Setting up a business in China

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Updated 2022-09-18 12:39

As the world's second economy, China attracts a lot of entrepreneurs and investors. However, running a business in China as an expat is not easy. It takes a lot of research, planning, paperwork, and a substantial investment. Here's everything you need to know about opening a company in China.

 

Do you need a Chinese company?

The first thing you will need to decide is whether you actually need a company in China.

A foreign national can set up a company in China — but registering a business in the country will take time and quite a bit of paperwork. Unless you intend to open a factory or have a large number of Chinese employees (in which case you will need to set up a Chinese company), you may want to consider opening an umbrella company in Hong Kong, which is simpler and will require a much smaller investment. You will also benefit from a very favorable tax policy, as Hong Kong taxes are among the lowest in the world.

The downsides include that you will not be eligible for a work visa in China and will not be able to recruit staff locally.

Setting up a company in Hong Kong is a straightforward process and, typically, does not take longer than a week.

Another option could be setting up a representative office. This will allow your business to have a physical presence in Mainland China without committing to forming a local company. Note, however, that with a representative office, you will not be able to receive money from clients in China and will need to transfer money for daily operations from abroad. With that, you will still be required to pay taxes in China, calculated as a percentage of your expenses.

No minimum capital is required to set up a representative office, and you will be eligible for a multiple entry visa valid for one year. You will also be allowed to recruit Chinese staff through recruitment agencies.

How to create a company in China?

If you do decide to open a company in China, there are several things you will need to take into account.

First, you will need to decide what type of company you want to open. You will have several options to choose from (in addition to the ones we've already listed above): Foreign Invested Enterprise (FIE), Wholly Foreign Owned Entity (WFOE), or a Joint Venture (JV).

Once you know what type of company you will be opening, you will also need to decide where you want to open it. And this will most likely be determined by what province, city or area will offer the best conditions for the type of business you want to develop. For instance, you may want to consider taking your business to the Pilot Free Trade Zone, Special Economic Zone, or Economic and Technological Development Zone.

Another thing you will need to look into is whether the field you are considering is open to foreign investment. Certain niches in China are strictly regulated and will require extra licensing and certification steps. Some areas, on the other hand, are fully restricted from foreign investment.

Your Business License will contain your selected business scope, and the information is public.

Let's go over this in a bit more detail.

What are the different types of companies in China?

If you want to establish your business operations in Mainland China, you will need to set up an FIE - Foreign Invested Enterprise (any company with 25% or more shares owned by foreign nationals is an FIE).

The WFOE (Wholly Foreign Owned Entity) is the most popular type of FIE. A WFOE is a 100% wholly foreign-owned enterprise doing business in China with the same rights as a local company. Opening a WFOE typically requires a minimum registered capital. However, this requirement has been lifted for companies operating in certain areas of business and some cities in China. The amount of registered capital will depend on the area of your company's activity and the province where it is established. The needed paperwork may also vary from province to province and depend on the scope of business your company will cover.

Another popular form of an FIE is a joint venture (JV), a company owned by both local and foreign investors. Note, however, that as Chinese intellectual property laws are rather vague, most foreign companies working with patented products do prefer to register a WFOE instead.

With that, specific industries in China are restricted, and a joint venture would be your only option for running a business in specific spheres.

Special areas for business development in China

As we've mentioned above, there are several specialized zones in China that offer favorable conditions for specific businesses.

China Pilot Free Trade Zone (or FTZs) are multi-functional special economic zones that offer favorable taxation and customs policies. China's Pilot Free Trade Zones include:

  • Anhui Pilot Free Trade Zone
  • Beijing Pilot Free Trade Zone
  • Chongqing Pilot Free Trade Zone
  • Fujian Pilot Free Trade Zone
  • Guangdong Pilot Free Trade Zone
  • Heilongjiang Pilot Free Trade Zone
  • Henan Pilot Free Trade Zone
  • Hubei Pilot Free Trade Zone
  • Hunan Pilot Free Trade Zone
  • Liaoning Pilot Free Trade Zone
  • Shaanxi Pilot Free Trade Zone
  • Shanghai Pilot Free Trade Zone
  • Sichuan Pilot Free Trade Zone
  • Tianjin Pilot Free Trade Zone
  • Zhejiang Pilot Free Trade Zone
  • Zhejiang Pilot Free Trade Zone

Special Economic Zones (SZEs) are industrial zones with special economic policies and management systems. They also feature tariff reductions and exemptions in certain cases and encourage foreign investment in various economic measures. Special Economic Zones include:

