Formation Company & Tax Advisory

Saturday, April 21, 2018

Establishing Chinese Companies

The legislation on taxation in China is going through a period of transition. Before 2008 were in force different criteria for the tax system, each applied by virtue of the type of investment, whether foreign or domestic. On 16 March 2007, the National People's Congress approved the Law on Enterprise Income Tax (CIT), or the Taxation of Corporate Income Tax that has unified standards and taxation for the two types of firms (in force from January 1st 2008).

To set up a company is critical to decide what type of business you want to carry on and how, for many other commercial realities of the Country you need to know where this company wants to be located. The procedures for the establishment of a company can be complex and require a number of constraints both administrative and capital-related. For these elements, the support rendered by those who know the system is strategic and efficient to benefit from “Warranty & Assistance”, in this regard Bright Business Consulting LLP provides knowledge and skills, essential elements.

One of the suitable solutions for foreign companies is that of the companies in total foreign capital since the benefits are much greater than the investee ones, but all needs to be carefully planned. Although this type of society is used for numerous activities and is very versatile, the decision should not be rushed. In fact, in contrast to other types of companies, companies in total foreign capital have simpler procedures of set up because it does not require negotiations with partners, and the control is totally in the hands of the foreign investor, for this reason the possible consequences resulting from a lack of analysis of the case, can be difficult to repair, especially not immediate, since the comparison with the authorities and in this case with the Ministry of Finance and the SAT (State Administration of Taxation) is very complicated.

In China it is therefore not advisable to move with simplicity. However, there are some positive elements to consider in choosing a partner, for example: the market in which you intend to fit and the manner of penetration, and others to be assessed case by case. Different types of companies are available, whose classification depends on the nationality or domicile of the owner and the legal nature of the ownership structure:

JOINT STOCK COMPANIES

  • Social capital: must be fully paid up and registered in Corporate Registry.
  • Contributions: either currency or in nature, industrial property, not-patented technology (the value of which may not exceed 20% of the nominal share capital) or real estate holding. The contributions must be valued and assessed and the property must be converted into shares.
  • Shares: the share capital is divided into shares of equal value having the form of share certificates. The registered shares are transferred by endorsement or in any other manner provided for by the laws or administrative regulations. The transfer of shares to the bearer is effective immediately upon delivery of the assignee.

LIMITED LIABILITY COMPANIES

Its constitution requires the drafting of a statute and the submission of a formal application for approval of the company name. To obtain the registration in the register of companies you must submit a separate application along with the statute and with the certificate of verification of investment in order to get the issuing of the authorization to the company. From this moment on the company is considered legally constituted.

  • The minimum amount for the companies operating in the field of production, business activity and in the wholesale of goods, for companies operating in the business of retail and for those of technological and scientific development, counselling and services. It must be fully paid.
  • Contributions: must be made in full at the time of incorporation of the company. Each contribution is subject to verification by an organization specified in the statute that will release its certification.
  • Responsibility: while the social partners are liable for the debts to the extent of their share capital, the company is liable with all its assets.
  • Partners: shall not be less than two and no more than fifty. The company needs to ensure the register of partners in which shall be recorded the name, address and the amount of the contributions of each of them.
  • Corporate Bodies: there is a board of directors, a manager, a board of supervisors.

WHOLLY FOREIGN OWNED COMPANIES (Wholly Foreign Owned Enterprise - WFOE)

Limited liability companies wholly owned by foreign investors. They have a limited life and linked to the nature of the firm (between fifteen and thirty years). The rules and requirements are the same as a limited liability company. The foreign owned Company has recently become the preferred vehicle for foreign investors, where possible, given that there are areas in which you are forced to operate under joint ventures. From 2000 onwards have been eliminated many constraints that had made "uneven" the operation of EJV (Joint-Venture) and WFOE, particularly with respect to the export of products, purchases of raw materials (now possible according to principles of "justice and sense" in the Chinese market as in the international market), in international transactions the WFOE are no longer subject to prior government authorization.


HOLDING COMPANIES

The case is suitable for foreign investors who need to integrate and manage multiple activities jointly conducted in China, to this purpose planning and careful analysis are strictly required.

REPRESENTATIVE OFFICE

A common vehicle through which foreign companies establish a presence in China, is the registration of a representative office, a choice that should be carefully evaluated. Many foreign companies have set up representative offices in China as the first step of their entry strategy into the Country, as well as in order to gain experience and a better understanding of the size and potential of the Chinese market.  Through a representative office, a foreign company may carry out a limited range of activities that can be the basis to make the company more involved with China.

Representative offices often carry out market research, establish relationships and formalize drafts and/or assumptions of contract with potential customers and partners. It is important to remember that the representative office is not a separate legal entity. Rather it is an extension of its parent company. In this regard, a not Chinese juridical entity with appropriate accreditation and well structured is advisable. Bright Business Consulting LLP is the ideal partner for carrying out what has just been expressed.

Normally representative offices in the People's Republic of China are not allowed to carry out a "direct activity" and such violation may lead to administrative sanctions and the closure of the office. There is no precise definition of "direct operation", however, the Chinese authorities, when consulted, generally indicate that "direct operations" may include direct sales, production and manufacturing. It is also clear that a representative office in the Republic of China cannot directly sign contracts or invest directly in order to make a profit.

In practice, the operations that a representative office can carry, without limitation:

  • Keeping links with local and foreign contacts, in the name of its parent company.
  • Receiving delegates from its parent company.
  • Keeping links with the Chinese government organizations.
  • Conducting market research, surveys, demonstration activities for its parent company in the local market.
  • Management of warranty and after-sales services and other non-profit organizations.

In spite of what written above, the representative offices of foreign companies that provide legal services, auditing, accounting, tax advisory services, tax consulting and management, as well as foreign airlines are permitted to carry out "direct operations" (authorizations to be required). The procedure for the setting up of a representative office is different according to the sector in which the parent company operates.

VIRTUAL OFFICE

The establishment of a foreign-based company requires the presence of a representative office in which to receive the documents and communications regarding the company. We therefore specialize in the professional management of virtual office that will allow you to manage your virtual office in a safe and reliable way as if it were the real one. There are also many services that can be activated at the site of the "Virtual Office".

Above are listed the possibilities, but for many reasons it is imperative to activate a constitutive procedure, taking advantage of the support of those who know the Chinese system: it is strategic and determined to benefit from “Warranty & Assistance” and so properly deal with the requirements of the government Authorities, plus opting for the right type of team and company. To this purpose Bright Business Consulting LLP offers knowledge and expertise as essential elements.

BBC-LLP offers its first consultancy for free - First Meeting to anyone wishing to get further info about how to set up a China Company.

For more details, click here.

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