The year 2020 marks the 40th anniversary of the establishment of the Shenzhen Special Economic Zone. The city’s GDP has grown from $196 million RMB to $2.6 trillion RMB in 40 years, a nearly 14,000-fold increase, and it has been hailed as China’s version of Silicon Valley.
On 8 December 2020, the Shenzhen government held a Global Promotion Investment Conference, which attracted about 300 local and international enterprises, including the world’s top 500 enterprises such as Qualcomm, Nvidia and Microsoft, China’s top 500 enterprises, and foreign consulates in China.
According to the official statistics, from January to October 2020, the actual size of foreign investment in Shenzhen was US$ 7.055 billion, with a cumulative US$ 120.5 billion of total amount, higher than the national average. As of the end of October 2020, Shenzhen has approved 96,000 foreign direct investment projects in the calendar year.
For a foreign company considering where to set up operations in China, Shenzhen might offer a great deal of attractiveness as a gateway to the Chinese market:
- Shenzhen borders Hong Kong and is a transport hub in the Belt and Road Initiative and Asia-Pacific. Shenzhen is within an arm’s reach of the most developed market in the world – Hong Kong. Within a one-hour drive from Shenzhen, you can procure any main parts or accessories for any industry.
- Shenzhen is a leading hub in electronic information, internet, biology,and new energy industries. It has given birth to many high-tech companies such as Huawei, ZTE, Tencent, BYD, and DJI.
- More than 90% of Shenzhen’s population are of working age. The average age of citizens is around 33 years old.
- Shenzhen is the city with the deepest level of “market economy”in China, there are more than 3.2 million commercial entities. Both the total number and density of commercial entities rank first in the country.
The Shenzhen government is one of China’s most efficient governments, overturning the common perception that setting up a company in China takes months to complete. In this article, we provide you with a checklist for starting a business here.
A Checklist for Starting a Business and Company Setup in Shenzhen
- Assess the market access feasibility
Regardless of the business idea in mind, the first step before considering doing business in China is to check whether such business activity is allowed for foreign investment by the Chinese government.
China has adopted a “Negative List” system to guide FDI flows into the open sectors following its economic agenda. The Negative List points out the industries and sectors that are not allowed. If your industry is not on the Negative List, your project can go through a record-filing procedure without being asked for pre-approval.
Furthermore, you will also need to check the Market Access Negative List, which applies to every domestic and foreign company in China. This List serves as a guideline to the license requirements for those regulated industries.
- Choose a district and find a physical office
Shenzhen is administered by the provincial government and is a sub-provincial class city with independent planning status. There are 11 administrative districts: Futian, Luohu, Yantian, Nanshan, Bao’an, Longgang, Longhua, Pingshan, Guangming, Dapeng New District, and Shenshan Special Cooperation Zone. Furthermore, the city is home to the Shenzhen Qianhai Shekou Free Trade Zone, which benefits companies that fall under a list of encouraged industries.
Key factors to consider when choosing a district are proximity to key customers, key suppliers, access to talents, operation costs, access to applicable incentives, etc.
The Commerce Bureau of Shenzhen Municipality publishes and updates reference data on some major operating costs such as water, electricity, office space, and salary standards. Further information on the website: http://invest.commerce.sz.gov.cn/INVEST/LEAP/NSSWEN/html/investServices.html?type=0204
There is also a webpage where you can navigate an administrative division map of Shenzhen: http://invest.commerce.sz.gov.cn/INVEST/LEAP/NSSWEN/html/overviewCity.html
- Decide on your business structure and organizational form
Since the Foreign Investment Law and its Implementation Regulations came into force on the 1st of January 2020, the three laws and their implementing rules (collectively Three FIE Laws) governing the establishment of Sino-foreign equity joint ventures, Sino-foreign co-operative joint ventures, and wholly foreign owned enterprises and their operations in China have been repealed simultaneously.
Generally, you will be choosing from a list of 3 options in terms of the organization form of your business:
- Choose a business name
Most company registration processes start with getting your company name approved. While you can register an English name for the company, only the Chinese name is legally binding, and it follows a specific structure. Whatever your trade (brand) name is, the Chinese name should also include the type of business and the registered location, followed by the organization form at the end.
- Define your business scope
Business scope is a list of business activities that your China company can conduct in China. Generally, you can only issue Chinese tax invoices in the name of those activities already approved in the business scope. It is essential to make your business scope as precise as possible to avoid any wrong classification of the company’s industry. The registration authority (Administration of Market Regulation, or AMR) often plays a strong emphasis on following the standard expression of the business scope according to the “Classification of Industries of National Economy”.
