A foreign company planning to setup an office or expand their business in China has several options that they may consider for their company structure. Foreign investment in China can be made via one of several types of investment vehicles. Choosing the appropriate investment structure for your business depends on several factors, including its planned activities, industry, and investment size.
It is crucial to take into account various aspects of the target entity types before deciding which kind of business to launch in China. These include differences in structure, legal liability, statutory compliance requirements, time needed to set up the business, the kinds of activities the business can engage in, and more. These factors aid in determining the proper business costs, requirements, risks, and limitations needed to support the company's future development, growth, and intended capabilities.
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The common entity types available to invest in China are Representative office (RO), Wholly foreign-owned enterprise (WFOE), and Joint venture (JV), while alternative investment options exist.
Each of these types are explained in the Types of Business in China guide and is suggested reading. This guide, meanwhile, focuses on comparing the entity types only via the below:
Comparison of Entity Types in China: Set Up Requirements, Pros, Cons, and More
Comparison of Three Types of Investment Structure in China
Comparison of entity types in China: Set up requirements, pros, cons, and more
Getting access to sectors that are restricted or prohibited to foreign investment
See common purpose
Breach risks of the contractual arrangement
Vague attitude of the Chinese authority towards VIE structure
*Under the FIL, the terms of the WFOE Law and the JV Law are no longer binding. Nevertheless, we still use WFOE and JV to refer to relevant investment forms for consistency and easier communication
The most common types of businesses that are set up by foreign investors are
China subsidiary (WFOE or JV);
Branch Office (BO); and
Representative Office (RO).
ROs are forbidden from engaging in any profit-seeking activities and may only be used to facilitate the activities of the foreign company in China, while branch office is rarely used when foreign investors access the China's market, except in limited cases such as foreign banks, foreign insurance company, foreign oil search company, etc. Rather, branch offices might be set up by Chinese subsidiaries when expanding business across China. For foreign investors planning to conduct business in China, registering and setting up a limited liability company (subsidiary company), either WFOE or JV, is the most obvious option.
Comparison of Three Types of Investment Structure in China
China subsidiary
Branch offices
Representative offices
Legal type
Separate legal entity
Not a separate legal entity but an extension of the company it affiliated
Not a separate legal entity but an extension of the parent company
Liabilities
Limited liabilities within the registered capital of the subsidiary
Liabilities incurred by the branch office extend to the company it affiliated
Liabilities incurred by the representative office extend to the parent company
Entity name
Can be the same or different from the parent company, but should indicate the form of liability of the business
Must be preceded by the name of the business to which it is affiliated, indicate the nationality and form of liability of the business, and suffixed with such words as "branch", "branch (factory)" or "outlet".
Must comprise the following components sequentially: nationality of the foreign enterprise, Chinese name of the foreign enterprise, name of the municipality where the representative office is located and the words "representative office"(代表处)
Allowed activities
Can be the same or different from the parent company
Limited to the same business scope as the company it affiliated
Limited to non-profit-seeking activities, including:
Market research, display, and publicity activities that relate to company products or services
Liaison activities that relate to product sales or services and domestic procurement
Validity period
The term of operation is subject to the investor’s decision
The term of operation cannot exceed the validity period of the company it affiliated
The term of existence cannot exceed the validity period of the foreign parent company
Taxation
Taxed at corporate income tax (CIT) rate of 25% with access to tax incentives available
Taxed at corporate income tax (CIT) rate of 25% with access to tax incentives available
Taxed as a permanent establishment in China, which usually amounts to a liability of approximately eight percent of the total expenses of the RO
Annual audit and reporting
Yes, during the period between January 1 and June 30
Yes, during the period between January 1 and June 30
Yes, during the period between March 1 and June 30
Staff hiring
No restrictions on hiring local staff; hiring foreign staff based on real needs.
No restrictions on hiring local staff; hiring foreign staff based on real needs.
Can directly hire up to four foreign nationals as the representatives; cannot directly hire Chinese employees, rather, it is required to employ local staff through a qualified labor dispatch agency.
Pros
Greater freedom in business activities than representative offices
Simple establishment
Easy maintenance
Easiest foreign investment structure to set up
Paves the way for future investment
Cons
Registered capital requirement (for select industries)
Lengthy establishment process
Limited business scope (must be within that of the company it is affiliated);
Not a legal entity (all liabilities born by the companyit is affiliated)
Cannot invoice locally in RMB
Must recruit staff from a local agency; no more than four representatives
