Key benefits

The People’s Republic of China is the world’s fourth largest country with over 1.3 billion people and is one of the fastest growing economies in the world. In recent years China has enjoyed a high economic growth to become the second largest economy in the world and the biggest recipient of direct foreign investment among developing countries.

As China becomes progressively liberalized it is increasingly seen as a dynamic and exciting business environment. Investment in China may be made through either a Wholly Foreign Owner Enterprise (WFOE) or a Joint Venture (JV) Company or a Representative Office.

Establishing a presence in China can be a challenge but Eltoma has the experience to assist you in the registration of business entities in China. Eltoma can provide professional advice tailored to your individual requirements to ensure that the best solution is made available.

China – Key Benefits

China’s entry into the World Trade Organisation marked the beginning of a significant change for investors and enterprise in China. The government of China has allowed entry into the market through the formation of Wholly Owned Foreign Enterprises (WOFE), Joint Ventures (JV) and Representative Offices.

China is one of the world’s fastest growing economies and is an exciting jurisdiction in which to incorporate a company however it must be remembered that China also has disadvantages associated with emerging markets. These include an immature legal system and poorly enforced laws. Before proceeding with the formation of a WOFE company you should seek expert advice from Eltoma in order to formulate the best possible structure for your situation.

On January 1st 2006 China implemented a new Company Law. This Company Law revolutionized foreign investment in China, abandoning the rigidity of the old law and promoting a more flexible approach to company management. The Articles of Association are now structured to meet the specific needs of each company and provide for management of the company by directors and shareholders. In summary, the new Company Law provides a modern, flexible approach in which to conduct business and improve corporate governance. When considering incorporating a company in China it is imperative to have a thorough understanding of the legal framework.

In China foreign investors can establish a business presence in one of the following modes; Wholly Foreign Owned Enterprise(WFOE), Representative Office or through a Joint Venture (JV). Also Eltoma can advise whether to use a Hong Kong Company as part of the company structure to aid efficiency of the operation in China and to minimize costs.

Wholly Foreign Owned Enterprises (WFOE)

A Wholly Foreign Owned Enterprise is a limited liability company wholly owned by foreign investors. WFOE’s are the primary means of investing in China and are business entities formed entirely with foreign capital.

WFOE were originally conceived to encourage an increase in western technology and to encourage manufacturing activities that were export orientated although due to liberalization WFOE’s are now used for service providers (such as consulting and managements services), the technology industry (such as software development) and trading. A WFOE requires registered capital and can generate income and pay tax in China. Profit can be repatriated back to the investor’s home country.

The main benefits of WFOE are as follows:

  • Freedom to implement the strategies of its parent company without having to consider the involvement of a Chinese partner
  • Able to formally carry out business rather than just be a representative office
  • Can convert profits to any currency for remittance to its parent company outside of China
  • Protection of intellectual property rights
  • No import / export licenses required
  • To set up a WFOE the investor doesn’t have to have been established for 2 years unlike when setting up a Representative Office

Representative Office

Representative Offices are an ideal way in which to establish a presence in China and gain an understanding of the Chinese market. The main purpose of a Representative Office is to act as a liaison between the home office and the various trade organizations in China. They are used for market research purposes and to establish contacts in China. A Representative Office is not a separate legal entity it is an extension of the parent company and may only engage in non-profit making activities.

A Representative Office may engage in the following activities:

  • Conducting research and providing data for its potential clients and partners
  • Conducting research for its parent company in the local market
  • Liaising with local contacts
  • Acting as coordinator for parent company in China
  • Making travel arrangements for parent company representatives in China

A Representative Office however must not engage in any profit making activities, receive any fees for services it provides or sign contracts on behalf of the parents company. In summary, a Representative Office is only to be used to for research purposes and to establish a presence in the marketplace.

The main benefits of a Representative Office are:

  • Enables a company to conduct thorough market research into an emerging market prior to committing funds for a fixed term
  • A Representative Office serves as a presence in China, to establish a brand / product
  • Demonstrates a long term commitment to the Chinese market thereby promoting trust in prospective business partners

Joint Venture (JV)

A Joint Venture is a limited liability company formed between a foreign investor and a Chinese Company Investor. In some instances WFOE’s cannot be used for investment into some sectors of the Chinese market. In some restricted areas such as mining, healthcare, education and construction a Joint Venture Partnership is the only way to invest. Even when a WFOE is possible, some companies choose to establish a Joint Venture due to the fact that they will be better placed to take advantage of the local Chinese market and have an insight into customs and procedures.

