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In order to avoid a cumbersome trial-and-error process, it is important to understand what options foreign investors have to set up a company or extend their business into China. This article introduces the various types of foreign business entities, their characteristics and whether or not they accommodate your needs.
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1. Representative Office (RO)
Representative offices are non-legal entities that are viable foreign investment vehicles. They are “non-legal” in the sense that any direct profit generating activities are strictly prohibited. Indirect business operations permissible for ROs are:
- Head office liaison with clients in China
- Product introduction
- Market research
- Data & information collection
Contracts cannot be concluded between ROs and other parties in China.
What’s in it for you?
If you are a trade agency or in the service industry and you have little initial investment funds, you may opt for ROs. The set up process and capital requirement for ROs are more easily obtained compared to that of foreign invested enterprises.
2.. Branch of a foreign corporation
What is it?Branches are also non-legal entities for foreign investment and thus cannot engage in direct profit making operations. A liable Chinese legal representative must be appointed to the branch. Unfortunately, as an extension of their overseas head offices, branches are not eligible to the legal rights and protection that Chinese business entities are entitled to.
What’s in it for you?
If you are in the financial services sector or oil exploration industry, you may opt for branches. Theoretically, all foreign enterprises can apply for branches in China, but in practice only branch applications from companies in the fields mentioned above are processed.
3.. Foreign Investment Enterprise (FIE)
A FIE is essentially a Chinese entity with 25% minimum foreign investment. In other words, as opposed to non-legal entities described above, FIEs are legal entities entitled to Chinese company law rights and protection. FIEs can conduct profit generating business activities in compliance to their government approved business scope. In general, FIEs encompass the industries such as manufacturing, processing, trading and/or service activities. There are three types of FIEs, depending on ownership and shares of profits:
3.1 Wholly Foreign-owned Enterprises (WFOE)
A WFOE, quite self-explanatorily, offers foreign investors exclusive control of the enterprise.
What’s in it for you?
Chinese partner involvement is not mandatory or required under investment regulations for WFOEs. Hence, WFOEs are sometimes used to protect technology and intellectual property. Additionally, the approval process is simpler and the limitations on business expense payment and local sales volume are more lenient for WFOEs.
3.2 Equity Joint Venture (EJV)
An EJV is an independent legal entity with at least one foreign investor and at least one Chinese investor. Ownership and profit division depend on each party’s respective contributions to registered capital. Investors hold equity interests instead of stock shares from public issuing. (More information from Joint Stock Company section) Equity can be cash, capital, intellectual property rights, materials and etc with the exception of labor. Directors, who are assigned by the investors, have voting power instead of shareholders in western country enterprises.
What’s in it for you?
The advantages of Chinese partners are: domestic financing, larger or deeper access to domestic markets and easier contact with domestic social networks. Furthermore, as a holding company, an EJV can benefit from economies of scale in operations and management via collective investments under one corporate identity. More specifically, EJVs may implement centralized purchasing, personnel training, project management coordination and product marketing.
3.3 Cooperative Joint Venture (CJV)
Besides the EJV, it is also possible to establish a CJV. There are two characteristic differences between an EJV and a CJV. Firstly, while an EJV is always a limited liability company, a CJV can be a legal as well as a non-legal person. The latter option is not very common though because it would mean that the partners of the joint venture would be personally liable for any losses the company might make in the future. Secondly, in an EJV the distribution of profits must be proportionally equivalent to each party’s capital contributions ratio. However, in a CJV the distribution of profits may be decided more flexibly by the parties.
3.4 Joint Stock Company (JSC)
A JSC is the only form of FIE that is eligible for public listing on a Chinese stock market. Other types of FIEs can be transformed into JSCs by converting registered capital into stock of the company.
What’s in it for you?
JSCs can invite shareholders in the company to increase capital and establish connections with other legal entities in China. Furthermore, JSCs do not require prior authorization from other partners to dispose or transfer interests.
Contact Us
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