DOING BUSINESS IN CHINA
INCORPORATING IN CHINA
FORMS OF BUSINESS ENTITIES
With over 1.3 billion people, the People’s Republic of China “China” is the world’s fourth largest country and the world’s fastest-growing economy. Developing effective and profitable operations in China is undoubtedly the greatest single opportunity for companies today. Since 1978, when China opened its doors to the outside world, China has enjoyed tremendous annual economic growth. It is now the second largest economy in the world and the world’s single biggest recipient of foreign direct investments among developing countries. China’s accession to the World Trade Organization is widely expected to trigger a further wave of inward investment from foreign companies as the terms of entry to new sectors of the China economy are progressively liberalized.
China is a dynamic market and international investors and buyers can find a wide range of quality products at very competitive prices. China is a major producer of textiles, apparel and footwear; raw materials, metals and chemicals; toys and handicrafts; and foodstuffs, among others.
Besides the obvious potential for selling consumer goods, China has a requirement for a wide range of agricultural and industrial raw materials, high tech components, capital goods and services. Due to the rapid development of the Chinese economy, it offers sellers ample opportunity to place goods in this fast growing economy. Many top brand names from across the world can now be found in the local high street of most major Chinese cities.
For manufacturers, China has the ability to provide a skilled work force and in some areas, so-called Special Economic Zones offer special incentives for specific production sectors. Through our extensive network of contacts in China, we are able to assist clients in finding the most tax advantageous and cost effective solution for their business.
CMS is able to assist its clients in the complete registration process of their business entities, our other services include:
Obtaining a detailed credit report on a Chinese company
Introducing possible joint-venture partners
Market research and feasibility study
Attending to corporate and personal tax registration
Assistance in finding office space
Opening of bank accounts in local and foreign currencies
Book keeping and arranging for audit of accounts
We will be happy to provide a quotation upon receiving further details regarding the activities of the proposed company such as estimated turnover, number of staff to be employed, location of company and proposed size of factory.
Business Matching is an innovative service to assist you in finding and meeting potential business partners in China and Hong Kong. We will help you find who is interested in your products or services; who is looking for partners and joint ventures; who is looking sell their existing business; who has technology and license to offer; or who is providing just the products, services, components and materials you need.
We will help you identify potential partners from our database of over 250,000 business contacts, covering Hong Kong and the whole Chinese Mainland.
SETTING UP IN CHINA
Establishing a presence in China is still a challenging experience for unwary organizations, however, with our experience and expertise we can smooth the way for prospective market entrants. China has three recognized forms of business organizations available to foreign investors who wish to register their companies, these are a Joint Venture, Wholly Foreign-Owned Enterprise and Representative Office.
JOINT VENTURE (“JV”)
A Joint Venture is a business arrangement in which the participants create a new business entity or official contractual relationship and share investment and operation expenses, management responsibilities, and profits and losses.
The Chinese authorities encourage foreign investors to use this form of company in order to obtain exposure to advanced technology and new management skills. In return, foreign investors can enjoy low labor costs, low production costs and a potentially large Chinese market share. Joint Ventures are sometimes the only way to register in China if a certain business activity is still controlled by the government. e.g. Restaurants, Bars, Building and Construction, Car Production, Cosmetics etc.
WHOLLY FOREIGN-OWNED ENTERPRISE (“WFOE”)
A wholly foreign-owned enterprise is a business entity formed in China entirely with foreign capital, it is totally under foreign control and does not have any formal Chinese ownership participation. For a foreign company to be able to issue receipts and export goods from China, it must be able to legally registered as a local company or a WFOE. A WFOE is set up as limited liability entity and represents separate legal persons and taxed according to local legislation.
WFOE’s can generally control their own governance through the articles of association and the normal minimum paid up share capital starts from 1 million RMB (approximately US$140,000), however, some provinces offer lower capital requirements in order to attract more foreign investment. Many foreign investors find this type of company attractive because of the full control and 100 percent ownership.
REPRESENTATIVE OFFICE (“REP. OFFICE”)
The simplest and most cost effective method of establishing a useful business presence in China is the Rep Office. The choice for an initial Rep office will normally be determined by basic market and product research in China. The high profile cities of Shanghai, Beijing, Guangzhou, and Shenzhen are the most likely choices for the Rep office. It should be noted that more than one Rep office can be established in China by a foreign entity.
