[PLEASE NOTE THAT the information given below is just some general overview of certain aspects of the law of the People's Republic of China ("PRC") and is intended for reference only. Readers are advised to obtain legal opinion from PRC practising lawyers on the validity and applicability of the information set out below to their particular cases.]
Hong Kong has a relatively free business environment where it is easy and simple for businessmen to set up companies and do business. In mainland China, stringent controls are imposed on various areas of doing business, such as setting up of companies by foreign enterprises, repatriation of foreign exchange, import and export of goods, or sale of products inside the PRC. Therefore, it is necessary to find out more before entering into the PRC market.
How many forms of companies can foreign enterprises establish in China?
The traditional foreign investment enterprises ("FIE") established in China can take the form of Sino-foreign equity joint venture ("EJV"), Sino-foreign cooperative joint venture ("CJV") and wholly foreign-owned enterprises ("WFOE"). Under the PRC Company Law, limited liability companies and joint stock companies can also be set up.
Foreign enterprises can also apply for the establishment of non-legal entities such as representative offices ("RO") or branch offices.
What approval is required for setting up companies in China?
The Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") is the authority dealing with the approval of foreign investments in China. Depending on the amount of total investment, the approval authority is sometimes delegated to the local offices of MOFTEC, generally known as "COFTEC" (Commission of Foreign Trade and Economic Cooperation).
If the business of a foreign enterprise applicant is related to a certain area which is under the control of another government department or ministry, MOFTEC would also seek the opinion or consent of that authority before approving an application.
What are the minimum requirements on capital injection into a joint venture by foreign enterprises?
The foreign enterprise and its Chinese partner have to prepare a feasibility study on the project, which includes the estimate of the total investment amount. The relevant regulations stipulate that the registered capital must be at a certain ratio of the total investment amount. The foreign enterprise and its Chinese partner have to contribute their respective registered capital in the form of cash, land, plant, machinery, and technology as agreed and approved.
Can a foreign enterprise establish a company to do any type of business it likes?
According to the Foreign Investment Guidelines Catalogue published by the MOFTEC and other departments, PRC projects are categorised into four (4) types: encouraged, restricted, prohibited, and permitted. No foreign enterprise can carry on business under the prohibited class. For the restricted class, the projects require special approval or the Chinese side must be the controlling shareholders of the joint venture.
What is the difference between an EJV and a CJV?
Basically, in an EJV, the parties contribute to the joint venture and share its profits according to the ratio of their equity interest, while in a CJV, the parties can agree by themselves on the amount to be contributed and the profit to be shared by respective parties on a different ratio. CJV will be more appropriate for foreigners who want to enjoy a greater portion of profit sharing, for the whole term or at least in the initial years thereby recovering their investment faster.
What is a WFOE?
A WFOE is a PRC company 100% owned by a foreign enterprise. It has the advantage of allowing the foreign enterprise total control and management of the company. There are however, some areas which the approval authority would not allow the establishment of WFOE, for instance, service companies, travel agencies, and enterprises which provide transportation services by vehicles.
What is the status of a representative office ("RO")?
An RO is not a separate legal entity. It is intended to be a liaison office of its parent foreign enterprise. Its main functions are researching the local market, liaising with local contacts, and making necessary arrangements for staff of its parent company in China. It is not allowed to engage in any business for profit, sign contracts or issue invoices.
Can an individual or a corporation purchase a piece of land in China to construct its own factory?
Ownership of land in China belongs to the State, but the land use right of a piece of land can be granted upon payment of premium and/or land use fees. Land use right can be assigned or mortgaged to other parties upon full payment of premium.
Can foreigners or foreign enterprises acquire individual units of office buildings or residential blocks?
Foreigners and foreign enterprises can only purchase commercial or residential units which are for sale to foreigners. This type of property is generally more expensive than those which are only saleable to local people.
What are some of the measures of exchange control in China?
Foreign exchange revenue of EJVs, CJVs, WFOEs and other foreign investment enterprises has to be sold or deposited with designated banks in China. If foreign exchange is needed for payment of imported goods, it can be purchased from the bank by production of vouchers and commercial documents.
Borrowing of foreign loans have to be registered with the foreign exchange control authorities before the borrower can purchase foreign exchange for repayment purposes. Individual PRC residents who enter or leave China carrying with them foreign exchange which is equivalent to US$2,000 have to make a customs declaration. For non-PRC residents, the limit is US$5,000.
How should foreign investment enterprises (FIEs) like EJVs, CJVs, WFOEs or ROs employ local staff?
FIEs are given autonomy in hiring local staff. They can decide the time, terms and conditions and method of recruitment.
For ROs, employment of local staff has to be done through the local foreign employment service company ("FESCO").
Can FIEs employ foreign expatriates?
FIEs should try to recruit staff and workers within PRC. If there is a need to recruit expatriates, approval of labour authority is required. Upon approval, the authority will grant a foreigner's employment certificate to the expatriate who can then obtain an employment visa for entering and working in China.
What is the tax rate levied on FIEs?
Tax is levied on income earned both inside and outside China by FIEs at the standard rate of 33%
Income tax of FIEs set up in special economic zones or economic and technical development zones engaging in production or business operation may be reduced to 24% or even 15%.
Is there any tax levied on non PRC residents?
In general, foreigners are liable to payment of PRC individual income tax if they stay in China for more than 90 days in a calendar year.
The exact amount of assessable income of that individual will depend on various factors including the years of continuous stay in China, the income being paid by PRC or overseas employer etc. If an expatriate has resided in China for more than five (5) years, his income earned worldwide will be chargeable for tax.
What is the rate of individual income tax?
Individual income tax is levied at progressive rate from 5% to 45%, while other categories of income such as royalties, interest, dividend shall be charged at 20%. There is a deductible allowance of RMB800 per month, and for foreigner not domiciled in China, an additional allowance of RMB3200 per month is given.
