Despite the uncertainty looming over today’s Chinese economy, the numbers show that the Asian nation’s economy is on the rise. Combined with the ease of manufacturing and the massive base of goods-oriented consumers, China’s financial stability makes it an attractive option for those looking to start their business overseas.
If you take a further look at the red tape surrounding opening a business as a foreigner, however, you’ll find the region is not so friendly. The World Bank Group ranked China as 90th in the world for ease of doing business, and 128th in the world for starting a business in 2014. Those rankings place China just above Nigeria for setting up shop; not exactly a strong position. While those rankings have improved over the last several years, there are still a lot of hurdles for foreign entrepreneurs looking to start a Chinese business.
This guide will take you through the extensive procedures required to start a company in China.
There's an old addage that locals know best. So while it's technically possible to start your business in China without any assistance, hiring a local consultant can seriously ease the process if you have the means to do so. A consultant can help you decide on your business structure, organize and file your paperwork, act as your representative while you’re not in China, and generally guide you through the process of getting your business registered.
While Transferwise isn't affiliated with any specific consultants, some well-reviewed companies include:
- AmCham China
- AmCham Shanghai
- Shanghai Expat
It’s important that you conduct your own independent research to make the best choice in consultants as you move forward.
There are multiple ways to set up your business in China, each with their own distinct advantages and disadvantages. These are three of the most common:
A representative office is significantly easier to open than the other types of companies, however, it’s extremely limiting in what your company can actually do. For instance, a representative office can’t manufacture products, import or export, or accept payment from Chinese clients. This option is typically only logical for offices that don’t do direct business, like the marketing arm of your company or your customer support staff.
Joint ventures are the second most common business type for foreigners operating in China. There’s significantly less restriction with a joint venture than with a representative office, and it’s the only structure in which “restricted” businesses, like software as a service (SaaS), can form. As with any joint venture, however, there are risks, escalated by the fact that your Chinese partner will have a controlling share in your business. Should your partnership go south, you risk losing control of your brand and your business, and with China’s lax intellectual property laws, if you’re planning to manufacture, produce, or sell a high value product, you may not want to take the risk.
WOFE’s allow foreign entrepreneurs to own 100% of their Chinese entity, however, they can be fairly difficult to set up. That being said, if you can successfully create a WOFE in China, you’ll have nearly the same rights as a Chinese-owned business. Most WOFE’s are LLCs, or Limited Liability Companies, in which partners only have responsibility for their own invested capital. Plus, with China now part of the World Trade Organization, WOFE’s can operate as trading companies or retail stores. Opening a WOFE will require registered capital, the amount of which varies between company activity types and provinces, however the minimum required registered capital is typically fairly low.
The recommended first step in opening your Chinese business is hiring a qualified consultant to take care of the process in your place, however, the following list details the process for opening a WOFE assuming you’re doing the process on your own.
It’s important to check your business type against China’s list of restricted industries to ensure you choose the correct structure. You may want to also check the catalogue of encouraged foreign businesses, to see what types of incentives you might be eligible for. As far as scope is concerned, you’ll want to make sure to have a good balance between being too broad and too limited. Broad scopes tend to be denied permits, while a limited scope can get you in trouble down the line if you’re found to be operating outside of it.
- Certificate of Incorporation, Articles of Formation (or the equivalent) certified by the Chinese embassy or Chinese consulate
- (2) Copies of the passports of each investor certified by the Chinese embassy or consulate overseas
- Bank references from each investor’s bank declaring good standing
- (2) Copies of the passports of the parent company’s director, the Chinese company’s legal representative and the Chinese company’s supervisor (if applicable)
- (6) 2”x2” photos of the Chinese legal representative along with a brief resume or CV
- Registered capital
- Business scope
- 8 proposed Chinese names for the company in China
- The Chinese office address, including (2) copies of leasing contracts, certificates of real estate ownership as well as landlord identification
- (4) Copies of a letter of authorization
- Purpose and estimated investment
- The enterprise’s operational structure and number of those employed
- Permission for land use
- Environment evaluation report
- Details of products
- Size of production
- Detailed list of equipment used
- Business plan
- Environmental protection measures
- Requirement for the utilities of the site such as water and electric usage
In China, your business must be approved through two separate entities: the Ministry of Commerce, and the State Administration of Industry and Commerce.
Your approval is contingent on your scope, especially in “restricted” sector businesses. Typically if there is a problem with your scope, one or both entities will require you to amend it. It is possible for your approval to be denied altogether.
If your business falls in the “encouraged” sector, you’ll also need approval from the National Development and Reform Commision.
Your application can take up to 90 days, and is subject to further verification that could extend the timeline.
After you’ve received your approval, you must register with the Chinese Administration for Industry and Commerce (AIC) and apply for your business license within 30 days. You’ll need a new set of documents to get your business license, as follows:
* The application form
* Articles of Association
* Approval certificate
* Company name, as approved by the AIC
* Business licenses of all investors
* Letter of recommendation from the company’s bank
* List of directors, managers, supervisors, and legal representatives
The AIC could also ask for additional documents, but this list is a baseline for what’s required. Once you have your business license, you’ll be able to open a Chinese bank account.
Your business in China will be subject to several different types of tax, including:
* Corporate Income Tax: roughly 25%, but variable
* Turnover tax: tax on sales, between 3-5%
* Customs duties
* VAT: about 17%
* Individual income tax
If you’re looking for additional information on laws, regulations, financial and political climate, and business types in China, the U.S. Government has put together an extensive whitepaper on the country’s investment climate.
For more details about policies and procedures, the Chinese government has set up an excellent English-language resource at their Ministry of Commerce website.