Eight considerations for incorporating in China
While the Chinese market offers a plethora of opportunities, it can be a challenging jurisdiction in which to do business. In an effort to encourage foreign investment, the Chinese government has taken steps to streamline and simplify the incorporation process.
In our latest annual GBCI (Global Business Complexity Index) report, China ranked as the 15th most complex place to do business. While it remains a challenging jurisdiction for companies seeking to set up here, it has improved in recent years – in 2022 it was in 14th place, while in 2021 it ranked 12th.
In August 2023, the Chinese government issued 24 new measures that are designed to boost foreign investment in the wake of Covid-19. The measures cover critical areas such as technological development, intellectual property rights, fiscal support and tax incentives.
The journey to incorporation in China
The first step to incorporating a business in China is identifying the entity type. Many foreign investors or companies prefer to incorporate as a Wholly Foreign Owned Enterprise (WFOE), as this type of company does not require a Chinese partner. In the past, opening a WFOE in China involved obtaining certificates from several ministries, but this process has been greatly simplified.
The registration process typically takes about four to five months, including document preparation and the application process. Certain documents may require validation in the shareholders’ home countries, which may now take longer than usual due to Covid-related delays.
Once all registration documents have been prepared and submitted to the regulatory authority, a business application may be approved within one to two days. Since the Covid outbreak, the government has allowed companies to submit paperwork online.
Previously, after obtaining a business licence, companies were required to register with five separate authorities in order to receive further certification. Today, the five certificates have been combined into a single business licence.
In most cases, a company’s registered address must be a physical office which had already been established prior to the company’s registration. Virtual offices are generally not allowed in China.
All documents required for incorporation must be translated into Chinese before being submitted to the government. However, while Chinese is the only official language, business contracts can be drafted in English, and English can serve as the recognised language.
No minimum capital is required except in certain sectors, such as banking and financial services.
Companies are required to open at least two bank accounts, including a foreign currency capital account which is used for capital contributions from shareholders, and a Chinese Yuan (CNY) basic account which is used as a working account for daily payments and collections. Additional foreign currency or CNY current accounts may be opened if required. In general, it takes about one to two months to open a bank account.
Eight considerations for incorporating in China
Foreign investors need to assess the legal, tax, cultural and political implications of incorporating in China. Here we detail some of the key considerations for successfully setting up a business in this region.
1. Market entry and Negative Lists
Review the ‘’Negative List” for foreign investment to determine whether your business is allowed or restricted. There are two types of special administrative measures: the first, “prohibited”, represents sectors in which no foreign investment is allowed; the second, “restricted”, means foreign investment is allowed but requires foreign shareholders to form a joint venture with the participation of Chinese shareholders (a relevant or absolute majority, depending on the sector), or senior management positions to be assumed by Chinese nationals.
2. Free trade zones
Since the establishment of the first free trade zone (FTZ) in Shanghai in 2013, 22 FTZs have been established across China. FTZs represent “field tests” for market opening initiatives. The Negative List for foreign investment is shorter in FTZs than it is in non-FTZ areas. Therefore, for certain sectors – such as publishing, entertainment and market research – foreign investment in FTZs enjoys more favourable market entry conditions compared with other areas. The steps for incorporation are quite similar within FTZs to those outside the zones.
3. Foreign Investment Law of China (FILC)
The FILC took effect on 1 January 2021. If you’re planning to set up a Chinese company or subsidiary, it’s important to understand the law and its impact on foreign-owned businesses. The law serves to protect the rights and interests of foreign investors; promote fair competition between Chinese and foreign enterprises; fight corruption; and standardise the administration of foreign investment.
4. Personal Information Protection Law (PIPL)
China's PIPL establishes rules for how companies collect, use and store data. It also outlines data processing requirements for companies based outside of China, including passing a security assessment conducted by state authorities.
Multinational corporations that move personal information out of the country may need to, depending on the nature and volume of personal information, conduct a security assessment, enter into standard contracts with overseas recipients, or obtain data protection certification from professional institutions.
5. China announced its accession to the Hague Apostille Convention
In November 2023, China became a member state of the Hague Apostille Convention. This means that the formerly lengthy and costly process of notarisation and consular certification of shareholder documents (certificate of incorporation and board resolutions) has been replaced by a simple Apostille certificate, thus significantly reducing costs and saving time.
6. Management structure
Not all management positions in a China-based company are required to be occupied by Chinese nationals or those residing in China. However, during incorporation in many cities, the legal representative or finance person in charge may be required to verify their identity at the registration/tax authority or at a bank. Appointing a Chinese national will significantly simplify the identification verification process.
7. Legal representative
The company’s legal representative is an important position in a Chinese company. Shareholders should choose the appointee carefully, as the legal representative’s civil activities, when acting on behalf of the company, may have repercussions for the entire company. A power of attorney must be put in place to regulate the behaviour of the legal representative.
8. Company chops
China still uses a chop system, under which documents are validated upon the stamping of company chops, even without the signatures of senior management. Therefore, a proper chop application/approval policy is advised before the company commences operations. Alternatively, an independent third-party chop custodian vendor can significantly reduce the misuse of chops.
Talk to us
Our experts on the ground offer services across the three core business lines of accounting and tax, global entity management, and human resources and payroll. In addition to assisting with incorporation procedures, we help you streamline your operations and stay compliant. We currently have offices in Shanghai, Beijing, Chengdu, Shenzhen, Tianjin, Dalian and Guangzhou.
To learn more about how we can help you set up a company in China, make an enquiry today.
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