China enacted a new Administrative Regulation on the Registration of Market Entities in March 2022, removing some of the bureaucratic barriers for foreign companies. However, for anyone in the UK who is used to setting up a company online with a few clicks, setting up in China is still a complex process. From our experience of handholding clients in establishing a presence in various locations across China, it’s necessary to understand the intricacies of the process for better preparation of registering business entities.
Once you have decided that a physical presence is needed in China, there are different types of business structures that you may consider, such as wholly-owned foreign enterprise (WOFE), Representative Office (RO) and Joint Venture (JV). Each comes with pros and cons that you should consider carefully and select the most suitable form according to your China business plan, among other factors.
For example, if local RMB invoice is required from Chinese customers, then RO is not the right choice as it only allows you to carry out liaison, BD and marketing but not sales. On the other hand, a 100% owned entity (WOFE) gives you better control on almost everything but you do not have the immediate market access that a Chinese JV partner is able to provide in sectors that foreign companies are restricted. It is also worth noting that an RO cannot be “upgraded” or transformed into a legal entity and shall not be regarded as a stepping stone as such, especially if you think your business in China will expand rapidly.
While this article is written with a focus on setting up a WOFE, the procedures of setting up RO and JV is more or less similar except for different requirements on capital investment, paperwork, and post-registration operation, such as HR management.
An important section on your Chinese business license is the “business scope”, besides registered capital, legal representative name and registered address. Companies in China can only operate within the exact business scope approved by the authorities, and it cannot be easily modified after registration. Thus, you need to clearly define what the local office is set out to do. For example, if the growth plan is to expand from physical products selling to technology licensing, it would be better to specify both in the scope to reflect that. In some industries such as media, education, publishing, virtual currency mining and so on, foreign investment (and your business activities) is restricted or prohibited in China. Make sure you understand these for your industry before making the detailed plan for setting up in China.
There is usually a link between the scope of business and financing requirement, and the most common challenge to business scope comes from the local Chinese tax bureau. For example, businesses involved in manufacturing require different tax treatments than a consulting business. If the tax bureau is not satisfied with the scope of business as appeared on your business license, they can refuse to process your tax registration – a key step when completing the business registration process.
There are no more minimum requirements on the registered capital when setting up a limited company in China. However, you should plan for registering at least the amount to cover initial operational funding needs based on your cashflow. According to current regulations, if the total investment of a wholly foreign owned entity or a Chinese-foreign equity joint venture is less than or equal to USD3 million, its register capital shall be at least 70% of the total investment. Therefore, if you register too little capital, you will not be able to increase the capital investment amount easily after the registration and may end up not having enough money for your local operation. Having said that, you can have a capital contribution plan to inject capital in instalments over a period of time.
Another important perspective is that the registered capital will be displayed on your business license which forms part of your credentials showing your credibility and financial capability, for example, if you are bidding for supply contracts.
In the circumstances of setting up RO, no registered capital is required.
While Shanghai and Beijing remain most popular locations for many multinationals to set up their first office in China, many other cities now such as Shenzhen, Guangzhou and Hangzhou offer good alternatives in terms of investment-friendliness, government efficiency as well as talent pool. There are other factors to consider too. You may want to be close to your customers in a large country like China. Some quick research will help you identify the locations of key players in your industry. If you have plan to set up your own factory in China, then you could compare pros and cons of a few cities in China, because local development zones provide various incentives for manufacturing plants. But if R&D is your focus then the choices may be more restricted due to the availability of the types of technology talent you want to hire and retain.
Requirements for company setup vary slightly by cities too. We are currently helping clients to set up RO and WOFE in cities including Shenzhen, Shanghai and Tianjin, and noticed some differences in paperwork.
Opposite to what many people may expect, a RO still needs a physical address and if you choose to go for a residential address, then any valid lease certificate needs to show the property is permitted for both residential and commercial use. If you want to save money by using an address of a Chinese partner, the regulation stipulates that you could only use their address if you have a valid lease agreement signed with their landlord, or if you are able to provide a letter of authorisation from your partner or their landlord as the owner of the property.
Last but not least, you must have a fully-functional management board for your China entity with roles including Legal Representative or legal person (LR), Director(s), General Manager, Supervisor (s), Finance person-in-charge. While LR will essentially have the full responsibilities to the company, cash, and capital with full civil, administrative and criminal liabilities, there are restrictions to what multiple roles one person can be within the structure. For example, the General Manager can be the Legal Representative OR Finance person-in-charge, but not both. There are also rules about who can be Supervisor eg legal person cannot be. Therefore, the management structure of a WOFE shall have no less than three individuals.
There are no residence or citizenship requirements to these roles. However, Personal ID certificates shall be submitted and it is important to keep these certificates unchanged during the establishment process.
If you are registering an RO, only the representatives need to be appointed, and up to four representatives are permitted. But you can have unlimited other roles in the RO, such as marketing manager and tech support. Although due to the tax inefficiency of an RO, companies tend to keep the number of RO headcount to just a few before looking at setting up a legal entity.
Generally speaking, it takes about 6 to 8 weeks to receive your business licence after submitting the application. The time-consuming part is actually in preparing all documents on the checklist, and other things to be sorted out before going for application, such as deciding a Chinese name for your China entity or office.
Documents to be enclosed when submitting the application form include notarised and legalised copies of company registration certificate, power of attorney, copies of identities, and beyond. Take the power of attorney as an example, it is to authorise a director to be the authorised signatory and sign relevant legal documents on behalf of ALL shareholders. It could take considerable time to get all the directors sign on the same paper before it is ready for notarisation. Electronic signatures on the application documents are not acceptable in China and when there was no designated independent signatory appointed in previous board meetings, documents, or in Articles of Association, you can then imagine how long it may take to post the documents back and forth if you have a board of five or more directors in different locations. It is worth to mention that the power of attorney shall include both executive and non-executive directors.
The application paperwork needs to be completed accurately and translations of the required documents have to be proofread by lawyers to avoid potential risks of misunderstanding. Submitting inaccurate materials may lead to registration failures.
In terms of document preparation to open bank accounts in China, some banks require the organization chart of shareholders in order to trace the ultimate beneficiary of the WOFE. While, proof of business existence and assets status must be submitted for RO.
Table: Steps to Establish Your Presence in China
Local Chinese tax bureaus require legal representative and finance person in control to have on-site real name verification to complete the tax registration. So a trip to China is inevitable and this step cannot be arranged in other locations than the registered district, however, an extension is possible if agreed with the tax bureau.
China has been promoting the use of electronic chops and electronic business licences since 2020. After the legal and finance representatives complete on-site verification the company can obtain e-business licence, e-chops and access to the online tax platform, which may be used where the counterparty accepts electronic formalities.
Most banks in China requires the legal representative to complete on-site ID verification. However, there are now a small selection of international banks that accepts verification at its branches in the country where the shareholding company of the China business is located in. There are also banks who accept video verifications but requires original ID despatched to China.
To set up a China presence successfully and efficiently, businesses are advised to get all-rounded support from experienced professionals instead of just finding someone in the country that only does the “legwork”. It is also important to keep in mind that your China operations start right after the registration, and consistency is needed on recruitment, tax, payroll and accounting. The China business needs to follow all the regulations and procedures to operate from Day 1.
Crayfish provides a holistic one-stop solution for companies to enter the Chinese market or expanding its China operations. Our UK based account manager will handhold every step of your business license registration, and together with our China local service partners, we will also help you with smooth transition of local operations.