While the scale of the Chinese market continues to offer companies bountiful opportunities, it can at times be a challenging jurisdiction in which to incorporate and do business. That being said, the process of incorporating in China has been simplified in recent years, with the government reducing the number of necessary steps and streamlining the registration process.
In our Global Business Complexity Index 2021, China ranked as the 12th most complex business environment. While it remains a challenging jurisdiction for companies seeking to set up here, this marks an improvement on its position in the 2020 GBCI, where it ranked in 6th place.
Many companies postponed their planned investments in China in 2020, in light of the pandemic. With restrictions on movement then continuing into 2021 and 2022, many have opted to rekindle their plans, despite being unable to travel to China in person. To work around this issue, some businesses have opted for identifying local directors or partners, and today, certain government processes and services can be accessed online.
Prior to incorporating in China
Before incorporating in China, there are a number of considerations to make and factors to carefully review.
The first of these is the type of entity to establish. Many foreign investors or companies will prefer to incorporate as a Wholly Foreign Owned Enterprise (WFOE), as this type of company does not require a Chinese partner. In the past, opening a WFOE in China required attaining certificates from several ministries, but today this process has been significantly simplified.
The registration process typically takes about four to five months, including the preparation of all documents and the application process itself. Certain documents may require validation in the shareholders' home countries, which may now take longer than usual given that there may be delays resulting from the pandemic.
Once all registration documents have been prepared and submitted to the regulatory authority, a business application may be approved within one to two days. Since the Covid outbreak, the government has allowed companies to submit paperwork online.
Previously, after obtaining a business licence, a company was required to register with five separate authorities in order to receive further certification. Today, upon receiving a business licence, the previous five certificates have been combined into a single business licence.
In most cases, a company's registered address must be a physical office which had already been established prior to the company's registration. Virtual offices are generally not allowed in China.
All documents required for incorporation must be translated into Chinese before being submitted to the government. However, while Chinese is the only official language, business contracts can be drafted in English, and English can serve as the recognised language.
No minimum capital is required except in certain sectors, such as banking and financial services. Opening a corporate bank account in China is a requirement, and it is worth bearing in mind that the process to open one can be quite complex and time consuming.
Eight considerations when incorporating in China
Foreign investors need to assess the legal, tax, cultural and political implications of incorporating in China. Here we detail some of the key considerations, but investors would be wise to seek advice from external professionals who can guide them through any uncertainties related to the process.
1. Market entry and Negative Lists
Check against the Negative List for Foreign Investment to determine if the proposed business is allowed or restricted. The system contains two types of special administrative measures: the first, "prohibited", represents sectors in which no foreign investment is allowed; the second, "restricted", means foreign investment is allowed but requires foreign shareholders to form a joint venture with the participation of Chinese shareholders (a relevant or absolute majority, depending on the sector) or senior management positions to be assumed by Chinese nationals.
2. Free Trade Zones
Since the establishment of the first Free Trade Zone (FTZ) in Shanghai in 2013, 22 FTZs have been established across China. FTZs represent "field tests" for market opening initiatives. The Negative List for Foreign Investment is shorter in FTZs than that of non-FTZ areas. Therefore, for certain sectors - such as publishing, entertainment and market research - foreign investment in FTZs enjoys more favourable market entry conditions compared with other areas of China. The steps for incorporation are quite similar within FTZs to those outside the zones.
3. Foreign Investment Law of China (FILC)
The FILC took effect on 1 January 2021. For those planning to set up a Chinese company or subsidiary, it is important to understand the new law and its impact on foreign-owned businesses. The law serves to protect the rights and interests of foreign investors, to promote fair competition between Chinese and foreign enterprises, fight corruption and standardise the administration of foreign investment.
4. Personal Information Protection Law (PIPL)
China's recently enacted PIPL establishes rules for how companies collect, use and store data. It also outlines data processing requirements for companies based outside of China, including passing a security assessment conducted by state authorities.
Multinational corporations that move personal information out of the country will need to obtain certification on data protection from professional institutions, if certain thresholds are met.
5. Legalisation of shareholder documents
China is not a Hague Apostille member country. Therefore, shareholder documents (certificate of incorporation and board resolutions) must be legalised in the home country for submission of company registration in China, a process that normally takes a minimum of four weeks.
6. Management structure
Not all management positions in a China-based company are required to be occupied by Chinese nationals or those residing in China. However, during incorporation in many cities, the legal representative or finance person-in-charge may be required to perform identification verification before the registration/tax authority or banks. Appointing a Chinese national will significantly simplify the identification verification.
7. Legal representative
The company's legal representative is an important and special position within a Chinese company. Shareholders should make a prudent choice of the appointee, as the civil activities of the legal representative, when acting on behalf of the company, may have repercussions for the company as a whole. Proper power of attorney needs to be put in place to regulate the behaviour of the legal representative.
8. Company chops
China still uses a chop system, under which documents are validated upon the stamping of company chops, even without the signatures of the senior management. Therefore, a proper chop application/approval policy is advised before the company commences operations. Alternatively, an independent third-party chop custodian vendor can significantly reduce the misuse of chops.
Talk to TMF China
TMF China's experts on the ground offer services across the three core business lines of accounting and tax, global entity management, and human resources and payroll. In addition to assisting with incorporation procedures, we help our clients with the cost efficient simplification of operations and all aspects of regulatory compliance. We currently have offices in Shanghai, Beijing, Chengdu, Shenzhen, Tianjin and Guangzhou.
Contact our experts today to find out how we can help you grow your business in China.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.