It should be noted that even though your business scope is approved during the company registration process, you are required to observe any industry licensing requirements before you officially operate the business. Relevant descriptions may be included in the business scope at the time of establishment with AMR, but certain business activities must first be approved by the relevant industry departments. For example, although “selling food” can be included in the business scope freely, but before engaging in the business activities of selling food, approval documents such as “Food business License” must be obtained.
- Project the working capital you need
Since 2014, China has implemented the “Registered Capital Subscription Registration System”. Shareholders of the company may independently agree on the amount of capital contribution, the method and timing of capital injection, which shall be defined in the Articles of Association of the company. Although the minimum registered capital requirement was cancelled, shareholders should still consider capital contribution plan carefully.
AMR typically evaluates whether the registered capital subscribed is enough to cover the working capital needed to start the business and maintain it for the next 13 months. Suppose the shareholders appear to use a small capital to run a business that is obviously beyond the capital capacity. In that case, it may raise doubts whether the shareholders are transferring the investment risk to the creditor by maliciously taking advantage of the company’s independent personality as a limited liability company and the limited liability of shareholders. In this regard, your business model’s financial analysis and cash flow planning are instrumental in determining how much working capital you need until your China company becomes self-sustainable. As a result, the amount of working capital you work out in the financial planning is an excellent reference to the amount of registered capital you should subscribe.
In case you consider making a capital contribution in-kind such as intellectual property, land use rights, and other non-cash properties, they must be evaluated and verified by a licensed PRC appraiser and transferred legally.
- Prepare notarized and certified corporate certificates of the parent company
Among the set of application documents required to register a company in China, notarized and certified corporate certificates of the parent company are usually a time-consuming item to prepare. The FIE investor must provide documents to prove that the investor, be it a natural person or a corporate person, legitimately exists. If the investor is a natural foreign person, some districts of Shenzhen might require the presence of the investor and to verify his/her identify when the application documents are presented physically to the local AMR office. If the foreign investor is a corporate person, the corporate certificates must be notarized by a public notary, certified by the Chinese Consulate/Embassy, and translated by a certified translation company before they can be recognized in China. The process of notarization and certification may vary depending on the country or region. From a registration perspective, many foreign investors use a Hong Kong Company to invest in mainland China to save time since the certificates of a Hong Kong company are bilingual in Chinese and English, and they only need to be verified by a China-Appointed Attesting Officer.
- Identify your management personnel
Article 31 of the Foreign Investment Law stipulates that the organizational form, organizational structure, and activity criteria of foreign-invested enterprises shall be governed by the Company Law, the Partnership Law of the People’s Republic of China, and other laws. Therefore, the organizational structure of foreign-invested limited liability companies and joint-stock limited companies should be established and registered in accordance with the relevant provisions of the Company Law. The applicable requirements of the Legal Representative, Directors, Supervisors, and other senior management positions are as follows:
Despite that there are no residence or citizenship requirements for the Legal Representative, a person must not assume the position of a legal representative if he/she falls under any of the following categories:
- the person has no or only limited capacity for civil acts;
- the person is currently subject to criminal punishment or criminal enforcement measures;
- the person is currently the subject of an arrest warrant issued by a public security or state security organ;
- the person was subject to criminal punishment due to an offence involving corruption and bribery, violation of property or disruption to the order of the socialist market economy and it is less than five (5) years since the expiry of the term of enforcement; the party was subject to criminal punishment due to another type of offence and it is less than three (3) years since the expiry of the term of enforcement; or the party was deprived of its political rights because of an offence and it is less than five (5) years since the expiry of the term of enforcement;
- the person held the position of legal representative, director or manager of an enterprise which has undergone bankruptcy and liquidation as the result of unsound management and the party was held personally liable for the bankruptcy of the enterprise and it is less than three (3) years since the conclusion of the bankruptcy and liquidation proceedings;
- the person held the position of legal representative of an enterprise whose business license was revoked due to a violation of the law and the party was held personally liable for the unlawful actions of the enterprise and it is less than three (3) years since the business license was revoked;
- the person has a relatively large amount of personal debt which it failed to pay when due; or
- other circumstances stipulated in laws and the State Council regulations where a party must assume the position of a legal representative.
- Filing with Administration of Market Regulation and obtaining the business license & company chops
In Shenzhen, the company registration application can be initiated online at the government’s e-service platform. As a first step, you must first pre-register the company name. If the name is available to register, you will be directed to an online form that you are required to complete. After submitting the online information, you can then make an appointment with the local Administration of Market Supervision to submit the originals of the application materials, which generally include all the signed forms, original notarized and certified corporate certificates of the foreign investor, the China company’s Articles of Association, the appointment letters of Legal Representative, Director(s), Supervisor(s). If the documents are in good order, the business license can be issued and printed on the spot. After you obtain the business license, you can then go to the Public Security Bureau to carve company chops. A complete set of mandatory company seals include the company’s official seal, finance seal, invoice seal, and the personal seal for the Legal Representative.
