How to Start Your Business in China
Qun Wang
Thinking about setting up an office in China? There are five things you should consider: business form, business scope, registered capital, application process and taxes.
A. Business Form
There are five types of business forms for foreign investors to consider when setting up an office in China:
1. Representative Office
A Representative Office is a foreign company’s branch office in China, it is not a separate legal entity from the parent company. It cannot conduct business operations in China, however, it can conduct marketing, customers service and liaison service for the parent company.
2. Wholly Owned Foreign Enterprise (WOFE)
A Wholly Owned Foreign Enterprise, usually called a WOFE, is a legal entity formed by a foreign company in China and is owned 100% by the parent company. A WOFE is a limited liability company.
3. Joint Venture Enterprise (JV)
A Joint Venture Enterprise (JV) is a company set up by 1 or more foreign companies or individuals with one or more Chinese companies or individuals. It is a limited liability company, of which the foreign ownership shall not be less than 25%. The profit of the JV will be shared by owners based on their ownership percentages.
4. Joint Cooperative Enterprise (JCE)
A Joint Cooperative Enterprise (JCE) is also a company set up by 1 or more foreign companies or individuals with one or more Chinese companies or individuals. It is very similar to a JV, except that the profit of the JCE will be shared by owners based on the Joint Cooperative Agreement, instead of their ownership percentages.
5. Foreign Invested Partnership (FIP)
A Foreign Invested Partnership is a partnership formed by a foreign company or individual with a Chinese company or induvial. A Foreign Invested Partnership can be a general partnership or a limited partnership.
B. Business Scope in China
In the US, a company may conduct “any legal activities legally allowed”. However, this is not the case in China. Chinese government tends to keep the certain areas or sectors of business away from foreign companies. This is called “Prohibited Business”. In other areas, Chinese government will allow foreign companies to participate only after obtaining permission from a Approving Authority. This is called “Restricted Business”. For all other areas, a company set up by a foreign entity can freely conduct business. The Chinese government publishes a Catalogue for the Guidance of Foreign Investment Industries (the Catalogue) every year. The Catalogue will list all the “Prohibited Business” and “Restricted Business” so you will know whether you can conduct your business freely in China. Although the current trend is that Chinese government tend to keep the scope of “Prohibited Business” and “Restricted Business” very narrow and allow foreign companies to participate wider range of business in China.
C. Registered Capital Requirements
Except for Representative Offices (RO) and Foreign Invested Partnerships (FIP), the Chinese law requires you to inject a minimum amount of capital (registered capital) into your business entity in China.
The amount of the registered capital varies from city to city and will depend on which type of business you intend to conduct in China. For example, the required capital of a foreign trading company could easily fall between USD100,000 to USD200,000.
The good news is, you can inject the registered capital in installments. In case of a WOFE, you may pay the first installment of 20% and the pay off the remainder within 2 years.
D. The Application Process
Setting up a business entity in China is much more complicated than filling out a few forms and paying a small amount in registration fees.
There are six major steps for setting up a business in China
1. Get permission from the local approval authorities, even if your business does not fall into the categories of “Prohibited Business” or “Restricted Business”.
2. Get a business license from the local bureau of Industry and Commerce.
3. Register with the local branch of the State Administration of Foreign Exchange (SAFE).
4. Register with the local tax bureau.
5. Register with the customs authority.
6. Register with the local labor department
E. Taxes
A business entity in China will generally pay three types of taxes:
1. Value-added tax (VAT tax)
The value-added tax is levied on the value that you added to the commodities you sold. The general VAT tax rate is 17%. For example, you bought a coffee cup for $5.00 and sold it for $7.00, the VAT tax you need to pay is (7-5)X17% = $0.34. If you export your products that are made in China to other countries, China, you may get a VAT tax refund.
2. Business tax
The business tax is levied on the value of the service you provided. The general business tax is between 3%-5%.
3. Profit tax (or income tax)
The profit tax is based on the value of the profit that you earn. The profit tax rate in China is 25%. You may get a reduced tax rate of 15% if you are a qualified high-tech company.
These three types of taxes count for the majority of the tax dollars your business needs to pay in China. There are also other categories of taxes which will count for small percentage of your tax dollars.
Different cities in China have slightly difference in terms of the percentage of tax rates. It is very important to have a local CPA to assist you to keep the record straight and to keep you informed of exactly how much taxes you need to pay.