China is being considered one of the big potential markets in the world.
As a foreign investor, starting a business in China is not an easy thing considering the difference in politics, language, culture, etc.
This article gives a guide to foreign investors in terms of the important things they should consider or understand before they officially start their business or invest in China.
Understand If You Need To Set-up A Company In China Or Not
For most of the foreign investors, when they are thinking about an investment or starting a business in China, they think of setting up a company in China to begin.
Company formation in China is quite complex and time-consuming as it involves a lot of formal documentation that could take months to be completed by foreign investors.
Even after the company establishment, foreign investors need to complete all the tax declaration on time to ensure legal compliance.
Therefore, establishing and maintaining corporate operations in China is also not an easy task. Many foreign investors engage a local service provider who can assist them in handling the corporate formations along with dealing with the tax & accounting issues since they are not familiar with the local policy.
On the one hand, where establishing a company is not easy, closing a company, on the other hand, involves even more complexities than the opening.
Many foreign investors might think of closing their company just after a few months of operation due to company losses, but closing down business in China is not so easy as simply stopping all the operations and abandoning the company.
Therefore, foreign investors should carefully consider the point if they really need a company set up in China to start their business or not.
Before choosing a legal structure, one should think about the different alternatives that exist.
For the initial stage, when you just want to test the China market for conducting market research, hiring employees through a local PEO/EOR agency in China without the need to establish a legal entity is the most viable and cost-effective method to enter the market.
If you are interested in selling your products directly in China, you can then consider setting up a company in the country.
Setting Up A Legal Entity in China
Once you decide on setting up a legal entity in China, you should understand the different legal structure that exists to get your business running in China.
Below mentioned are the 5 types of entity in China:
- Wholly owned Foreign Enterprise (WFOE)
- Representative Office (RO)
- Contractual or Cooperative Joint Venture (CJV)
- Equity Joint Venture (EJV)
- Foreign Invested Partnership Enterprise (FIPE)
Among all, WFOE and RO are the most popular entity types among foreign investors because of the flexibility and the ease of operations they provide.
Below discussed are the details and guidance of these two-entity types.
Wholly Foreign-Owned Enterprise (WFOE / WOFE)
A Wholly Foreign-Owned Enterprise is a foreign-invested limited liability entity that is legally entitled to carry out all the operations similar to that of a normal company. A WFOE is more beneficial than RO due to its well-organized structure, expandability, and flexibility. A WFOE is more advantageous as it allows you to issue invoices, open bank accounts, apply for import and export licenses, engage in funding, hiring employees, etc.
Representative Office (RO)
RO serves the basic purpose of market promotion and liaison for foreign investors in China. The specific functions of RO include technology exchange, target market research, and product promotion, offering assistance to the overseas parent companies for operating in Mainland China, and the operational nature of business liaisons.
However, RO holds no legal rights of its own and doesn’t possess complete economic functions to conduct commercial activities. RO in China is not allowed to sign contracts with customers or suppliers using its name, to hire staff directly, to open an LC account in a bank, to request the qualification of a general taxpayer, and to apply for an independent import/export license.
As far as the hiring is concerned, RO shall engage a licensed HR agency to hire Chinese employees under labor dispatch services. For expats, the overseas parent company can dispatch the expats working for the RO as the chief representatives.
Comparison between RO and WFOE
| Representative Office (RO) | WFOE | |
| Function | Market research or other non-profit activities | A fully functioned entity, capable of conducting any business within the registered business scope |
Registration administration | City level | District Level |
Employment | Not capable of hiring | Fully capable of hiring |
Bank account | Only to receive payment from the parent company to maintain its operation | Fully functioned bank account, capable of receiving and sending payment to oversea’s or domestic account |
Entity status | No legal entity, cannot sign any business contract under its name | Fully functioned legal entity |
Tax status | As long as it is operating, tax needs to be paid | If there is no business, the tax does not need to be paid |
Time duration | Same duration | Same duration |
Process for company setup in China
Below mentioned are the general steps and documents that are needed to incorporate a legal entity in China.
It is important for foreign investors to note that the documents may vary from one city to another and therefore, it is highly advisable to engage an experienced local service provider or law firm who can handle the setup.
Also, extra documents need to be supplied in case of the special license required in a specific industry.
