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One of the most important things of doing business in China is to choose a correct company type. Which one you should choose among a WFOE, Rep Office and Joint Venture? What’s the framework and procedures of each?
Corporate establishment/registration/incorporation in China for foreign enterprises is usually possible via three main company types. These are the so-called Wholly Foreign-Owned Enterprises (WFOEs), Joint Ventures (JVs) and Representative Offices (ROs). Each investment form has its own merits and drawbacks and the right choice for you will be dependent on your organisation's goals and strategy for China market access.
Widely accepted as the most popular entity for doing business in China, WFOEs are investment vehicles entirely owned by foreign (i.e. not Chinese) natural and legal persons. WFOEs are Limited Liability Companies (LLC) with shareholders held liable for the company’s debts or liabilities only up to the registered capital under the PRC new Foreign Investment Law. They represent the most viable way for foreign investors whenever revenues and profit making activities have to be undertaken directly and without local partners involved at shareholding level.
Different industries have different registered capital requirements (equity and investment) for WFOEs but since the Company Law update back in 2014, minimum registered capital indications have been abolished, with no minimum investment to set up a WFOE provided that activities do not involve one of the regulated industries (i.e. securities, insurance, banking). Although the recent liberalisation, it’s highly suggested to evaluate the blueprint of similar investments in the same industry and consider the registered capital as the main financing wallet of the China venture being it’s total amount dedicated to actual working capital. Commonly, a trading company will opt for 300-500,000.00 RMB to secure its import/export license (in case of e-commerce operations TMALL has 1,000,000.00 RMB as threshold for brand stores), 100-200,000.00 RMB for a general consulting firm, and 600-700,000.00 RMB as minimum for a Manufacturing WFOE.
Especially when venturing alone in China, it’s important to understand that different municipalities and regions suit different types of industries. For example, Shanghai is known to be famous for finance, automobile, chemical, logistics investment whereas Shenzhen recently developed itself as Hi-Tech powerhouse for smartphone, IT equipment, home appliances robotics and drones. Other factors to take into account when finding the right place can be government regulations (especially in terms of environmental impact), infrastructures and trading routes plus the customers and distributors base. Typically, coastal provinces, large and first tier cities as Shanghai, Suzhou, Guangzhou, Beijing, Shenzhen and Hangzhou might be crucial to encounter authorities and a network of supporting services familiar with challenges for Foreign Invested Enterprises.
Different types of WFOEs are required for different business activities.
For example, a Trading WFOE can import its goods and products to China or export them from China to the rest of the world or simply handling domestic trading within China with the modification of those goods (packaging aside) forbidden by definition. A Consulting WFOE will mostly provide services and would face a shorter registration process given the lack of registration at the Customs and Quarantine Inspection authorities. Manufacturing WFOEs allow their shareholder to enact a full supply chain made of purchase, processing and trade/wholesale of finished products and spare-parts. Manufacturing WFOEs will have to be registered in industrial parks or manufacturing premises with reports for Environmental Impact Assessment Approval or Online Filing and Anti-Fire inspection as pre-requisite for their entrance into business.
With a WFOE you will be able to:
|Different Types of WFOE||Function||Duration|
|Manufacturing WFOE||Manufacture and Resell goods and products||More than 5 months|
|Trading WFOE||Trading, Wholesales, Retail or Franchise in China||Within 4 months|
|Consulting WFOE||Consultancy & Services||3 months|
|Different Types of WFOE||Suggested Registered Capitals (RMB)|
|Manufacturing WFOE||600,000+ (USD90,000+)|
|Trading WFOE||300,000+ (USD75,000~140,000)|
|Consulting WFOE||100,000~300,000 (USD15,000~50,000)|
|F&B / Hospitality WFOE||500,000~1 million (USD75,000~140,000)|
|Hi-Tech WFOE (AI, Software)||100,000~300,000 (USD15,000~50,000)|
The standard process of setting up a Wholly Foreign Owned Enterprise takes 60 days with 2 main sections of activities: pre-registration and post-registration. Pre-registration requires the submission of a number of business-related documents including passport copies of individual investors or notarized documents of the controlling entity, while post-registration requires companies to formally register with a number of Chinese government agencies using the Business License issued by local Administration for Industry & Commerce.
