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.

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