«MAIN STEPS TO SET UP A BUSINESS IN CHINA»
As the world’s second largest economy and the most populous nation on Earth, China still offers enormous opportunities for foreign companies, both as manufacturing labor pool and, increasingly, as a consumer market of, what is often defined, endless potential. However, China is different and that does not only apply to the culture of doing business but also to the processes intimately connected to the winding roads leading to incorporation of a business. Investors willing to operate in China face a string of crucial decisions which are all interconnected and can cost significant disbursement of funds and time, if improperly handled. It is therefore crucial to avail yourself of a local consultancy such as Dezan Shira & Associates, which will greatly ease the process and ensure a smooth market entry.
How can foreign businesses enter the Chinese market?
There are a number of entity types a foreign business can establish in China. Choosing the appropriate one, however, depends on several factors, including planned activities, industry, investment size and business model. Businesses that simply want to explore the market, find partners, conduct market research and, to some extent, showcase its products and services can enter the market through a Representative office (RO). For those companies looking to target the Chinese consumer directly or interact on a commercial level with suppliers, then the Wholly foreign-owned enterprise (WFOE) represents the most popular investment vehicle. Opening an RO is significantly easier than opening any other type of company but is extremely limited in the operations and can quickly become heavily taxed. Manufacturing, Import and Export as well as accepting payments from any party other than its headquarters are strictly forbidden for an RO. Foreign investors are also restricted or prohibited to engage =in certain commercial and industrial sectors. The Special Administrative Measures for Foreign Investment Access (i.e. the Negative List) names those restricted and prohibited areas and is published by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM).
Businesses that want to invest in one of these restricted industry sectors need to enter the Chinese market as a Joint Venture. The Joint Venture (JV) is a limited liability company formed by a foreign investor or individual, along with a parented Chinese company. Examples for restricted areas are among others fashion design, telecommunication and the production of radio and television programs and movies. This strictness regarding several creative service industries exists because creative industries are closely linked with politically sensitive content and influential material that is distributed to the public. There are three distinct WFOE types available: eign-Invested Service WFOE; Trading WFOE (or Foreign-Invested Commercial
Enterprise, “FICE”); and, - Manufacturing WFOE.
While these types of companies are somewhat differentiated by setup time, steps and cost, they are all legal entities, unlike the Representative Office.
How does the business setup process work?
After you and professionals at a foreign investment firm like ours have chosen your business model, one of the most important steps is to define a business scope which dictates the nature and the range of action of the WFOE by classifying it in one of the above-mentioned types. Particular activities included in the business scope will trigger equally particular licenses the investor will need to obtain in the incorporation process. As far as timing is concerned, by and large it takes between three and six months, but the time can vary according to location, documents collection speed, deciding on registered capital and several other matters.
Generally, the pre-licensing procedure takes two to three months and includes e.g. the name approval, the collection of documents prepared by the parenting company, a certificate of approval from the MOFCOM as well as a 5-in-1 Business License. After obtaining this Business License, the company legally exists but still must go through several post-licensing steps, that could add up to two months to the entire process. This part of the incorporation includes opening bank accounts, the capital injection, customsand tax filings. Many companies choose to establish holding companies, or “special purpose vehicles”, in jurisdictions such as Hong Kong or Singapore to hold their Chinese entity. Holding companies allow for an additional layer of distance between the Chinese subsidiary and parent company and can “ring-fence” the investment to an extent, protecting it from potential risks and liabilities of the Chinese subsidiary.