Company Incorporation In China: A Guide On The Benefits And Required Steps

How to incorporate a company in China is a topic requested many times by our readers.

China is an ever-changing country and rules about company formation, especially related to foreign businesses, changed a lot in times. China is incentivizing foreign investment in the country that can help the country to grow.

But what are the benefits and steps required to incorporate a business in China? 

We hope that this article will help you to understand more about the economical situation of China and what are the benefits and disadvantages of registering a company in China.

Overview of China’s economic situation

China’s soaring economy has been bringing confidence to investors for decades. Especially after the year 2000, few would disagree it is a leading choice for global business expansion.

Countries with a high GDP either can’t hold back their unemployment or can’t stay independent from trade in the overseas markets. Judging from most indicators/indexes, it is a top-tier market.

Unemployment rate from 1999-2020, World Bank

For a country of 1.4 billion people, low unemployment and independence in trade together mean the country has a relatively complete industrial chain.

Producing chemicals? You’ll find all facilities you need in China. Selling coffee? You’ll find all kinds of people to hire in China. Consulting? Shoemaking? Disney Land visiting? Come to China.

Considering opening a business in China’s enormous domestic market? You will see the power of an unprecedentedly well-developed infrastructure, and much more.

Trade Volume from 1999-2020, World Bank

Benefits and disadvantages of company incorporation in China

Establishing a company in China can bring many benefits to companies, but we want to advise the readers also about some of the disadvantages that registering a company in China can bring.

Below we consider the benefits and disadvantages for both WFOE and Representative Offices, the two main kind of companies used in China.

WFOE benefits:

• The business is allowed to engage in profit-making activities
• You can directly hire staff in China
• It is a perfect way to protect your trademark in China
• It can be formed without a Chinese partner
• You are able to send funds overseas
• Long term licensing (15 to 30 years)

WFOE disadvantages:

• Incorporating a WFOE can take several months and a lot of bureaucracy is involved
• Changing business scope can take several months
• Lack of local expertise to handle the company registration

Representative office benefits:

• No registered capital is required
• Low-cost entry to the market
• Hiring and HR is simple, but it must be done through a local HR agency authorized by the government
• You can start to operate in around 2 weeks

Representative office disadvantages:

• Only non-profit making activities are permitted (market research, networking, etc.)
• You cannot send profits out of China
• It cannot engage in a contract with clients or issue invoices

Company formation rules in China

Here comes the hard part. Although being listed in China is usually way more beneficial than being listed in the US, the rules in China are strict. The company formation process sees the same situation.

Entering 2020, China adopted the new Foreign Investment Law, abolishing 3 old acts that had a general reputation of restricting foreign capital greatly.

The Foreign Investment Law introduces a pre-establishment national treatment, which allows foreign investors to register a company without the hassle that has scared many in the past decades.

Below you can find a list of aspects to consider before registering a company in China.

Negative lists

Something like investments in 30 businesses spread through 12 industries is forbidden in China, so, generally you either won’t get a business license for jobs that are regarded critical to the national economy, or the proportion allowed of your holdings is limited to usually less than 49%.

Examples for such jobs include breeding of new maize varieties, car making, and construction of nuclear power plants, etc.

Furthermore, there are 2 lists usually brought up by people. One restricts investment in Pilot Free Trade Zones (FTZs), and one does that in other areas. The former is slightly less tight, which is one of the many reasons for you to choose FTZs for you company’s location.

Another good news is by the dawn of 2020, there are FTZs in all coastal provinces and the big cities, and that should cover most investors’ needs. With the control over foreign capital loosening year by year, China is gaining an increasingly good reputation.

More precisely, there are 3 more lists, which overall makes 5. In this article, we show you more details about these.

Business license

This is a standard business license needed to operate in China, and this article will give you an introduction to all elements present in the license, as well as insights to keep in mind when applying for a Chinese business license.

Business scope

This is a list of some of the possible business scopes:

• Corporate management consulting;
• Computer software, hardware development, and technical services;
• Marketing management;
• Social insurance (security) agency;
• Human resource management consulting;
• Technology development by undertaking service outsourcing;
• Business information consulting;
• Corporate image planning;
• Corporate marketing planning;
• Real estate marketing planning;
• Automobile brokerage;
• Landscaping maintenance;
• Human loading and unloading;
• Business registration agency;
• Business agency service;
• Advertising design;
• Agency;
• Information consulting services;
• Independent business activities with business licenses.

You are likely to need a minute to make sense of all the phrases. But it is recommended to make sure you’re putting every kind of business you’re doing, for risk management purposes. If the government finds anyone operating a business outside the registered scope, it imposes a fine or suspends the licenses. Also, it can take months to register a change of business scope.

A tip: Since the scope is directly related to what the company does, sometimes it has to apply for approval from certain bureaus before it legally includes some operations into its business scope. In other situations, like with the ICP (Internet Content Provider) license, you can get your license first, ask for approval afterward.

