Company formation in China can be a promising solution for growing international businesses looking to enter Asian markets.
Features and Benefits of the Jurisdiction
China’s economy is showing steady growth and is one of the largest in the world. It remains an attractive jurisdiction for setting up a company with foreign ownership.
Key benefits of starting a business in China include:
- The option to open a company with foreign shareholders without visiting China,
- The ability for the company founder to obtain a business visa, allowing easy travel to China,
- Access to a billion-strong consumer market with high demand for quality goods and services,
- Various options for foreign investors to establish a presence,
- Advanced digital infrastructure, including online company registration and quick access to government services,
- Favourable geographical location.
China is also considered one of the most competitive economies in the world. For example, the Global Competitiveness Index highlights China’s strong commercial efficiency and infrastructure development.
Corporate Law in China and Main Types of Foreign Companies
The main legal act governing company formation in China and business operations is the PRC Company Law, effective from 29 December 2023. This law applies to all companies registered in China, including those with foreign ownership. In addition, foreign investment in China is regulated by the Foreign Investment Law, which has been in force since 1 January 2020.
Under Chinese law, foreign companies (that is, companies established with foreign investment) can operate in the following forms:
- Wholly Foreign-Owned Enterprise (WFOE),
- Joint Venture,
- Representative Office.
Each of these options has its own features, benefits, and drawbacks.
Wholly Foreign-Owned Enterprise (WFOE)
A key feature of a WFOE is that its share capital is owned only by foreign investors. In essence, a WFOE is a limited liability company that is fully owned by foreigners. A Wholly Foreign-Owned Enterprise has the following characteristics:
| Criterion | Description |
|---|---|
| Business Sector | WFOEs can operate in any sectors not listed in the so-called negative lists, which restrict foreign investment. |
| Share Capital |
There are no minimum share capital requirements, except for regulated sectors where such rules apply (for example, banking).
Usually, the share capital is 10,000 yuan (about 1,400 US dollars), but this may vary by sector. The share capital must be fully paid within five years from the company registration date. |
| Company Management |
A WFOE must have at least two founders.
Usually, the company is managed by the following persons:
Information about these persons is submitted to the registration authority. |
| Timeframe for Setup | Digital processes have made WFOE setup faster. Registration can be completed within one month, depending on the business sector. |
The main benefits of establishing a WFOE are:
- Full independence from a Chinese partner, with complete control over the business and its management,
- The ability to carry out official commercial activities, not limited to representative functions,
- Protection of intellectual property,
- A relatively quick registration process.
However, foreign companies in the Chinese market may lack the expertise and connections that a local partner can offer.
Joint Venture
A joint venture involves both a foreign investor and a Chinese partner, who can be either a legal entity or an individual. Joint ventures can be registered as limited liability companies or as joint stock companies. This structure is usually chosen when there is a need to use local workforce and combine it with the technology and know-how of the foreign partner.
Key features of a joint venture:
| Criterion | Description |
|---|---|
| Business Sector | In general, a joint venture can operate in any sector except those with restrictions on foreign investment. |
| Share Capital | There are no minimum share capital requirements. |
| Company Management |
The management structure of a joint venture usually includes:
|
| Timeframe for Setup | Joint venture registration is completed electronically and may take up to one month. |
The advantages of using a joint venture include:
- The ability to enter into various contracts and carry out full business activities,
- Access to Chinese workforce and equipment,
- Protection of the joint venture’s intellectual property rights.
However, you should also consider the following drawbacks:
- Possible difficulties in finding a suitable Chinese partner,
- A lengthy process for preparing the business plan and negotiating with the Chinese partner,
- The need to share profits between partners.
Representative Office of a Foreign Company
A representative office is the simplest way for a foreign business to establish a presence in China. It is not a separate legal entity and mainly serves to build connections between the foreign company and Chinese partners.
A representative office can only carry out limited activities, such as:
- Market research,
- Running advertising campaigns,
- Taking part in exhibitions,
- Monitoring the Chinese market,
- Sourcing products and suppliers,
- Providing consulting services if the business is related to consulting.
Both foreign and local employees can work at a representative office. Foreign employees must have work and residence permits in China. Local staff must be hired through a licensed agency.
It is important to note that a foreign company setting up a representative office in China must meet certain requirements, for example:
- The company must have existed for at least two years,
- It must provide bank statements confirming its financial standing.
Requirements may vary depending on the region where the office is set up.
Here are the main advantages and disadvantages of a representative office:
| Advantages of a Representative Office | Disadvantages of a Representative Office |
|---|---|
| Relatively simple and low-cost registration process | Limited legal capacity of the representative office |
Company Formation Procedure in China
Starting a business in China, no matter which company type you choose, involves the following steps:
- Choosing a company name that meets the requirements,
- Defining the business sector and legal structure,
- Arranging a commercial address (for example, renting an office),
- Preparing key corporate documents, including the articles of association and business plan,
- Registering the company with the Ministry of Commerce (MOFCOM),
- Obtaining a business licence and any additional permits required for your sector,
- Registering with the tax authorities,
- Opening a corporate bank account.
Company Taxation in China
Companies registered in China must pay the following taxes:
| Type of Tax | Rate and Payment Procedure |
|---|---|
| Corporate Income Tax |
The standard corporate income tax rate is 25%. There are tax incentives and reduced rates, for example:
|
| Withholding Tax |
Dividends, interest, and royalties paid to non-resident companies are taxed at 10%, unless a double tax treaty sets a different rate. China is active in international tax cooperation and has signed over 100 double taxation agreements. |
| VAT (Value Added Tax) |
Rates are 13%, 9%, or 6% depending on the type of goods and services. Reduced rates are available for small taxpayers. VAT returns are usually filed monthly by the 15th of the following month. |
| Consumption Tax |
This tax is charged in addition to VAT on certain goods, such as:
The tax rate ranges from 1% to 56% of the product’s value. |
Financial Reporting and Audit of Chinese Companies
Chinese companies must prepare financial statements at the end of each financial year, which matches the calendar year from 1 January to 31 December. Reports must follow Chinese GAAP and be prepared in Chinese.
Financial statements include:
- Balance sheet,
- Profit and loss statement,
- Cash flow statement,
- Statement of changes in capital,
- Notes to the financial statements,
- Summary of taxable profit.
All financial statements must be audited by a licensed Chinese audit firm.
Companies with foreign ownership can distribute profits or pay dividends abroad only after completing the annual audit and meeting all tax obligations.
Opening Bank Accounts in China
After registering a company in China, the next step is to open a corporate bank account. You should be aware of global trends towards stricter bank compliance and expect longer checks, especially for companies with foreign ownership.
Banks usually request the following documents:
- General corporate documents,
- Details of directors and shareholders,
- Details of beneficial owners,
- Documents confirming business activity (for example, contracts with partners).
Opening a bank account in China can take several months, depending on the bank’s requirements and the complexity of the company’s structure and activities.