China Company Establishment
The main forms of business vehicles in China are companies and partnerships.
Limited Liability Company (LLC)
LLC is the most common entity type and is used by most businesses with a foreign investment component. Chinese citizens also prefer limited liability companies.
The advantages of LLC are:
Limited Liability: The liability of shareholders or owners is limited to protect the owners' personal assets from liabilities or losses incurred by the corporation.
Legal entity: A registered LLC is a legal person with legal rights and protections. Its assets, including intellectual property rights, are protected by Chinese law. It can own property and is the subject of litigation in the event of infringement or breach of contract. Shareholders of a limited liability company are responsible for the company within the scope of their capital contribution;
Regulatory system: LLC registration in China is relatively easy compared to joint stock companies, and the compliance requirements are relatively loose. With the consent of the majority shareholder, the ownership of the company can be transferred by simply transferring the shares. This facilitates easy exit.
Control: LLCs can be closely held, thus providing greater control over the company's ownership, scope of operations, and assets.
Joint Stock Company Limited (JSLC)
These are limited liability companies (CLSs), so the procedures for setting them up, as well as their regulatory compliance, are more stringent than for LLCs.
The advantages and disadvantages are:
Accelerate capital concentration: JSLC plays a unique role in concentrating a small amount of capital to form a larger capital. It is extremely beneficial to the overall economic development of the country.
Loss of power of small shareholders: JSLC is mainly used to issue shares to the public. Therefore, shareholders have voting rights in the company and can achieve control over the company's management rights through various means such as electing directors. However, minority shareholders rarely obtain effective voting rights.
The establishment and operation mechanism is relatively complex: there are detailed and specific regulations on establishment conditions, procedures, methods, management structure and principles, supervision system, financial processing and other issues.
Easy to speculate: JSLC can issue stocks to the public during its establishment and operation. Once the issued stocks enter the market, they become a new commodity with independent prices. Its stock price is not only affected by the operating conditions of the stock company, but also by other factors to a considerable extent, leading to stock price fluctuations.
Partnership
China amended its Partnership Enterprise Law in 2007 to help encourage an investment environment that is conducive to corporate law. The revised law significantly changed partnership rules and principles.
A general partnership can be composed of general partners, who shall bear unlimited joint and several liability for the debts of the partnership.
A limited partnership is composed of general partners and limited partners, and limited partners are responsible for the debts of the partnership within the scope of their investment.
A special general partnership is similar to a general partnership, except that it must be a professional service organization that provides services requiring specialized knowledge. Unlike a general partnership, a special general partnership protects co-partners from unlimited liability for the gross negligence or willful misconduct of other partners.
The distribution of profits or sharing of losses of a partnership must be carried out in accordance with the provisions of the partnership agreement.
The Chinese government has explicitly contemplated foreign investment in Chinese partnerships through Article 108 of the Partnership Law. The measures, known as the Foreign Investment Partnership Enterprise (FIPE) Measures, provide guidance on the procedures for establishing a foreign-invested partnership in China, including:
Guiding Opinions on the Administration of Partnership Enterprises Established in China by Foreign Enterprises and Individuals (State Council Decree No. 567, November 25, 2009).
Measures for the Administration of Registration of Foreign-Invested Partnership Enterprises (State Administration for Industry and Commerce Decree No. 47, January 29, 2010).
New Foreign Investment Law
On March 15, 2019, the National People’s Congress passed a new Foreign Investment Law (FIL) to “enhance the openness, transparency and predictability of the investment environment, establish equal treatment for Chinese and foreign investors, and address the concerns of foreign investors surrounding technology transfer”.
FIL came into effect on January 1, 2020. It replaces three foreign capital laws passed between 1979 and 1990 that set the framework for the country’s transition from decades of economic isolation:
The three most common options for foreign investors setting up in China are:
- Representative Office
- Wholly Foreign Owned Enterprise
- Joint Venture
Each has advantages and disadvantages, and the choice depends on the investor's goals and strategies.
Representative Office (RO）
Description. It is a good choice for new enterprises entering China to lay the foundation for future investment. RO does not require any registered capital and the establishment processing time is relatively short, between 1 and 3 months. They are not allowed to conduct substantive business such as commercial contracts or invoicing in RMB in their own name, so they are most often used for marketing, research, publicity and contact activities that do not involve direct revenue generation.
