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Doing business in Shenzhen is an objective for many companies and entrepreneurs that want to enter China.
Shenzhen has become one of the best places in China for setting up a new business, especially in the technological industry.
The city has also produced many influential private companies, including telecom equipment giant Huawei.
Shenzhen barely avoided an economic contraction in the first half of this year, as a strong rise in investment offset weaker consumer spending and exports.
As many places in China, it is not easy to completely understand how to effectively start a business and how to reduce the costs of setting up a company.
In this guide, we want to give you an overview of the possibilities and how you can start doing business in Shenzhen:
- Introduction to Shenzhen
- Current economy and top industries in Shenzhen
- Business opportunities in Shenzhen
- Top startups in Shenzhen
- Benefits of opening a company in the Shenzhen Free Trade Zone
- How to open a company in Shenzhen
- Can foreigners open a company in Shenzhen?
- How to start a business in Shenzhen without a legal entity
Introduction to Shenzhen
Shenzhen is located in the southern tip of the Guangdong province adjacent to Hong Kong and was established in 1979 by Deng Xiaoping for experimenting with the market reform.
This city is commonly known as Hong Kong’s backyard as it overlooks Hong Kong and neighbors Kowloon. It used to be a small fishing village with only 30,000 residents in the starting. At present, it has a population of more than 15 million people.
Shenzhen has replaced Hong Kong in terms of population density having an average of 7,500 citizens per square foot.
Shenzhen has grown exponentially in the past few years becoming one of the most successful special economic zones (one among many cities along the coast of China which were welcomed for foreign investment, expertise, and technology through joint ventures).
It is one of the best cities and regions in Asia for setting up a company. The city also received financial help from Chinese banks that helped them to upgrade the infrastructure such as building schools, roads, houses, and power and water supply for the growing population.
In 1980, the city witnessed exceptional growth because of the investment of a large amount of foreign and domestic capital. The special economic zones witnessed higher standards of living and wages as compared to the rest of China and a huge number of professionals and workers entered the city to work in various factories producing chemicals, electronics, textiles, processed food, etc.
This rapid growth became to be known as the Shenzhen speed and its success lead the Chinese government to convert more coastal cities into special economic zones so as to promote modernization.
In 2019, Shenzhen’s gross domestic product (GDP) totalled 2.69 trillion yuan which was at the third number after Shanghai and Beijing. In terms of growth in GDP, Shenzhen exceeds Zhuhai and Xiamen and has been considered as one of the most economically active cities in China. The city’s super economic development is justified by the GDP growth and has greatly benefited from the reforming policies.
Current Economy and Top Industries in Shenzhen
Frequently referred to as China’s Silicon Valley, Shenzhen is one of the fastest developing and growing cities in China. Shenzhen has been transformed into a major business center from a small fishing village as it is backed up with flowing capital from neighbor Hong Kong. Many people migrate to this city in search of work to have an ample amount of benefits from its investments.
Shenzhen is one of the major cities serving as a developing machine in the region as per the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).
In 2018, out of Shenzhen’s GDP, four percent was invested in research and around 11,000 high-tech companies are based in the city. It is considered as the GBA’s technology and a hub for all the research and development.
In the same year, China had the fourth largest airport and the container port and accounted for 38% of the total export of Guangdong and 10% of the total export of China.
Shenzhen is considered a global market for several high technology sectors such as financial sectors, industries, and manufacturers, logistics, metamaterials, etc.
Some of the leading companies which are headquartered in Shenzhen include Tencent, IBM, Huawei, ZTE, Baidu, along with financial institutions such as HSBC, China Merchants Bank, Standard Chartered, and Citigroup.
In 2010 Shenzhen’s Special Economic Zones were expanded from 4 districts to the whole city. Enterprises that come under the SEZ of Shenzhen take benefits of the wide range of exemptions in tax, loans, grants, and also enjoy the reduced rates. Following are some of the policies that are implemented in Shenzhen related to the tax benefits:
- Manufacturing companies and high-tech enterprises enjoy three to five years of tax exemptions
- Foreign banks are exempted from tax for five years
- Imported material used for end products is exempted from value-added tax (VAT) and tariff
- Both locals and foreigners enjoy equal living rates
- Protection for production from permits and state quotas
- Goods that are made and sold locally are exempted from VAT
Business Opportunities in Shenzhen
The transformation of Shenzhen from a small fishing village to a great hub of electronic manufacturing is no less than magic. Chinese President Hu Jintao in 2010, called the city a “Miracle” on the 30th anniversary of the developing economic reforms.
