing a simple guidance regarding any paperwork that needs to be signed. To further elaborate on the process of registering a business in China, the procedure is divided into the following steps:
- All relevant paperwork is first submitted to the necessary department of foreign and economic trade to be approved;
- After the first step is completed and the documents approved, we shall move on to gaining permission from the Municipal Administration by submitting the relevant documents;
- 3 names of the company will be sent to the Registrar for approval;
- As per requirement, our company will make and send a feasibility study to the relevant government department for approval;
- As per requirement, our company will make and send the Articles of Association for approval to the Registrar;
- Our company will also apply for a business license on the client’s behalf;
- We shall provide guidance to the business regarding it opening a bank account;
- Our company will also secure the relevant permits required for the foreign business to operate in the country such as work permits, resident permits etc.
- As per requirement, securing certificates such as from the Public Security Department, the Customs Agency, the National Taxation Administration department and others related, will be our undertaking and responsibility.
A History of Different Types of Company Development in China
Entry Strategy as ‘Joint Venture’
Historically, the ‘Joint Venture (JV)’ in China worked to attract foreign businesses with the opportunity to get products manufactured at a cheap rate through cheap labor, land etc. and in return, the foreign business typically provided technical knowledge of how this would be achieved along with management skills and finances. This has been a mandatory requirement in some sectors in China to be entered into a Joint Venture to be able to do business in the particular sector. Today, China typically does not require the finances in most sectors but the requirement for businesses to be in a joint venture with the government still exists such as in the auditing sector.
Entry Strategy as ‘WFOE’
In the early years, China attracted businesses with the opportunity to invest in the country, with incentives such as not being taxed, giving away land for a certain period of time etc. Foreign businesses enjoyed cheap labor, lowered manufacturing costs and other such factors that resulted in increased profits. Normally materials were brought into China, the product was manufactured, and shifted back to a country where it would be sold. Most of the times, these products were not allowed to be sold within China.
Over the years, China’s businesses learned from foreign businesses operating in the country and adapted these practices into Chinese-owned factories. Most foreign businesses today opt out of setting up a WFOE rather set up representative offices in the country.
Entry Strategy as ‘Representative Office’
A Representative Office works to serve as a liaison between the Chinese business and the foreign business. Set up by the foreign business in China, the Representative Office buys a product manufactured in China in bulk and sells to a different country. Usually the foreign business sends a few of its employees to overlook the operations in China such as the quality or quantity of the goods being purchased.
What can be the purpose of a foreign business to enter the local market?
- Functioning in the form of a Cost Center
- A foreign business acting as a cost center sets up a factory in the form of a WFOE, with a manufacturing plant being established in China. In this method, the foreign company produces a product using cheap Chinese labor and other comparatively cheaper resources to save money in production, and then sell to an overseas market. Businesses usually use China as a cost center as compared to other countries because of the cheap labor market and incentives such as lower tax rates. But recently, a surge in air pollution in the country due to a large number of factories has resulted in putting tighter measures to make it harder for factories to be set up. This is due to the pollution reaching such a level that Chinese citizens were forced to wear masks. Other reasons are also present why businesses are moving away from choosing China as a cost center such as the locals at present preferring higher pay and better working conditions. So, our advice would be not to choose China as a Cost Center rather choose a different country such as Vietnam.
- Functioning in the form of a Sales Center
- China at present being the world’s second largest economy along with holding a population of around 1.4 billion people makes a strong market for foreign businesses to sell products. A Sales Center thus acts to sell its products to the China Market through retail, wholesale, distribution or any other method that is economically viable. We recommend businesses to set up their businesses as Sales Center due to China being a very large market, and thus giving businesses the opportunity for higher returns as compared to other countries.
- Our company can help foreign businesses in this regard by helping businesses come up with an entry strategy and getting their company registered.
- Functioning as a Purchasing Agent
- By acting as a Purchasing Agent, foreign businesses can buy products in bulk in China and sell at a higher rate overseas. It should be noted that China does not allow a representative office to claim a VAT refund in this regard. To claim this refund, a business should be setup as a WFOE and in Hong Kong. Most businesses adopt the practice of transferring their profits to a company registered in Hong Kong as it is legal there and the tax is exempted. In this way, a VAT refund can also be claimed.
- To Operate by shifting Human Resources to China
- Foreign businesses can choose to send human resources to China as a high demand for it grows in the country. At present, the country requires a high demand of innovation and skilled labor, the demand for which can be filled by a foreign company registered as a WFOE. This is because a company registered as a representative office is not allowed to apply for a work visa for its employees.
- This method has been used more and more in recent years by companies operating in Hong Kong who are shifting their business due to the heavy expenses that one has to bare in Hong Kong. An example of this is HSBC which has recently shifted most of its operations from Hong Kong to China.