China is undoubtedly a global economic hub and a primary destination for investors from all over the world. Since its economic reforms in the 1970s, the country has experienced tremendous growth, making it an ideal launchpad for companies seeking global expansion and investment opportunities.
This article is dedicated to those who are looking for the best way to benefit from this major investment and economic destination. We will provide a detailed discussion of the advantages of establishing a company in China, as well as all the procedures and steps required to complete the establishment process.
So, are you interested in the idea of starting a company in China? If your answer is yes, then you are in the perfect place to learn all the information you are looking for. Stay with us.
Benefits of Establishing a Company in China
Before we delve into the steps and procedures for establishing a company in China, let’s explore the key advantages of starting a business there. This will help you relocate or establish your business with confidence. Below are the main benefits of opening a company in China for foreigners:
- A Magnet for Global Brands
The most renowned global brands and companies across various sectors are drawn to China’s rapidly growing economy, seeking to leverage it for further expansion. As a result, many leading companies worldwide are present in the Chinese market, often using it as a launchpad to penetrate global markets. - A Strategic Market with Vast Potential
China boasts numerous factors that bolster business success and growth opportunities. Its population, approximately 1.3 billion people, is a major draw for entrepreneurs looking to establish companies in China, ensuring a ready and vast market. Additionally, China’s strategic geographical location in the Far East facilitates access to other major markets in East Asia, such as India, Thailand, and Japan. This makes it one of the best choices for establishing companies in Asia, alongside establishing a company in Qatar. - A Rapidly Growing Economy
Known for being one of the fastest and strongest-growing economies, China sees highly active import and export movements. These activities are supported by numerous facilitation measures, ensuring economic success and easy profitability for companies with smooth operational procedures. - A Diversified Economy
China’s economy is highly diversified, offering opportunities across various sectors. Whether your business involves agriculture, technology, manufacturing, automobiles, hospitality, oil and gas, or other industries, you are assured of growth and success with readily available opportunities. - Ease of Establishing Companies for Foreigners
China is one of the easiest countries globally for foreign companies to register and receive all the facilities they need. - Ready Consumer Market
With its 1.3 billion population, China offers a vast and prepared market for businesses to thrive.
Types of Companies You Can Establish in China
There are three main types of entities you can choose from when setting up a business in China:
- Wholly Foreign-Owned Enterprise (WFOE)
- Joint Ventures (JV)
- Representative Offices (R.O.)
Each of these entities has unique advantages and legal requirements. Below is an overview of their benefits and requirements for establishing a company in China.
Establishing a Wholly Foreign-Owned Enterprise (WFOE) in China
WFOE, short for Wholly Foreign-Owned Enterprise, refers to a business entity fully owned by foreigners. It is one of the most prominent forms of establishing a company in China.
For foreigners seeking to start a business in China, a WFOE is considered the best option. According to Chinese law, a WFOE is a limited liability company wholly owned or managed by a foreigner or a foreign company. Owning the company entirely gives you greater control over its operations, profit objectives, and revenues.
Being a limited liability company also means it is a separate legal entity, limiting your liability to the contributed capital. This is the most favorable option for foreign businesses aiming to enter the Chinese market.
Advantages of Establishing a WFOE in China
In addition to the general benefits mentioned earlier, a WFOE offers specific advantages, including:
- The company is permitted to engage in all registered activities in China.
- Full control over the company's decision-making processes.
- It is an ideal way to protect your brand when expanding operations to China.
- Full authority over hiring employees.
- Suitable for businesses seeking long-term presence in China.
Establishing a Joint Venture (JV) in China
A Joint Venture is another type of business entity that takes the form of a limited liability company. In this model, you need to identify and register the company with a Chinese partner.
One crucial point to note about JVs in China is that the Chinese partner must hold a controlling stake of more than 50% in the company. This means, unlike a WFOE, your partner will have greater control over the company’s daily operations.
