China has been rapidly removing barriers to international investment in recent times to increase the attraction of investors from the global market. China is an ideal location to establish a business or set up your firm there due to the size of its low production costs, market, and economic dynamism.
Nevertheless, given the bureaucracy and regional laws, establishing or selling a business in China is somewhat difficult. Setting up a business in China is a lengthy process and demands strict regulations.
Read on to find out how to start a business in China along with requirements and all other details.
Advantages of Company Registration in China
Check out the advantages of doing business in China there before you look at the details of business setup there.
- China is the second-largest economy in the world behind the United States. Its GDP in Q1 2023 reached US$4,145.5 billion, up by 4.5% year on year at constant price. Quarter-on-quarter, the economy grew 2.2% from the Q4 of 2022. As a result, China has emerged as a known entryway to Asia and a significant actor on the global stage.
- Since the Chinese economy is so varied, there are chances for businesses to set up here belonging to many industries. This is why, whether your company is in automobile, oil & gas, manufacturing, agriculture, technology, or any other industry, you can be guaranteed long-term success and growth. The ideal strategy for the success of business owners and entrepreneurs will be business registration in China given the abundance of chances.
- In 2001, the People’s Republic of China finally became a member of the World Trade Center (WTO). This makes opening a business there far easier for firms from throughout the globe. In fact, the country has significantly lowered its customs taxes and got rid of a big number of trade-related regulations.
- China has a population of 1.3 billion and is a ready market for any type of business. In addition to that, due to China’s strategic location in the Far East, it is easy for businessmen to access markets in nearby countries like Thailand, India, and Japan.
- It is feasible to manufacture products in China at extremely low prices. In China, manufacturing, labor, construction, and transportation are all quite affordable for business owners and entrepreneurs. is also inexpensive. 430,000 foreign businesses have chosen to establish themselves in China which shows the attraction of the country for business-related people.
- Additionally, setting up a business, a subsidiary or any other type of commercial unit in China allows foreign entrepreneurs, business owners, and investors access to a market of 1.4 billion potential customers.
- Apple, Nokia, Oracle, and nearly every Fortune 500 company are operational in China. These companies take advantage of this rapidly expanding economy to grow all over the world. This shows businesses from any part of the globe can use China as a launching pad for the success of their business.
- China is one of the major exporters and importers of goods and products in the world and has one of the fastest-expanding economies worldwide. As a result, such a business-friendly environment will quickly catapult your business to success in China.
Types of Legal Entity in China
Three different business structures can be established in China which are Wholly Foreign-Owned Enterprises (WFOE), Representative Offices (RO), and Sino-Foreign Cooperative Joint Venture. Here, we’ll go over each company type in more detail.
Wholly Foreign Owned Enterprise (WFOE)
WFOE is the abbreviation for a limited liability company that is entirely owned, invested, and run independently by foreign investors. The most common company structure is a WFOE, which is followed by over 60% of foreign-owned businesses. WFOEs include well-known multinational corporations like Apple, General Electric, Oracle, and Amazon. A board of directors for WFOEs must consist of three to thirteen members.
A WFOE can be riskier to establish than other company types if foreign businesses don’t have a thorough understanding of the Chinese market and also because of the need for greater investment. Having said that, there’s a good reason why foreigners choose this company types the most.
WFOEs grant foreign businesses complete ownership, thus there are also no limitations on how the business is structured internally. Also, foreign firms can transfer profits to their parent companies abroad, continue to be the sole owners of the businesses, and convert RMB earnings into USD.
Another type of business that adopts the structure of a limited liability corporation is a joint venture. You must find a Chinese partner and register your business with them in order to conduct business operations under this model. Chinese partner owns controlling shares (more than 50%) in the business. It is another noteworthy aspect of JVs. This suggests that, in contrast to the totally foreign-owned company, your partner will have more control over the business’s everyday operations.
The advantage of a JV is that you do not need to be concerned about the barriers to entry that new companies typically face. Moreover, another key benefit of forming a joint venture is that you can enter the Chinese market quickly by utilizing existing established businesses and using their distribution networks, sales channels, and expertise.
