Have you, as a foreigner, ever wondered about the types of businesses and/or companies that foreign investors can establish on Chinese territory?

Foreign Business Formation in China

Have you, as a foreigner, ever wondered about the types of businesses and/or companies that foreign investors can establish on Chinese territory?

To help you find the answer to this question, we need to first state that the choice depends on the investor’s goals, available resources, and the target industry in China.

To shed light on this matter, we have listed the most common types of businesses that foreign investors can establish in China:

  1. Wholly Foreign-Owned Enterprise (WFOE) – This is the most common type of business for foreign investors in China. The investor holds 100% of the capital and has total operational control, with exclusive responsibility for profits and losses. WFOEs must register as limited liability entities within certain business scopes. The company can implement strategies that effectively serve the interests of the foreign parent company.
  2. Joint Venture (JV) – Like WFOE, a JV is also registered as a limited liability entity within certain business scopes. However, it is a partnership between foreign and Chinese companies to share risks, resources, and profits. The foreign investor shares control and profits with the Chinese partner based on the percentage of ownership.
  3. Representative Office (RO) – A representative office serves as an outpost for conducting market research or promotional activities to learn more about the country. ROs can be used as a liaison office for the headquarters and must limit their activities to promotion. They cannot generate revenue in China.
  4. Branch of a Foreign Company – A branch of a global company registered to conduct all business operations of the foreign parent company in China.

Timelines for Establishing Foreign Businesses in China

A second question that is very common for foreigners considering investment in China is about the timeline for establishing their businesses.

From the submission of all required documents, it generally takes 1 to 2 months for the legal entity to become operational. The establishment procedures in China are typically organized around five main steps (approval of the company name, obtaining the business license, completing tax registration, bank accounts opening, and registration with other authorities).

Requirements for Registering Foreign Businesses in China

The main registration and tax declaration requirements in China include:

  1. Corporate Income Tax (CIT) – Flat rate of 25% for all companies.

On March 16, 2007, the National People’s Congress approved the new Corporate Income Tax Law, setting the standard CIT rate for both domestic and foreign companies at 25% from January 1, 2008. According to current laws and regulations, a company is subject to CIT based on actual profits.

  1. Value Added Tax (VAT) – Rates from 6 to 13% based on the industry.

According to current VAT regulations in China, companies are typically subject to VAT as follows:

  • Sales and import of goods (13% VAT)
  • Provision of processing, repair, and replacement services (13% VAT)
  • Provision of transportation, postal, basic telecommunications, construction and real estate leasing, property sales, and possession transfer (9% VAT)
  • Lease of tangible movable property (13% VAT)
  • Other services (6% VAT)
  1. Individual Income Tax (IIT) – Progressive personal tax rates up to 45%.

IIT is imposed on both Chinese and foreign individuals (with varying subsidies), and it is levied on the income of private enterprises. Expatriate employees of Chinese companies, resident representatives of foreign companies, and other individuals with normal residence permits usually need to register with tax authorities if subject to IIT in China. Short-term foreign travelers may also be subject to China’s IIT, depending on the duration of their stay.

In 2018, the new Individual Income Tax Law of the People’s Republic of China (“new IIT law”) was published, introducing significant changes to the existing IIT system, along with final regulations for the amended IIT law.

State Taxation Administration (STA)

The State Taxation Administration (STA) oversees national tax policies and collectors. The annual deadline for tax declaration is May 31.

China has implemented a “one license, one code” system for business registrations, including a Unified Social Credit Code serving as a unified tax identification number. Companies still need to separately register tax details with the STA after obtaining a business license. In addition to business and tax registrations, companies involved in trade must register with Customs, while some industries require approvals from relevant regulators before starting operations in China.

In conclusion

Transforming your company into a successful venture in China, as anywhere in the world, comes with complexities to be understood. In structures such as Totally Foreign Companies, there is total control by the foreign investor. However, in joint ventures, he leverages valuable local information. In addition to these two scenarios, investors must comply with regulations regarding business types, protected industries, recruitment, cash flows, etc., based on desired operations.

Investment outcomes depend on the selection of strategic formats in the face of China’s unique challenges. Those who dedicate time to thorough preparation position themselves to explore China’s vast and rapidly growing consumer market with established support systems.

After overcoming obstacles, China opens its doors to external players. Early dedication to understanding the contexts, requirements, and disadvantages affecting specific ventures paves the way to capitalize on substantial growth opportunities.

With acceptable risk management that safeguards investments against pitfalls, China’s distinctive business landscape cultivates strong returns for those who establish diligent foundations. Contact us to learn more!

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