27th May 2016Journey to the East – Setting up operations in China

The last few years especially have seen a dramatic rise of upper middle class families in China. These households, with annual disposable income of between US$24,000 and US$46,000, currently account for 17 per cent of urban households. According to a recent survey by BCG and AliResearch, the number of such households is expected to reach 30 per cent or 100 million by 2020.

…such rising affluence and the demand for more sophisticated and premium products present significant opportunities for foreign companies aiming to target China.

Despite a recent slow-down in the Chinese economy, such rising affluence and the demand for more sophisticated and premium products present significant opportunities for foreign companies aiming to target China. The traditional route of selling to China has been via local distributors or directly to consumers via e-commerce. But foreign businesses will find that setting up operations in China itself will become an increasingly attractive proposition.

The three most common ways of setting up in China are:

i) Local representative office

A representative in China may conduct certain business activities such as meeting customers and suppliers, but cannot be seen to undertake profit-making activities.

ii) Joint venture structure

A joint venture (JV) managed by both Chinese and foreign parents is incorporated as a limited liability legal entity. There may be restrictions on the level of foreign ownership and finding a competent and trustworthy JV partner can be challenging.

iii) Wholly foreign-owned enterprise

A wholly foreign-owned enterprise (WFOE) is a limited liability legal entity and can have 100 per cent foreign ownership. This structure gives the most flexibility to foreign investors and is often set up with a Hong Kong intermediate parent company, to make full use of double tax arrangements.

Setting up Foreign Invested Enterprises (FIE) such as a JV or WFOE in China is challenging and time-intensive.

The principal aspects of setting up a WFOE are:

i. Securing business premises and signing a lease with the landlord from the start.

ii. Defining the business activity, which needs to be on the list of government-approved activities.

iii. Applying for name registration and then the business licence.

iv. Registering for tax and foreign exchange control.

v. Registering with the Public Security Bureau and obtaining the company seals or chops (in China, company chops are used on most official correspondence and documents).

vi. Determining the level of invested capital and the debt vs equity ratio.

vii. Appointing a legal representative and employing staff.

Although reforms in China to cut red tape are on-going, appointing the right professional with key knowledge of the process and the local culture is critical and can expedite the establishment of the FIE.

Here at HW Fisher & Company and with our contacts in China and Hong Kong, we can assist UK businesses in their journey to the East.

Gilles Siow, Audit Principal
T 020 7874 1159
E gsiow@hwfisher.co.uk