China presents some great market opportunities for companies looking to grow overseas, but managing the intricacies of the country’s business regulations can become an expansion headache. Understanding the rules that apply to your company establishment is key, so you can avoid wasting time and money – as well prevent major issues for noncompliance.
Below is a short overview of the main forms of foreign invested enterprises in China.
A representative office, RO, allows a company to establish a minimal presence in China, acting as a “liaison” office to assess market opportunities. ROs are an easy way for foreign investors to get started in China because they do not have a minimum investment requirement and have lower maintenance concerns compared to other entity types.
However, ROs are very limited in what they are allowed to do, and may only be suitable for certain business scenarios. Non-income generating, non-transactional business activities such as market research, building relationships with suppliers, etc. are allowed, but engaging in sales, signing contracts and issuing invoices are generally not permitted.
Wholly Foreign Owned Enterprise
As the name suggests, a wholly foreign owned enterprise (WFOE) is 100 percent owned by foreign shareholders. This business model is the choice for most foreign investors in industries where there are no restrictions on foreign investment and where there are no strategic incentives for engaging a Chinese partner. This structure permits a foreign organization to do business directly in China while retaining control over the business. It is often utilized by foreign entities that have long-term business objectives in China, and can allow businesses to enter into contracts, hire local employees, conduct research and development, market products and services, issue invoices and receive payments in the local Chinese currency.
While allowing foreign investors to do business in China, the WFOE is strictly regulated. A minimum investment requirement exists, dependent on the nature of business and the specific locality of operation. Additionally, the government requires that a WFOE articulate a defined business scope from the start and stay within it, unless approval is sought from the local authorities.
A joint venture is a partnership between a foreign business and local Chinese company, whereby the parties agree to collaboratively setup a new entity, sharing expenses, assets and revenues. Foreign investors can benefit by working with a partner who is a known brand/entity in China, has the right government contacts, have established distributions and sales channels, etc. To build up local network independently takes years of any foreign company. To initiate a joint venture with a local partner who already has the right infrastructure in place may save time, money, and resources – and in this way; dramatically reduce overall startup costs in China.
This type of setup is, however, not without risk. By working with a partner, a foreign investor is surrendering a certain amount of control to a partner. Additionally, if every detail is not thoroughly considered, differing culture and business practices can often cause issues between partnering companies.
Presently, two types of JVs exist; Equity Joint Ventures (EJV) and Corporate Joint Ventures (CJV).
The EJV is the most commonly adopted structure for joint Chinese and foreign ownership. Shareholders have joint management of the company incorporated as a limited liability legal entity. Profit and losses are distributed in proportion with each party’s capital contribution. In certain industries, there may be restrictions on the level of foreign ownership in an EJV.
The Corporate Joint Venture, or CJV, is in many ways similar to an EJV but provides more flexibility in terms of what a party may contribute as registered capital, cooperative conditions, distribution of profits and liability, and return of investment, which may be agreed in the joint venture document. A CJV can be incorporated either as a legal entity with limited liability or a non-legal entity. A corporate Joint Venture is the preferred investment vehicle for joint construction and management of hotels, commercial complexes, infrastructure and mining projects.
There exists other forms and variations of foreign invested companies apart from those mentioned above such as Foreign Invested Partnership (FIP), Foreign Invested Company Limited by Shares (FICLS), Special FIEs, and China Holding Company. (CHC). Your choice of company structure depends on your strategy for the China market. We always suggest careful analysis and planning prior to deciding on the company structure. Contact us for a talk about your plans and how to choose the optimal company structure for your set-up.