Investment

In addition to establishing an RO, foreign investors have several other options. These options require heavier capital investment and include:

Activities that are allowed to be performed by foreign investors under the Chinese law are listed in the 2020 Catalogue of Industries for Guiding Foreign Investment.

Preinvestment Considerations

Entering the Chinese market requires a lot of strategic planning and it is highly recommended that legal experts are consulted before the company’s market entry. It is crucial to decide in advance which kind of business scope the company will have. This decision will affect the registration and the application process for obtaining the business license.

The table below shows the most common forms of investment in China.

Choices of Chinese market entry
Form of investment	Legal standing
Representative office	No legal identity
WFOE (100% foreign investment)	LLC (limited liability company)
Joint Venture (minimum 25% foreign investment)	LLC or partnership (contractual JV)
Holding or regional headquarters	LLC
Merger and acquisition	LLC or foreign-invested company by shares
Public shares	Chinese Stock Company

Wholly Foreign-Owned Enterprise (WFOE/WOFE)

A WFOE, commonly known as “WOFE,” is a limited liability company (LLC) owned by foreign nationals and capitalized solely by one or more foreign investors. The WOFE is a suitable structure for companies whose main activities in China consist in selling products, manufacturing, or providing such services as business consulting or research and development. Companies engaging in trading or retail and distribution of imported goods may also do so under a WOFE but must be registered as a specific type of WOFE known as a FICE. According to Chinese law, “foreign investors are permitted to establish a 100 percent foreign-owned enterprise in industries that are conducive to the development of China’s economic interests and not prohibited or restricted by the Chinese government.” A complete list of these categories can be found in the Investment Catalogue.

The Chinese law and regulations prohibit or restrict the creation of WFOEs in certain industries. MOFCOM, the Chinese Ministry of Commerce, is generally responsible for the examination and approval.

The typical lifespan of a WOFE is between 15 and 30 years. In case the capital is large, the construction period is long and the return on investment is low or in cases where sophisticated or internationally competitive goods using advanced technologies are produced by the foreign partner, it is possible to obtain an extension of the WOFE’s duration. A WOFE can be extended up to an additional 50 years upon approval from the State Council. Advantages of choosing a WOFE as an investment vehicle include—but are not limited to—the protection of proprietary technology and other IPR, exclusive management control over all decisions and profits of the parent company without the involvement of the Chinese partner. The WOFE is the sole recipient of investment vehicle profits and is able to issue invoices to customers in RMB while it maintains full control of human resources.

Registered capital is the amount of money required by the law to establish a company. The amount varies depending on the local administration, the industry sector, the region, and the intended size of the business. This amount should be consistent with the scale of intended business operations. Increases in the amount of the registered capital must receive prior approval from the competent authorities. On the other hand, unless special approval is granted, the registered capital cannot be reduced during the term of operation. Foreign investors may contribute capital in the form of freely convertible foreign currencies or certified RMB profits from other FIEs. Items such as equipment, machinery, proprietary technology, or industrial property can also be capitalized based on their monetary value. It is important to know that the time limit within which the capital contributions are to be made must be clearly specified in the application and articles of associations. Contributions can be made in installments. The first installment must be made within 90 days of the issuance of the business license, representing no less than 15 percent of the total registered capital amount, while the last installment within 3 years. After all capital contributions have been made the company must engage a China registered accountant to verify the contributions and provide an investment verification report.

WOFEs are generally required to make allocations to a reserve fund as well as a bonus and welfare fund for their staff from the after-tax profits. Reserve fund allocations must not be less than 10 percent of the aftertax profits. Profits may not be distributed until clearance of the prior years’ losses.

According to Chinese law, the minimum registered capital for a single shareholder company is RMB 100,000 while for a multiple shareholder company the minimum required capital is RMB 30,000. For a FICE the capital required is much higher. For example, the amount required for trading (import–export) rights is no less than RMB 1 million, for wholesale distribution rights the amount is generally RMB 500,000, while for retail distribution rights it is RMB 300,000. Generally, the local authorities review the feasibility study on a case-by-case basis before granting the investment approval.

