Today we interview Wei Hsu, Managing Director of INS Global Consulting, a Shanghai-based firm that helps foreign companies and individuals to develop their business in China, handle Visa procedures, payroll management, recruitment and much more.
In this interview, we’ll focus on what you need to know in order to start a business in China.
Wei, first of all, thank you for accepting this interview. If you want to operate in China, you need a legal entity. What is the difference between the most common types of legal entities in China, Wholly Foreign Owned Enterprise (WFOE), Joint-Venture (JV) and Representative Office (RO)?
A WFOE can be owned by foreign parties or offshore companies. It is an independent legal structure that offers a control of operations and a physical presence. You are the sole investor of the company so costs are not shared with your Chinese partner like in a JV. However, as an owner, you are able to choose a business strategy and are responsible for the processing of sales, the local logistics and management of staff.
There is also an important fact to take into consideration: it is not possible to set up a WFOE in every sector. The Foreign Investment Catalogue provided by the Chinese Government lists all restricted sectors as well as those for which investment is encouraged, prohibited or simply permitted.
A JV can exist in two forms: the Equity Joint Venture (EJV) where profits are proportionate to each partner‘s shares and the Cooperative Joint Venture (CJV) where profits are allocated according to the terms of the venture contract. A JV is usually considered with a local company having a complementary commercial and technical know-how.
When establishing an Representative Office, your goal should be essentially representation, branding and market research as it does not allow you to make any sales. Financially, it is solely supported by its parent company.
In what cases it’s better to go for a WFOE instead of a Joint-Venture?
It is important to not forget that a Joint-Venture often implies a technological transfer. As you may be well aware, there are some issues with intellectual property in China. Usually foreign companies wanting to sell and/or manufacture a high value-added product will opt for a WFOE to protect their technology and know-how.
A WFOE also allows you to avoid lengthy negotiations with a Chinese partner and an independent use of your capital in Renminbi (RMB) to pay for business expenses and local sales. The decision process is simpler and the management easier for a WFOE.
Basically, you should pounder the pros and cons with your needs.
What are the costs of setting up a WFOE and how long it takes to complete the procedure?
It is hard to give a short answer to the question of cost or duration of the procedure. Sectors opened to the creation of a WFOE can be extremely diverse. Most WFOE belong to one of these categories: Trading/Import-Export, Consulting, Service Industry, Retail, Franchising or Manufacturing. With a minimum of setbacks it usually takes 3 months for a Consulting business license, 3 to 6 months for a Trading business license and 6 to 12 months (or more) for a manufacturing business license.
Regarding the cost of establishing a WFOE, I would like to point out that following the company law of March 2014, there is no longer a minimum registered capital required (excluding sectors like banking, forwarding, etc.). I will still advise to prepare a registered capital within the scale of 100,000 to 500,000 RMB. You will need to rent an office before submitting your demand of business registration to provide a real address for the required documents.
Since August 2015, the Chinese government lifted some restrictions concerning real estate regulations. Foreign institutions and individuals, outside of the real estate sector, can now invest their money in buying commercial real estate for self-using. Whatever your choice is (buy or rent), it will be an important investment, especially if the procedure lasts 6 months or more. You will have to pay several months of rent at a time in which you cannot make any sales.
Moreover, after getting the registration certificate, there are some mandatory post-registration requirements to complete the establishment of your business. To avoid setbacks, foreign investors are often advised to hire a consultant on the ground to help set up their subsidiary.
Does the procedure change according to the city and/or the type of your business?
That is a good question. Indeed, the procedure and the government fees vary according to the type of businesses or the city you want to set up in. But there is still a common ground in the process of setting up a business in China. You will need to: make sure your sector of activity is opened to foreign investments, choose a Chinese name for your company and check that it is abiding by the regulations and that it does not already exist, open a bank account and deposit funds, apply for a business license.
In the case of a WFOE, you will also have to appoint a legal representative who is taking up responsibility. Then, if you want to open a Consulting, Software, Service or Trading WFOE in Beijing, Shanghai, Shenzhen, Hangzhou, Tianjin or Guangzhou, the government fee will be approximately 1,000 Euros. If you want to open a Freight Forwarding WFOE it costs about 2,000 Euros, a Food and Beverage WFOE 2,500 Euros and a Manufacturing WFOE approximately 5,000 euros.
