China Entry Modes
Basically, there are 3 main entry modes available to foreign investors, which are the Wholly Foreign-Owned Enterprise (WFOE), Joint Venture (JV), and the Representative Office (RO). Key differences between these structures are the legal status, liabilities of shareholders, registered capital, business scope, employment regulations, and invoicing and contracting.
A WFOE is the most common and generally most preferred entry mode to available to foreign investors in the Chinese market. A WFOE is a Limited Liability Company (LLC) which is established exclusively by the foreign investor's capital (hence "wholly foreign-owned"). In general, there are three distinct types of WFOEs, which are the following:
- Standard/Consulting WFOE: is licensed to operate as a consulting business within the service industry.
- Trading WFOE: is licensed to conduct trading, wholesaling retailing, and/or franchising activities in China. These types of companies are required to make an additional registration at Customs to be able to import/export goods in/from China.
- Manufacturing WFOE: is licensed to manufacture goods in China. An additional requirement for is the environmental impact assessment (EPA). This needs to be completed, before you can receive your business license.
A Joint Venture (JV) is an LLC like the WFOE. A JV is a structure in which a foreign investor partners with a Chinese company (i.e. Sino Foreign JV). Generally, there are two reasons why companies want to establish a JV in China:
- You want to invest in a restricted industry sector in which foreign investment is only permitted through a joint venture.
- You want to utilize the network of a Chinese partner with local market knowledge and established contacts.
However, a Joint Venture means joint management, which can be difficult to manage for companies without any significant international experience. Within the Chinese corporate environment, shareholders do not always have a direct influence on the activities of the company, instead the board of directors and above all the legal representative of the company have the authority to make principal decisions. Therefore, in case of a Joint Venture, if you are expected to possess a minority stake on the board, successfully operating a Joint Venture may prove difficult.
A Representative Office is not a separate legal entity but rather a type of "branch" of the head office ("liaison office" ). Although the RO does not have any registered capital requirements, a defining characteristic is its limited business scope. They are only allowed to conduct marketing & research activities for the headquarters. In addition, they are required to pay Corporate Income Tax based on their expenses, which they are unable to offset as they are not allowed to engage in any real business activities, nor are they allowed to send invoices to their clients in China.
Comparison of China entry modes
To better understand the differences between these different entry modes, we have made a comparison (see table below) of the different entry modes. Please note that the optimal entry mode depends on your business and expectations of the Chinese market, any of these entry modes could be suitable for your business in China.
Separate legal entity
LIABILITIES OF SHAREHOLDERS
Limited to the amount of registered capital
No requirement on the minimum amount, however in practice, a sufficient amount is expected by the authorities
Generally allowed to conduct trading, manufacturing, and servicing as specified in the business scope as far as the activity is not a part of the negative list as issued in the company law catalogue
(a) Can hire both foreigners and local Chinese
(b) There exists no limitation on hiring process
(c) Must have a Legal Representative Executive Director/ Board of Directors, General Manager, and the Supervisor
INVOICING AND CONTRACTING
Allowed to issue invoices (fapiaos) to customers in RMB and under company's own name
Same as WFOE
Limited to the amount of registered capital by both the foreign shareholder and the Chinese shareholder
Same as WFOE
Same as WFOE
Same as WFOE
Same as WFOE
Not a separate legal entity, but an extension of the foreign HQ that must already existed for at least 2 years
Foreiqn HQ bears 100% liabilities on all of the conducts of an RO
No registered capital
Limited to (a) Marketing activities for the Head Office, and (b) Liaison and coordination with business contacts for the foreign head office
(a) Cannot employ more than 4 foreigners
(b) Required to appoint one Chief Representative
(c) Other foreign employees can only be treated as General Representatives
(d) Local Chinese can only be employed via FESCO
Not allowed to issue invoices, sign contracts, and collect revenue from customers
This article has been prepared by Moore Consulting, a professional service firm based in China and member of Moore International. Moore Consulting provides full financial services to foreign companies active in China and Hong Kong. For more information regarding this article, please do not hesitate to contact us at email@example.com or visit their website to be updated on news about China.