- Apply for name approval and registration
- Rent office space as necessary
- Online registration via MOFCOM
- Apply for a “5 in 1” business license from the local Administration of Industry and Commerce (AIC)
- Carving chops for the new company
- Opening bank accounts
- Register under tax authority
- Further registrations with local authorities. Special licenses are required to obtain before doing business in specific industries
- Open company social insurance and housing fund account
- Issue contracts and complete the necessary registration for employees
Documents required for WFOE
Below you can find the documents required to set up a WFOE in China:
- 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
Starting a Business in China Without Setting Up a Legal Entity
As mentioned before, foreign investors can also choose to do business in China without setting up a WFOE or RO in the initial stage of entry into the Chinese market.
For such a scenario, companies can hire employees through PEO/EOR service to hire staff for conducting market research, marketing, sales assistance, or client assistance to their overseas entity.
This is a cost-effective and smart way for foreign investors to enter the China market in the initial stage.
Through PEO/EOR agencies, employees are hired and managed on behalf of the company, and everything from payroll setup, drafting contracts, and legal matters are handled by these agencies so that foreign companies can access and test the market in a flexible and fully compliant manner.
While setting up legal entities in China may require a great deal of time and investment, labor dispatch and PEO solutions are the best alternatives and the most popular options for hiring local employees in China as it requires minimal cost and flexible hiring process.
After a couple of months of operating successfully in China under this model, foreign companies can then choose to set up a WFOE in China; or they can leave the Chinese market by terminating these employees through the HR agency if they feel the business cannot survive the market.
Since both hiring and termination are handled by the HR agency, it gets very convenient and flexible for foreign companies not only to enter but, if required, to leave the Chinese market as well.
Understand China Hiring Practice
No matter you decided to set up a company in China or hire employees through an HR agency, you should also understand some important hiring practices in China to ensure that your hiring is compliant with the local regulations.
Below mentioned are some of the important points that foreign employers should understand.
Sign Written Labor Contract
When it comes to hiring employees in China, the employment/labor contract is the first priority which should be in written and signed with each employee in a timely manner.
The employment contract must include the below-mentioned information. In the case of an expatriate employee, it is suggested that the contract should be bilingual (English and Chinese):
- The date of contract signing/time of contract;
- The registered name of the employer, registered address, details of its legal representative or supervisor, and signature;
- The name of the employee, permanent and temporary address, valid identity card details, and signature;
- The term/duration of the employment contract;
- The job description, probation period, and work location;
- The working hours, daily breaks, working days, annual holidays;
- The compensation and benefits of the employee;
- The social insurance information;
- Employer expectations with regard to the ‘quality’ of services;
- The non-disclosure of information or non-competition clause;
- The clauses which may lead to termination of employment or discontinuation of services;
- Information about relevant labor protections, a favorable working environment, and protection against occupational hazards.
Cost for hiring employees in China
It is vital to understand how much you need to pay for hiring an employee in China. As presented below, the structure of your monthly employee hiring cost should be very clear and concise.
Note: “ER” refers to employer and “EE” refers to the employee
Our China payroll calculator tool below can help you to have an estimate of the total employment cost of your employees in China.
Mandatory benefits, social insurance, and housing fund
The hiring cost of an employee in China may generally increase 35-40 percent more than the employee’s gross salary because of the mandatory benefits.
China’s Social Security System consists of 5 mandatory insurance schemes (pension fund, medical insurance, industrial injury insurance, unemployment insurance, and maternity insurance) + a housing fund (only applicable to Chinese employees).
In China, mandatory benefit contribution policies are very complicated with each province, and cities having their own contribution policies and bases.
As an HR company, especially the foreign ones, should be very clear and stay updated about the local policies where their company has the presence.
China’s social security law was promulgated by the central government, but its administration and specific details are governed by local authorities.
For instance, for each benefit, the employee and employer contributions rates and base differ as per the local jurisdiction and are subject to annual changes and reforms.
National holidays
Employees are entitled to the holidays as mentioned in the below chart and the employer should adhere to the same.
Currently, seven official public holidays are observed in China every year. The detailed holiday periods are adjusted every year.
Annual leaves
Although most of these leaves are mandatory, the employer always has the right to grant more leaves or vacations in the company’s policy.
However, the employer shall know that once it is recorded in the company’s policy through proper procedure, the stated additional leaves or other benefits will be mandatory.
The following are the annual leave based on the working period of the employee:
- Cumulative working years 1-10 years: 5 days annual paid leave
- Cumulative working years 10-20 years: 10 days annual paid leave
- Cumulative working years more than 20 years: 15 days annual paid leave
Probation periods
If an employment contract has a term of no less than 3 months but less than 1 year, the probation period may not exceed 1 month.