Even while these advantages are fantastic, it’s crucial to remember that You are essentially placing your money in someone else’s hands. You have limited control over the company. This is a serious risk for many investors to take.
Common Pitfalls with Joint Ventures
Potential problems arise when international businesses form joint ventures with local partners in China because of unbalanced contributions and conflicts of interest. Furthermore, as JVs are greater reporting requirements and are subject to stricter regulations, you should carefully assess the local laws.
Additional reporting requirements can be related to hiring/firing practices of senior management, the composition of the board of directors, and yearly capital contribution ratios. To conduct efficient business operations and meet all reporting requirements, you must keep a good working relationship with your Chinese partner.
Therefore, it’s essential to thoroughly go through possible Chinese partners and then choose them before committing to a formal JV arrangement.
A board of directors must be constituted once the JV is created in order to run and oversee the business activities. The board’s chairperson can be a representative from both the Chinese and foreign sides. The chairperson would then legally become the JV’s representative. The chairman is also in charge of choosing the managing directors who will run and oversee the JV.
Representative Office (RO)
An RO is a liaison agency created by a foreign-invested corporation in China to represent the parent company. ROs are unable to make money, send money abroad, or run typical businesses because they are not recognized as separate legal entities. Product promotion, liaison work, market research, and opening bank accounts are all examples of allowed non-direct business operations.
You can think of RO as a less risky way to enter the market. Foreign businesses frequently use ROs to research the Chinese market, establish contacts, and do testing before fully entering the Chinese market. This is feasible since there are no capital restrictions for businesses in China when they register and invest in ROs.
Businesses should be aware that ROs can only open their offices in foreign-related office buildings (buildings authorized by the government that can include foreign firms as tenants) and hire people through government-recognized HR agencies.
The present RO license is valid for three years, although ROs are permitted to extend it an infinite number of times.
Foreign Invested Commercial Enterprise (FICE)
Trading WOFE, also known as FICE, enables foreign businesses to do business in China by selling goods, claiming refunds on export taxes, setting up an online store, providing associated consultancy services, and importing and exporting franchise brands. A FICE can also run services for delivery, storage, warehousing, maintenance and repair, inventory control, and training.
In addition to the FICE (trading WOFE), other types of WOFE, such as food & beverage WFOE, technology WFOE, and manufacturing WFOE that can make industrial goods in China are also available for businesses.
You should be aware of several restrictions with regard to FICE. Before engaging in any import-export activities, you must also apply for separate licenses. VAT (Fapiao) difficulties can be challenging, and you can only engage in commercial activity.
Required Documents for Registering Company in China
You must compile a number of documents and submit them for approval in order to be granted permission to start operating your business. Here are the required documents for setting up a business in China:
List of Controlling Partners
The bulk of the shares in the business you are establishing are owned by these shareholders. Make sure the company partners are permitted to own shares in China in order to avoid future issues.
You must get permission from the Administration of Industry and Commerce in order to obtain the company name. This is crucial to make sure that your name does not conflict with those that are already in use. Be aware that depending on where you plan to launch the business, this approval could take anywhere from two to fifteen days.
The board of directors, supervisors, general manager, and legal representative are all included in this comprehensive operational description of the company. The directors’ passport copies should be submitted with this structure.
The legal address is the location of the company’s official headquarters, where the authorities can get answers to any questions they may have related to the business. The phone number and email of the house or landowner are some of the mandatory details that the address should have.
Articles of Association
This is yet another important document for the registration of Chinese companies. The extent of your intended operations is among the key details of the company description that must be included in these documents. You are required to describe the essential elements of the company, such as the techniques to be applied for recouping losses and the managerial structure of the business in the documents.
You must present a thorough budget and business plan to the authorities in order to demonstrate to them beyond a reasonable doubt that the company is feasible. You must here show that the registered capital can support your planned company activities.
In order for your company registration to be accepted, the feasibility study must satisfy the authorities.
Total Investment and Registered Capital
Total investment is the sum of potential investor loans and registered capital. It might also come from other sources like banks. Whereas the resources set aside to cover the costs of keeping the business operational are represented by the registered capital.
Challenges of Setting Up a Business in China
Though there are tons of benefits to moving or growing your business to China, there are still a number of obstacles you must face.