According to the Regulations on the Registration and Administration of Representative Offices of Foreign Enterprises, a representative office may employ up to three representatives and one chief representative.
Since an RO is not a separate legal entity, liability extends to its parent company. To qualify to establish an RO, the parent company must have been in existence for at least two years.
Setup and cost. ROs are the easiest entities to set up and operate. They are subject to inspection and are required to keep accounting records. However, the application process is still relatively simple. Once the company documents are submitted and the application is approved, it will be registered with the Chinese government agency.
The cost of setting up an RO is also relatively low and has the advantage of not requiring capital injection.
Intellectual property. ROs have limited capabilities. They cannot issue invoices, collect payments or conduct profit-making activities. As a result, they have to outsource the production of their business activities to local suppliers, although they are able to monitor progress and thus limit any infringement of intellectual property rights.
Wholly Foreign Owned Enterprise (WFOE)
Description. The establishment requirements of a wholly foreign-owned enterprise are relatively high, and it can carry out a full range of business activities such as signing contracts in RMB, collecting payments on behalf of others, and issuing tax-specific invoices (invoices). A WFOE is a limited liability company with separate responsibilities from the parent company.
The incorporation process usually takes two to four months and the minimum registered capital requirements vary depending on the company's business activities.
Setup and costs. The process of setting up a WFOE usually takes about 30 to 40 working days. You can choose different types of business such as manufacturing, trading, services, etc. The process can be divided into two parts:
Pre-registration: This requires submitting some business-related documents
After registration. This requires the company to be officially registered with a Chinese government agency
WOFEs originally required registered capital to be invested in the company. However, in 2014, the regulations regarding minimum registered capital were removed in many cases to further promote it as an investment vehicle for foreign companies.
Intellectual Property. A WFOE is completely owned by its foreign parent company. This means that the parent company controls all aspects of business processes and daily operations. This makes it easy to protect its business processes, trademarks, and trade secrets.
Joint Venture (JV）
Description. This is usually a limited liability company formed between a foreign company or investor and a Chinese company, in which the foreign company owns more than 25% of the shares of the business entity. The proportion of foreign to Chinese capital depends on the type of industry. A joint venture can be one of the following:
Equity Joint Venture (EJV）
During the early years of China’s economic reform, EJVs were one of the most important forms of foreign-invested enterprises in China. The Chinese government actively encouraged the establishment of joint ventures to bring foreign capital and technology into China and allowed the government to exercise a considerable degree of control over new enterprises.
An EJV must be established as an LLC and have the status of a legal entity. The parties to a joint venture may include a Chinese company, enterprise or other entity and one or more foreign companies, enterprises or individuals.
Under the law, a joint venture must promote the development of China's economy and meet at least one of the following conditions:
Adopt high-tech equipment and scientific management to increase product variety, quality, output, and save energy or materials;
Promote enterprise technology upgrades and achieve good economic benefits with less investment, faster returns and greater profits;
Produce export products and increase foreign exchange earnings; or
Makes training of technical and management personnel possible.
If approved by the government, the registered capital can include financial and non-financial assets such as intellectual property, buildings, materials or machinery. According to the law, there must be at least one foreign investor and one Chinese investor. Foreign investors usually contribute at least 25% of the total registered capital. In practice, the contribution ratio of each investor is usually closer to 50%. The profits of the joint venture will be distributed to the investors according to their equity ratio.
If a joint venture with a foreign investment ratio of less than 25% is approved for registration, the business license shall state "foreign investment ratio less than 25%". In this case, the foreign investor must provide the full investment within three months after obtaining the business license, if the investment is in cash, or within six months if the investment is in kind or industrial property. Such joint ventures cannot enjoy tax reduction treatment and other tax treatment for foreign-invested enterprises when importing equipment and goods for their own use.
Without government approval, equity cannot be transferred or withdrawn. Each party shares profits and bears risks and losses in proportion to its investment.
Chinese investors in joint ventures can greatly assist foreign investors in interacting with government officials, gaining access to labor markets and material supply sources, and, where appropriate, domestic markets.
Contract & == & Collaborative Joint Venture (CJV). A CJV is based on a contract between venture partners to develop a project with a limited duration and a specific objective, such as the construction of a building, hotel or factory.
A joint venture must be in the form of a limited liability company and have the status of a legal entity, unless the partnership contract stipulates otherwise. If the joint venture is not a legal entity, each party must pay taxes on the profits generated by the joint venture and bear its own liabilities and losses.
