Under the strong economic growth of China’s economy, companies may intent to expand their business to China. Since December, 2004, China has committed to open various business fields to foreign investors after joining World Trade Organisation (“WTO”). Nowadays, setting up a trading company or a franchise in China will be as easy as in USA, Hong Kong and Singapore or Taiwan.
In general, there are several approaches for foreign enterprises to step in China, they are Wholly Foreign-Owned Enterprises (“WFOEs”), Joint Ventures (“JVs”) and Representative Office (“RO”). Although set up a foreign enterprise in China is much easier now, it is still a challenging experience if customers would like to apply by themselves. With our experience in China, we can help you smooth the application with closedly follow up.
Wholly Foreign-Owned Enterprises
It is an independent legal entity in China with limited liability, wholly owned by one or more foreign investors and established entirely with foreign capital. “WFOEs” can carry business within its registered business scope. This kind of company is increasingly being used for service providers such as a variety of consulting and management services, software development and trading.
Advantage of “WFOEs”
Capital requirement for “WFOEs”
|Nature of business||Minimum capital requirement (RMB)|
|Consulting||0.1 – 0.5 million|
|Service||0.1 – 0.5 million|
|High Technology||0.1 – 0.5 million|
|Wholesales||0.5 – 1 million|
|Retails||0.5 – 1 million|
|Food and Beverage||0.5 – 1 million|
|Manufacturing||0.5 – 1 million|
The above table has listed the minimum capital requirements for the establishment of “WFOEs”. However, by our experience we will advice our customer to increase the capital up to a level which can cover the initial costs, says the office rent, decoration, salary, etc. As additional cost will be incurred, if reapply for permission to increase capital, additional licensing fees, renewals of business license and so on. Moreover, the setting up time may be difference from city to city.
Joint Ventures (“JVs”)
It is a legal entity with limited liabilities and is usually set up for specific purposes such as the establishment of a new manufacturing concern. Normally, it will limited to a fixed period of time from 30 to 50 years. In some circumstances, unlimited period of operation can be approved, says involved the transfer of advanced technology. Also, it requires foreign partner(s) to contribute a minimum of 25% of the capital. In general, the foreign partners provide the capital investment, technical knowledge and management skills and arrange for technology transfer. The Chinese partner normally makes land and buildings available and facilitates the smooth operation of the joint venture. The partners share the profits and losses of the joint venture in proportion to their capital contributions. The paid up capital of an equity joint venture may not be withdrawn during the term of its operation other than in exceptional circumstances and is subject to approval.
Capital requirement for “EJVs”
|Size of EJVs||Capital contribution required|
|Debt and equity||≧ US$3 million 70%|
|Debt and equity||US$3 million ≧ US$10 million 50%|
|Debt and equity||US$10 million ≧ US$30 million 40%|
|Debt and equity||≦ US$30 million 33.3%|
The “CJV” are sometimes referred to as Contractual Joint Venture and similar to “EJV”. However, it allows either to form as a single entity with limited liability or bears liabilities independently. The partners of “CJV” may share their profits and losses in accordance with the provisions in the “JV” contract which do not necessarily correspond with the ratio of their investment. In addition, the foreign partner may recoup its capital during the term of the “JV” as specified in the contract, provided that the ownership of all the fixed assets of the joint venture may revert to the Chinese partner on the expiry of the term.
Difference Between “EJVs” and “CJVs”
|Minimum Capital requirement||25%||N/A|
|Capital nature||Approval must obtain for contribution other than cash||Cash or Non-cash contribution are acceptable|
|Profit/Loss distribution||Linked to shareholding||Linked to the contract|
|Dissolution/Expiry||Net asset will distribute according to shareholding||Net asset may be transferred to Chinese party|
Representation Office (“RO”)
In general, “RO” is established for engaging business liaisons, quality control, product promotion, market research, exchange of technology and other permitted activities in China. Also, it is an effective and relative cheap way to expand your business in China begins with an “RO”. However, “RO” is not an independent legal entity. It is not allowed to directly engage in operational activities, cannot issue official invoices or receiving payments from its clients.