At present, Shenzhen is one of the fastest-growing cities in the world estimating about 15 million residents. The former angler’s paradise along the Pearl River Delta is home to the Shenzhen Stock Exchange, many massive tech firms, and startups. Consider as the Silicon Valley of China, Shenzhen is a start-up hub for various industries, such as electronics, biotech, healthcare, manufacturing, pharmaceuticals.
If you’re a start-up for manufacturing a product, you won’t be able to find another city manufacturing your goods cheaply and in a timely manner. Shenzhen can be one of your next homes if you are willing to establish a footprint in the world’s most populated country.
Top Startups in Shenzhen
Shenzhen is now a top startup city in China that is growing rapidly. It used to be the place to build and ship products and it is now becoming one of the cities producing high-quality technology and staff to produce and sell products.
The top Shenzhen startups are observed globally for any upcoming developments.
The following are some of the startups that are growing massively:
Shenzhen is the home to the company that is behind WeChat. Tencent is now one of the biggest internet companies in the world. It offers internet, mobile, telecom, and other advertising services.
OnePlus is a technology startup that is providing the market with affordable quality smartphones and bringing innovation to the technology sector.
DJI is a Chinese company that produces commercial and unmanned aerial systems. It is a leader in the commercialization of drones.
It is a hardware innovation platform that helps businesses to upscale from prototype to mass production.
Makeblock, an open-source construction platform, which provides mechanical parts and electronic modules to construct robots.
- UBTech Robotics
UBTech Robotics is a humanoid robotics company that is among the top Shenzhen startups.
Benefits of Opening a Company in the Shenzhen Free Trade Zone
Shenzhen is smaller in size as compared to Shanghai and Beijing, but the city is set to expand the economy to ¥2.6 trillion by the end of 2020.
There are four state-level development zones consisting of the Shenzhen trade free zones:
- Shenzhen Yantian Port Free Trade Zone (Shenzhen Yantian Port FTZ)
- Shenzhen Futian Free Trade Zone (Shenzhen Futian FTZ)
- Shenzhen Shatoujiao Free Trade Zone (Shenzhen Shatoujiao FTZ)
- Shenzhen Yantian Port Bonded Logistic Park (Shenzhen Yantian Port BLP)
The following are the points highlighting why it is profitable to do business in the Shenzhen Free Trade Zone:
- Lower rate of taxes
There are a lot of financial advantages and tax breaks that make doing business in Shenzhen much easy and profitable. While the national average of corporate tax in China is 30%, Shenzhen Free Trade Zone offers a corporate tax of 16.5%.
- No duty on warehousing
This means there is no import tax for storing your imported goods. Hence, you are not required to spend hours of your time figuring the import tax and pay for the goods to be delivered in Shenzhen Free Trade Zone. Companies can directly get their goods into the mainland and ship them directly to their respective warehouses. There is no requirement for import tax.
- Backed by the State Government
Chinese Government attracts a lot of foreign investors by providing incentives and grants. For the companies operating in Shenzhen Free Trade Zone, special ‘bonuses’ and ‘grants’ will be provided to continue doing business in the country. Such monetary incentives are remunerative enough to encourage the companies/investors to operate in Shenzhen Free Trade Zone.
How to Open a Company in Shenzhen
Shenzhen, considered to be the silicon valley of China, is a major hub of startups.
It is a good choice for companies that are specialized in computer software, IT, microelectronics and components, video and audio products, electromechanical integration, and key projects of light industry and energy.
But other industries like pharmaceuticals, biotechnology, and medical equipment are also on the rise in Shenzhen.
When setting up a company in Shenzhen, there are numerous things to consider and hence it is important to seek appropriate legal help.
Registering a company in Shenzhen can also be referred to as Shenzhen company incorporation.
The following are the 4 steps needed to be taken while setting up a new business in Shenzhen:
- Pick the right location/district
You need to pick the right location for your business. There are 7 administrative districts in Shenzhen – Futian, Luohu, Nanshan, Baoan, Longgang, Longhua, and Pingshan. Hence, it is really important to familiarize yourself with such a big city so as to have numerous options.
