Ines Liu is an Assistant Manager in Dezan Shira & Associates' Beijing office and a member of the International Business Advisory team. She advises clients on corporate structuring, taxation, China investments, and general accounting matters in China.
Ines has extensive auditing & assurance service experience working with PwC and Deloitte and has managed investor relations for China-based U.S. IPOs in Ogilvy Public Relations Worldwide.
Where it is true to consider doing business in China as a challenge, their government has introduced new measures that should make it easier for those seeking to do business in this massive economy. The Chinese government has already announced, and will continue to issue more bold reforms and measures to open-up and facilitate foreign investment.
When it comes to Foreign Direct Investment (FDI), the Foreign Investment Catalogues are the best source of preliminary information to understand the lay of the land to check whether the investment by a foreign company is permitted and under what ownership structure.
First introduced in 1995, the Catalogue has been amended many times, typically to reflect changing national economic and industrial policy goals. In 2019, the Chinese government has further liberalised number of industries in the negative list and made a lot progress in terms of making the market access system more streamlined and rule-based as well as open more industries to the list of encouraged, which can be understood as a part of a larger campaign by the Chinese government to improve the ease of doing business in the country.
When choosing an appropriate investment structure, it is important to remember that
“strategy must lead structure.” This means that foreign investors entering a new market
must first decide on their business strategy and then use this strategy to guide them to choose an
appropriate investment vehicle that will allow them to carry out their desired commercial objectives.
There are three main investment vehicles available to foreign investors:
1. RO (Representative Office)
The RO is a liaison office of its parent company. As such, the RO is run as a cost centre of the parent company and is taxed on a cost-plus basis, with the expenses of an RO (e.g. office rental, salaries, etc.) being taxed at roughly an 8.36%. Because an RO is not a legal entity, it requires no registered capital.
However, for purposes of legal and financial liabilities, an RO will be required to be opened in the name of and held by an overseas parent company that has been in operation for no less than two years.
2. WFOE (Wholly Foreign Owned Enterprise)
A WFOE is a limited liability company and is permitted to conduct a broad range of business activities, as long as those business activities are defined in its officially registered business scope.
As such, a WFOE can directly hire and employ both local Chinese and foreign staff, directly engage
with Chinese businesses and conduct contracts, collect and issue RMB payments, and issue official
RMB invoices (“fapiaos” in Chinese).
3. Joint Venture (JV)
Investors commonly opt for a JV in one of two situations. Foreign companies that want to invest in
a restricted Industry sector develop JVs with a Chinese partner to meet investment requirements.
Otherwise, foreign companies can form JVs when they want to make use of the sales channels and
distribution networks of a Chinese partner.
Establishing a business in China is not rocket science, but establishing the most appropriate investment structure is crucial to the success of even the most lucrative business.
For those business people with the drive and ambition to do so, at least see that there is now legislation that make it easier for them to establish investments in China.