Foreign companies looking to establish or expand their presence in China have several options for their company structure. The choice of investment vehicle depends on planned activities, industry, and investment size. Understanding the differences between these structures is essential for determining costs, requirements, risks, and limitations, ensuring the company’s future growth and capabilities.
Common Business Structure Types in China
Foreign investors can choose from several entity types, including Representative Offices (RO), Wholly Foreign-Owned Enterprises (WFOE), and Joint Ventures (JV). Each type has its unique advantages and disadvantages.
Comparison of Entity Types:
Investment Options | Common Purpose(s) | Pros | Cons |
RO | Market research, Liaise with overseas headquarters | Easiest foreign investment structure to set up, Paves way for future investment | Cannot invoice locally in RMB, Must recruit staff from local agency; no more than four representatives, Heavily taxed if expenses are high |
WFOE | Manufacturing, Servicing, Trading (if a FICE) | Greater freedom in business activities than RO, 100% ownership and management control | Registered capital requirement (for select industries), Lengthy establishment process |
JV | Entering industries that require a local partner | Leverage partner's existing facilities, workforce, sales/distribution channels | Split profits, Less management control than a WFOE, Technology transfer/IP risks, Inheriting partner liabilities |
FIP | Investment vehicle, Servicing | Allows for domestic and foreign ownership, Easier setup | Unlimited liability of the general partner, Newness of structure (potential challenges with taxation or foreign currency exchange) |
M&A | Expanding business presence without establishing operations from scratch | Simplify details of a greenfield investment, Leverage market share and established framework of target company, Acquire capabilities not developed internally | Subject to FDI restrictions and rules, Higher scrutiny from authorities, Antitrust and security reviews, Post-merger integrations may require additional resources |
VIE | Access to sectors restricted or prohibited to foreign investment | See common purpose | Breach risks of the contractual arrangement, Vague attitude of Chinese authorities towards VIE structure |
Comparison of Three Types of Investment Structures:
China Subsidiary (WFOE or JV) | Branch Offices | Representative Offices |
Legal Type | Separate legal entity | Not a separate legal entity but an extension of the company it is affiliated with |
Liabilities | Limited liabilities within the registered capital of the subsidiary | Liabilities incurred by the branch office extend to the affiliated company |
Entity Name | Can be the same or different from the parent company, must indicate the form of liability | Must include the name of the affiliated company, indicate nationality and form of liability, and suffix such as "branch", "branch (factory)" or "outlet" |
Allowed Activities | Same or different from the parent company | Limited to the business scope of the affiliated company |
Validity Period | Determined by the investor | Cannot exceed the validity period of the affiliated company |
Taxation | Corporate income tax (CIT) rate of 25%, access to tax incentives | CIT rate of 25%, access to tax incentives |
Annual Audit and Reporting | Yes, between January 1 and June 30 | Yes, between January 1 and June 30 |
Staff Hiring | No restrictions on hiring local staff; foreign staff based on needs | No restrictions on hiring local staff; foreign staff based on needs |
Pros | Greater freedom in business activities, Simple establishment, Easy maintenance | Simple establishment, Easy maintenance |
Cons | Registered capital requirement (for select industries), Lengthy establishment process | Limited business scope, Not a legal entity (all liabilities borne by the affiliated company) |
When considering entering the Chinese market, it is essential to choose the right business structure based on the specific needs and goals of the company. Each structure comes with its own set of requirements and limitations, making it crucial to thoroughly understand the implications of each option.
Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms.
Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.
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