Minimum registered capital
Limited liability company (with multiple shareholders)	RMB 30,000
Limited liability company (with a single shareholder)	RMB 100,000

Total investment is the registered capital together with foreign exchange loans, usually originating from the parent company. Total investment refers to the maximum amount that the mother company is allowed to transfer to its China-based subsidiary. It is the only source the WOFE can rely on to finance its operations until it generates profits from its business activities. It is important to know that the amount of total investment is limited and strictly supervised. For that reason it is crucial to prepare a financial plan and set the amount of total investment with a clear view on expected future costs and revenues until the WOFE can reply solely on its own profits. It is necessary to ensure that the registered capital is sufficient for the company’s cash flow needs throughout the first phases of the start-up period. Moreover, careful attention should be paid to the relationship between registered capital and total investment. The financial gap, that is, the difference between registered capital and financial investment should be planned very carefully.

Joint Ventures

A JV is an LLC formed by a Chinese company and one or more foreign investors. I want to emphasize that the JV is not the result of a merger or an acquisition between a Chinese and a foreign company. The JV is a totally new entity, partly owned by both sides—with the foreign party owning at least 25 percent of the total shares. Liability does not extend to the parent company and is limited to the assets each of the parties has brought to the business. There are two types of possible JVs in China: the EJV and the CJV. Although on the surface they might appear very similar, they do have different implications for the structuring of the entity. Before committing to any JV you need to ask yourself why you need a partner. They should have tangible assets to contribute. Obviously, the main reason foreign companies choose to enter into a partnership with a domestic company is that the latter can be used as an entry vehicle to help them access an industrial sector which is otherwise restricted or prohibited to 100 percent foreign investment.

In fact “joint venture” sounds like a rather friendly way of doing business in China. An ideal marriage between two parties in pursuit of common goals perhaps? It is very likely that you will be offered a lot of such deals. Many Chinese companies are looking to gain access to Western technology and they are also looking to secure foreign sales through a foreign partner. This option, indeed, might sound more compelling than a WFOE, which is the main alternative. Be aware though that China’s business history is full of broken dreams and unhappy partnerships. A CEO of a major Western consumer electronics company once told me that their JV was a win/win situation in the sense that the Chinese side won twice.

Remember that strategy must always lead structure. It is important to create a JV for the right reasons. In the same way it is crucial that you choose the right structure for the JV itself not because legal rules imply a particular direction but because of operational business reasons. The Chinese government still requires participation of Chinese companies in a number of sectors. This might be one reason why your company would prefer this structure while an alternative one is that Chinese partners are used because they have valuable assets to offer, such as a well-established distribution network, brand reputation, technical know-how for a special manufacturing process, or other forms of tangible assets such as special licenses or even land use rights.

It is a common mistake to think that a JV will limit your cost of market entry due to the shared costs. Experience shows it is usually far from being the case. Another important question you should think is what the partner wants or expects out of this partnership. It is equally important to engage in thorough discussions with them in order to understand their perspective which might be very different from what you might be thinking.

Below you can see a checklist of the main issues you will need to consider:

Equity Joint Ventures

An EJV is a legal entity created by Chinese and foreign partners that hold joint ownership and operations of an LLC and have reached an agreement on management and the division of profit and risk. EJV companies share both revenues and risks based on their respective registered capital contributions. The foreign party’s capital in an EJV must account for at least 25 percent of the total registered capital. According to the Investment Catalogue, in specific industries, the Chinese party is required to have control over the JV in which case the foreign side is not permitted to own more than 49 percent. Profit is distributed based on each party’s respective ownership interest, normally in the form of dividends.

The steps to follow for approval of an EJV are generally very similar to the WFOE. The list of required documents differs though, since in this case a JV contract is required. The necessary steps also depend on the industry in which your business operates and the required special permits. However, the time needed to set up an EJV is usually longer compared to the setup of a WFOE. Approval from MOFCOM is generally granted at the central level but a proposed EJV can apply to the provincial bureau in case certain requirements are met, such as the ones listed below:

Capital contributions of an EJV can take the form of cash, industrial property rights, capital goods, and other assets. Generally, the Chinese partner will contribute cash land or land use rights, while the foreign partner will most likely contribute cash, equipment, machinery, or construction materials. All JV contracts must contain a schedule for capital contributions. In case the capital contribution is made in a single payment all partners must complete the payment of the full amount within six months of the date the business license is issued. A temporary business license is normally issued during the capital contributions period. If the partners fail to make their contributions within the required time frame, the temporary license will not be renewed. All capital contributions must be certified in an official report from a China-registered Certified Public Accountant (CPA) firm as a way to confirm that the contributions stated in the contract have been received. During the life of an EJV the foreign partner’s equity contribution should generally not be repaid. Once the venture has been liquidated though, the net assets—if there are any—will be distributed according to the shareholdings of each partner.

