Business setup in China is popular among foreign investors. According to American Chamber of Commerce in South China, China was the top investment destination for its members, mostly foreign-funded multinational companies. The Chinese market seems offer an uncountable number of opportunities.
However, in order to successfully set up a business in China, it is crucial to proceed correctly as the regulations and rules require. Many difficulties and issues may arise during the company’s future activities, leading to a possible failure in China. Therefore it is recommended to carefully consider the different options when entering the Mainland. There are many types of legal entities, each with advantages, but also limitations given different purposes of a market entry in China.
Major Types for Companies in China
For foreign enterprises there are three main types of companies in China. Before investing in China, each company has to be sure what it wants to reach and how long it wants to stay in the Chinese market.
1. Representative office (RO)
For many companies, the formation of a representative office is the first step to entry into China. The representatives are founded out of marketing and promotion reasons in most of the times. The problem concerning a RO is that it is not allowed of signing business deals or contracts. They are not allowed to be involved in any business operations as well as selling products in China.
2. Joint Venture (JV)
In earlier year, the Joint Venture was the most common business type for foreign enterprises in China. In some sectors it was and still is necessary for the formation of such a company as a car producer or the aircraft industry. A crucial point for the formation of the JV is to gain market shares, customers and knowledge about the Chinese market through the JV-partner.
3. Wholly Foreign Owned Enterprise (WFOE)
Nowadays, it is the most common type for founding an enterprise as foreign investor. Compared to a JV, the advantage of WFOE is that the foreign company is able to follow their own aims more clearly and does not have to take care about their Chinese JV partner. The shares are in the hands of foreign investors and the company is founded as a subsidiary in most the times.
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Investment Zones (IZ) and Incentives
There are various Investment Zones which were established alongside the economic liberalization of China. These include:
(1) Special Economic Zones (SEZ);
(2) Open Cities (OC);
(3) Economic and Technological Development Zones (ETDZ);
(4) Hi-tech Development Zones (HTDZ);
(5) Free-Trade Zones (FTZ);
(6) Export Processing Zones (EPZ).
Tax Breaks in China The main incentive of an Investment Zone is the tax break. Tax breaks vary according to the industrial sector:
(1) The most common tax break that an alien business investing in an Investment Zone may receive is a 50% discount on the corporation income tax, a reduction from 30% to 15%.
(2) Invariably, a complete exemption of the tax can be warranted for a two-year period with a further reduction by half for the next three years. For example, two years at 0% and then a further three years at 7.5%.
(3) If your business introduces technology that is deemed as 'advanced' by the authorities, then a further three years' reduction (by half) can be negotiated.
(4) If an overseas investment has an export value of more than 70% for a certain year, then they may receive a preferential Corporate Income Tax rate of 10% for that year.
Contact Us
If you have further inquires, please do not hesitate to contact Tannet at anytime, anywhere by simply visiting Tannet’s website english.tannet-group.com, or calling Hong Kong hotline at 852-27826888 or China hotline at 86-755-82143422, or emailing to tannet-solution@hotmail.com. You are also welcome to visit our office situated in 16/F, Taiyangdao Bldg 2020, Dongmen Rd South, Luohu, Shenzhen, China.
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