The main advantage of entering into a JV is the ability to grow rapidly in the Chinese market by leveraging established companies to benefit from their expertise, distribution networks, and sales channels. Moreover, you won’t have to worry about the challenges of establishing a new company and entering the market, which often affects new businesses.
However, the limited control makes it a risky investment for many investors, prompting most to prefer WFOE as their primary choice when establishing a company in China.
Establishing Representative Offices (R.O.) in China
This is the simplest type of business entity you can set up in China. However, unlike a WFOE or Joint Venture, which allows you to engage in profitable activities, a Representative Office comes with significant restrictions. It is only permitted to engage in non-profit activities such as customer support and market research.
Best Time to Establish a Representative Office in China
With all the restrictions associated with running a Representative Office, it becomes less appealing to investors looking to grow their businesses quickly. So, when is the best time to open a Representative Office?
- When exploring the market, especially if your company is small with a limited budget.
- When your company is considering expanding into the Chinese market but has not made a final decision yet.
- When the company seeks a simple market presence for activities like quality assurance and supplier communication.
These are the three main types of entities for establishing a company in China. If you are looking for other options for setting up a company in Asia, you can check the requirements for establishing a company in Bahrain here.
What are the procedures for establishing a company in China?
In this section, we will outline the steps you need to follow in order to open and establish a company in China. Are you still interested? Keep reading this section.
Choose an Agency to Assist You with Registration
Although the Chinese government provides all possible facilities and efforts to support the establishment of foreign companies in China, it is important to note that company registration is not a simple task.
From interpreting company laws to preparing the necessary documents, the process can be tedious. However, this should not discourage you from expanding or establishing a company in China. To make this process smoother and more efficient, it is highly recommended to use a legal agency to assist you in completing the company establishment and registration procedures in China.
These agencies are accredited legal entities with many specialists in the legal establishment of companies in China, so they know all the required steps and legal procedures, making it easier for you to complete the establishment process legally and as quickly as possible while avoiding any potential mistakes.
In addition to assisting with company formation in China, some agencies also help with other tasks such as:
- Preparing payrolls for company employees.
- Maintaining the company’s legal records.
- Providing tax advice and methods to reduce taxes.
- Conducting audits and reviewing taxes to ensure that you don’t face any tax issues that may affect the company’s operations.
- Supporting the company’s annual financial statements.
Define the Preferred Company Scope
Next, define the preferred legal structure of the company and the scope of its business. The Chinese government has categorized its industries and focused on sectors that have the potential to grow the economy more quickly.
To understand the categories, you should refer to the Catalog of Foreign Investment Industries in China, which is regularly updated, as the government encourages investors focusing on innovation.
For example, if you are working in the manufacturing sector, the business will be heavily supported by the government, which is why Chinese manufacturing has grown in ways never seen before in any other country in recent history.
Prepare and Gather All Required Documents
To obtain a company establishment permit in China and start operations, you will need to prepare a variety of documents and submit them for review and approval. We will discuss the required documents for establishing a company in China in more detail later.
What Documents and Papers Are Required to Establish a Company in China?
Apply for an Approval Certificate
To obtain the approval certificate and operating license, you need to deal with two main entities:
- Ministry of Commerce (MOFCOM).
- State Administration for Industry and Commerce (SAIC).
These authorities will review your application and inform you whether the certificate has been approved or rejected.
Apply for a Business License
Once the business approval certificate is issued, you will need additional licenses depending on the industry you are working in. In China, companies in manufacturing, food and beverages, construction, and telecommunications require additional licenses.
Register with the Public Security Bureau (PSB)
When registering a company in China with the Public Security Bureau (PSB), you will obtain a company seal, which is essential for validating any contracts signed by the company. Therefore, if you want to establish a company in China, you must ensure that you complete the registration with the PSB to ensure that all contracts signed by the company are legally valid.
Open a Corporate Bank Account
To start your business operations in China, you must open a bank account in the name of the company at one of the Chinese banks.
This Chinese bank account will allow the company to receive funds, pay bills, and will also be useful for tax filings.
Register with the Tax Bureau
In China, all companies, including wholly foreign-owned enterprises, must comply with tax regulations.
