How to choose the right business activity for your China company
When starting a new business, entrepreneurs are faced with several important
decisions. One of the first that you’ll need to make when setting up in China is
choosing which business activity you are going to trade under. Essentially, this
is a question of the industry you are going to trade in and the types of activities
you wish to undertake. While not the most taxing of tasks, it can be particularly
daunting as there are only 63 industries which are listed on China’s Negative List
– meaning these are industries that are either restricted or prohibited to foreigner’s
investors. This means that all remaining sectors and industries are open to foreigner investors, which means thousands of activities are open. to choose from in China. Depending on the nature of your business, you may wish to choose a single activity or a range of activities under a single license. Your chosen activity will determine not only the type of business you are permitted to carry out but also, in some cases, the area in which you can set up. For example, some free zones – such as Shanghai’s Free Trade Zone – are advantageous for only a few business activities. As this is such an important, and potentially confusing part of the company formation process, it is advisable to work with a company formation agent or a lawyer who can advise on what activities best cover your business.
Understanding China’s business licenses and activities
There are several license types to choose from in China including professional services, consulting services, commercial and ecommerce and manufacturing – each with a number of permitted activities within them. The professional license covers everything from recruitment firms, restaurants to architecture and urban planning companies. The commercial and ecommerce licenses span a number of areas depending on what product is being traded; and industrial licenses tend to cover manufacturing activities such as printing, packaging fabrication as well as the manufacture of high-tech equipment and goods.
If you are undertaking trading activities it is possible to trade under a general trading license. While this approach offers more scope as you can trade any commodity permitted in China, it can cause problems when opening corporate bank accounts as most banks require more specific details. The other option is to choose a specific trading activity under another license – such as auto parts trading which falls under the commercial license. This approach will limit you to that specific type of trading, however it will be far easier to open your business bank account. And remember that business scopes can be updated once bank accounts are fully opened and operational.
It is also worth noting that certain commodities require special approval and additional trade licenses from the Chinese authorities. These include food items, tobacco, alcohol, pharmaceuticals, oil and gas, diamonds, gold and precious stones/metals, plus electrical consumer goods, etc.
The “Negative List” catalogue
In 2013 the State Council mapped out plans to implement a series of “Negative Lists” for market access, as part of the government’s efforts to establish an open, competitive and well-regulated China market. This was first tried and tested in the “new” Free Trade Zones – initially in Shanghai, but then expanded to Tianjin, Fujian and Guangdong. The pilot was a major step towards the government’s aim to explore a system that could be replicated nationwide for application in early 2018 as part of efforts to streamline government administration and give more freedom to the market.
Market access for foreign investors, therefore, can have equal access as local Chinese investors to industries, fields and businesses that are NOT on the list. Governments at all levels are responsible for enforcement. In terms of the degree of enforcement, the lists can fall into two categories of prohibited entry and limited entry, both applying to initial and expanded investments, mergers, and other market entry activities by any voluntary market participants.
For the prohibited entry list, market players will not be approved to get access to such industries by the administrative authority, whereas;
For limited entry, market players will have to apply for access, which will then be assessed by the authority, and then meet the requirements laid out by the government.
Update on the “Negative List”
In June 2018 the State Council released the new foreign investment negative list for Free Trade Zones. The negative list covers 15 sectors, such as mining, leasing and commercial services, manufacturing, wholesale and retail, and financing. Among the sectors, 40 categories and 95 special management measures are included. Compared to the 2015 list, it cuts 10 categories and 27 measures concerning such fields as aviation manufacturing, waterway transportation, banking services and education.
Choosing the activity that is right for you
In many countries, such as the UK for example, listed business activities on official forms are often vague. For example, a company registered to undertake ‘public relations and communications activities’ is permitted to carry out any number of services loosely linked to that field, such as marketing, events, public relations and so on. In China, this is not the case.
If you are offering a service in a field not listed as an activity on your license you may encounter issues when it comes to audits, and may face questions from suppliers, venues or clients. You many even run the risk of fines and legal action. Chinese regulations are very clear on this, stating that all companies ‘shall obtain all the approvals and licenses as required for the activity to be conducted by the company in the city prior to commencement of its activity.’
To avoid such reprimands, it is vital that you include all your intended business activities on your license. In most cases you are also permitted to undertake multiple activity types – commercial, professional, industrial etc – under one license. When the license combines several activities, the largest activity which is the industrial activity is taken into consideration followed by the commercial activity and then the professional one. For example, if a license contained both commercial and professional activities, the type of the license should be commercial since it’s the larger activity.’ (It’s worth noting that many free zones also allow for multiple activities under one license.)
Choosing your business activities is just one of several key decisions you’ll need to make when setting up a business in China. You’ll also be required to decide on a business name – which again comes with its own quirks and intricacies unique to China. With these initial decisions made, it’s time to make your application.
Every one of these early decisions can have a huge bearing on the type of business you are permitted to carry out and where you can trade. That’s why it is highly advisable to work with an expert in company formation who can guide you through every step of the process from choosing a business activity and company name, to registering with the relevant authorities, opening corporate bank accounts and processing visa applications. A slight error at any one of these stages can lead to delays and possibly even the rejection of your license application, so it pays to get it right first time.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.