A series of reforms in China, over the past decades, have led to changes in both the nature and number of opportunities available to foreign entrepreneurs. This guide covers China as an opportunity, how to register a business, how taxation and accounting work, how to deal with human resources and trade regulations and how to open bank accounts.
China as an opportunity
China has risen from widespread famine and crippling poverty to become the world’s second-largest economy, in only a few decades. As a result, hundreds of millions of its citizens have joined the global middle-class creating an enormous consumer market, hungry for all types of goods and services. This is a relatively unsaturated market which is easier than ever to enter, especially via the internet.
So much so that any online business, regardless of its country of registration, can now sell to Chinese consumers without even having to establish a subsidiary or any type of local presence. Website translation and some simple technical integrations are all that is needed (read this article for more details). This was not possible a few years ago and still would not be if it was not for the recent internationalization of China’s main payment services and the newly available local capabilities from cloud services providers like Microsoft and Amazon. Things are a bit more complicated when a local presence is needed or for businesses dealing in physical goods and those offering local services (for example, restaurants) but they have been improving and should continue to do so.
If you are still sitting on the fence about China, consider this: it is a country which will play an enormous role in the future of our species, in nearly every fields. Any business which understands this will have a tremendous competitive advantage. With the barriers of entry falling, even that of language thanks to technology, there has never been a better time to enter the Chinese market and China itself has never been as much of an opportunity as it is now.
A word of warning
Despite massive improvements in nearly every fields, China remains a fairly dangerous country for the unprepared entrepreneur. You cannot count on the fairness of its justice system or the willingness of its government to help in case of a dispute. You need to be knowledgeable and to have contingency plans in place for every situation. Meet other foreign entrepreneurs doing business in China and learn from their mistakes. Whenever in doubt, seek the advice of a lawyer with experience in China (preferably one based in China). It is also important to take the ongoing impact of covid into consideration.
Registering a business
As mentioned above, there is often no need to register a Chinese business in order to access the Chinese market. A foreign-registered business, with a Chinese language website, with the proper payment services integrations, will benefit from nearly the same level of access as local businesses do. An added bonus is that it will not have to deal with the local bureaucracy.
If a local presence is needed, it will usually be necessary to register a Chinese business. This process is complicated, costly and time-consuming. For this reason, entering into a distributorship relationship with one or multiple Chinese companies can also be an option, depending on the nature of your products. Chinese distribution agreements are fairly similar to their counterparts internationally and can be a far cheaper way to enter the Chinese market. Contrary to popular belief, there is no need to sign over IP rights or give exclusivity to one distributor.
Now if you absolutely need a local presence, you will first have to choose a legal entity type from the wide variety available to foreigners, then apply for permission to register, then apply for the registration itself, then apply for a tax ID and finally, undergo a series of administrative procedures to verify that every previous step were done right and that the business is fully compliant.
In most cases, the process takes months and can be fairly expensive, especially if registering a WFOE or Joint Stock Company.
As of 2024, six different types of legal entities are available to foreigners.
The Equity Joint Venture is essentially a normal partnership (between a Chinese and a foreign stakeholder). Profits and losses are distributed proportionally to the ratio of each partner’s investment. It is rather flexible, in terms of allowed business activities, but comes with several requirements. One such is that the foreign stakeholder must contribute at least 25% of the capital. Another is that the company must make regular allocations to three funds: a staff bonus fund, an enterprise expansion fund and a general reserve fund. It is important to note that general and duty managers must be hired to manage the business and that a board meeting must be held at least once every year in China.
The Cooperative Joint Venture is the Chinese equivalent to the LLP. It must have at least two partners, one of which must be Chinese. As with the EJV, a CJV must appoint general and duty managers and must also make allocations to the three funds listed in the EJV description. The main difference with the EJV is in the way it is taxed. For example, the allocations it must make have to be based on its pre-tax profits instead of its after-tax profits as is the case with the EJV.
The Wholly Foreign-Owned Enterprise is the most popular legal entity type for foreign entrepreneurs and investors in China. As its name implies, it allows foreigners the right to fully own a business. It also is closer, in function, to what most entrepreneurs are familiar with (normal run of the mill corporation). As is the case with the EJV and the CJV, allocations must be made to various funds (no less than 10% of the after-tax profits). Profits can only be distributed if all losses have been cleared (this includes losses from prior years, up to the founding of the company).
The Joint Stock Company is the Chinese equivalent to a public company. It has a rather high minimum capital requirement of 30000000 RMB, at least 25% of which must come from foreign investors. It also has to abide by stricter rules than the other legal entity types listed on this page.
The Partnership is a pass-through entity type which was opened up to foreigners in 2010. I would only recommend it in rare circumstances due to multiple factors including taxation and compliance.
The Representative Office allow foreign companies, which have been in business for at least two years, to set up and operate an outpost in China. It is important to note that a representative office cannot engage in any profit-making activities. That said, it can be used to facilitate deals with the parent company and this opens up some very interesting opportunities. For example, a US LLC + representative office combo can be used to do business and live in China tax-free, if properly structured. This combo allows the sponsorship of up to four work visas and is compatible with Alipay / WeChat Pay. It also eliminates the troubles many businesses face when it comes time to remitting their profits from China.
