While domestic companies have a wide range of alternatives in establishing business operations in China, foreign companies are more restricted, with the most common business vehicles for foreign investors being:



- Representative Offices

- Wholly Foreign Owned Enterprises

- Joint Ventures (Cooperative and Contractual)

1.0 Representative Offices

General

The fastest and easiest method for a foreign company to establish a presence or 'footprint' in China is through registration of a Representative Office of a foreign company for the help www.easy-jv-manager.com. While this is true, there are certain factors that must be considered when deciding whether an RO is the appropriate structure:

i) ROs cannot conduct direct profit-making activities (cannot earn income) and may only serve a liaison function between head office and suppliers/distributors/customers in China;

ii) ROs do not have separate legal personality and may only contract or conduct business on behalf of head office;

iii) practically, ROs are limited with regards to business relations with Chinese companies who may prefer to deal with Mainland registered company;

iv) taxes must still be paid (though there are no profits);

v) ROs, while simple to establish, are relatively more complex when closing.

An RO is permitted to:

- Conduct data collection and research on local market

- Liaise with local contacts on behalf of parent company

- Coordinate parent companies activities in China such as contract negotiations

- Coordination of warranty and after-sales service

- Conduct services for parent company such as coordination of import, export, and distribution of products

An RO is not permitted to:

- Directly engage in business for profit

- Sign contracts on its own behalf

- Represent entities other than the parent company

- Collect money or issue invoices for products or services

Registration

Unlike many other countries, Representative Offices in China are subject to registration requirements. A filing must be made with the local Administration for Industry and Commerce, which, if successful, will issue an Approval Certificate for the Representative Office. Thereafter, a number of filings with other authorities such as the Foreign Exchange Bureau must be made, and a 'Business License' issued by the local Administration for Industry and Commerce.

Registration is generally valid for only three years and application must be made prior to expiration for renewal of the term.

2.0 Wholly Foreign Owned Enterprises

General

Wholly Foreign Owned Enterprises (WFOEs) or limited liability companies whose investors are purely foreign are quickly becoming the most popular method of foreign investment in China. While foreign companies once thought (and were often compelled by laws) that a local partner was necessary to operate business in China, this is increasingly no longer the case in a wide range of industries.

Characteristics of WFOEs:

- Between one to fifty shareholders

- Restricts the right to transfer shares

- Prohibits public offering of shares

- Equity is divided based on contribution to registered capital and not allocation of shares

- Liability is limited to the amount of registered capital contributed

WFOEs are governed by the Law of the PRC on Enterprises Operated Exclusively with Foreign Capital, and relevant implementing regulations.

Advantages of WFOEs:

- Management control

- Simpler establishment procedures

- Easier to terminate

- Easier to increase investment

- Protection of intellectual property

Disadvantages of WFOEs:

- Lack of experience and local connections

- May not be listed on stock exchange

Establishment

There are a number of steps required to establish a WFOE:

- Filing of articles of company introduction letter, articles of association, feasibility study, and other corporate documents with the local foreign commerce bureau for approval and issuance of Foreign Investment Approval Certificate.

- Collateral filings with other government authorities such as:

o Local and national tax bureaus

o Foreign exchange bureau

o Customs bureau

o Statistics bureau

o Public security bureau

- Within 30 days of obtaining Foreign Investment Approval Certificate, obtain temporary Business License from the Administration for Industry and Commerce

- Make Registered Capital Contributions and Audit by Domestic Accounting Firm

- Submit investment report to Administration for Industry and Commerce to obtain Permanent Business License

Important considerations

Name

A company name must be in both English and Chinese, though, for practical purposes, only the Chinese name is important. It cannot be identical or similar to a previously registered company name. The name can be pre-reserved for a period of up to six months, which will expire if not used for establishment purposes during this time.

Business scope

Unlike companies in many western nations where they are permitted to do any range of business activities unless otherwise stated in laws and regulations, foreign investors in China are required to define their company's business scope at the outset of operations and must conduct business within this scope, subject to modification through re-application.