Any organization wishing to do business with or in China may consider at one moment in time to establisha business entity within China. Setting up a business in China requires much time and investment and may seem complex for foreign investors. It is important to have a good plan before entering the Chinese marketand one must coordinate the entry well to avoid or minimize any disruptions to your business.
China Entry Modes
Basically, there are 3 main entry modes availableto foreign investors, which are the Wholly Foreign-Owned Enterprise (WFOE), Joint Venture (JV), and theRepresentative Office (RO). Key differences between these structures are the legal status, liabilities of shareholders, registered capital, business scope, employment regulations, and invoicing and contracting.
WFOE
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A WFOE is the most common and generally mostpreferred entry mode to available to foreign investors in the Chinese market. A WFOE is a Limited Liability Company (LLC) which is established exclusively by the foreign investor’s capital (hence “wholly foreign-owned”).
In general, there are three distinct types of WFOEs, which are the following:
- Standard/Consulting WFOE:is licensed to operate as a consulting business within the service industry.
- Trading WFOE:is licensed to conduct trading, wholesaling retailing, and/or franchising activities in China. These types of companies are required to make an additional registration at Customs to be able to import/export goods in/from China.
- Manufacturing WFOE:is licensed to manufacture goods in China. An additional requirement for is the environmental impact assessment (EPA). This needs to be completed, before you can receive your business license.
Joint Venture
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A Joint Venture (JV) is an LLC like the WFOE. AJV is a structure in which a foreign investor partners with a Chinese company (i.e. Sino Foreign JV). Generally, there are two reasons why companies want to establish a JV in China:
1. You want to invest in a restricted industry sector in which foreign investment is only permitted through a joint venture.
2.You want to utilize the network of a Chinese partner with local market knowledge and established contacts.
However, a Joint Venture means joint management, which can be difficult to manage for companies without any significant international experience. Within the Chinese corporate environment, shareholders do not always have a direct influence on the activities of the company, instead the board of directors and above all the legal representative of the company have the authority to make principal decisions. Therefore, in case of a Joint Venture, if you are expected to possess a minority stake on the board, successfully operating a Joint Venture may prove difficult.
Representative Office
ARepresentative Office is not a separate legal entity but rather a type of “branch” of the head office (“liaison office”). Although the RO does not have any registered capital requirements, a defining characteristicis its limited business scope. They are only allowed to conduct marketing & research activities for the headquarters. In addition, they are required to pay Corporate Income Tax based on their expenses, which they are unable to offset as they are not allowed to engage in any real business activities, nor are they allowed to send invoices to their clients in China.
If you wish to enter the Chinese market, please take a look at our Solutions in Corporate Services
Comparison of China entry modes
To better understand the differences between these different entry modes, we have made a comparison (see table below)of the different entry modes. Please note that the optimal entry mode depends on your business and expectations of the Chinese market, any of these entry modes could be suitable for your business in China.
Throughout our presence in China, we have successfully helped companies to enter the Chinese market and provided advice on the most suitable business structure taking into account their business requirements.
If you would like to enter the Chinese market and understand which of the structures is most suitable for your business, please do not hesitate to contact us atinfo@msadvisory.com
For more information about setting up a WFOE in China, please request our WFOE white paper here
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