Therefore, you must first register the company’s financial and operational information, such as verifying the chief financial officer and other relevant details.
What is the Tax System for Foreign Companies in China?
If you plan to establish a company in China, you need to be aware of the tax system imposed on foreign companies. Here are some of the major taxes imposed on foreign companies in China:
- Corporate Income Tax: This is a tax on profits, typically at a rate of 25%. However, if you are in a "supported sector," you may enjoy reduced corporate income taxes.
- Transaction Tax: Also known as the sales tax, it ranges from 3-5% of the business sales.
- Customs Duties: These are levied on goods exported from or imported into China.
- Value Added Tax (VAT): There are different VAT rates in China: 3%, 6%, 9%, and 13%, depending on the industry.
- Individual Income Tax: This tax is imposed on the profits of company partners and employee salaries.
Required Documents for Company Establishment in China
In the previous sections, we outlined the steps that a foreign investor must follow to establish a company in China, and we also mentioned that there are several essential documents that must be prepared to ensure the proper completion of the company’s establishment process.
Here are the most important required documents:
- Company Name Reservation Document: To obtain the company name, you must get approval from the Industry and Commerce Administration. This is crucial to ensure your name doesn’t conflict with other existing companies. The approval can take between two and fifteen days, depending on the location of your business.
- List of Controlling Partners: This is a list of the shareholders who own the majority of shares in the company you are establishing. To avoid any future issues, it is advisable to ensure that business partners are allowed to hold shares in China.
- Company Organizational Structure: This includes the operational file of the business, which details the board of directors, supervisors, general manager, and legal representative. This file must include copies of passports for foreign board members.
- Legal Address of the Company: This is the official address of the company where authorities can contact the company for any matters. The address should include phone numbers and email details.
- Company Articles of Association: This is another crucial document in the company establishment process, containing important details about the business, including the scope of the operations you intend to engage in. It outlines the company’s organizational structure and the methods that will be used for profit distribution.
- Registered Capital and Total Investment: Registered capital refers to the funds allocated to cover the company’s operational expenses, while total investment includes both registered capital and any future loans from investors, including third parties like banks.
- Feasibility Study for the Project: To prove to the authorities that your business is viable, you need to submit a comprehensive business plan and budget. You will need to demonstrate that the registered capital is enough to finance the operations. If the authorities are not convinced by your feasibility study, your registration may not be approved, so ensure you work with a professional agency to draft a convincing feasibility document.
FAQ
How can I register a company in China?
Registering a company in China is a process that requires you to prepare the correct documents and obtain approvals from various departments. The best way to register a company in China is to use a specialized agency. Registering a company in China requires following these steps:
- Choose an agency to assist you with registration.
- Define your preferred company scope.
- Prepare the required documents.
- Apply for the approval certificate.
- Apply for a business license.
- Register with the Public Security Bureau (PSB).
- Register with the tax bureau.
What are the main documents required to establish a company in China?
There is a complete set of documents that you need to prepare in the process of business registration in China. Here are some of them:
- Company name
- List of controlling shareholders
- Corporate structure
- Legal address
- Articles of incorporation
- Registered capital and total investment
- Feasibility study
Can foreigners own companies in China?
Yes, foreigners can own companies in China by incorporating them. For example, foreigners can set up a wholly foreign-owned enterprise (WFOE), establish a joint venture, or open a representative office.
What is the tax reduction on corporate income tax for WFOEs in the "encouraged" sectors in China?
If your company is in the "encouraged" sectors, the Chinese government reduces the corporate income tax rate from 25% to 15%.
What are the advantages of setting up a wholly foreign-owned enterprise (WFOE) in China?
Setting up a WFOE is the most complete and flexible option for establishing a company in China. It has many advantages over a representative office or joint venture, including:
- It can be set up without a Chinese partner.
- It can generate profits in China.
- It allows the ability to remit funds abroad.
- It enables direct hiring of employees.
- It is the best option for protecting intellectual property rights in China.