ChinaSource image: “摩天 Scraping the Sky” / 凱旋門 The Arch + 君臨天下 The Harbourside + 環球貿易廣場 International Commerce Centre / 香港摩天大廈建築之形 Hong Kong Skyscrapers Architecture Forms / SML.20130508.6D.05489 by See-ming Lee / CC BY-SA 3.0
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 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
CJEU: Defines Key Definitions for Tax & Beneficial Ownership Purposes
Last month, the Court of Justice of the European Union (CJEU) issued a series of important judgments dealing with tax avoidance and beneficial ownership in the context of the EU Parent-Subsidiary Directive (PSD) and the Interest and Royalties Directive (IRD).