A Rep. Office is an entity involved in business activities, which do not result in direct profits being made by the office. They are not allowed to operate as partnerships or sole proprietorships in China as they are not recognized as legal persons. However, they are allowed and encouraged to conduct "indirect operational activities" such as liaison for business purposes, introduction of products, market research and technology exchange. These activities should be preparatory and supplementary activities, market research on the local market, providing business information and supplying sales for the headquarters. The foreign enterprise applying for the Rep. Office must be legally registered in its country of origin for at least 12 months.
CLOSER ECONOMIC PARTNERSHIP ARRANGEMENT (CEPA)
WHAT IS CEPA?
• A free trade agreement between Hong Kong and mainland China effective from 1 January 2004
• Significant China market liberalization (for goods and services)
• Preferential access to China market from Hong Kong
• Offers better deal than China WTO commitments
• Strengthens Hong Kong as a platform for China business
WHAT DOES IT MEAN?
• Zero tariffs on 90% of Hong Kong exports to China
• Faster/ easier market access for 18 service sectors
• Lower entry thresholds for smaller players (capital/trading history requirements)
• 100% ownership of many China ventures
• Makes Hong Kong the simplest and most profitable route into/out of China
• Manufacturers in China are able to use Hong Kong services
• Company must be incorporated in Hong Kong and conducting business in Hong Kong for past 3-5 years
• Company must be liable for Hong Kong profits tax
• Employ 50% of staff locally in Hong Kong
• Any nationality or size of company can be eligible
• Goods must qualify as “made in Hong Kong”
• Not necessary for company to be based in Hong Kong
• To qualify, goods must be substantially transformed in Hong Kong
– 30% of value must be added in Hong Kong (includes R & D, design costs)
HOW CAN OVERSEAS COMPANIES TAKE ADVANTAGE?
• Partner with, invest in, or buy into a CEPA-qualified firm in Hong Kong
• Manufacturers or traders of goods
• Partner with, or outsource to, a Hong Kong manufacturer (no need to be based in Hong Kong)
USING OFFSHORE COMPANIES FOR INVESTING IN CHINA
When structuring your investment into China you have a choice of using your existing company or establishing a specific holding company to apply for the China business registration on your parent's behalf. Over the years, investors have utilized a wide variety of offshore jurisdictions to structure investments into China, including British Virgin Islands (BVI), Seychelles, Mauritius, Bahamas, amongst others.
WHY USE NA OFFSHORE COMPANY?
Here are a few reasons why it may be preferable to use an offshore company:
1) Keeps your China venture risk one-step removed from your parent company.
2) In some applications, the parent company original documentation may be required to be presented to the Chinese authorities. If this documentation is valuable, it makes sense to minimize any loss by using separate, holding company documentation as an alternative.
3) Ease of application. As Holding company corporate documentation must be translated into Chinese for application purposes, it makes sense to use a jurisdiction whose documentation exists in bi-lingual format (i.e. Hong Kong) rather than spend money on expensive translations.
4) Tax benefits. It may be possible to structure an investment whereby profits are held by an offshore holding entity, tax free, prior to further repatriation to the parent company. This may be useful if wishing to utilize such monies for re-investment elsewhere at a minimal tax exposure.
5) Management and Administration. It can be easier to service your China venture's financing and administration from a Holding company closer to China's time zones.
Due to Hong Kong sharing the same time zone as mainland China and it's access to the international banking, the territory is the favored location for establishing accounts in respect of inward investment into China. While previously a fairly straightforward process; banks in Hong Kong now impose a lengthy and detailed application procedure for ALL offshore companies wishing to establish accounts, this is in response to new Anti-Money Laundering and Anti-Terrorism regulations. However, as Hong Kong companies are more reputable and transparent, the requirements to establish an account are more relaxed.
We have also experienced (especially in Shanghai) a reluctance by the Chinese licensing authorities to allow business registrations for BVI and other offshore jurisdictions for periods in excess of one year, a situation unlikely to ever apply to a Hong Kong registered company.
Non-Hong Kong residents can be directors of Hong Kong companies, and can easily establish accounts for their company in Hong Kong, although it may normally require a personal visit by the directors to the bank to do so. The most commonly used local banks are Hong Kong & Shanghai Banking Corporation (HSBC), Standard Chartered and Bank of East Asia although most international banks will permit accounts to be opened for local companies. To service your China entity, funds would normally be channeled into China from this account, which may in turn have been fed by the parent.