Advantages Disadvantages. CJVs offer greater flexibility in structuring investment contributions than EJVs because they are governed by the terms of the contract signed by the partners. The approval and registration process for CJVs is similar to that for EJVs. CJVs do not require a new business license if they are arranged contractually under the auspices of an existing JV business.
Compared with an EJV, a CJV enjoys more freedom in profit sharing. A joint venture does not require a shareholding ratio as a reference for sharing profits. The parties can agree on the method and time of profit distribution. For example, one of the parties can obtain a part of the products produced by the joint venture, or different operating years can apply to different profit sharing ratios for each party. The investment contribution of each party is not limited to financial capital, but may also include non-financial assets such as intellectual property, buildings, materials or machinery. After obtaining a fair or premium return on investment, the foreign investor returns most or all of the ownership of the enterprise to the Chinese partner.
Given its flexibility in capitalization and profit sharing, the CJV model allows foreign investors to set up joint ventures with less investment to obtain faster returns and therefore has lower risks than EJV. In addition, the contract terms can be renewed at any time and extended with government approval.
Nowadays, governments are often reluctant to allow the establishment of CJVs and most JVs are in the form of EJVs.
Setup and costs. The costs associated with establishing a joint venture depend on the type of joint venture and the capitalization decisions of the shareholders. Generally speaking, the absolute minimum registered capital for a multi-shareholder company is RMB 30,000 per investor and the absolute minimum registered capital for a single shareholder company is RMB 100,000.
The process of establishing a joint venture is complex. First, the right Chinese company needs to be found, and then the terms of the partnership need to be negotiated effectively. Choosing a partner who can make a tangible commercial contribution, protect intellectual property rights, and ensure operational control and management talent for the joint venture requires agreement.
Before initiating the FIE establishment procedure, foreign investors can use an agent to assist in the establishment. Foreign investors must now determine the FIE’s business scope before preparing the necessary documents, which generally include the following, but may vary depending on the FIE’s business scope and location:
Legal address of the FIE
FIE organizational structure
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Amount of registered capital (currently, there is generally no threshold for registered capital for establishing a new company unless otherwise provided by laws, administrative regulations or decisions of the State Council).
Feasibility studies (especially for manufacturing companies), business plans and investment budgets (in a standard format provided by the authorities).
The formation process of FIE usually includes the following steps:
Pre-verification of business name. This is submitted to SAMR or its local branch. The process usually takes only a few days and the approval is valid for six months, which can be extended for another six months.
Preliminary approval. Some foreign investment projects require project approval from the National Development and Reform Commission or its local branches, and approval from the NDRC or relevant industry regulators.
Establishment approval. This is obtained from the Ministry of Commerce or local branch.
The State Administration for Market Regulation or its dispatched agencies shall issue business licenses. Foreign-invested enterprises shall be deemed to be formally established from the date of issuance of the business license.
Open a bank account and deposit registered capital. After obtaining a business license, if a foreign-invested enterprise wants to start operating, the foreign investor must pay the corresponding amount of registered capital to the bank account of the foreign-invested enterprise. Therefore, a bank account must be opened at the Bank of China or other banks designated by the State Administration of Foreign Exchange (SAFE).
Other post-establishment registration procedures include:
A company seal (a type of company stamp) approved by the Public Security Bureau (PSB)
Register with the tax bureau, customs and SAFE
Hire an accountant (accounting books are mandatory in China)
Any other requirements or approvals required may vary depending on the type and location of the foreign-invested enterprise.
The approval fees for setting up a foreign-invested enterprise usually vary depending on the industry and the location of the foreign-invested enterprise. For example, the tax benefits for registration in an urban area are usually limited, and the cost of obtaining a corresponding address is higher. Therefore, foreign investors are advised to consider the costs and consult the local market regulatory authorities for details.
Articles of Association
The Company Law requires companies to draft articles of association in accordance with the law. Articles of association are binding on the company, shareholders, directors, supervisors and senior management. The articles of association of a limited liability company must state the following:
Company Name and Address
Company business scope
Company registered capital
Shareholder Name
Shareholders' investment method, amount and time of investment
The corporate structure including duties, powers and rules of procedure
Legal representative of the company
Other matters required by the general meeting of shareholders
Shareholders must sign and seal the company's articles of association
Financial Reports
What are the main types of taxes that companies need to pay?
