While domestic companies have a wide range of alternatives to establish business operations in China, foreign companies are more restricted, with the most common business vehicles for foreign investors being:

– Representative offices
– Wholly foreign-owned companies
– Joint Ventures (Cooperatives and Contractual)

1.0 Representative Offices

General

The quickest and easiest method for a foreign company to establish a presence or ‘footprint’ in China is through the registration of a Representative Office of a foreign company. While this is true, there are certain factors that need to be considered when deciding if an RO is the right structure:
(i) ROs cannot engage in direct profit-making activities (cannot earn income) and can only perform a liaison function between the head office and suppliers/distributors/customers in China;
(ii) ROs do not have their own legal personality and can only contract or conduct business on behalf of the parent company;
iii) ROs are in practice limited in terms of doing business with Chinese companies which may prefer to deal with companies registered in mainland China;
iv) taxes still have to be paid (although there are no profits);
v) ROs, while simple to set up, are relatively more complex to close.

An RO is allowed:
– Carry out data collection and research on the local market.
– Liaise with local contacts on behalf of the parent company
– Coordinate the activities of the parent companies in China, such as contract negotiations.
– Coordination of warranty and after-sales service.
– Perform services for the parent company such as coordination of import, export and distribution of products.

An RO is not authorized to:
– Participate directly in businesses for profit.
– Sign contracts on their own behalf
– Represent entities other than the parent company
– Collect money or issue invoices for products or services

Representative offices are governed by the Procedures for Registration and Administration of Resident Representative Offices of Foreign Companies in China and the Detailed Rules of the Ministry of Foreign Trade and Economic Cooperation for the Implementation of Provisional Regulations Governing the Examination, Approval and Administration of Representation Offices of Foreign Companies.

Record

Unlike many other countries, representative offices in China are subject to registration requirements. An application must be made to the local Administration for Industry and Commerce, which, if successful, will issue a Certificate of Approval for the Representative Office. Thereafter, a series of presentations must be made to other authorities, such as the Foreign Exchange Office, and a ‘Business License’ issued by the local Administration of Industry and Commerce.

The registration is generally valid for only three years and the request must be made before the expiration to renew the term.

It is important to note that in order to set up an RO in China, you need to set up physical office space (in cities like Shanghai, only certain commercial buildings can be used to register ROs).

2.0 Wholly foreign-owned companies

General

Wholly Foreign Owned Enterprises (WFOEs) or limited liability companies with purely foreign investors are fast becoming the most popular method of foreign investment in China. While foreign companies once thought (and were often forced by law) that a local partner was necessary to do business in China, this is no longer the case across a wide range of industries.

WFOE Features:
– Between one and fifty shareholders
– Restricts the right to transfer shares
– Prohibits the public offering of shares.
– The capital is divided based on the contribution to the share capital and not on the allocation of shares
– Liability is limited to the amount of registered capital contributed

WFOEs are governed by the Law of the People’s Republic of China on Exclusively Foreign-Equity Operated Enterprises, and relevant implementing regulations.

Advantages of WFOEs:
– Driving control
– Simpler establishment procedures
– Easier to finish
– Easier to increase investment
– Protection of intellectual property

Disadvantages of WFOEs:
– Lack of experience and local connections.
– Cannot be listed on the stock exchange

Establishment

There are a number of steps required to establish a WFOE:
– Submission of articles from the company’s cover letter, bylaws, feasibility study and other corporate documents to the local foreign trade office for approval and issuance of the Foreign Investment Approval Certificate.
– Presentation of guarantees before other government authorities, such as:

o Local and national tax offices

o Foreign exchange office

or customs office

o Statistics Office

o Public Security Office
– Within 30 days after obtaining the Foreign Investment Approval Certificate, obtain a temporary business license from the Administration of Industry and Commerce
– Make Registered Capital Contributions and Audit by National Accounting Firm
– Submit an investment report to the Administration of Industry and Commerce to obtain the Permanent Commercial License

Important considerations

Name

A company name must be in both English and Chinese, although for practical purposes only the Chinese name is important. It cannot be identical or similar to a previously registered company name. The name can be pre-reserved for a period of up to six months, which expires if it is not used for establishment purposes during this time.

business scope

Unlike companies in many Western countries, where they are allowed to carry out any type of business activity, unless laws and regulations state otherwise, foreign investors in China must define the business scope of their company at the beginning of operations. and must conduct business within this scope. subject to modification through a new application.

registered capital

Depending on the business scope defined, a foreign investor will be required to invest a certain minimum amount of capital which must be registered or registered with the relevant authorities as done to the WFOE. Generally, this amount will range from 30,000 RMB to several million RMB for larger projects. The capital must simply be invested in the company and registered as fact with the local administration of industry and commerce.

Shareholders

The shareholders must all be foreigners and there must be between one and fifty who have an interest in the WFOE.

directors

The WFOE must appoint a board of directors (or a single director) to serve for the initial term (as set out in the statutes).

Legal representative

Only one person can bind to the WFOE by means of a simple signature (without the use of a company chop), and must be designated as Legal Representative in the formation documents.

senior managers

At a minimum, the WFOE must appoint its first general manager.

From a purely legal perspective, directors, senior managers, supervisors and other senior staff do not have to be Chinese residents, although it may be more practical to do so.

supervisor(s)

At least one person who is not a Director or Senior Manager must act as supervisor of the WFOE.

Physical address

Every business must have a unique physical address where the business is registered. Unlike other nations where virtual offices are allowed, China requires a business to have physical office space.

annual presentation

Within three months of the end of each calendar year, the WFOE must undergo an annual inspection. Prior to the annual inspection, the firm must retain a local accounting firm to perform an audit of the books.

3.0 Joint Ventures

Joint ventures, in this specific context, refer to a registered legal entity cooperation between at least one foreign investor and one Chinese investor. Previously, this structure was more common, although it has been steadily declining due to the following disadvantages.

Joint Ventures can be classified into two different types:
– Capital joint ventures
– Cooperative joint ventures

The main distinction between the two is that the latter provides more flexibility in the distribution of income. While equity joint ventures require joint venture partners to share in profit sharing based on their proportionate contribution to registered capital, cooperative joint ventures allow loss sharing and sharing based on contractual terms. rather than monetary/asset contributions.

Equity joint ventures are governed by the Equity Joint Venture Law of the People’s Republic of China and related implementing regulations.

Cooperative joint ventures are governed by the Law of the People’s Republic of China on Cooperative Joint Ventures and related implementing regulations.

Some advantages of joint ventures include:
– Only option, since the industry is restricted
– Guanxi (connections)
– Rapid establishment/contribution of existing facilities
– Local experience

Some disadvantages include:
– Inflexibility
– Difficulties in expanding investment (partners have the right of first refusal to buy newly issued capital and transfer shares to third parties)
– Different business plans.
– Different management styles.
– Exposure and theft of intellectual property

Establishment

The establishment of a joint venture is very similar to that of a WFOE, with the addition of a key document, the joint venture agreement. The Joint Venture Agreement has many of the same features as the WFOE articles of association, however it contains more terms similar to a Shareholders Agreement.

This type of documentation and negotiations with the Chinese side can be quite complex and will usually require the assistance of a lawyer.