The basic decision on how to establish a presence in China turns on whether an organisation needs to issue invoices for goods or services from within China. If no such need exists a Representative Office could be the appropriate solution.
Where an organisation does have the need to issue invoices from within China they have a choice between Joint Ventures or Wholly Foreign Owned Enterprises
The choice between a Joint Ventures or Wholly Foreign Owned Enterprises depends on whether the organization will have a local Chinese partner. Where a Chinese partner does exist the operation could be structured as a Joint Venture.
1. The Representative Office
The Representative Office offers an inexpensive way to establish a permanent presence in China to provide access to the China market. Although a Representative Office can not issue invoices, it can generally be used for conducting market research, quality control, purchasing, marketing and sales administration for sales conducted between China and the parent company, as well as administration of group activities elsewhere in China.
Representative Offices must be located in Grade A, government approved buildings and will need a lease of a minimum of one year. The immediate parent company of the Representative Office must have existed for at least two years prior to the Representative Office’s registration. The number of foreign staff is limited to four only, though there is no such restriction on local staff. If local staff are employed, they need to be hired and paid via a government recognized organization approved for this purpose.
3. Joint Ventures (JV)
JVs can be subdivided into equity JVs and contractual JVs. An equity JV is a partnership between a foreign and a Chinese organization and needs to be approved by the China government. The strategies must be in compliance with state economic development programmes. With a contractual JV, all liabilities, rights, and responsibilities are agreed on in a contract, and things like the division of profits are not dependant on the proportion of shares held.
4. Wholly Foreign Owned Enterprise (WFOE)
A Wholly Foreign Owned Enterprise (WFOE) is often the chosen method of operation in China as no local Chinese partner is necessary.
A WFOE is a Chinese limited liability company that is wholly foreign owned and limited by its registered capital which is generally a combination of equipment and cash. The amount of cash required and ratio between equipment and cash vary depending on the location and business activity. The required minimum registered capital was previously USD140,000 and although this requirement was removed in 2006, the authorities still view this as the benchmark when approving new WFOE’s. Generally, the test would be that the minimum registered capital should be sufficient for the WFOE to maintain itself until it is self sustainable. Critical to the successful set up of a WFOE is the careful drafting of the company articles as these define what a WFOE will and will not be able to do in its trading and financial operations.
In addition to the above, the parent company of a WFOE will generally be required to pay the registered capital in full upon registration OR 20% of the registered capital within 3 months from the issuance of the business licence, with the outstanding capital required to be paid in within 2 years. There are restrictions on numerous business activities in China and these are regularly changed.