Corporate formation.

Wholly Foreign Owned Enterprise (WFOE) limits liability to the foreign legal company or foreign individual. Citizens of Hong Kong, Macau, and Taiwan are considered foreigners when registering a company in Mainland China. Local Chinese partners, however, are not allowed to join as shareholders in a WFOE.

A WFOE may conduct business only within the scope of business approved by the government which is written on the business license. Because registering a WFOE normally takes between 5 to 6 months, it is extremely important to determine the precise business scope to avoid re-applications.

There are four main categories for WFOEs:

• Manufacturing (manufacturing, assembly, processing, etc.)
• Technology (development of high-tech products)
• Service (consulting services, restaurant…, etc.)
• Foreign Invested Corporate Enterprise (FICE) (trading, wholesale, retail, franchising, etc.)

Note: A FICE is unique in that a FICE has import and export rights within its business scope.

Advantages

• Flexibility to make decision about management and strategy without legally bound to consider local partners.
• Allowed to conduct business in Mainland China (≠RO), invoice in both RMB and foreign currencies, and transfer RMB to the overseas parent company and convert to any currency.
• Increased protection of Intellectual property, in accordance with international law.
• Authority over human resources (≠JV).
• No restriction on the minimum number of years of establishment for the overseas parent company (≠RO)
• Legal responsibility limited to original investment

Disadvantages

• Limited access to industry activities.
• Minimum government support

Note: Foreign investors that are prevented from directly submitting an incorporation application must retain a PRC entity authorized to do so by the relevant authorities.

Learn more about the full process of creation of a WFOE/FICE

Setting up a Representative Office (RO) is the easiest and cheapest way to establish a legal presence in China. A RO is a liaison office in Mainland China owned by a foreign company pursuing liaisons with Chinese businesses, suppliers, and customers on behalf of its parent company. The establishment of a RO is simple but still requires a foreign company (in France, Hong Kong, USA, etc.) to act as a parent company.

Shareholder of a RO must be a company and not an individual. Also, the chief representative legally responsible does not need to be a Chinese resident. The RO may not exclusively use an employment agency to employ local employees (e.g. FESCO, CIIC), and it is restricted from hiring more than 6 employees (maximum 4 foreign employees), all of which must pay taxes in China.

Indirect operational activities (non profit-making activities) such as business meetings, visiting factories, promoting products, market research, technology exchange, and other permitted activities can be conducted with a RO. However, under no circumstances may a RO buy products or services in China, receive payment from clients, sign contracts or deals on behalf of their holding company, buy property, or import equipment. It is forbidden for a RO to issue official invoices (since there is no registered capital). The RO is allowed to receive money from the parent company, but it cannot generate revenue or sign contracts in China.

Since January 2010, only ROs with parent companies at least two years old are eligible to register. A RO is allowed to exist for a maximum of 3 years (insurance companies, 5 years, and financial institutions, 6 years).

Advantages

• Low investment (lower registration fees than WFOE/FICE or JV and no registered capital investment)
• Faster and easier registration process
• Less risk
• Easier accounting and tax calculations (average of 10% of taxes)
• Can hire foreign and local employees through a third party
• Can obtain working visas for foreign employees

Disadvantages

• Forbidden to conduct business in China
• May not issue invoices to clients in China on the name of the parent company
• No right to import or export product or services
• RO bank account may not receive any money (other than from the parent company)
• Forbidden to sign contracts on its own name – all contracts must be signed on the name of the parent company
• Limitation of number of employees
• Restrictive duration of establishment in China

Note: Before January 4, 2010, a RO was able to list a parent company younger than 2 years old. A RO an legal entity used to explore the Chinese market before establishing a JV or WFOE.

Learn more about the full process of creation of a RO

A Joint Venture (JV) is a business association of two or more entities (enterprise, administration, or person) agreeing to develop and control together, for a limited period, a new business entity and new assets by combining investment and operation expenses, management responsibilities, and profits and losses. Certain business sectors are controlled by Chinese administration (e.g. education, mining, health care). This requires foreign firms to form JVs with Chinese companies in order in order to enter the market. Joint ventures can be profitable when the Chinese side brings certain aspects to the partnership such as administrative support, brand recognition, property, licenses, and distribution or supplier network. Chinese authorities encourage foreign investors to use this form of corporation in order to gain experience in the technology and management fields.