Value Added Tax (VAT)
All businesses and individuals engaged in the sale or import of goods; providing processing, repair or maintenance services; and selling services, intangible assets and real estate in China must pay VAT.
Various VAT rates (such as 13%, 9%, 6% and 0%) apply to different business activities or different types of taxpayers.
Starting from April 1, 2019, the new VAT rate will be implemented. The VAT rate in China will change as follows:
The 16% tax rate for manufacturing industries was reduced to 13%
The 10% tax rate for construction and transportation was reduced to 9%
The 6% tax rate for services remains unchanged, but the rate will be further reduced
Consumption Tax
Entities and individuals that produce, process on behalf of others, or import goods specified in the Provisional Regulations on Consumption Tax of the People's Republic of China (the "Provisional Regulations on Consumption Tax") within the territory of China, as well as other entities and individuals that sell consumer goods specified in the Provisional Regulations on Consumption Tax determined by the State Council, are consumption tax taxpayers that must pay consumption tax.
Currently, consumption tax mainly covers cigarettes, alcohol, firecrackers and fireworks, high-end cosmetics, refined oil, high-end jewelry and gemstones, golf balls and equipment, high-end watches, yachts, disposable wooden chopsticks, wooden floors, motorcycles and small cars.
Consumption tax is included in the transaction price and is only levied on the production, subcontracting processing import, retail, transfer use and wholesale of tobacco.
The taxes are ultimately borne by consumers.
Personal income tax
On August 31, 2018, the Individual Income Tax Law of the People's Republic of China (Income Tax Law) was promulgated, and any company doing business in China has the responsibility to accurately calculate and verify the accuracy of individual income tax. The periods of resident taxpayers and non-resident taxpayers no longer exist, and are replaced by the concept of residence, which is to live in mainland China for 183 days in a tax year.
Examples of individual income tax rates for annual taxable income under the Income Tax Act are as follows:
Up to RMB 36,000: 3%
RMB 36,000 to RMB 144,000: 10%
RMB 144,000 to RMB 300,000: 20%
RMB 300,000 to RMB 420,000: 25%
RMB 420,000 to RMB 660,000: 30%
RMB 660,000 to RMB 960,000: 35%
More than RMB 960,0000: 45%
Land value-added tax
Land value-added tax is levied on the income obtained by units and individuals from the transfer of state-owned land rights, buildings, and ancillary facilities. It is levied at the prescribed tax rate according to the amount of land value added transferred by the taxpayer.
The rates are as follows:
The portion of the value-added amount that does not exceed 50% of the deduction amount shall be calculated at 30% in accordance with Article 6 of the Provisional Regulations on Land Value-added Tax. The portion of the value-added value between 50% and 100% of the deduction amount shall be calculated at 40%. The portion of the value-added amount that exceeds 100% of the deduction amount but is less than 200% shall be calculated at 50%. The portion of the value-added amount that exceeds 200% of the deduction amount shall be calculated at 60%. The land value-added tax shall be exempted in any of the following circumstances: The taxpayer builds an ordinary standard house for sale, and the value-added does not exceed 20% of the deduction amount.
Income Tax Law
Resident enterprises shall pay enterprise income tax on their income from inside and outside China. Non-resident enterprises that have established institutions or places in China shall pay enterprise income tax on the income from inside China obtained by their institutions or places, as well as the income generated outside China but actually connected with their institutions or places.
If a non-resident enterprise does not have an organization or place of business in China, or if it has an organization or place of business but the income it obtains is not actually connected with the organization or place of business it has established, it shall pay enterprise income tax on its income derived from China. The enterprise income tax rate is 25%. The applicable tax rate for income obtained by a non-resident enterprise as specified in Article 3, Paragraph 3 of the Enterprise Income Tax Law of the People's Republic of China is 20%.
The taxable income is the total income of an enterprise in each tax year, minus non-taxable income, tax-exempt income, various deductions and allowed offset of losses from previous years.
The total income is the income that an enterprise obtains from various sources in monetary and non-monetary forms. It includes:
1. Revenue from sales of goods
(II) Income from providing labor services
(III) Income from transfer of property
(IV) Equity investment income such as dividends and bonuses
(V) Interest income
(VI) Rental income
(VII) Royalties Income
(VIII) Receipt of donation income
(IX) Other income
