Navigating the intricate incorporation process in China may seem a complicated maze of regulatory, legal, and cultural obstacles. Many business professionals ask themselves how to start a business in China as a foreigner. It is important to understand the necessary steps involved in establishing a successful operation in the world’s second biggest economy.
Foreign professionals must evaluate various critical aspects before making key decisions. This evaluation can be done through comprehensive research of the market and proactive planning.
China is one of the most dynamic markets and rewarding business environments in the world. However, starting a business as a foreigner can be daunting.
In the last few years, the Chinese government has implemented pro-business policies for both domestic and international companies, looking to boost their economy and attract foreign investment.
Choosing the right business incorporation
In China, there are several options to incorporate a company, depending on the type of business:
A Wholly-owned Foreign Enterprise (WFOE)
A Contractual or Cooperative Joint Venture (CJV)
An Equity Joint Venture (EJV)
A Representative Office (RO)
A Foreign Invested Partnership Enterprise (FIPE)
Choosing the appropriate investment structure depends on several factors, including its planned activities, industry, and investment size. Before deciding which business to launch, investors must consider structure, legal liability, statutory compliance requirements, time needed to set up the business, and activities the business can engage in, among other things.
These factors determine business costs, requirements, risks, and limitations needed to support the company's future development and growth.
Foreign Investor Challenges
To avoid risks and minimize difficulties, foreign professionals must understand the challenges they may face when venturing into the Chinese market.
Transparency and active participation are two crucial aspects when starting a business in China.
Investors need to comprehend their business operations, have a clear vision for the future, and actively participate in decision-making processes.
The company registration process can be unfamiliar and uniquely intricate, leading to confusion regarding timelines and necessary documentation. Many times, there is a lack of transparency from service providers making decisions on their behalf, hindering a clear understanding of critical considerations.
China has a complex regulatory environment that may vary across industries and regions, requiring a thorough understanding of local laws.
Incorporation Process
Breaking down the incorporation process is a good first step. From establishment registration to post-registration activities, the timeframe can vary depending on factors such as document reviews, courier services, and decision-making speed.
Post-registration requirements, such as obtaining additional licenses for specific industries, can require additional time and documentation. The incorporation process in China may take several months.
Accuracy with the scope and definition of your business is critical for success. It must also align with local laws and regulations.
Because of strict Chinese government policies, starting a business in China as a foreigner can consume a lot of time and money. If you choose to incorporate your business with an official legal structure, the process could take months.
If you choose to start your business in China with help from a local Professional Employment Organization (PEO)/Employer of Record (EOR), you can start operating in days.
A China PEO or China Employer of Record is a global expansion partner which helps foreign companies without local entities or interests directly hire local Chinese talent. They act as the local employees’ ‘Employer of Record’, distributing payroll, benefits, and making the necessary arrangements for tax withholding.
The China PEO becomes responsible for all employee tax obligations and possible penalties in China.
Registered capital requirements
No minimum registered capital is required for company registration except for areas like banking, finance, insurance, etc. However, the foreign shareholder should ensure that a company's registered capital is enough to sustain its business activities for at least a year, including rent, employee salaries, and office expenses.
The registered capital does not need to be paid completely upfront. China now follows a subscribed capital model, under which a schedule of contributions must be declared in the Article of Association and be registered with the local AMR in charge. The government will check whether the investors follow the capital injection plan.
The registered capital is the fund to which all shareholders contribute or promise to contribute when they apply to the local Administration of Market Regulation (AMR) for company registration.
Authorities will use the registered capital amount to determine the size of the company. This could impact the company's eligibility for various preferential treatments, including tax incentives, funding opportunities, and participation in bidding projects.
Structure, Finance, People, and Location
Foreign investors must consider four key decisions: structure, finance, people, and location. Analyzing the right business entity, budgeting capital investments, appointing key personnel, and choosing the business location is essential. It is recommended to develop plans for the present, five years, and ten years ahead, allowing for strategic business scaling.
Investors should evaluate the significance of financial management and the potential benefits of outsourcing finance-related functions. Startups may consider outsourcing due to cost-effectiveness and expertise, to be able to focus on core business operations. This approach could be beneficial for navigating the intricate financial landscape in China.
Location Analysis and Tax Implications
Choosing a registered office address and analyzing its implications on business operations and tax regulations in different districts within Chinese cities is an integral part of the process. Another critical consideration is the legal and tax
consequences of office relocation and the tax incentives offered by different locations within the country.
Factors such as the proximity to target markets and distribution channels, access to a skilled workforce and resources, and favorable government policies affecting business operations are key to decision making.
Location is a crucial factor when starting a business. This aspect could impact the success, budget, and longevity of the company. China is a large country, with a diverse population. Choosing the right location is critical to attract consumers, find suppliers and develop business relationships.
There are preferential taxes for foreign companies depending on the nature of the business and the geographical location. This can impact on the cost structure and budget of the company.
The country offers a few Free Trade Zones, which have become popular among foreign companies. In these areas, companies can operate under beneficial regulations, particularly preferential customs handling and import without paying duties.
Investors must consider the significance of Chinese company names in relation to brand image, trademark registration, and domain registration. The link between company names, trademarks, and online presence highlights the importance of strategic naming decisions aligned with long-term branding strategies.
A Representative Office (RO) in China is taxed on its expenditures. As a result, it is in the investor's
best interest to keep expenses allocated to the RO as low as possible and advisable to direct the RO's pre-incorporation expenses to the foreign headquarters.
Meanwhile, a Foreign Invested Enterprise (FIE) is taxed on income and may deduct expenses from tax. Even though pre-incorporation expenses are, by definition, incurred prior to the FIE formally existing, only a portion of these expenses can be borne by the FIE.
Selecting the right bank, considering long-term services rather than incorporation processes is essential. It is important to interview multiple banks to assess service capabilities and long-term suitability. Comprehensive evaluations are necessary before making banking decisions.
Create a Business Plan
When starting a business in China, a thorough business plan is critical. Besides a description of the industry and product or services, a business plan should include:
Business location
Projected revenue
Expected number of employees
Budget requirements
Once completed, the business plan will be approved by the government. A company will have to adhere to the guidelines written down or risk fines. Considering this restriction, it is convenient to create a business plan that is not so broad that it will be denied, but not too specific either because it will limit business growth.
As part of the business plan, an international enterprise will often need a robust marketing strategy to guide the expansion.
Making long-term partnerships, creating good relationships with government agencies and having a local expert on your team will help you navigate through the logistical and cultural challenges ahead.
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.
Talk to an expert
Schedule a 30-mins complimentary, no-obligation call to see how Woodburn can help you. Book a call with our Head of Business Advisory - Kristina Koehler-Coluccia.
Topics we can advise on include:
Company Registration
Cloud Accounting & Financial Reporting
Cloud Payroll Services
Tax & Audit Services
Recruitment
Employer-of-Record
Visa Application
Trademark Registration
Switch to Woodburn
Partner with Woodburn (cross referral)
Our calls are automatically scheduled via Zoom - or via Teams, WeChat or WhatsApp upon direct request.
Our advisory calls are available from Monday-Friday from 8am to 5pm CEST and Wednesday until 9pm CEST.