If you need details, usually there are public documents online to refer to, or hotlines you can consult. But you might as well leave it to your legal team or hire an agency to handle all this.

Required documents

Required documents to register a company in China are:

• Registration Information: Including but not limited to the proposed Chinese name list, registered capital, registered address, business scope, shareholders
• Certified Notarization documents for Business License of the investor
• Translated Certified Notarization documents for Business License of Investors
• Legal representative passport
• Finance manager passport
• Supervisor passport
• Liaison person passport
• Controller of the investor passport

Tax registration

Taxation in China is administered by the State Administration of Taxation. This government body establishes the tax laws in China and adjusts tax rates for all companies. The handling and collection of taxes, however, is dealt with at a local level by its branches.

In general, most taxation schemes apply nationally but there are often cases where regional differences can arise. These can occur for several reasons, for example:

• Tax incentives in China that apply only to specific regions or industries (for example lower CIT rates);
• Policies and changes that are first tested/trialed regionally before expansion nationwide (for example recent VAT reform);
• Special tax rates or policies which apply to Free Trade Zones.

To many companies, the tax system in China can appear complex and confusing. One of the main reasons for this is that the rules and tax rates change frequently.

This comes partly from a rapidly changing business environment (and a modern taxation system that only really started in the 1980s), and partly from the government’s ongoing desire to improve the market for both domestic and foreign companies in China.

Progress has already been made in this area of market improvement through overall tax reduction in recent years. For example VAT reforms carried out since 2012 have to date delivered overall tax reductions of approximately 2.1 trillion Yuan.

Steps for company incorporation in China

Incorporate a company in China is a process that requires some time to complete. There are documents to fill in and steps required to compliantly incorporate a company.

Below you can check the steps required:

1. Apply for name approval and registration. Names must be appropriate for the company and branding but also meet specified requirements.
2. Rent office space as necessary. Before an application for WFOE incorporation, it is necessary to have a minimum 1-year lease for company space in the city of registration.
3. Online registration via MOFCOM. This provides the approval required to set up and license the WFOE.
4. Apply for a “5 in 1” business license from the local Administration of Industry and Commerce (AIC). One single application is made for licenses covering the main business license, tax registration certificate, organization code certificate, social security registration certificate, and statistical registration certificate.
5. Carving chops for the new chops, or seal, form the official representation and authentication of the new company.
6. Opening bank accounts. A WFOE will need at least two accounts – a local currency account and a capital contribution account – normally with the same institution.
7. Further registrations with local authorities. WFOEs must be registered for VAT payments with the local tax bureau. Also, a trading WFOE will need to carry out customs and import-exit registration.
8. Issue contracts and complete the necessary registration for employees. As a WFOE can directly hire staff, contracts will need to be issued for new employees, or transferred across from agencies if hired under a previous agreement or Representative Office structure.

Post company incorporation services in China

Accounting, payroll, tax, these words kick in after the registration. They see no difference from those in the western countries in terms of high standards since China has adopted a market-driven system.

At the beginning of every year, your company has to submit the annual report for the previous fiscal year, which consists of:

1. Profit determination
2. Revenue
3. Costs
4. Capital assets
5. Liabilities
6. Amount of initial capital
7. Salaries
8. Cleared taxes or taxable loss carried forward
9. Tax credit
10. Information on closely related companies (i.e. subsidiaries)
11. Exact information on social contributions like rent, sickness benefit, social welfare, unemployment benefit, housing allowance, etc.
12. If applicable: evidence for tax exemption or tax reduction

There are special policies in this mysterious land, like Fapiao, Special VAT Fapiao, and registration process with the tax authorities.

This is where Professional Employment Organizations (PEO) are especially helpful. For large groups with thousands of employees in China, they probably have their own accounting team or accounting firm.

But for most companies, handling taxation by themselves won’t be the most cost-effective strategy, especially when company formation seems tedious to you.

Another important aspect to consider after incorporation is the one related to the hiring of employees to work for your company. While for a WFOE, it is possible to hire employees directly and manage all the HR-related aspects, for Representative Offices, the situation is different, and companies have to go through an HR agency to compliantly hire staff to work for the office in China.

An important aspect is also the one related to law compliance. For many small and medium enterprises, without the resources to deal with employment, tax, salary laws, and regulations in China, a PEO is probably the best solution. In this way, foreign businesses can outsource HR and payroll, so that the PEO takes care of all the employment liabilities while the business focuses only on the growth in the country.

The below table shows you 4 reasons as to why PEOs are a good solution compared to Rep Offices and WFOE:

Conclusion

Register a company in China can be troublesome if you are not 100% sure of the law and regulations.

Using a local agency is probably the best option to avoid risking losing money and time to incorporate a company.

We at FDI China offers company formation services for both WFOE and Representative Offices, with the possibility to take care of HR, payroll, tax, and accounting for your company, so you can focus on the growth of your business in China.