- Find a representative
A representative is important and can help you while registering your company. This help could be with necessary documents and important information that is required.
- Trademark your intellectual properties
This is a really important step as a grievous mistake you could make is not to trademark your intellectual properties before diving fully into your business. You need to know the agency that can help with this.
- Hire a qualified staff
This is another important step as the person should be knowledgeable enough to operate the business. Again, you need to know the agency who can help with this as the expertise of staff from young & energetic to experienced will vary with industry type.
Can Foreigners Open a Company in Shenzhen?
Once your business goal is set and everything is planned and you decide to deliver a promising product in China’s market, foreigners can certainly set up branches in China which should be in accordance with the Companies Act and the Commercial Code.
Also, the important thing to note for the investors is that documents of the parent company are necessary for establishing a branch in China.
In China, you have four options to choose from for your company setup:
- Joint venture
- Representative office
- Wholly foreign-owned enterprise (WFOE)
- Umbrella company
Deciding to set up your business as a joint venture will have you to declare that you will run your company with a local partner from China. In this setup, the company is controlled by both foreign and Chinese partners.
The representative office is relatively simple to open than establishing a WFOE but having its own set of limitations as it doesn’t include the option of yielding the revenue as it is strictly for market testing or promoting the product or the service. Setting up an RO option does not yield any revenue because it is strictly for marketing and communication.
WFOE businesses take longer to set up than other options. The only way of paying expenses for such company type is to send money from abroad. Investors need to note that even though RO does not make any profit still they need to pay taxes which is usually calculated as a percentage of the company’s expenses.
A WFOE is a legal entity that is completely owned by foreigners. LLC (Limited Liability Company) is one of the most common type chosen by the majority of foreign investors to be opened in China. A WFOE is free to perform any kind of profit-making activity, pay tax in China and all the profits earned can be sent back to the home country of the investor.
An umbrella company, also called PEO/EOR, is a company that helps in hiring employees for your company in China, or in other terms, it hosts employees or teams for you. Umbrella companies do not actually create structures in China.
How to Start a Business in Shenzhen Without a Legal Entity
The rules and regulations for foreign companies to do business in China are considered to be strict, depending on the type of industry.
But it is possible for foreign companies to do business in China without WOFE or another type of entity.
Such companies can, for example, sell and import goods into China, have their products manufactured in China, sell their services in China.
There are still various issues that should be considered and which can make doing business in China complicated.
These issues are explained as below:
- Issue 1: a local entity is required for issuing ‘fapiao’
When selling goods and/or services in China, local companies need to issue a ‘fapiao’ which is an official Chinese invoice. This document is important since, without this, local companies won’t be able to deduct Corporate Income Tax and deduct input VAT from their output VAT.
- Issue 2: employees can only be hired by a local entity in China
Both Chinese citizens and expats are allowed to work only for local companies registered in China.
- Issue 3: it is difficult to receive payments from the client without a local entity
Since there are strict Foreign Exchange controls in China and all exchanges in China are administrated by the State Administration of Foreign Exchange (SAFE), if you don’t have a local entity, it is complicated to receive payments.
The Solution to the Above Issues
One of the proposed solutions is the setting of a WFOE in China. In this way, your company can have a local entity and also conduct profit-making activities.
But companies can make use of another solution called PEO or employment outsourcing.
This is probably the best solution in terms of costs and time spent to start the business in Shenzhen. And this is a solution that does not require you to have a local entity in the country.
Basically, investors can rely on local experts in employment and labor law to legally hire the employees on their payroll. These employees will continue to work for you, while the PEO company will manage all the HR and employment relationships.
Employment outsourcing is the most reliable, rapid, and compliant way to have employees hired to work for you in Shenzhen.
Such PEO agencies act as an employer of record (EOR) for your employees directly hiring employees to work for you on your projects.
To conclude, Shenzhen is the best place and has the best business environment for doing business in China.
The number of market entities in Shenzhen crossed 3.06 million in the past years and therefore becoming the only city to cross the three million mark in China.
Setting up a business in Shenzhen is a huge project in itself and many finances and time is required to be consumed to reap the benefits of a rapidly growing city.
We at FDI China can help you to start a business in Shenzhen in a quick and low-risk way. Our market entry solution will allow you to start a business rapidly, without having a local company.