- Corporate bank accounts: opening the RMB basic account and the capital account
An FIE usually needs, at minimum, two types of bank accounts: the Capital Account and the RMB Basic Account. Before the Capital Account can be set up, an FIE needs to go through Foreign Direct Investment Registration with the State Administration of Foreign Exchange (SAFE). However, the FIE does not need to contact SAFE directly for such registration. Since 2015, SAFE has already delegated its registration authority to the banks. That said, when an FIE applies for a Capital Account with an authorized bank, the bank will collect relevant information from the FIE and submit it to SAFE to get its approval.
In addition to the Capital Account, an FIE is also required to open an RMB Basic Account to pay salaries, taxes, and contribute social security premiums to their employees. Since only the RMB Basic Account can handle cash withdrawal, it is generally opened in a bank branch near the office of the FIE to facilitate the daily business. Depending on your business needs, you may also wish to open a Foreign Exchange General Account to facilitate foreign currency transactions.
- Legal Representative and Financial Controller‘s real name authentication with the Tax Bureau
In Shenzhen, for the newly set up FIE, the Legal Representative, the Finance Person-in-charge, Tax operator/handler must all go through an identity verification process with the tax bureau called “Real Name Authentication Registration”. While local personnel can do the Real-Name Authentication Registration online, foreign personnel must appear in person at the tax bureau. The tax officer will register their identity document, contact number, and facial information.
- Company Tax Registration at the Tax Bureau
In principle, an FIE must go through tax registration within 30 days after receiving its business license. After the tax registration, regardless of whether there is tax payable, the FIE must file tax returns within each tax period (monthly or quarterly).
- Social Security and Housing Fund Registration
You must also observe the deadline to register with the local social security agency and the housing provident fund management center. Typically, it is expected that a newly set up company registers the social security and housing provident fund contribution within 30 days from the date of its establishment.
- Apply for the industry licenses required before you start operating
If the FIE’s business scope involves activities that require other industry department’s approval, you should continue to go through the approval procedures with the relevant industry department before you conduct the activities. For example, import/export permit, food-operating license etc.
- Apply for work permits and residence permits for foreign expatriates or employees working in China
If you intend to employ foreign nationals working in China, you must apply for both the work permits and resident permits for these foreign individuals. With the nationwide implementation of the “Permit System for Foreigners Working in China” in 2017, the standards and procedures have been unified across the country. However, before you make an offer to any candidate, make sure the candidate meets these basic requirements:
- The company formation is compliant with the law with no severe breach of law and credibility records;
- The positions taken up by foreigners should be those with special needs,and there is a temporary shortage of suitable candidates in China;
- The wages and salaries of the candidates shall not be lower than the local minimum wage standards.
- At least 18 years old and in good health;
- Has no criminal record;
- Possesses the professional skills or appropriate knowledge level necessary for the work.
In 2017, China established classification criteria for foreigners working in China, which adopts a comprehensive application of i) a score points system, ii) a guidance catalog of foreigners working in China and, iii) a labor market quota management system. Under this mechanism, foreigners are classified into three types, Type A (High-level Talents), Type B (Professional Talents), and Type C (Common Applicants). As there is no simple definition for Type A, Type B, and Type C, it’s recommended to talk to an experienced China visa agent. Upon reviewing the candidate’s qualification, the agent should be able to tell you the type of applicant as well as the success rate.
- Annual and ongoing requirements
After carefully planning and implementing the steps above, you are now ready to start your business in Shenzhen. Our last piece of advice is to pay attention to the ongoing compliance requirements, such as accounting requirements, tax filing deadlines, annual audits, and annual reporting to government agencies.
Indeed, most start-up businesses need to focus on business and commercial development rather than government filings. The most straightforward solution is to find a reliable firm to which you can outsource the financial function. In looking for a service provider, besides comparing the scope of services and their fees, you might want to find out:
- Whether the accounting team engaged consists of qualified and licensed CPA professionals;
- Whether the accountant assigned to your case can communicate in English directly;
- Whether the senior management or the Engaging Partner of the firm is reachable to deal with any high-level issues occasionally;
- Professional and work ethics of the firm.
As a Hong Kong-based CPA firm with our wholly owned subsidiaries in Shenzhen, Guangzhou, and Shanghai, CW has accumulated years of experience serving foreign companies operating in Greater China.
If you wish to know more about setting up a business in Shenzhen, please do not hesitate to contact our Phenix Zheng at email@example.com.
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