Opening Company in China
One of the priorities of the Chinese government is to increase domestic demand and reduce the economy’s dependence on government subsidies, exports, and certain heavy industries. Particular attention is paid to innovation and scientific and technological development. Modern Chinese citizens receive quality education abroad or in prestigious Chinese universities, and many of them, instead of hired work, prefer to start up their deal in their own country. Consequently, the competition in the market only increases.
To live in this state and start up a business in China successfully, foreigners need to consider the mentality of the local residents, the peculiarities of culture and traditions, and most importantly, the language barrier. With the help of Chinese partners and well-qualified personnel: accountants, lawyers, and consultants, it is much easier to form a company in China.
China ranks 46th out of 190 countries in terms of the availability of starting a business. Market reforms are being implemented slowly; therefore, compared with many developed regions of Europe and Asia, the procedure for new company registration is very difficult for foreigners in China. The dominant role in the economy continues to belong to the state, which controls both local businesses and foreign entrepreneurs.
Forms of Ownership in China
The legislation allows foreigners to use new company registration in China with several forms of ownership, each of which has certain advantages and disadvantages. The three most popular and affordable are:
Representative Office or RO
The most affordable way to open a business in China is to register a representative office of a foreign company. However, this form of ownership keeps case options to a minimum. Product release, payment acceptance, import, and export are prohibited. In essence, it will be a marketing structure suitable for drawing the attention of Chinese customers to goods and services produced and distributed in another country.
Joint Venture or JV
Incorporating a joint venture in China opens to foreign entrepreneurs a broader field of activity. There are no serious restrictions, but one big issue each entrepreneur faces is a reliable partner. All documents must be carefully checked and executed, with special attention to the shares of participants in the firm’s property.
Fully Owned Foreign Enterprise or WOFE
If you want to start a business, registering this form of ownership seems challenging. In addition, this form of ownership gives foreigners equal rights with local people in business. Most of the WOFE functions as an LLC, by analogy with domestic LLCs. The owners’ liability for obligations is limited to the number of contributions to the firm’s authorized capital.
How to Set up a Private Limited Company in China? Registration Procedure
The statistics show that more than half of foreign entrepreneurs prefer WOFE to other forms of ownership in China. Let’s take WOFE as an example to figure out how to incorporate business and make registration procedures easier.
- Choosing a field of activity for business. Some areas of entrepreneurship in China are completely or partially inaccessible to foreigners: medicine, education, telecommunications, sea and air transport, and the banking sector.
- What documents do I need to register a business?
– Certificate of registration and constituent documents of the company, certified by the Chinese Consulate.
– An official letter from a banking institution where foreign businessmen are served, confirming a good reputation and availability of funds.
– Copy of the CEO’s passport, certified by the Chinese Consulate.
– Photo and short CV of the Chinese partner.
– Eight naming options for a company.
– Information about the foreign office in China; for example, a copy of a Lease Agreement or a Certificate of ownership of the real estate.
– A detailed description of the field of activity and business plan.
- How to submit an application for new company registration in China?
The application is submitted to the authorized government bodies, particularly to the Ministry of Commerce. The review period is usually at least 2-3 months. It all depends on the city, the direction, and the scale of your deal. The approval process for registering a company can involve numerous negotiations with regulatory authorities and the payment of various registration fees.
If there is a positive decision, an application is submitted within 30 days to obtain a license to do business. The company is registered with the Administration of Industry and Commerce. The employees of the department specify the list of documents. The last step is to open an account with a Chinese financial institution. The procedure to register a company in China will be much easier if you seek help from specialists.
Taxes in China
China’s tax legislation provides for equal tax rates for both local and foreign entrepreneurs. At the same time, in recent years, there has been a significant liberalization of the fiscal sphere in the country, which is an additional incentive for investors and has a positive effect on the development of the economy.
Tax rates in China in 2021:
- Corporate income tax is 25%. Besides, small companies in China with an annual turnover of up to 500,000 RMB could pay a corporate tax of 20%.
- Dividends (interest, royalties) – 10%.
- VAT are 13 (base rate), 9, 6, 3, and 2%. In particular, the 9% rate is provided for retail trade, catering services, real estate, construction, transport, and logistics.
- Social contributions are up to 40% of the payroll.
- Property tax is 1.2% of the value of the property or 12% of the rental amount.
- Construction and maintenance of the city’s infrastructure are 1, 5, 7%.Learn more about Taxes in China in our other guides.