If you want to establish your company in a specific Chinese city, before doing anything, you have to be in contact with the local government, get a specific guide of the registration procedures there. Maybe the local government implemented attractive policies for your sector of activity.
This will help make an accurate estimation of how much money and time the procedure will cost you.
What are the costs of maintaining a WFOE?
The main factors affecting the maintenance costs of a WFOE in China are: accounting and taxes, human resources/financial/corporate management, office rental (or purchase), banking services. There used to be an annual audit and accounting inspection, a real source of expense, but it is not the case anymore.
A company can have its accounting records kept in another language but it must have a Chinese version. Apart from the taxes, recruitment will be an important part of maintaining a WFOE. The general trend in China is that average wages are increasing. The salaries of your employees will depend on the location of the WFOE and the sector of activity of the company. People in first-tier cities (Beijing, Shanghai) will expect a higher salary than in second (Hangzhou, Tianjin) or third-tier (Suzhou) cities.
Beside the costs, what are the most common challenges for a foreigner that intends to set up a company in China?
The demography, geography, business values and consumer behavior are really different than in western countries. Foreign companies always try to apply their Western business model “that worked everywhere else” to China and fail.
Flexibility and adaptability are the keys for a successful strategy in China. Also, communications with Chinese business partners or clients is really important. Avoiding misunderstandings is a priority and demonstrating efforts to understand the culture is really appreciated by Chinese people. Finally, the administrative procedures are heavy and complicated especially if you have no connection (or Guanxi).
A question we get often from our readers: Is it possible to operate in China through an off-shore company in Hong Kong or Singapore?
People used to open a Trading Company in Hong Kong and a Representation Office in China to avoid setting up a WFOE or a JV. They could then enjoy the tax advantages of Hong Kong: there was no need for a minimal registered capital and the paperwork was easily done.
Then, the Chinese government implemented new rules to stop this practice. Since March 2011, to open a Representation Office in China, a Parent Company should be at least 2 years old, regardless of the country of origin. So instead of waiting 6 to 12 months at the most you would have to wait 2 and a half years at least for opening a Representation Office.
If you want to directly and independently operate in China, it is now easier to work through a WFOE or outsourcing your business and staff management to an already established local company.
Can your Chinese company sponsor a Visa for you and/or your foreign employees?
Yes. Once established, a Chinese company can sponsor a working visa or a business visa for foreign employees.
What’s the taxation rate for a WFOE or Joint-Venture?
Tax duty of a WFOE and a Joint Venture include: the Turnover Tax or Transaction Tax (consisting of the monthly Business Tax), Value-added Tax or VAT and the Income Tax (which includes the Corporate Income Tax or CIT, and the Individual Income Tax). The Business Tax varies from industries from 3% to 5% (excluding entertainment: 5% to 20%). VAT is usually 17% or 13% and for small-scale taxpayers can be 3%. It applies to trading and manufacturing businesses. The CIT is based on gross profit; it is 25% nationwide but encouraged industries, advanced technology enterprises, companies enjoying tax incentives in Special Economic Zone are subject to a 15% CIT.
There are all kinds of tax incentives. They are specific to an industry or a location and are usually negotiated with the local authorities.
What about taxation for company owners on salary and/or dividends?
For the salary, we are talking about the Individual Income Tax (IIT). If you are living and working in China for more than 90 days (or 183 days if a tax treaty is applicable) but less than a year, you are subject to paying the IIT on the income derived from sources within China. The taxation goes from 5% to 45%. Individual Income Tax Concessions for Foreigners exist such as the exemption from IIT of language training fees and children’s education expenses, verified and approved by the local tax authorities. The Dividend Tax is 20%. As for public listed enterprises, the Dividend Tax is 10%.
Do you have any further advice for our readers?
A failure in China can have repercussion on the position of your company on the market compared to your competitors but not coming to China would be missing a unique and great opportunity for development. You will never be prepared enough to deal with Chinese business practices. If you lack knowledge and expertise in business development, intercultural management, legal and administrative matters and/or marketing in China, the best solution would be to bring in an expert.
With thorough preparation, perseverance and a good environment with competent individuals, success is definitely possible in China!
Thank you Wei for replying to my questions!
P.S. If you want to learn more on how to open and operate a business in China, you can head to INS Global Consulting’s website.