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Choosing the Right Business Structure in China

Foreign companies looking to establish or expand their presence in China have several options for their company structure. The choice of investment vehicle depends on planned activities, industry, and investment size. Understanding the differences between these structures is essential for determining costs, requirements, risks, and limitations, ensuring the company’s future growth and capabilities.

Common Business Structure Types in China

Foreign investors can choose from several entity types, including Representative Offices (RO), Wholly Foreign-Owned Enterprises (WFOE), and Joint Ventures (JV). Each type has its unique advantages and disadvantages.

Comparison of Entity Types:

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 require a local partner

Leverage 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 without establishing operations from scratch

Simplify details of a greenfield investment, Leverage market share and established framework of target company, Acquire capabilities not developed internally

Subject to FDI restrictions and rules, Higher scrutiny from authorities, Antitrust and security reviews, Post-merger integrations may require additional resources

VIE

Access to sectors restricted or prohibited to foreign investment

See common purpose

Breach risks of the contractual arrangement, Vague attitude of Chinese authorities towards VIE structure

Comparison of Three Types of Investment Structures:

China Subsidiary (WFOE or JV)

Branch Offices

Representative Offices

Legal Type

Separate legal entity

Not a separate legal entity but an extension of the company it is affiliated with

Liabilities

Limited liabilities within the registered capital of the subsidiary

Liabilities incurred by the branch office extend to the affiliated company

Entity Name

Can be the same or different from the parent company, must indicate the form of liability

Must include the name of the affiliated company, indicate nationality and form of liability, and suffix such as "branch", "branch (factory)" or "outlet"

Allowed Activities

Same or different from the parent company

Limited to the business scope of the affiliated company

Validity Period

Determined by the investor

Cannot exceed the validity period of the affiliated company

Taxation

Corporate income tax (CIT) rate of 25%, access to tax incentives

CIT rate of 25%, access to tax incentives

Annual Audit and Reporting

Yes, between January 1 and June 30

Yes, between January 1 and June 30

Staff Hiring

No restrictions on hiring local staff; foreign staff based on needs

No restrictions on hiring local staff; foreign staff based on needs

Pros

Greater freedom in business activities, Simple establishment, Easy maintenance

Simple establishment, Easy maintenance

Cons

Registered capital requirement (for select industries), Lengthy establishment process

Limited business scope, Not a legal entity (all liabilities borne by the affiliated company)

When considering entering the Chinese market, it is essential to choose the right business structure based on the specific needs and goals of the company. Each structure comes with its own set of requirements and limitations, making it crucial to thoroughly understand the implications of each option.



Can Woodburn help you?

 

Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms.


Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.

 

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Schedule a 30-mins complimentary, no-obligation call to see how Woodburn can help you. Book a call with our Head of Business Advisory - Kristina Koehler-Coluccia.

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