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China has three recognized
forms of business organizations
available to foreign investors.
These are: |
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1)
Joint Venture (JV) |
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A
Joint Venture is a business
arrangement in which the
participants create a
new business entity or
official contractual relationship
and share investment and
operation expenses, management
responsibilities, and
profits and losses.
The Chinese authorities
encourage foreign investors
to use this form of company
in order to gain a familiarity
with advanced technology
and new management skills.
In return, foreign investors
can enjoy low labour cost,
low production costs and
a potentially large Chinese
market share. Joint Ventures
are sometimes the only
way to register in China
if a certain business
activity is still controlled
by the government. e.g.
restaurants, bars, building
and construction, car
production etc.
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2)
Wholly Foreign-Owned Enterprise
(WFOE) |
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A
wholly foreign-owned enterprise
is a business entity formed
in China entirely with
foreign capital, it is
totally under foreign
control and does not have
any formal Chinese ownership
participation. In order
that a foreign company
could issue receipts and
export goods from China,
it must be able to legally
registered as a local
company or a WFOE. A WFOE
is set up as limited liability
entity and represents
separate legal persons
and is taxed according
to the local legislation.
WFOE's can generally control
their own governance through
the articles of association
and the normal minimum
paid up share capital
starts from 1 million
RMB (approximately USD140,000),
however, some provinces
offer lower capital requirements
in order to attract more
foreign investment. Many
foreign investors find
this type of company attractive
because of the full control
and 100 percent ownership.
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3)
Representative Office (Rep.
Office) |
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The
simplest and most cost
effective method of establishing
a useful business presence
in China is the Rep. Office.
The choice for an initial
Rep. Office will normally
be determined by basic
market and product research
in China. The high profile
cities of Shanghai, Beijing,
Guangzhou, and Shenzhen
are the most likely choices
for the Rep. Office. It
should be noted that more
than one Rep. office can
be established in China
by a foreign entity.
A Rep. Office is an entity
involved in business activities,
which do not result in
direct profits being made
by the office. They are
allowed to operate as
partnerships or sole proprietorships
in China, as they are
not recognized as legal
persons. However, they
are allowed and encouraged
to conduct "indirect operational
activities" such as liaison
for business purposes,
introduction of products,
market research and technology
exchange. These activities
should be preparatory
and supplementary activities,
market research on the
local market, providing
business information and
supplying sales for the
headquarters. The foreign
enterprise applying for
the Rep. Office must be
legally registered in
its country of origin
for at least 12 months.
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