Regarding the relationship between the shareholders, the partners of an EJV share joint management of the whole venture and representation matches the proportion of shareholder interest in the venture. The board of directors holds the power to make all major decisions regarding the financial standing of the venture. Partners share common responsibility in the appointment of the board members and a board meeting is required at least once a year according to the law. Also, the board of directors must engage a general manager and deputy managers. The general manager will be responsible for board decisions as well as for the daily management of the venture.

The profits and losses of an EJV are distributed based on the ratio of each partner’s investment. After taxes have been paid and profits distributed, the JV is required to make allocations to three funds: a welfare and staff bonus fund, a general reserve fund, and an enterprise expansion fund. Normally, the amount to these three funds is designated in the JV contract or it must be decided by the board of directors. Note that all losses from previous years must be cleared before distributing the current year’s profits.

Cooperative/Contractual Joint Ventures

A cooperative joint venture or CJV is a partnership between a Chinese organization or enterprise and a foreign organization, enterprise, or individual. A CJV can take the form of a partnership based on an incorporated arrangement with an LLC while it can also be based on a contractual cooperation agreement (real CJV). It is important to mention that there are not many real CJVs. What is of benefit to the foreign party is that they can enjoy a lot of flexibility when negotiating the specifics of the CJV and enjoy an important bargaining power for profit sharing, capital investment, management structure, and so on. There is a minimum of 25 percent of foreign investment required in the CJV while there is no limit for the contribution of the Chinese party. Ownership as well as profit or losses of a CJV are usually not shared on an equity or capital contributions basis but are determined on the basis of a contractual agreement between the parties involved.

The CJV contract should state each investor’s obligations in terms of invested capital as well as timeline. If an investor fails to fulfill their contract obligations SAIC will set a new timeline for carrying out those engagements. An investor who fails to fulfill their capital obligations might be charged with breach of contract. EJVs are required to have a registered capital which will be the total amount of capital registered with SAIC at the time of the establishment of the EJV. The amount should be stated clearly in RMB unless of course both parties agree on an alternative currency.

Capital contributed to the venture by all involved parties may be in cash or kind. Industrial property rights, land use rights, as well as other property rights can be used as capital contributions. The law on CJVs requires that all parties fulfill their investment and cooperation obligations as these are stated in the JV contract. Failure to do so within the prescribed time frame will lead to another deadline being set by the relevant authorities whereas further failure will be handled based on the relevant state provisions. Capital contributions must be verified by a Chinese-registered CPA which will issue a verification certificate. As in the case of the EJV, a CJV, as an LLC, must appoint a board of directors or a joint managerial committee that will be in charge of making all major decisions and supervise the management of the JV.

The profits and losses of a CJV would normally be distributed following the ratio stated in the contract. This varies over the contract terms. Note that the total amount provided by an EJV for the three reserve funds (general reserve fund, staff bonus and welfare fund, and enterprise expansion fund) is expressed as a percentage of the after-tax profits, while in the case of the CJV the total amount provided to these funds is expressed as a percentage of pretax profits.

