You have decided that your business has now outgrown your current mode of presence in the Chinese market – whether that be cooperating with local partners and distributors, testing the waters through a representative office, or hiring local staff through an Employer-of-Record service provider. You are now ready to take the plunge by setting up a standalone, full-fledged foreign invested enterprise (“FIE”) in China.
Or you may still be on the fence. You are considering the viability of what is indeed a rather heavy investment, and carefully weighing up the costs and benefits involved before taking the ultimate step.
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Do you need to set up an FIE in China?
Besides the more obvious reasons, such as having reached critical mass or needing to set up your own manufacturing and inventory facilities, below are several other pointers to help you determine whether setting up an FIE in China could be the way forward for your business:
Take back the reins of control
Rather than relying on local trade intermediaries, such as distributors or sales agents, to sell to China, you may now wish to take ownership of the full length of your customers’ buying journey – as well as have more transparency and control over the financial administration of your business in China.
In order to sell to Chinese customers directly, you will need to have local corporate presence to be able to issue fapiaos, which are official invoices issued by the tax bureau for the purchase of goods and services. Its purpose is two-fold – to serve as a tax invoice and as proof of purchase. A possible scenario might be that your customers have voiced concerns over transacting with your existing intermediaries and asked for the issuance of fapiaos bearing your company’s name.
Having your own entity in China means being able to exercise full control over all business processes directly, which can in turn better facilitate the enforcement of intellectual property rights and minimise the chances of your intellectual properties falling into the wrong hands.
Show clear commitment to Chinese market
Establishing proper corporate presence in China can help send a very clear signal to your customers and stakeholders that you are in earnest about your investment in the Chinese market and in it for the long haul. As opposed to selling through trade intermediaries, whose representation may not give full play to your brand and value proposition, you would like to enhance brand credibility and trust by way of a well-established, permanent local presence.
Hire on-the-ground staff
It could be that employing staff through Employer-of-Record or other similar agencies no longer suits the needs of your fast-growing business. Having on-the-ground staff with local expertise and knowhow is invaluable in a market as vast and culturally specific as China, where business relationships and interactions are largely governed by unwritten rules that foreigners may find hard to grasp. A well-connected and robust network of on-the-ground facilitators to coordinate all aspects of your China business is indispensable. Additionally, the increase in sales and expansion of your client base with more differentiated needs may now necessitate a more overt local presence, such as having an on-the-ground customer service team.
Fully participate in China’s rich digital ecosystem
In order to leverage the pervasive power of social media platforms in China, it is generally necessary to set up your own company in China so that you can register for an official account on WeChat, for example. Since the Chinese market is made up overwhelmingly of so-called “mobile-first” consumers, fully engaging with the local digital ecosystem can help you tap deeper into the Chinese market.
In addition, while you can indeed have your website translated into Chinese, tailor it to Chinese consumers and host it with an overseas service provider, hosting it inside China can improve its accessibility and site speed.
What should you consider before setting up an FIE in China?
Market access
Although, since the promulgation the new Foreign Investment Law in January 2020, foreign invested enterprises and domestic enterprises have been legally regarded as being on equal footing, entry into certain industries remains restricted through China’s “Negative List” system. As the first step, it is vital to check whether your proposed business activities in China are classified as prohibited or restricted to foreign investment. In the case of a restricted activity, approval is at the authorities’ discretion, and a joint venture investment structure will need to be set up. In the case of a non-restricted activity, however, no prior approval is required. You will instead undergo a registration process to file the relevant records.
Registered capital
Registered capital refers to the total amount of capital contribution to be injected by the shareholders of the FIE. In accordance with the new Company Law promulgated in March 2014, a minimum registered capital requirement is no longer imposed on the majority of companies, bar those engaged in the provision of financial services, insurance, etc. Individual shareholders are given discretion over the amount, timing, and method of their respective capital contributions, which can be paid in a lump sum or instalments.
It is important to note that, while there is no minimum registered capital on paper, the local Administration for Market Regulation (“AMR”) will in practice evaluate the sufficiency of the registered capital, taking into account whether the amount set is adequate to cover operating expenses for the initial 6 – 12 months following establishment.
Under the amended Company Law scheduled to take effect on 1 July 2024, shareholders must contribute their entire subscribed capital within five years from the date of incorporation.