Taxation
All businesses operating in China are subject to Corporate Income Tax (CIT) at the flat-rate of 25%. Resident businesses (businesses registered in China or managed from China) are liable for CIT on their worldwide income while non-resident businesses are only liable for CIT on their China-sourced income. Please note that selling to Chinese consumers via an overseas business, with no physical presence in China, does not usually constitute China-sourced income. Foreign tax credits are available as well as other benefits when a treaty exists. Businesses operating in certain industries may be taxed at a lower rate and in some cases, completely exempt from CIT. It is important to note that dividends paid to non-residents are subject to a 10% withholding CIT (unless a tax treaty says otherwise).
Depending on business activities, other taxes may also apply. Such taxes include VAT, Business tax, Consumption tax, Customs duties, Stamp tax, Vehicle and vessel tax, Motor vehicle acquisition tax, Deed tax, Land appreciation tax, Real estate tax, Urban and township land-use tax, Resources tax, Urban construction tax, Maintenance tax, Education surtax etc.
Capital gains, interest, royalties and dividends received by resident businesses are usually taxed as normal income.
The tax year for businesses is the calendar year. All returns must be filed within five months following the end of the tax year. It is important to note that all returns must be audited by a Chinese-registered CPA firm.
Individuals who reside in China may be liable for the Individual Income Tax (IIT) if their stay exceeds 90 days in every 12 months (183 days for treaty countries) or if they are employed by a Chinese company.
That said, unless the full year is spent in China (not a single day out of the country), only China-sourced income will be liable. In effect, this makes China a territorial taxation country for most expats.
Personal tax returns are filed on a monthly basis by the employing entity. In some circumstances, they can be filed on an annual basis.
Accounting
China uses the Chinese Accounting Standards (CAS2006) which generally reflects all IFRS principles but with a few local quirks. One of those is that a company has to disclose information about all its subsidiaries regardless of whether any transactions took place (including dormant companies). Another is that all records must be kept in Chinese and denominated in CNY.
All statements must be audited on an annual basis by a Chinese-registered CPA firm. This obviously adds to the overall compliance cost and is something to take into account when choosing the type of entity to register.
Human resources
One of the first steps a new business will take after registration is recruiting local staff. While this may seem a simple and straightforward process, in China it is anything but. Firstly, the type of entity you registered will determine your options in regards to how, where and who you can hire. For example, a CJV will need to recruit staff from the Chinese partner’s employee pool (or recommendations). A WFOE, on the other hand, will be able to hire anyone without restrictions (as long as they are Chinese citizens). As for a RO, it will only be able to source staff from an authorized labor agency (you will pay the authorized labor agency a salary + service fee every month for each employee).
Terminating employment is also complicated and bureaucratic. It is heavily regulated and employees can only be let go in some very specific circumstances. Severance payments are mandatory (based on the number of years in employment) and so is giving an advance notice.
China, being a communist country, is very much pro-trade unions (although Chinese trade unions are nothing like their Western counterparts). As such, employers are required to support employees wishing to set up their own trade unions (or join existing ones). Employers are also required to contribute funds equivalent to at least 2% of total salary costs for the activities of said trade unions.
In order to hire foreign staff, a Chinese business must first apply for an employment license. This license gives the business the right to issue invitation letters which can then be used by the prospective employees to apply for work visas (Z). Please note that issuing an invitation letter does not guarantee, in any way, that the visa application will be approved.
In the case of ROs, the maximum number of foreign employees is four. Also, these employees are issued Working Cards instead of work permits.
Businesses can set their own remuneration packages, as long as wages are not lower than the local legal minimum. Incentive programs should also be offered, especially in the case of management and sales, in order to be competitive and attract the best talent.
It is important to note that employers are required to participate in the Chinese social benefitssystem. In most cases, the total cost of this participation will amount to 35-40% of the salary cost.
The standard working week in China is 40 hours. Overtime, depending on circumstances, must be compensated at 150-300% of normal wages.
Trade
Thanks to China’s membership in the World Trade Organisation, Chinese businesses can import and export directly in their own names (was not possible pre-WTO). That said, businesses must first register with the Customs and in some cases, apply for a special license.
As a member of the WTO, China uses the standard tariff system for imported goods (MFN, PTR etc). Duty reduction and exemption may be available in some situations. Anti-dumping measures also exist in order to protect the domestic market against external pricing manipulation.
An increasing number of Free Trade Zones (FTZ) have been established in recent years, some near the major population centers. Special Economic Zones also exists, the most famous being the city of Shenzhen in Guangdong.
Banking
Every Chinese business must open at least two RMB bank accounts: a basic account and a general account. The basic account is to be used to handle daily fund transfers, the payment of employee salaries as well as cash deposits and withdrawals. The general account is to be used for cash management needs. Both accounts must be at different banks and there can only be one basic account per business (in all of China).
If the business needs to engage in transactions not allowed by the two aforementioned accounts, special or temporary accounts can be opened.
Foreign currencies accounts may also be opened, if necessary, with the permission of the State Administrative of Foreign Exchange (SAFE).
Bank accounts in China tend to be local and as such, a business operating across multiple locations will typically need to open accounts in each of those locations.
It is important to note that the only way a business can repatriate cash outside of China is via an annual dividend. A large number of documents are required (including tax clearance certificates) to process such dividends. This is another reason why using a foreign-registered business often makes more sense.
Censorship
Chances are that you will, at some point, need to relocate to China to run your business, or at least spend a significant amount of time in-country. This will bring challenges of its own, a major one being censorship. I have also written a guide covering how to bypass the great firewall, you can read it here.
