Due to the latest changes in the China Company Law, we have updated this article to reflect the new regulations effective from July 1, 2024
New company law amendments introduce significant changes to corporate governance, capital contribution timelines, shareholder rights, and more. The updated law aims to enhance transparency, accountability, and creditor protection. Key changes include the requirement for shareholders to pay their subscribed capital within five years, the introduction of audit committees as an alternative to supervisory boards, and expanded rights for shareholders to access information and request equity buybacks. This comprehensive guide now includes these essential updates to help investors navigate the process of setting up a company in China in 2024.
Registering a Foreign Invested Enterprise (FIE) is the first step in your journey of doing business in China. During the setup process, foreign investors must make some important decisions that will determine their allowed business activity and impact the taxes they pay.
Three main types of FIE exist in China, each with their own characteristics and intended purpose.
Wholly Foreign-Owned Enterprise (WFOE) – is the most common legal entity type for foreign investment in China and is suitable for most forms of business ventures. WFOEs can hire local and expatriate employees and engage in commercial business activities in accordance with their business scope.
Joint Ventures (JVs) – are legal entities with shared ownership between two or more parties. Equity Joint Ventures (EJV) share risk and return equal to an investor’s share of ownership. Co-operative Joint Ventures (CJV) share risk and reward according to the terms of a contract – allowing for more structural flexibility over an equity joint venture. EJVs can sometimes provide foreign investors access to industries restricted for foreign investment.
Representative Office (RO) – are not considered legal entities in China but instead as an extension of oversea entities. Their intended purpose is to liaise with local parties and coordinate promotional activities in China on behalf of their overseas head offices and therefore cannot engage in commercial businesses in China. They can hire employees using a third-party HR agent and are taxed based on their costs – as opposed to revenue.
The business scope is defined by the business and submitted for approval by the State Administration for Market Regulation (SAMR) . The business scope plays an important role in China as it determines the types of business activity the business can legally engage in and the items for which the business can provide an official VAT invoice (fapiao).
When determining the desired business scope, foreign investors should create an exhaustive list of the products and services that they wish to offer and align their descriptions with the official Industry Classifications.
Business activities in China are classified as either “Prohibited”, “Restricted” or “Encouraged” according to the “FI Encouraged List”, “FI Negative List”, and the “MA Negative List”.
Encouraged industries are often eligible for preferential treatment and tax incentives whereas restricted industries are subject to special conditions such as shareholding limits as well as special approvals by the government. Prohibited industries are entirely off-limits for foreign investment. Industries that do not appear on any of these lists grant equal market access to foreign investment as domestic investment.
FI Encouraged List – Catalogue of Encouraged Industries for Foreign Investment (2022 edition)
FI Negative List – Special Administrative Measures on Access to Foreign Investment (2021 edition)
MA Negative List – The Negative List for Market Access (2022 updated)
When registering a business in China, there are mandatory legal positions that must be filled and verified through real-name authentication. There are no restrictions – such as nationality – or qualification for who can hold these positions.
Legal Representative – is the most important role in the company as they are the default authorized signatory. Typically, this is the sole investor themselves, or a person designated by the executive director or board of directors of the China company.
Executive Director – is appointed by the shareholder to manage the company. Investors can also appoint a board of directors which must consist of 3 or more persons. For small businesses, the executive director is typically the same person as the legal representative.
Financial Responsible Person – is a mandatory position. Typically, this is the company’s internal finance manager or a third-party financial services provider.
No Mandatory Supervisor Required: The revised Company Law permits companies to establish only a board of directors without a board of supervisors. Companies that only set up a board of directors should establish an audit committee under the board to exercise the powers of the board of supervisors.
The Company Law further simplifies the organizational structure of companies. For companies that are smaller in scale or have fewer shareholders, it is possible to appoint a single director, and instead of setting up a board of supervisors, appoint a single supervisor. It is permissible not to appoint a supervisor for smaller LLC or those with fewer shareholders, with the unanimous consent of all shareholders.
The amount of registered capital – together with the total investment – is defined on the Articles of Association submitted by the investors during the business license application process. It is the primary source of funding for the company to meet its financial obligations before it is self-sustaining.
The new Company Law stipulates that shareholders must pay their entire subscribed capital contribution within five years of the company’s establishment, enhancing creditor protection.
Foreign Debt Quota – is the difference between total investment and registered capital and is capped by the SAIC. Foreign debt allows investors to provide short-term or long-term funding to the business to help it meet its financial obligations.
Foreign Debt Quota = Total Investment – Registered Capital
There are several other issues that investors should be aware of when registering their business.
Company (Chinese) Name
The name needs to contain four elements: the unique business name, industry description, location, and legal form. The industry description, location, and legal form are determined by the nature of the company and cannot be freely decided upon. The unique business name is up to the discretion of investors. It’s important to remember that the business name is printed on official VAT invoices and engraved on the company’s seal, so it’s generally a good idea to choose something which is simple.
Bank Accounts
All businesses in China are required to have at least two bank accounts; the capital account, for depositing the registered capital, and the RMB basic account for day-to-day business operations. Foreign businesses might also require foreign currency accounts which are separate accounts.
Registered Address
In order to complete the company registration process, businesses must have a valid rental contract to which their business is registered. Some districts allow multiple addresses business to a single address, so make sure to check whether the district you wish to register in allows this before deciding to rent shared office space.
Common Mistakes
One of the common mistakes investors make when registering their FIE in China is selecting a business scope that is not suitable for their planned business activities. For some industries, a business scope that is too broad may prevent the FIE from obtaining preferential policies or tax incentives. On the other hand, a scope which is too narrow can prevent the business from issuing VAT invoices for specific product or service categories.
Another common mistake by investors is allocating too little registered capital. FIEs in China may find it difficult to apply for a bank loan as they lack credit history and assets to secure a loan. The registered capital becomes the primary source of funding for the business until it is cash flow positive. Allocating too little registered capital can prevent investors from providing additional funding in the form of capital injection and financing in order to meet their financial obligations.
These issues can be addressed by making changes to the business license, though this takes time and a cumbersome process to complete. Investors are advised to carefully consider the details of their registration application – and seek the help of a professional if needed.
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