Business scope
You must clearly define the business scope of your FIE in China, which refers to an approved list of business activities that your company is allowed to conduct. The formulation of such a list is very concisely and specifically worded using standardised terminology. Thus, you are well advised to draft a carefully worded business scope that conforms to the language norms prescribed by the authorities. You can consult the Industrial Classification for National Economic Activities for reference purposes. An accurate definition of your business scope is of utmost importance, given that you will only be allowed to issue fapiaos in the name of the activities enumerated in your business scope. Infrequent slight deviations from the business scope may be tolerated, but regular deviations can lead to administrative fines and – in the worst-case scenario – the revocation of your business licence. Given the severe repercussions of non-compliance, it is crucial to operate within the confines of your registered business scope.
Depending on the industry in which you wish to operate, you may be required to apply for specific industry licences and observe additional requirements as set by the relevant industry departments. For example, you must obtain the food business licence to be able to establish a business in the catering industry.
The significance of a strategically crafted business scope cannot be emphasised enough. On the one hand, an overly narrow scope will be restrictive on the development of your business; on the other hand, an overly wide, “catch-all” scope is unlikely to be approved by the local AMR.
Location
Without a doubt, the choice of where to establish your company is an integral part of your strategic planning. Proximity to key customers and suppliers, access to talents, operating environment, availability of real estate and government incentives, etc. should be factored into your decision-making process.
Owing to the sheer size and diversity of the country, China is far from being a homogenous, unified market. Categorised according to tiers, cities differ greatly in terms of infrastructure, population size and development. Tier 1 cities, i.e., Shanghai, Beijing as well as Guangzhou and Shenzhen in the Greater Bay Area, are the largest with the highest GDP. On the other end of the scale, lower-tier cities may often be overlooked and not receive much fanfare, but they actually make up over 70% of China’s population, and consumption in such cities is expected to surge to USD6.9 trillion by 2030. The city-tier system provides a useful starting point for navigating the enormous scale of the Chinese market, which is geographically highly segmented in terms of consumer habits and discretionary spending power.
In addition, you may want to consider setting up your company in one of China’s 21 pilot free trade zones (“FTZ”), including Shanghai, Guangdong, Fujian and Hainan, which offer preferential policies and a less restrictive regulatory environment conducive to trade and investment. Several key advantages of setting up in an FTZ include bonded zones, simplified customs procedures, lower corporate tax rates, a more liberalised investment environment for certain industries and more relaxed foreign exchange controls. However, it should be noted that, once you are set up in a particular FTZ, it may be very difficult to extend your operations beyond the FTZ to another locality – if your business activities are classed as restricted or even prohibited in the locality where you are seeking to expand your business.
Office
It is a prerequisite to produce an appropriate lease agreement or property deed for office premises as part of the FIE registration process. If the offices premises are leased from another party, you are well advised to conduct verification checks to ensure that the office premises have been duly approved to be used for commercial purposes, and the duration of the lease should not be less than a year.
When conducting due diligence, you should request the following documents from the landlord:
- Business licence affixed with company seal
- Property ownership certificate affixed with company seal
- Filing records in respect of the property issued by the local authority
- In the case of a sublessor leasing commercial property from another party, a legally valid sublease agreement
What do you need to prepare before incorporation?
Have key documents legalised and notarised
Prior to registration of your FIE, it is necessary to have the incorporation documents of the parent company legalised by a local notary public or notary office, notarised by the Chinese embassy or Consulate-General at the location where you are based, and then translated into Chinese by a certified translator. This can turn out to be a rather protracted and time-consuming process, spanning several months, so it would be sensible to prepare well in advance.
A Power of Attorney authorising another party to act on your behalf and conferring power on the designated person to sign all legal documents in the FIE’s name, will also need to be legalised and notarised, should the local registration authority require its submission.
Decide on company name
Choosing a Chinese name written in Chinese characters is compulsory, while an English name is optional. Generally, the name should follow a standardised format, comprising the following four aspects:
- Name of the administrative region where the FIE will be based
- Trading name made up of no fewer than two Chinese characters
- Type of business or industry in which the FIE will operate
- Type of corporate structure
Identify key management personnel
Click here to find out more about the important role and responsibilities of the legal representative.
What is the procedure for setting up an FIE in China?
What documents are required?
What can CW do for you?
At CW, we understand that you want to hit the ground running when you enter the Chinese market. Setting the right market entry strategy from the very outset is, therefore, essential. We know that businesses come in all shapes and sizes, each with their own particularities. Providing you with a tailored and total solution from entry, set-up to supporting your business in reaching the next stage of growth in China every step of the journey, we can help you determine which type of entity is the optimal investment vehicle and best suited to your individual needs as a business.
To start your China business with us, contact us today.