Prior to deciding on the JV type, your purpose must be clear and well thought through. There are two types of Sino-Foreign Joint Venture possible: Equity JV and Cooperative JV

Equity Joint Venture (EJV):

The older and second most common way foreign firms enter the Chinese market, Equity Joint Ventures (EJV) have limited liabilities as well as a limited time period (usually 30 to 50 years, though an unrestricted period of operation can be permitted).

In an EJV, capital investment is made by the associates is proportionate to the equity invested by each party (e.g. Company A invests 45% of the total capital, so Company A collects 45% of the profits). In general, foreign companies must invest more than 25% of the total investment. The allowed debt to equity ratio of an EJV is regulated depending on the size of the joint venture (e.g. If the initial capital investment exceeds $30 million, a minimum of one-third of the total debt and equity must be equity).

Registered EJVs in China are considered Chinese entities, therefore required to obey all Chinese laws. EJVs can hire Chinese employees and purchase land to construct buildings (≠RO). The supervision of the EJV is in hands of a Board of Directors (at least three members).

Cooperative Joint Venture (CJV)

Cooperative Joint Ventures (Contractual Joint Venture or CJV) offer more flexibility since there is no minimum financial investment for foreign companies (and can therefore be a minor shareholder). The investment made by all parties does not need to be explicitly listed the initial financial contribution. Instead, parties can state contributions of labor, resources, services, knowledge, etc. CJV can be registered as a limited liability corporation, a non-legal individual, or a separate legal entity bearing liabilities independently.

CJVs profits are allowed to be divided up according to the terms of the CJV contract rather than by participation share. There are no terms or provisions in CJVs for terms of duration. CJV contracts may be renewed subject to the approval of the companies and authorities involved. Any type of equity change made during a CJV must be approved by the Ministry of Foreign Trade and Economic Cooperation.

Finally, CJVs are evaluative and can be restructured into WFOEs. However, many details must be negotiated beforehand thus costing time and money to set up a comprehensive CJV.

EJV vs. CJV

• Unlike an EJV, a CJV does not need to be a legal representative to register.
• Unlike an EJV, a CJV does not need to distribute its profits, control, and risks according to the ratio of the initial capital investment made by each party. Instead, CJVs distribute its profits, control, and risks according to the contract terms agreed upon by each party.
• Unlike an EJV, a company of a CJV can not only contribute an initial financial investment, but it can also supply cooperative circumstances (e.g. market access rights, licensing rights, etc.) and give access to controlled sectors (Chinese companies only).

Learn more about the full process of creation of a Joint Venture

Beijing Retail assists individuals and private firms with offshore incorporation. Currently, Beijing Retail provides services in the below jurisdictions:

• Hong Kong
• Singapore
• British Virgin Islands
• Bahamas
• Bermuda
• Jersey
• Marshall Island
• Cayman Islands

Registering an offshore company (a.k.a. “non-resident company”) is an easy and quick process that has many advantages. Contrary to popular belief, offshore companies are not the illegal hideaways. Instead, depending on which jurisdiction you choose, the legal benefits of an offshore company can include:

• Beneficiary taxation (VAT exemption, stamp duty, dividend taxation, etc.)
• Low operation costs
• Asset protection (against spouse, lawsuits, etc.)
• Bank privacy
• Asset transfer
• Privacy (anonymity)
• Profit maximization
• Company structuring
• Foreign property holdings
• Limited liability in business transactions
• Unrestricted capital flow

As China becomes the business center of Asia, more and more companies will establish their Special Purpose Vehicle (SPV) in Hong Kong as a gateway to Mainland China. Hong Kong, a Special Administrative Region (SAR) of China, maintains its own jurisdiction with separate taxation laws. Hong Kong is not only one of the major trading and financial centers of Asia, but it is also one of the quickest locations to incorporate a business. Forbes and the US based Heritage Foundation has recognized Hong Kong as one of the world’s freest economy over the past 10 years.

Global investors favor Hong Kong because of its political stability, established legal system, simplified and favorable tax environment, well-equipped infrastructure, free flow of information and communication, free trade and open markets, few trade barriers, absent quotas, lack of foreign exchange controls, and high-quality professionalism.

Learn more about the full process of creation of an offshore company