Even when using an agent for registration, understanding the fundamentals of the process and how the investment and business categories affect the operations of a company, is essential for any foreign company with an interest in conducting business in China. Just as China’s economy continues to change rapidly, so do the regulations on establishing legal entities. The following information reflects the process at the time of this writing.

Nature of the Investment

When a foreign investor decides to launch a business venture in China they will need to decide whether to launch their business in the form of an actual capital investment or whether it is better to start out more carefully by scanning the market and building networks.

Foreign investors without a comprehensive understanding of the China market may wish to test the market strength first to see whether or not it is worthy to establish a full operation in China and invest a large sum of capital.

Foreign investors with more experience and understanding of the China market who intend to conduct a full range of business activities need to establish a legal entity. In the case that a legal entity is preferred, the form of the entity chosen is quite crucial. Aspects that have to be considered are the sector of business and amount of money invested, if a Chinese partner is desirable or even mandatory for the business, along with other general commercial and strategic considerations. Along with the level of financial risk and control a company prefers for its China operations, government restrictions on specific industries affect the investment type made. Media, automotive and telecom industries are examples of industries that require foreign invested enterprises to have local partners.

A Representative Office (Rep. Office) represents the interests of the foreign investor by acting as a liaison office for the parent company. Rep. Offices may conduct market research, develop partnerships and business channels; however, all business transactions, including issuance of invoices, are managed by the parent company. Furthermore, Rep. Offices may not directly hire local employees but must rely on a government-authorized employment agency. Since Rep. Offices do not have a minimum investment requirement, they are not considered a Foreign Invested Enterprise. Rep. Offices are the least complicated way for a foreign firm to have a legal presence in China and is often the choice for foreign companies with little or no previous experience in the country. However, given the restrictions on direct employment of local employees, transactions and taxation on expenses, Wholly Foreign Owned Enterprises may be a better option.

The most common Foreign Invested Enterprise (FIE), Wholly Foreign Owned Enterprise (WFOE) is a limited liability company fully invested by one or more foreign entities. Along with the rights afforded to a Rep. Office, a WFOE may also legally conduct business transactions within China and hire local employees on its own accord. However, they do have a minimum investment requirement that is dependent upon the locality and nature of the business. WFOE’s are becoming more and more common and have begun to outpace Joint Ventures as the most popular vehicle for a China presence

Equity Joint Venture (EJV) companies have capital investments from both local and foreign firms. The percentage of the capital investment determines the amount of profit and risk that both the foreign and local company assumes. Foreign firms entering industries where WFOE’s cannot operate, often use JV’s although this is becoming less prevalent as more and more industries begin to gradually open up to WFOE’s.

The risk associated with entering into partnerships with other companies applies in China and is often exacerbated by disparities in culture and business practices between the foreign and local partners. Foreign Companies should enter into JV’s only when both parties have reached a clear understanding of the business objectives and appropriate exit strategies have been developed.

Cooperative Joint Ventures (CJV) are also partnerships with a local company; however, the amount of risk and profit shared by each party is not determined by capital investment but rather agreed upon at the beginning of the partnership. CJV’s were used more in the 1990’s when the Chinese economy was not as developed. International companies often injected funds while the local Chinese companies provided equipment and other necessities. Laws and regulations can vary substantially between industries and procedures vary accordingly.

Recent years have shown a trend towards investing in China through mergers & acquisitions (M&As). There are many options for M&As in China including equity and asset acquisitions as well as mergers. As a form of foreign direct investment, the general rules on establishment of FIEs also apply to M&As.

For more information on establishing a sourcing entity in China, please contact The JLJ Group: info@jljgroup.com

This article is contributed by The JLJ Group www.jljgroup.com  – a one-stop service provider for foreign companies entering and growing in China. Over the past 13 years, we have worked with more than 400 clients from over 30 countries, in a wide variety of industries in China. For more information please contact Katja.Friedrich@jljgroup.com

About us:

The JLJ Group is one of the very few companies in the China market that serves as one-stop service provider assisting foreign companies in China. We combine the expertise of four legally licensed in-house divisions – JLJ Consulting, JLJ FDI, JLJ Recruitment and JLJ HR Services – to provide a single point-of-contact for foreign invested companies. Over the past 13 years, we have worked with more than 400 clients from over 30 countries, including Fortune 1000, SMEs, Government Organizations and Institutional Investors in a wide variety of industries in China.

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Katja Friedrich
Marketing Manager
The JLJ Group - Solutions for China Entry & Growth