There are two main types of Joint Ventures available in China: Equity Joint Ventures (EJV) and Co-operative Joint Ventures (CJV).
There is no minimum investment requirement for Chinese partners in a JV project, however China’s EJV Law still requires that the foreign party contributes no less than 25% of the registered capital. Additionally, just like for WFOEs, JVs are still subject to borrowing gap limitations as showed in the below table:
|Size of investment (US Dollar)||Share of registered capital|
|Less than 3 million||70%|
|Between 3 million and 10 million||50%|
|Between 10 million and 30 million||40%|
|More than 30 million||30%|
Fewer and fewer sectors now require a Joint Venture in exchange for market entry as China has moved from an investment catalog of industries open to foreign investors to a Negative List showcasing less and less closed door exception every year. JVs are often a favorable option for innovative endeavors facing potential resistances where a Chinese counterpart might imply getting a stake of the local market and a partner that shares strategic goals and on the ground knowledge.
Joint Venture agreements and Corporate Governance structures to be completed and signed-off before pre-registration steps usually delay the typical time frame described for WFOEs.
Intellectual property, management blueprints and operational control in areas such as expected revenues and ROI, people and finance are all topics to be discussed and solved beforehand in order to ensure a smooth process in terms of documental licensing.
A representative office is a local window established by a foreign company in need to represent its activities like market research, PR and suppliers visits. Since it is not an independent legal entity, it cannot participate in any direct commercial activity generating revenues or profits and it can only be set up by foreign entities with minimum 2 years of existence in the relevant jurisdiction.
There are no registered capital requirements for a representative office but local expenses need to be handled via overseas remittance from the Foreign Company. Set-up costs and timeframe are usually lower than the ones for a WFOE however de-registration processes are as complex and time-consuming as the ones reserved to the latter. A physical address in a commercial building is still required just like for Consulting and Trading WFOEs.
Permitted activities include business development, establishing partners, rendering advice, preparation of market studies, and general collection of information and liaising with authorities and business partners. Foreign employees can be hired as Chief Representative and General Representatives of the local office whereas Chinese employees cannot hold direct labor relationship with the RO, in this case a registered HR dispatching agency is needed to undertake contractual duties. In essence, a RO holds the status of a physical office and enables the activities of Foreign/Chinese staff deadlines with distributors, agents, and suppliers of the parent company.
While this is perhaps the simplest to set-up because registration can often be completed within a few weeks; de-registration can be a very lengthy process, particularly where there are more complex structures involved.
|Prohibited||Railway, Shipping, Freight, and Oil & Gas field ownership. In such industries, it is common for foreign investors to establish entities that can provide services to Chinese owners|
|Restricted||(This applies to Joint Ventures only) Mining, Pharmaceuticals, Oil & Gas, and Tobacco. In a joint venture within China, the Chinese party must hold the majority|
|Encouraged||Consulting, Manufacturing, and FICE (Foreign Invested Commercial Enterprises) i.e. trading. This applied to Wholly Foreign-Owned Enterprises (WFOEs) and some Joint Ventures.
*Including but not limited to
|Company Types||Complexity||Setup Time Frame||Structure|
|WFOE||Medium||2-5 months (depending on the business scope)||100% Foreigner investment|
|Joint Venture||High||5+ months||Partnership|
|Representative Office||Low||Few weeks||No actual & direct “business”|
China is both a daunting and exciting prospect for foreign business owners and investors. Cultural differences and complex regulatory requirements can make it difficult to know where to start, and who to trust.
Hawksford is an established provider of company incorporation and outsourced corporate services in China. With 100 multilingual professionals based in Shanghai, Beijing, Suzhou, Guangzhou and Shenzhen we are able to offer the very best of local knowledge to our international clients. We take pride in our unique Account Manager model, employing multilingual professionals (French, German, Spanish and Italian) who will ensure that you receive the quality service and communication that you expect from your partner in China.
For companies already up and running in China we provide Accounting Bookkeeping and Tax Filing services as registered agents, annual filing of returns, licenses & company information renewals, enabling you to focus on your core business activities while leaving administrative tasks to our team of professionals.
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