Summary of entity types
A foreign company planning to setup an office or expand their business in China has several options that they may consider for their company structure. Foreign investment in China can be made via one of several types of investment vehicles. Choosing the appropriate investment structure for your business depends on several factors, including its planned activities, industry, and investment size.
It is crucial to take into account various aspects of the target entity types before deciding which kind of business to launch in China. These include differences in structure, legal liability, statutory compliance requirements, time needed to set up the business, the kinds of activities the business can engage in, and more. These factors aid in determining the proper business costs, requirements, risks, and limitations needed to support the company's future development, growth, and intended capabilities.
WATCH
Investing and Doing Business in China 2023: Reopening and Rebound
This video is unavailable in your region. Please enable VPN to view
The common entity types available to invest in China are Representative office (RO), Wholly foreign-owned enterprise (WFOE), and Joint venture (JV), while alternative investment options exist.
Each of these types are explained in the Types of Business in China guide and is suggested reading. This guide, meanwhile, focuses on comparing the entity types only via the below:
- Comparison of Entity Types in China: Set Up Requirements, Pros, Cons, and More
- Comparison of Three Types of Investment Structure in China
Comparison of entity types in China: Set up requirements, pros, cons, and more
Click on the FIE Structure Type to read further details about the entity.
|
Comparison of Different Investment Options
|
|
Investment Options
|
Common Purpose(s)
|
Pros
|
Cons
|
|
RO
|
- Market research
- Liaise with overseas headquarters
|
- Easiest foreign
investment structure to set up
- Paves way for future investment
|
- Cannot invoice locally in RMB
- Must recruit staff from local agency; no more than four representatives
- Heavily taxed if expenses are high
|
|
WFOE*
|
- Manufacturing
- Servicing
- Trading (if a FICE)
|
- Greater freedom in business activities than RO
- 100% ownership and management control
|
- Registered capital requirement (for select industries)
- Lengthy establishment process
|
|
JV
|
- Entering industries that by law
require a local partner
- Leveraging a partner's existing facilities, workforce, sales/ distribution channels
|
|
- Split profits
- Less management control than a WFOE
- Technology transfer/IP risks
- Inheriting partner liabilities
|
|
FIP
|
- Investment vehicle
- Servicing
|
- Allows for domestic and foreign ownership
- Easier setup
|
- Unlimited liability of the general partner
- Newness of structure (potential challenges with taxation or foreign currency exchange)
|
|
M&A
|
- Expanding business presence in a new market without establishing operations from the scratch
|
- Simplify the tedious details involved in a greenfield investment
- Leverage the market share and established framework of the target company
- Help the investing company acquire capabilities it cannot or does not want to develop internally
|
- Subject to all FDI restrictions and rules
- Higher scrutiny from the authority
- Antitrust review and potential security review
- Post-merger integrations may require additional resources
|
|
VIE
|
Getting access to sectors that are restricted or prohibited to foreign investment
|
See common purpose
|
- Breach risks of the contractual arrangement
- Vague attitude of the Chinese authority towards VIE structure
|
|
*Under the FIL, the terms of the WFOE Law and the JV Law are no longer binding. Nevertheless, we still use WFOE and JV to refer to relevant investment forms for consistency and easier communication
|
Comparison of three types of investment structure in China
The most common types of businesses that are set up by foreign investors are
- China subsidiary (WFOE or JV);
- Branch Office (BO); and
- Representative Office (RO).
ROs are forbidden from engaging in any profit-seeking activities and may only be used to facilitate the activities of the foreign company in China, while branch office is rarely used when foreign investors access the China's market, except in limited cases such as foreign banks, foreign insurance company, foreign oil search company, etc. Rather, branch offices might be set up by Chinese subsidiaries when expanding business across China. For foreign investors planning to conduct business in China, registering and setting up a limited liability company (subsidiary company), either WFOE or JV, is the most obvious option.
|
Comparison of Three Types of Investment Structure in China
|
|
|
China subsidiary
|
Branch offices
|
Representative offices
|
|
Legal type
|
|
- Not a separate legal entity but an extension of the company it affiliated
|
- Not a separate legal entity but an extension of the parent company
|
|
Liabilities
|
- Limited liabilities within the registered capital of the subsidiary
|
- Liabilities incurred by the branch office extend to the company it affiliated
|
- Liabilities incurred by the representative office extend to the parent company
|
|
Entity name
|
- Can be the same or different from the parent company, but should indicate the form of liability of the business
|
- Must be preceded by the name of the business to which it is affiliated, indicate the nationality and form of liability of the business, and suffixed with such words as "branch", "branch (factory)" or "outlet".
|
- Must comprise the following components sequentially: nationality of the foreign enterprise, Chinese name of the foreign enterprise, name of the municipality where the representative office is located and the words "representative office"(代表处)
|
|
Allowed activities
|
- Can be the same or different from the parent company
|
- Limited to the same business scope as the company it affiliated
|
- Limited to non-profit-seeking activities, including:
- Market research, display, and publicity activities that relate to company products or services
- Liaison activities that relate to product sales or services and domestic procurement
|
|
Validity period
|
- The term of operation is subject to the investor’s decision
|
- The term of operation cannot exceed the validity period of the company it affiliated
|
- The term of existence cannot exceed the validity period of the foreign parent company
|
|
Taxation
|
- Taxed at corporate income tax (CIT) rate of 25% with access to tax incentives available
|
- Taxed at corporate income tax (CIT) rate of 25% with access to tax incentives available
|
- Taxed as a permanent establishment in China, which usually amounts to a liability of approximately eight percent of the total expenses of the RO
|
|
Annual audit and reporting
|
- Yes, during the period between January 1 and June 30
|
- Yes, during the period between January 1 and June 30
|
- Yes, during the period between March 1 and June 30
|
|
Staff hiring
|
- No restrictions on hiring local staff; hiring foreign staff based on real needs.
|
- No restrictions on hiring local staff; hiring foreign staff based on real needs.
|
- Can directly hire up to four foreign nationals as the representatives; cannot directly hire Chinese employees, rather, it is required to employ local staff through a qualified labor dispatch agency.
|
|
Pros
|
- Greater freedom in business activities than representative offices
|
- Simple establishment
- Easy maintenance
|
- Easiest foreign investment structure to set up
- Paves the way for future investment
|
|
Cons
|
- Registered capital requirement (for select industries)
- Lengthy establishment process
|
- Limited business scope (must be within that of the company it is affiliated);
- Not a legal entity (all liabilities born by the company it is affiliated)
|
- Cannot invoice locally in RMB
- Must recruit staff from a local agency; no more than four representatives
- Heavily taxed if expenses are high
|