  • Hainan Province Special Economic Zone
  • Xiamen Special Economic Zone
  • Shantou Special Economic Zone
  • Shenzhen Special Economic Zone
  • Zhuhai Special Economic Zone
  • Kashgar Special Economic Zone
  • Shanghai Special Economic Zone
  • Tianjin Special Economic Zone
  • Fuzhou Special Economic Zone
  • Zhangjiang Special Economic Zone
  • Beihai Special Economic Zone
  • Qinhuangdao Special Economic Zone
  • Lianyungang Special Economic Zone
  • Nantong Special Economic Zone
  • Dailan Special Economic Zone
  • Qingdao Special Economic Zone
  • Yantai Special Economic Zone
  • Ningbo Special Economic Zone
  • Wenzhou Special Economic Zone

Economic and Technological Development Zones are generally located in smaller towns next to larger cities. These are designated for predominantly high-tech industries. They offer a specialized infrastructure and an active investment environment, including the utilization of foreign capital. Most major cities in China have a number of Economic and Technological Development Zones. You can find the full list here.

Industries with restricted foreign investment in China

There are several industries in China where foreign investment is not allowed. It's also known as the “Negative List”. Note that Special Economic Zones in China also have their own Negative Lists. If your industry is part of the Negative List, you may not be able to open a company in this sphere directly as an expat in China. You can find more information on China's Negative List in 2022 here.

In addition to the Negative List, there are also industries where foreign investment is restricted. In this case, you will be required to obtain a special license before starting your company.

How to set up a Chinese company?

If you have decided to set up a company in China, know your company type and where you want to grow your business, there is a procedure to follow.

It is strongly advised that you start by hiring an agent who will guide you through the process of setting up a Chinese company, as doing it on your own would be very complicated. You will need someone by your side who is fluent in Chinese and knowledgeable about local legal practices.

Your next step would be to define the scope of your business clearly. Note that the Chinese government labels specific industries as:

  • favorable for foreign investment (there are incentives for foreign companies operating in this sector)
  • restricted to foreign investment (certain industries only allow foreign investment in partnership with a local representative)
  • prohibited to foreign investment (sectors in which foreign investors are not allowed to operate)

Gather all the necessary documentation. Typically, the requested documents will include the following:

  • company name in Chinese that has been pre-approved by the Administration of Industry and Commerce in the city where you intend to operate
  • a list of board members and key managerial personnel with their passport copies
  • legal company address and contact information
  • the Articles of Association (AOA), including vital company information such as business scope, structure, etc.
  • details on hiring employees or positions for which you intend to hire
  • information about the registered capital and total investment
  • a business plan and investment budget (you will need to prove to authorities that the funds you intend to invest will be enough to sustain your business project).

Other documents may be requested depending on the specifics of your situation.

Once you have gathered all the necessary documentation, you will need to apply for an approval certificate at the Ministry of Commerce and the State Administration of Industry.

When you have received the approval certificate, you will need to apply for a business license at the Administration of Industry and Commerce within 30 days with the following documentation:

  • duly filled in application form
  • the Articles of Association
  • the newly acquired approval certificate
  • pre-approved company name
  • list of all directors and shareholders
  • letter of recommendation from the bank where the company has a registered account

Once you have acquired a business license, you will need to deposit the amount of your company's registered capital into the company's bank account.

Good to know:

Depending on each case and the province or city where you choose to set up your business, there may be additional steps to the procedure.

Corporate income tax in China

Corporate income tax (CIT) is charged to companies at 25%. However, it can also be reduced to 15% for certain enterprises that are working in industries encouraged by the Chinese government.

Other things to consider when starting a business in China

When starting a business in China, there are a few things you will need to consider. Opening a Chinese company requires a substantial investment (both financially and timewise) — and this decision shouldn't be taken lightly.

While the process for opening a company in China is quite straightforward, it's better if you have someone by your side who can help you navigate the system. There are special agencies and individual agents in China who can help you open a Chinese company for a set fee. You may also work with freelance agents who can handle the paperwork and document translation to help you through the process. When looking for someone to work with, consider checking with fellow expats who have been through a similar process or looking for advice and recommendation on agents to work with.

To open and run a Chinese company, you will also need a local accountant. They will make sure your taxes are in order and take care of all the paperwork on your behalf.

If the process of opening a Chinese company seems too complicated and you need it only to handle certain formalities, consider opening a company in Hong Kong instead. The process for this is much simpler and also substantially more cost-efficient. As a business owner in Hong Kong, you will also benefit from the region's favorable tax system.

Useful links:

Setting up a Hong Kong company

Catalog for the Guidance of Foreign Investment Industries

We do our best to provide accurate and up to date information. However, if you have noticed any inaccuracies in this article, please let us know in the comments section below.