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How to open a company in China

China has adopted a pro-foreign investment policy, increasingly opening its industries and business sectors to foreign investors. The country has specific policies for foreign investments and has four categories of investment sectors: encouraged, permitted, restricted, and prohibited. Foreign investment projects are analyzed based on the category in which they are comprised.

Encouraged investment fields in China include:

  • new agricultural technology;
  • transportation;
  • raw materials exploitation;
  • advanced technology projects, including those related to the use of energy and those that aim to increase the economic efficiency of the country.

Restricted fields are general those that involve the exploitation of protected minerals or activities developed in industries that have yet to be completely opened by the Government for foreign investment purposes.

Investors should research the field in which they want to set up a business in China to find out if it is included in an encouraged or a permitted category. According to the investment category, businesses may also be eligible for tax incentives in China. A preferential tax rate of 15 percent is in place for companies that are included in a high-new technology category. Special deductions of up to 75% apply for R&D expenditure in some cases.

Types of companies in China

The legal entity used by foreign investors in China is the wholly foreign-owned enterprise (WFOE). Other types of companies include: the equity joint venture, the cooperative joint venture, and the joint stock company. These types of legal entities have legal personality and are separate from their founders.

Investors can also choose to open a branch in China or a representative office. These types of business entities do not have legal capacity and cannot act on their own behalf in the country. The foreign corporation abroad is fully liable for its debts and obligations in China.

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Company formation in China

Foreign investors who open a WFOE in China should know that this business structure mimics the limited liability company. The participation of a Chinese resident may be needed even for this type of company; however, this will depend on the chosen business field. Foreign investors are advised to consider this aspect when choosing a suitable business form in China.

The minimum capital requirements were abolished in China in most of the business fields, while in some industries, like banking, this is still applicable. Company founders can make their contributions in cash or in kind. According to the Company Law, 30% of the capital contribution must be made in cash.

As far as corporate management and control is concerned, the WFOE has a board of directors or a managing director. The Articles of Association must contain the company’s management structure and must include the duties, liabilities and limitations of the general manager, the chief accountant, and others.

Taxation and reporting in China

Companies in China, including domestic and foreign-owned enterprises, are subject to corporate taxation as well as other taxes. The corporate income tax rate in China is 25% and resident companies are taxed on their worldwide profits. Branches in China are taxed at the same rate.

Other taxes for companies in China include the value added tax, the consumption tax, resource tax, land appreciation tax, stamp duty, customs duties, social security. China levies the value added tax on the sale of goods, on the import of goods into the country and on services related to processing, repair, or replacement. There are two categories of VAT payers in China: the general ones and the small-scale ones which are legal entities whose sales do not exceed 0.5 million RMB each year or companies in the wholesale or retail trade that have sales not exceeding 0.8 million RMB per year.

  Heavy work for a while

Double taxation relief is possible in China through the country’s broad network of double tax treaties. These not only allow for the elimination of double taxation for companies that derive income from both signatory countries, but they also provide for reduced withholding tax rates on dividends, interest, and royalties.

The Company Law is one of the most important resources for accounting, auditing, and filing requirements for Chinese companies. According to law, corporations need to prepare their financial statements at the end of each year and have them audited by a certified public accounting firm in the country. Yearly tax returns should be filed within five months of the end of the year.

China is a country with a large internal market and plenty of opportunities in many different business fields. Investors should consider the aspects highlighted in this article as well as others when deciding to open a company in China.

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