Business visa to China
A foreigner must apply for a business visa to China to carry out one-time or multiple trips and conduct business on Chinese territory. Local legislation provides two options:
- Visa M. A new business visa to China, valid from September 1, 2013, issued to foreigners to carry out commercial and trade activities on Chinese territory. The maximum validity period is one year, with the right to renew for 180 days.
- Visa F. Formally, visa F is not intended for commercial activities in China, to incorporate a business or something like that; it is issued for participation in scientific, technical, educational, cultural, medical, and sports events. But in fact, some entrepreneurs use this type of visa to resolve business issues in China.
Activities in China
All activities in China fall into four categories:
- Encouraged activities. These are the types of activities in which there are benefits for a company with foreign capital. For example, a privilege for the import of equipment. Reduced taxes can be similar benefits. You need to know how to set up a private limited company in China to qualify for these benefits.
- Permitted types refer to activities where enterprises with foreign capital are granted national treatment; they can work under the same conditions as Chinese companies. Permitted activities are not listed in the encouraged, limited, and prohibited lists for the company registration in China.
- Restricted activities. These are activities where enterprises must comply with specific additional requirements to establish a company with foreign investment. Such additional requirements may be, for example, restrictions on the organizational and legal form. Find out how to set up a private limited company in China and find out about the restrictions in advance.There may be restrictions on the share of foreign capital when only joint ventures can operate. It can be written that the share of foreign capital cannot exceed 50%; that is, the Chinese and foreign parties must have the same shares. There may also be a restriction to have only PRC citizenship for the head of the enterprise. For instance, this is relevant for educational institutions: if, let’s say, a university is registered as a joint venture, then only a citizen of the PRC can hold the position of rector of such a university. Therefore, it is crucial to know how to set up a private limited company in China to be aware of the restrictions in advance.
- Prohibited activities are supposed only home capital; so, in this case, to open a company in China by foreigners is not possible. For example, this can be the media or actions related to the Internet, video hosting, etc.The scope of company activity is determined by its Charter, where the founders themselves indicate the types of activities they want to conduct. There is a special classification for start-up businesses adopted by the State Statistical Office of China. It is called the Classification of Activities of the National Economy. This classification represents the activities used for economic statistics. And when a company wants to determine the types of activities that it plans to carry out and indicate them in the Charter, it can just use the classification of the State Statistical Office of the PRC as a guide. If some activity is not indicated there, mostly a new kind of activity, the company may deviate slightly from the classification. But the standard principle is reconciliation with the classification of the State Statistical Office activities. Based on this, the types of activities are indicated in the Charter and the company’s application for registration.
Milestones in the company formation in China
To create a legal entity in China, you need:
- The first thing you need is to open a bank account. The purpose of opening a bank account can be both to optimize your business and to improve your own income. A bank account will help build relationships with local corporations for further collaboration and growth.
- A clear definition of the scope and region to open a business in China. At the initial stage, it is necessary to define your company’s future field of activity clearly; indicate it in the registration documents, including the license of the enterprise. The activities of start-ups must strictly comply with those declared in the registration documents; otherwise, changes will have to be registered with the PRC Market Surveillance Authority.
- Specific conditions for the functioning of the enterprise depend on the choice of the region. For example, a company incorporated in China, registered in free economic zones, enjoys certain benefits. In some regions, a virtual office is acceptable for certain types of activity, and in others, only an actual location. Accordingly, the choice of the field and region of activity will affect the cost of service, company registration, and the project cost as a whole.
- Determine the organizational and legal form. Currently, the majority of entrepreneurs and choose a limited liability form of ownership. It can be an enterprise with only foreign capital or only Chinese capital, or a joint venture. For companies with 100% foreign capital, following Chinese law, there are several restrictions compared to companies with only domestic capital and Chinese founders.
- Develop two or more unique names for a future company. In the Middle Kingdom, the process of enterprise registering includes several stages and has permissive nature. The first step is to verify and approve a unique company name. It consists of several elements (exclusively in Chinese):
- legal form.
Names in English or any other language are not registered and are not official companies’ names.
- Prepare required documents. Depending on the founder’s citizenship, the list of documents may differ. Of course, the documents must go through all the necessary legalization procedures.
- Rent or purchase an office. When starting up a business in China or any other state, there must be an office and document confirming the availability of premises. This may be a lease agreement or another document confirming the ownership of the premises. You can find specialists who give you a piece of advice or help you find a real office (or provide a virtual one).
- Submission of documents to the registration authority. After preparing the required papers and approving the company’s name, you must contact the PRC Market Surveillance Authority. After filling out all the necessary applications and attaching the existing documents, you need to wait for the decision of the registering authority and then pick up the license and other registration documents.