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China: Choosing a Business Format
ASIA/PACIFIC
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A DIFFERENT TAX JURISDICTION
China:
Types of Business Format
The
following are the main types of business format used by
foreign investors in China:
- The Representative Office (RO)
- The Wholly Foreign-Owned Enterprise (WFOE)
- The Foreign-Invested Commercial Enterprise (FICE)
- The Joint Venture (JV)
- Partnership
- Processing And Assembly Contracts
- Holding Company
The
first five of these are described briefly in the paragraphs
that follow, with links to more detailed formation briefings.
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China:
Summary for the Representative Office
Originally,
Representative Offices were unable to conduct business
as such in China, but the rules have been considerably
relaxed. Many investors used ROs in illegitimate ways,
routing their trading through offshore companies in
Hong Kong and elsewhere, which has led the tax authorities
to impose ever greater tax burdens on ROs unless they
are patently being used simply for market research
or similar. Given the improvements that have taken
place in Chinese corporate law and the effects of
China's WTO entry, there is hardly any point by now
in using an RO for anything other than the most basic
exploratory or representational purposes.
ROs
do not have legal personality but can still pay tax.
See
here
for a fuller description of the nature of ROs and
their formation.
China:
Summary for the Wholly Foreign-Owned Enterprise (WFOE)
It
has now become common practice to form a limited company
under the Law of the People's Republic of China on
Enterprises Operated Exclusively with Foreign Capital,
1986, normally known as a Wholly Foreign-Owned Enterprise
or WFOE. Originally,
WFOEs were intended for export or high-technology
manufacturing, but China's entry into the WTO has
led to a gradual broadening of the use of WFOEs into
service and trading sectors.
The
actual limited liability company itself must be formed
under The Company Law of the People’s Republic
of China, adopted October 27, 2005, effective January
1, 2006. This was an entirely new piece of legislation
which brought Chinese company law significantly closer
to Western practice.
As
with a Representative Office, the formation of a WFOE
is conducted under local rules, and central government
becomes involved only if the business falls within
certain nominated sectors such as financial services,
telecommunications and the media. The legal minimum
capital under the law is RMB100,000 (USD15,000) for
a company with multiple shareholders, or RMB30,000
for a single-shareholder company, but the registered
capital must reflect the needs of the business and
is likely to be far higher than the minimum for most
businesses.
Profits
can be repatriated by all means, although the renminbi
(yuan) is still not fully convertible, and transfers
will have to be approved and conducted through an
authorised bank. WFOE's are formed to operate within
a defined business sector, known as business 'scope'.
WFOEs
can employ both foreign and domestic workers, following
appropriate procedures.
The
entire formation and registration process will
take up to six months, depending to some extent
on the region or city of registration, and evidently
also upon the complexity of the business plan.
Once the registration has been approved, certain
other formalities must be completed within various
specified periods.
The
headline rate of taxation for a WFOE on its profits
is 25%, the same as for Chinese-owned companies
since 2008. Some companies may be able to take
advantage of a 15% tax rate if they have successfully
'grandfathered' their previous status; and there
are regional and national incentive schemes in
particular sectors which allow for lower rates.
See
here
for a fuller description of the nature of WFOEs and their
formation.
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China: Summary for the
Foreign-Invested Commercial Enterprise (FICE)
It
has now become common practice to form a limited company
under the Law of the People's Republic of China on Enterprises
Operated Exclusively with Foreign Capital, 1986, normally
known as a Wholly Foreign-Owned Enterprise or WFOE (see
above) or in the case of retail or distribution activities
as a Foreign-Invested Commercial Enterprise (FICE).
The Measures for Foreign Investment in Commerce, which
were enacted in 2004, allowed a wide range of trading
activities by WFOEs, which in this case are known as
Foreign-Invested Commercial Enterprises (FICE).
The
actual limited liability company itself must be formed
under The Company Law of the People’s Republic
of China, adopted October 27, 2005, effective January
1, 2006. This was an entirely new piece of legislation
which brought Chinese company law significantly closer
to Western practice.
As
with a WFOE, the formation of a FICE is conducted under
local rules, and central government becomes involved
only if the business falls within certain nominated
sectors such as financial services, telecommunications
and the media. The legal minimum capital under the law
is RMB100,000 (USD15,000) for a company with multiple
shareholders, or RMB30,000 for a single-shareholder
company, but the registered capital must reflect the
needs of the business and is likely to be far higher
than the minimum for most businesses.
Profits
can be repatriated by all means, although the renminbi
(yuan) is still not fully convertible, and transfers
will have to be approved and conducted through an authorised
bank. FICEs are formed to operate within a defined business
sector, known as business 'scope'.
FICEs
can employ both foreign and domestic workers, following
appropriate procedures.
The
entire formation and registration process will take
up to six months, depending to some extent on the
region or city of registration, and evidently also
upon the complexity of the business plan. Once the
registration has been approved, certain other formalities
must be completed within various specified periods.
The
headline rate of taxation for a FICE on its profits
is 25%, the same as for Chinese-owned companies
since 2008.
See
here
for a fuller description of the nature of FICEs and their
formation.
China: Summary
for a Joint Venture
Joint
Ventures used to be the most widely used business form
for a foreign company making a business investment in
China, but they have largely been superseded by the Wholly
Foreign-Owned Enterprise and the Foreign-Invested Commercial
Enterprise (see above), particularly since company law
was extensively revised in 2006. Many companies in fact
experienced problems with Joint Ventures due to legal
uncertainties and failure to understand Chinese business
culture. Although the Joint Venture form seems to be fading
out, it still has its uses, particularly perhaps when
dealing with a large Chinese state organization.
Originally,
Joint Ventures were seen by the Chinese themselves as
being a vehicle for generating exports, and as a means
of encouraging high technology manufacturing. The first
JV law was framed in those terms; but as time went by
JVs became used for much wider purposes. There are two
types of JV: Equity Joint Ventures and Cooperative Joint
Ventures.
The
original law governing Joint Ventures, which has been
amended a number of times since, is The Law of the PRC
on Joint Venture Using Chinese and Foreign Investment,
1979. There are also numerous sets of detailed regulations.
Originally, share structures set up for a Joint Venture
were highly inflexible, but over time the regulations
have become somewhat more accommodating.
Initial
approval for formation of a Joint Venture in China must
be obtained from MOFTEC (The Ministry of Foreign Trade
and Economic Cooperation) or one of its regional branch
offices, based on a proposal by the prospective partners.
Iif a Joint Venture is going to be formed on the basis
of a limited company, the formation procedures and documentation
requirements are similar to those required for a Wholly
Foreign-Owned Enterprise, described here.
Under
Chinese law a JV may employ both Chinese and foreign workers.
Individual labour contracts are required and must be submitted
for approval to the local labour bureau.
The
headline rate of taxation for a JV on its profits is 25%,
the same as for Chinese-owned companies since 2008.
See
here for a fuller description
of the nature of JVs and their formation.
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China: Summary
for a Partnership
General
partnerships and limited partnerships may be formed under
the Partnership Enterprise Law 2007 and are broadly similar
to equivalent Western forms.
A
further form of partnership under the law is the Special General
Partnership, designed to be suitable for professional firms
and offering some protection to a partner from her colleagues'
negligence or misconduct.
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