In China, establishing a company is subject to a number of regulations. The terms of entry into the Chinese market can change depending on the province and the industry.
Additionally, censorship on many social media platforms, like Twitter, Facebook, and YouTube, may require you to adopt regional tools and trends and complicates communication strategies.
Foreigners may experience additional difficulties due to cultural differences and language barriers. Even in the business world, social norms are fairly rigid.
The frequent infringement of intellectual property in China shows the significance of properly safeguarding your company venture.
Whatever stage of starting a business in China you are at you need to be aware of and respectful of the local cultural practices, especially in the city and province you want to run the company. There are significant differences between consumer habits, languages, customs, demands, and expectations from one region to another in China due to the country’s 7 official languages and countless dialects.
Step-by-Step Process to Start a Business in China
The following are the main steps that must be taken if you wish to start a business in China.
Do Market Research
The first step is to analyze the Chinese market and find out growth sectors. The Chinese market is enormous and very complicated. You must consequently conduct a thorough in-depth market analysis. Supply, weaknesses, demand, consumer needs, opportunities, threats, competitiveness, etc. should all be given consideration in the study. The offer, positioning, and growth plan will therefore need to be modified in light of these various criteria.
In addition to that, it is important to keep in mind that China is a world leader in the e-commerce industry. It is very competitive in a number of industries, including fintech, manufacturing, mining, the service industry, agriculture, technology, etc.
China’s 9.597 million km2 surface area provides a wide range of business setup options. You have access to a wide range of appealing, large, and vibrant cities as potential locations. Shanghai, which has over 26 million, Beijing, which has 20 million residents, Shenzhen, Wuhan, Canton, Hong Kong, etc. are cities where this is very much true. You should think about your area of expertise while selecting a city and evaluate the local supply and demand dynamics for that area.
Perform Legal and Administrative Procedures
Despite being accessible to foreign businesses, China has some business ventures that are specifically promoted by the government, others that are more regulated, and some that are simply prohibited. As a result, you should refer to the Catalogue of Encouraged Industries for Foreign Investment, which divides industries into three groups:
Sectors of Prohibited Investment
- Legal advice on Chinese laws
- The sale of tobacco
- Production and broadcasting of television programs
Investment Encouraged Sectors
- Technical services
- Social work
- The financial sector, etc.
Sectors of Restricted Investment
The creation of the following
- Higher education institutions
- Agriculture, etc.
The next thing to do is to research the type of business you desire to establish, the legal prerequisites for foreign investors as well as the administrative processes unique to the involved municipality and your industry.
Find a Local Partner
The formalities for establishing a business in China are rather hectic. For setting up a business here, you need to be well-educated in how the Chinese government operates. Utilizing a company or finding a local partner to assist you with these procedures is the best thing to do for dealing with these formalities.
For instance, you may get in touch with a chamber of commerce, which helps businesspeople establish their business ventures in China. This will also be very helpful in assisting you in better understanding the specificities, local customs, and needs of the Chinese market.
Use a Professional Translator
In China, there are numerous different languages that people use for communication. When launching a business in China, the language barrier can be a significant barrier because Mandarin is one of the hardest languages in the world to learn. You should employ a translator to make interactions with regional partners easier, whether it is for:
- Translating your marketing, website, institutional and commercial documents into Chinese
- Translating technical, financial, or legal documents.
- Using an interpreter when dealing with local partners
- Obtaining sworn (certified) translations for your legal and official documents when establishing your company
Select the Type of Business
You can select between the following legal structures when setting up a business in China:
- An Equity Joint Venture (EJV), or its simplified form, a Cooperative Joint Venture (CJV)
- A Wholly Foreign-Owned Enterprise (WFOE)
- A Representative Office
Financial arrangements, legal requirements, and administrative processes apply to every type of legal entity. Moreover, the permissible activities may change depending on the type of company that is formed. This is why, it is best for you to consult a professional for advice.
Create Your Legal Entity or Company
After choosing your company type, you can begin to gather the necessary paperwork to create the entity. It is preferable for you to work with a professional Chinese business setup expert to finish all the procedures conveniently and quickly for foreign businessmen and investors.
