How Foreigners Can Set Up and Run Business in China
The China Laws Series . 23 February 2023
This is our new original series on China laws which aims to share on impact and development of the laws of China to our readers and clients who are seeking to venture to China for business activities, or simply as reading material for further knowledge.
China is an economic superpower which is leading the way in terms of modern rail infrastructure, electronics, digital trends and innovations, future living and many other ways of modern living. Long known as the factory of the world, China has reinvented itself multiple times to be the world's source of products manufacturing and other components that make living in modern times so advanced and comfortable. Indeed China has positioned itself as the next economic superpower in modern times and its post Covid economic recovery has not stopped China's GDP from maintaining a consistently high and impressive growth.
In this post today, together with our colleagues at one of Guangdong's leading law firms, I would like to share on how foreigners who are looking to set up a business or company in China need to have a clear knowledge of how Chinese laws work as it is imperative for a successful venture. This in-depth report will explore the variety of businesses and companies in China and the available legal avenues for foreign investors to establish their presence in the country. Getting the correct business structure in place is important in order to ensure that a business is compliant with the regulations and guidance of the Chinese government.
Overview of Business Types and Business Law
The most common type of business setup in China is the limited liability company (LLC). An LLC is a business organization owned by a group of shareholders and managed by members of the company. The LLC is the most popular form of business in China and is also the most flexible when it comes to tax planning and management of resources.
Other common forms of businesses in China include sole proprietorships, joint ventures, cooperatives and private limited companies. Each of these business types has different rules and regulations that govern their operations and also have different tax implications.
The Chinese legal system is split into two main branches - civil law and administrative law. Civil law is made up of the Codes of Civil Procedure and Administrative Law is made up of the Administrative Procedures. A company must follow both the civil and administrative laws in order to be compliant with Chinese laws and regulations.
Foreigners may set up a business or company in China through one of the following legal avenues:
1.Wholly Foreign Owned Enterprises – These are businesses that are solely owned by foreign investors and have no presence or control by a Chinese partner. In order to set up a WFOE in China, foreign investors must register with the Chinese government and obtain a Wholly Foreign Owned Enterprise license.
2. Joint Ventures – These are businesses that are set up for joint investments between Chinese and foreign investors. While the foreign investor may own a majority stake in the company, the Chinese investor must have a stake in the company no less than 25%. In order to set up a joint venture, both the Chinese and foreign investor must register with the Chinese government and obtain both a Wholly Foreign Owned Enterprise license and a Chinese Enterprise License.
3. Representative Offices – These are businesses that are setup by foreign companies as a liaison office to service their existing customers and clients in China. A representative office in China is only permitted to conduct sales/marketing activities and will not be allowed to conduct any financial activities such as holding funds or invoicing.
Foreign investors looking to set up a business in China need a clear knowledge of the legal avenues available to them in the country. By understanding the various business setups, foreign investors can ensure that their business is compliant with Chinese regulations. All types of businesses come with their own unique tax and legal implications, so getting the right business structure in place is important for a successful venture in China.
Advantages of Setting Up Business in China for Foreigners
Business in China often presents great opportunities, both in terms of wealth and opportunities for expansion. The golden age of Chinese economy and business began in the late 1970s with the opening up of the Chinese market and since then it has become a thriving global economic and business powerhouse. The following are some of the advantages of setting up business in China for foreigners.
1. Favorable Laws and Regulations: The Chinese government has made many reforms that have pushed the economy forward and made it easier for foreign companies to do business in China. Regulations in China are greater than most countries and the country has an established legal system which helps to protect foreign investments and experiences. Furthermore, the Chinese government has policies in place to continually improve its policies.
2. Access to Larger Markets: China has a population of 1.4 billion people, making it the world's biggest consumer market. A business located in China can access more potential customers than any other country.
3. Low Labor Costs: According to Forbes, China's labor costs are some of the lowest in the world. This is a significant plus for anyone wanting to do business in China.
4. Government Support: The Chinese government has implemented policies to promote foreign investment. This means that foreign companies that open up businesses in China can get access to tax benefits and subsidized loans. In addition, the Chinese government has made efforts to streamline the process of setting up businesses, making it easier and faster for foreign companies to establish themselves in the Chinese market.
5. Abundant Resources: China has an abundant supply of raw materials, resources, and skilled labor. This means that businesses based in China can take advantage of these to produce high-quality products at a lower cost than if they were located in another part of the world.
6. Skilled and Motivated Workforce: Although China has traditionally had a low-cost workforce, the country has made great efforts to improve the skills and qualifications of its citizens. This means that foreigners who do business in China can have access to a highly motivated and skilled workforce.
7. Access to Talent: China also has an abundance of talent and experienced professionals in many specific business fields. This gives foreign companies access to a skilled workforce that can help them succeed in the Chinese market quickly.
What about the Chinese company, business, visa and tax laws ?
The Chinese company, business, visa and tax laws are different from most foreign countries. China is divided into two legal jurisdictions: the mainland, where the national law applies, and Hong Kong/Macau, where the separate legal systems apply. In the mainland, there are primarily two legal systems governing business activities: the Civil Law and Company Law.
Chinese Civil Law is the basis of all national legislation. It determines basic procedures for entering into contracts and litigation, as well as specific regulations governing intellectual property protection, real estate, and foreign investment.
Chinese Company Law governs domestic corporations and foreign invested companies. It prescribes administrative, financial, and other regulations related to the formation and business activities. It requires companies to obtain license depending on the type of business, and set up its books according to the Financial Accounts Law and other regulations.
In terms of visa incentives, foreign investors are allowed to apply for business visas in order to work and live in the mainland. There are also investment visas and skilled worker visas, which come with a set of special benefits and accelerated immigration timelines.
In terms of taxation, foreign companies can take advantage of several benefits and preferential policies in China, especially in the manufacturing and technology industries. Depending on their activities, companies may also be eligible for special grants and tax cuts.
Overall, doing business in China can help business owners expand their reach and make them huge profits. The Chinese laws and regulations for foreigners setting up businesses in the country are fairly straight forward with many incentives. It is important to note that, since the rules and regulations are constantly changing, it is imperative to stay up-to-date on all of the rules and regulations in order to run a successful business in China. Our legal team in Malaysia and China can help you to enter into China and to bridge your commercial and business interest to be as successful as possible.
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