If an employment contract has a term of no less than 1 year but less than 3 years, the probation period may not exceed 2 months.
If an employment contract has a term of no less than 3 years or is a non-fixed term, the probation period may not exceed 6 months.
An employer may stipulate only one probation period with one employee. A probation period shall not be stipulated in a project-based employment contract or an employment contract with a term of fewer than three months.
How can I hire expats to work in China?
Expats are only able to legally work in China after obtaining a work permit and a residence permit.
The new work permit policy in China categorizes the work permit of every legally employed expatriate in China into type A, type B, or type C as per the government’s new grading system based on talent points.
This new grading system will rank different perspectives of the candidate like education, Chinese language proficiency, salary in China, length of work experience in China, etc.
Trademark Registration in China
Registering trademark in China is a key legal step for foreign companies since China acknowledges the trademarks registered in its own jurisdiction.
In the absence of registering the trademark in China, the company can lose the infringement claims, no matter how legally they have been selling goods in other countries under the same brand.
Having a trademark protects the business from counterfeiters and fake suppliers.
Defining trademark in China
Trademark is used to identify the particular use of goods or services, which allows consumers to differentiate between the goods from other producers in the market.
The following aspects must be fulfilled to be eligible for trademark registration in China:
- The mark must be legal and should not represent the name/flag of the state or any international organization;
- It should be distinctive from others;
- It should be different from the nature of the services and goods and therefore cannot be functional;
- It should be available for registration among the online database that can be searched for all the existing trademarks.
Steps for trademark registration in China
Below mentioned are the steps to be followed for the registration process:
- Filing the application with the China Trade Mark Office (CTMO) or through the World Intellectual Property Organization (WIPO);
- Choosing the product and the service subclass as China’s international classification of goods and services dived the classes further into subclasses. This allows the same trademark to be registered by different companies in each subclass if they are not similar;
- Registering the trademark in Chinese characters as the trademark of foreign companies in their native language will not protect them against infringement in China.
Different Taxes Faced by WFOEs in China
The China tax system for foreign companies is not straightforward and is subjected to change frequently.
But it is very important for any company operating in China to understand – both to better plan business in the country and to comply with legal requirements.
There are two main types of taxes that apply to companies doing business in China:
- Those related to company income/profit, including Corporate Income Tax and Withholding Tax;
- Taxes related to Sales/turnover, including VAT, consumption tax, Stamp Tax, and Real Estate Tax.
China business tax and China tax rate
China Business Tax or Corporate Income Tax (CIT) applies to all companies in China.
It is levied on company profits at a rate of 25%. These days, CIT applies equally to all companies.
CIT is calculated on an accrual basis – that is income and expenses are recorded at the time they are earned/spent.
It is calculated and paid monthly or quarterly (within 15 days of the period end), and then reconciled annually as part of a company’s year-end audit. Additional tax is paid or a rebate applied for as appropriate at this time.
Withholding tax
Withholding Tax (WT) applies to payments of China derived income to non-resident enterprises.
For such payments, a tax must be “withheld” before remittance. The current rate of withholding tax is 10%, but note that this is a general reduction from a higher rate of 20%, and could change in the future.
Consumption Tax – Value Added Tax (VAT)
Value Added Tax (VAT) is applied as a consumption tax, based on a percentage of the invoiced sale amount for goods and services in China.
There is an important distinction in China whether a company is registered as a general VAT payer or a small-scale payer.
The criteria for this are based on annual taxable sales amounts, but there are often cases where a small-scale company may be better of registering as a general payer.
Business tax
There has been a significant change in the VAT system in China in recent years.
In the past, there were a number of different rates applied for different areas, alongside a separate Business Tax applied for some areas of service income.
These have gradually been simplified and merged, resulting in a new VAT system applied nationwide from July 2017 that has three different levels of VAT – 6, 11, and 17 percent.
Conclusion
China’s business environment is challenging.
Before starting a business in China, do as much research as you can, be familiar with the culture, language, and business practices of China, and engage a reliable local service provider to ensure your operation compliance in China.
Here at FDI China, we can help you in all the steps required before starting a business in China, analyzing your economical situation and what are the best options for you to do business in China.
We can help your company not only to enter China through our employer of record service and company formation service but also to develop and maintain your business operations in China with our tax and accounting service and our payroll service.