Apply for an Approval Certificate
You must work with two authorities to obtain an operating license and an approval certificate. First is the State Administration of Industry and Commerce (SAIC) and other is the the Ministry of Commerce (MOFCOM). These entities will examine your application and let you know if the certificate has been accepted or rejected after reviewing it.
Apply for a Business License
After receiving a company certificate, depending on the industry you are doing business in, you may require extra licenses. Construction, food, manufacturing, telecommunications, and beverage companies in China need additional licenses.
Register with the PSB (Public Security Bureau)
Registering with the PSB is also important. This registration enables you to obtain company chops. Company chops in China are comparable to the value of a signature in the West. Any contract cannot be validated if you do not have a chop.
Register at the Tax Bureau
All businesses in China, including Wholly Foreign-Owned Enterprises, must abide by the tax laws and regulations. This is why you should register the company’s fundamental financial and operational information first, including CFO verification, category, and more. While doing this, you should be aware of several tax obligations. They consist of:
Individual Income Tax
This tax is applicable on dividends that are levied by staff salaries and company partners.
Corporate Income Tax
A corporate income tax is imposed on profits of 25%. But, you can enjoy lower corporate income taxes if you are in the “encouraged sectors”.
If you import goods to or export them from China, customs duties are applicable to them.
Transaction tax or turnover tax is 3% to 5% of the business sales.
Value Added Tax (VAT)
Tax rates vary in China. For industries, VAT is 3%, 6%, 9%, and 13%. To learn more about VAT in China, you can go through China’s VAT reform.
Protect Your Intellectual Property-Trademark
For businesses operating in China, Intellectual Property (IP) has long been a crucial concern. If your company trademarks, patents, and copyrights have not yet been registered, there is no official protection for your intellectual property in China. Therefore, it is crucial for businesses to register their intellectual property as soon as they begin running their companies in the country.
Start Monthly and Yearly Administration Operations
WFOE needs to carry out compulsory procedures in accordance with local laws or policies in order to conduct business in China. These procedures are mostly related to the accounting and tax, as well as employment and human resources industries. Once you’ve found the talented individuals, you can carry out the following tasks in-house or contract them out to a payroll and employment agency.
- Yearly audit and tax return
- Monthly payroll: Salary is calculated and paid out to employees every month
- Mandatory social insurance and housing fund contribution
- Tax Declaration: VAT must be declared monthly whereas corporate income tax is declared quarterly. Individual income tax must be declared by an employer on a monthly basis.
Take Help from an Agency for Business Registration
Even while the Chinese government has worked hard to encourage companies to set up their identities in China, note that forming a company is not an easy procedure. The process can be challenging, from interpreting the company laws to gathering the necessary documentation. But this shouldn’t make you less determined to grow your business in China. To make things easy for you, taking help from an agency is the best and most reliable choice.
Professionals that have assisted other investors with business setup in China run the agencies. They are aware of the mistakes to avoid and the ideal processes to follow. So, get in touch with the top company registration service provider in China if you want to finish the registration professionally, quickly, and with ease at each stage.
Other than assisting you with business setup in China, a knowledgeable Chinese business setup firm will be useful to you in order to help you with the following:
- Support for the annual financial statements
- Tax advise
- Tax minimization methods
Please remember that when launching a business in China, the actual registration procedure and necessary paperwork may vary from city to city and may be updated by the local government. On the website of the Ministry of Commerce, the Chinese government has given a fantastic English-language resource for anybody looking for additional information about the rules or regulations for setting up a business in China.
So, that was all about the process to set up a business in China. The process requires attention and should be completed in the right way to ensure you start your company in an error-free way.
Can I start a business in China as a foreigner?
Yes, you as a foreigner can start a business entity in China. Foreign companies are also welcome to open their branches in China.
Can you start your own business in China?
Yes, you can set up a company in China. Just make sure to define the business scope, keep the employer of record, and keep other important things when starting our own business in China.
How to start a business in China?
To start a business in China, you need to follow a set process including submitting the necessary documentation.
Is China a good place to start a business?
Yes, China is a fantastic place to start a business.
Please Note: We do not provide any assistance regarding business setup in China. However, If you are looking to start your business in the UAE, get in touch with RIZ & MONA CONSULTANCY.