China has a large market with important potential for development. The business conditions and quality of life are improving steadily and a growing number of investment opportunities become available to entrepreneurs as China continues to adjust its economic structure and change its policies.
Foreign investors in China have several options if they want to enter the market: establish a representative office, open a business in partnership with a Chinese citizen or open a wholly foreign owned enterprise (WFOE). Each of these types of companies has its own characteristics and may be more suitable for certain types of businesses, depending on the investor’s needs, plans and the available initial budget.
Business fields available for foreign investments
China is opening up to foreign investments, however, a number of business fields such as mining, health or education, do not allow for 100% foreign ownership. It is important to select a suitable business field, be informed about the conditions for investment and the laws set forth by the Chinese Government. Secondly, you should pick a suitable location in China. Popular options include the major cities and business hubs like Beijing, Shanghai, and Guangzhou. Second tier cities include Hangzhou, Chengdu or Tianjin. The chosen location can depend on the nature of the business, its logistical and transportation needs: it is more important for import and export companies or for manufacturing businesses.
The types of companies that are available for incorporation in China are the wholly foreign-owned enterprise, the partnership enterprise, the joint venture, the representative office. Investors can choose the suitable business type based on their needs and whether or not they want to share company ownership with a Chinese resident (the only option available in certain business fields).
The Chinese company needs to have its Articles of Incorporation, business license, bank account and other documents drafted or translated into Chinese. After these are duly submitted, the investor needs to wait for Government approval for his/her investment project. This is a mandatory step and, if the project is not approved, then the company cannot be registered.
Options for foreign investors in China
Foreign investors can choose to form a partnership with a Chinese citizen or open their own, fully foreign owned company. The joint venture is the partnership between a foreign investor and a Chinese resident. However, it is recommended that this option is thoroughly considered: although it often offers more opportunities in various fields, the two investors need to be certain that they share the same business goals.
The representative office and the wholly foreign-owned enterprise (WFOE) are two other options, although the representative office will only have a limited scope of action. The WFOE allows for the maximum amount of foreign business control and is thus preferred by most foreign investors. Another notable advantage is that it has no requirements for a minimum registered capital.
A different option for foreign investors who want to enter the Chinese market is to incorporate their business in the Hong Kong Special Administrative Region. While this is an autonomous territory, Hong Kong has close ties with China and is very well developed. Investors have the option to use Hong Kong as a springboard for their businesses on the Mainland.
Company taxation in China
Resident companies in China are taxed on their worldwide profits derived from the country, while non-resident companies only pay taxes on their Chinese-source income. The standard corporate tax rate in China is 25% but special, lower rates may apply for small businesses. A 10% withholding tax applies on dividends, interest, and royalties. Foreign companies that derive income both from China and from their country or origin benefit from double taxation relief. China has signed more than 100 double tax treaties with countries worldwide.
Chinese companies are required to register for tax purposes immediately after they are registered for business purposes. Additional VAT registration is required for some taxpayers, but it is not mandatory for non-resident companies.
Investing in China may seem like a business challenge for many investors. Nevertheless, the large internal market and the opportunities for rapid development with low maintenance and manufacturing costs outweigh the language and policy hurdles.
Entrepreneurs who want to open a company in China can ask for professional help from a local company incorporation specialist.