Business Registration - Frequently Asked Questions:

How to establish a wholly foreign owned enterprise in China?  

Wholly foreign owned enterprises are permitted to register in cases where at least half of their annual output is exported or if the nature of their operations relies heavily on advanced technology and the application of this high technology is beneficial to China. Approval to establish a wholly foreign owned enterprise is granted much more sparingly when compared to joint ventures. 

Like joint ventures, wholly foreign owned enterprises are in most cases required to balance their foreign exchange and are allowed to occupy facilities other than those managed by the Foreign Management Bureau. As a Chinese legal entity they may sign separate contracts with the appropriate government authorities or Chinese business entities to acquire land use rights, rent buildings, and receive utility services.

Wholly foreign owned enterprises enjoy exclusive management control of their business activities and have autonomy in their operation and management with less interference from the Chinese government. Because there is no Chinese partner to guide the project through the approval process and through the other regulatory issues associated with construction and operation of the enterprise, the logistics of establishing a wholly foreign owned enterprise can be difficult and costly.

A wholly foreign owned enterprise is considered a Chinese legal entity and must abide by all Chinese laws. They must employ Chinese labour in accordance with local and central government labour laws and are encouraged to establish trade unions (but not required to do so.

Traditionally the wholly foreign owned enterprise has rarely been the chosen method for investment in China. The independence offered to the foreign investor is often outweighed by the lack of direct links to the domestic economy. Most international corporations choose to establish joint ventures for the relationships and connections provided by the Chinese partners.

Recently some major international players in China's telecommunications industry including AT&T and Ericsson have set up wholly owned enterprises to handle much of the domestic management originally handled by their representative office. They have done so only after years of business experience in China and despite their registration as a wholly foreign owned enterprise, maintain the registration of their representative office.

How to establish an equity joint venture in China?

Equity joint ventures are the second most common manner in which foreign companies enter the China market and the preferred manner for cooperation where the Chinese government and Chinese businesses are concerned. Joint ventures are usually established to exploit the market knowledge, preferential market treatment, and manufacturing capability of the Chinese side along with the technology, manufacturing know-how, and marketing experience of the foreign partner. 

Normally operation of a joint venture is limited to a fixed period of time from thirty to fifty years. In some cases an unlimited period of operation can be approved, especially when the transfer of advanced technology is involved. Profit and risk sharing in a joint venture are proportionate to the equity of each partner in the joint venture, except in cases of a breach of the joint venture contract.   

Share holdings in a joint venture are usually non-negotiable and cannot be transferred without approval from the Chinese government. Investors are restricted from withdrawing registered capital during the life of the joint venture contract. Regulations surrounding the transfer of shares with only the approval of the board of directors and without approval from government authorities will probably evolve over time as the size and number of international joint ventures grow.

There are specific requirements for the management structure of a joint venture but either party can hold the position as chairman of the board of directors. A minimum of 25% of the capital must be contributed by the foreign partner(s). There is no minimum investment for the Chinese partner(s). 

It is preferable that foreign exchange accounts are balanced in order to remit profits abroad so that the repatriated foreign exchange is offset by exports from the joint venture. With the elimination of foreign exchange certificates and the further opening of the China market, this requirement is becoming more and more relaxed.    

The permissible debt to equity ratio of a joint venture is regulated depending on the size of the joint venture. In situations where the sum of debt and equity is less than US$ 3 million, equity must constitute 70% of the total investment. In joint ventures where the sum of the debt and equity is more than US$ 3 million but less than US$ 10 million, equity must constitute at least half of the total investment. In cases where the sum of the debt and equity is more than US$ 10 million but less than US$ 30 million, 40% of the total investment must be in the form of equity. When the total investment exceeds US$ 30 million, at least a third of the sum of the debt and equity must be equity.

Equity can include cash, buildings, equipment, materials, intellectual property rights, and land-use rights but cannot include labor. The value of any equipment, materials, intellectual property rights, or land-use rights must be approved by government authorities before the joint venture can be approved.

After a joint venture is registered, the entity is considered a Chinese legal entity and must abide by all Chinese laws. As a Chinese legal entity, a joint venture is free to hire Chinese nationals without the interference from government employment industries as long as they abide by Chinese labor law. Joint ventures are also able to purchase land and build their own buildings, privileges prevented to representative offices.

How to set up a resident representative office?  

Foreign traders, manufacturers, shipping agents, economic organizations and other groups shall report, according to their nature of the business, to the Ministry of Commerce (Mofcom) or other relevant ministries, committees or bureaus which are authorized for the examination and approval of the setup of resident offices. Proxy authorized by Mofcom will go through the examination and approval procedures for the above-mentioned companies. The business activities of the established institutions can only be in the range of business connection, product introduction, marketing, technology exchange and consulting service and etc. Direct business activities are prohibited. 

Documents Required and Necessary Procedures 

(1) Application for setting up the office: The application shall include background of the enterprise, business conditions, purpose of the office to be established, name of the office, person in charge, scope of business, location and operational term. Application shall be signed by the chairman or president of the enterprise together with the enterprise's seal. (original)

(2) A certificate of authorization to the representative accredited to the office issued by the chairman or president of the enterprise. (original) 

(3) Copy of certificate of legal operation or copy of certificate of registration provided by the proper authorities of the country or region where the enterprise comes. 

(4) Bank reference provided by the bank of the country or region where the enterprise comes: The bank reference, to be signed by the person in charge or business manager of the bank, shall state clearly the enterprise's registered capital and present amount of deposit, as well as the reputation of its flexing capitals after the opening of the account. (Original) 

(5) Resume of representative accredited to the office. The resume, including both educational and working background, should be detailed, specific and true. Disconnection is not allowed. Two photographs of each representative are required. 

(6) Identification paper of the representatives. For representatives of foreign nationality, copy of passport of the country he holds should be submitted. For compatriots from Hong Kong and Macao, copy of certification for his returning to his hometown and permanent resident identification should be submitted. If a domestic personnel is to take the post of representative or chief representative, approval and identification from Beijing Foreign Enterprise Service Corporation (FESCO) are needed.