A Joint Venture works by both parties agreeing to the entity by contributing equity and then sharing the expenses, revenue and control of the company.

The benefits of setting up a Joint Venture Company in China are:

  • A Joint Venture allows access to restricted sectors of the market
  • A Joint Venture reduces risk by exploiting market knowledge, gaining preferential market treatment and generally benefiting from local expertise and know-how
  • A Joint Venture benefits from Chinese authority assistance enabling low labour costs, low production costs and a potential share of the Chinese market

A Hong Kong Company (SPV)

Formation of a Hong Kong Company can be used as a Special Purpose Vehicle (SPV) to invest in mainland China. Although a Hong Kong Company is not a legal entity in mainland China it can be an advantage to set up a Hong Kong Company from a tax perspective and also with regards to making the process of incorporating in China slightly easier. Many investors from Europe and North America choose this option.

The benefits of setting up a Hong Kong SPV are:

  • Hong Kong is a major gateway to mainland China
  • Hong Kong is one of the top twenty trading economies and the world’s third largest financial centre which means it is a well established and credible jurisdiction in which to incorporate a company
  • Hong Kong Incorporation Documents are in English and Chinese which helps with any processes that are undertaken in China
  • Lower tax rates by using a Hong Kong Company Operation Offshore with its WFOE in China
  • Hong Kong has no currency control restrictions, no restrictions on capital transfer in / out of Hong Kong
  • Easier to change the structure of a company if necessary. For example a reallocation of shares may take 2 months in China whereas in Hong Kong this would take 1 week

 

 

Take the next step, we are here to help.

Register a China company.
Open a China bank account.

  Resources:

OECD publishes compliance review for all non-compliant jurisdictions

OECD publishes compliance review for all non-compliant jurisdictions

The OECDs global tax transparency initiative was launched last year in April 2016, with the purpose of encouraging every jurisdiction across the world to commit to implementation of a CRS (Common Reporting Standard) for automatic exchange of information by 2018, and to sign the Multilateral Convention on the exchanging of tax data. A forum on behalf of the OECD has released the results of its review for jurisdictions it considers to be non-compliant.

EU Parliament Committee release findings & recommendations for current offshore taxation measures

EU Parliament Committee release findings & recommendations for current offshore taxation measures

A formal enquiry into the Panamanian law firm Mossack Fonseca has been launched by the European Parliament's Committee, which found gaps in beneficial ownership transparency for trusts and fiduciaries and didn’t meet the EU standard.

2017 G20 summit: Enforcement of taxation highest priority

2017 G20 summit: Enforcement of taxation highest priority

The 2017 G20 leaders’ summit took place in Hamburg last week where the European Commission Council and leaders discussed the priorities and primary projects for the upcoming summit. EC President Jean-Claude Juncker has stated that advancing the global combat against tax evasion is top of the list.

The EC takes action against advocates promoting tax avoidance schemes

The EC takes action against advocates promoting tax avoidance schemes

The European Commission has recommended the implementation of a new regulation regarding companies or intermediaries who promote or design cross-border tax planning schemes will going forward be required to provide full disclosure to the tax authorities of their relevant jurisdiction within five days of offering them to clients.

What are the new Beneficial Ownership reporting requirements for BVI companies?

What are the new Beneficial Ownership reporting requirements for BVI companies?

Going forward, a new regulation will require certain British Virgin Islands companies to gather and retain details of Beneficial Owners with 25% or more of the company’s shareholding rights, with an ongoing requirement to keep the details up to date.

Russian citizens can gain Cyprus tax residency by staying only 60 days on island, whats the catch?

Russian citizens can gain Cyprus tax residency by staying only 60 days on island, whats the catch?

Cyprus is once again working to improve its economic desirability and will be able to increase its alternative business base for Russians with good creditworthiness.

Cyprus tax department releases new guidance on CRS deadlines and the online portal

Cyprus tax department releases new guidance on CRS deadlines and the online portal

The Cyprus Tax Department has released a notification to all Cyprus based Financial Institutions & Service Providers of the new guidance notes on the Automatic Exchange of Financial Account Information and other information relating to the Common Reporting Standard (CRS).

Hong Kong establishes AEOI agreement with Indonesia

Hong Kong establishes AEOI agreement with Indonesia

Last week, Hong Kong finalised and signed an agreement with Indonesia to allow for the automatic exchange of financial information (AEOI) regarding all tax matters.