WFOE		JV
Pro’s	Con’s	Pro’s	Con’s
Fast decision making processes	Capital contribution only from one party	Capital from 2 or more parties	Time and cost expenditure because of more effort and longer decision-making process
Protected technologies and know-how	Limited knowledge of the Chinese market	Share of the costs and the risk	Technology and know-how piracy risk
100% ownership and control	Built-up relationships with Chinese business contacts and government long-term process	Use relationships of Chinese JV partner and his business and government contacts	Dependency
No culture differences			Culture differences

Foreign-Invested Commercial Enterprise

Once an international company has reached a level of success in trading with or selling to China, it is only natural that they decide to establish an on-the-ground presence, usually in the form of a FICE. This structure has become one of the most popular ones among foreign investors who wish to enter the Chinese market as it is by far the most convenient and cost-efficient business structure available to foreign traders seeking to:

In fact, a FICE is easier to set up compared to a full manufacturing WFOE because the capitalization requirements are normally lower due to the absence of any imported tooling requirements or machinery. FICEs are also a more cost-effective option in comparison with ROs. From an accounting, tax, and legal perspective though, establishing a FICE demands both administrative and technical knowledge. It is crucial to ensure right from the start that the business model is feasible and that all investors have a full and very clear understanding of the internal control processes, company cash flows, as well as pre- and postregistration procedures.

A FICE is capable of conducting the commercial activities listed below. The business scope of a FICE includes one or more of the following activities:

There are two main types of FICE: wholesale FICE and retail FICE. A retail FICE can engage in:

A wholesale FICE can engage in:

Finally, a FICE can authorize others to open branches through way of franchising.

Foreign-Invested Partnership (FIP)

An FIP is an unlimited liability business entity without minimum registered capital requirements. It was back in 2010 when the Administrative Measures on the Establishment of Partnership Enterprises by Foreign Enterprises or Individuals in China were made official by China’s State Council. For the first time, these measures opened the door for foreign investors and entities to invest directly in China-based partnerships.

The partners or investors of an FIP can be composed of:

Two forms are recognized: general partnerships and limited partnerships. The measures governing the formation and arrangements of such partnerships are pretty similar to those in other countries. FIPs have become particularly popular in recent years as the most convenient and easy way for foreign investors to establish a business in China. In addition to be an attractive entry strategy for private equity funds, FIPs are open to all “encouraged” sectors of the Investment Catalogue and also to certain restrictive sectors subject to review.

Registration of an FIP is subject to the following requirements:

When setting up an FIP there is no minimum requirement of registered capital. However, it is necessary to submit a confirmation of agreed consideration signed by all partners or an assessment certificate of consideration issued by a China-registered statutory agency. Current measures allow FIP partners to contribute capital in local or foreign currency. All FIP parties may also contribute to the FIP’s capital in terms of intellectual property or land use rights or even labor investments. Note that only the general partner is allowed to make capital contributions by labor service, always following certain regulations. A foreign general partner making contributions by labor investment must submit employment licenses of all foreign staff to the competent SAIC branch.

Profits of an FIP can be distributed in the following ways:

An FIP is generally seen as a flow-through entity and for that reason income tax is imposed at the partner level. A legal person/partner is subject to a 3 percent to 5 percent business and corporate income tax (CIT) for the profits they receive.

Joint Stock Companies

The foreign-invested joint stock company, also known as a company limited by shares, is a particularly attractive option because it allows for broad participation in the equity of the company, whether it is a foreign or domestic company and whether it is private or public. This structure type offers its executives and employees stock incentive plans and eventually also offers its shares on a public stock exchange (e.g., Beijing or Shanghai Stock Exchange). Moreover, it can use its stock as assets or currency in debt and equity offerings as well as mergers and acquisitions. From that perspective the FIJSC is very similar to its corporate counterparts in the United States and Europe.

Greater freedom to enlist broader participation in its equity comes along with higher and more demanding requirements of corporate governance. Therefore, the minimum capital requirement is also substantially higher (RMB 30 million). Given that the FIJSC is a more complex organization, it requires more time, energy, and financial resources to establish. On the other hand, for foreign-invested companies seeking to conduct the full range of corporate activities which are normally associated with growing and ambitious Western companies, the FIJSC offers the most suitable structure.

Other recently introduced foreign company structures also offer the opportunity to comingle assets with Chinese partners but these companies are purposely designed for investing, and not for business operations, and reach beyond the means of most businesses. These include the foreign-invested holding company and foreign-invested venture capital investment enterprise. The minimum cumulative capital requirement is U.S.$30 million for the former and the standard requirement for the latter is that each investor contributes a minimum of U.S.$1 million.

Due to certain limitations to the traditional business structures, including the inability to coinvest with Chinese partners, the most flexible and versatile FIP and FIJSC offer investors some tantalizing options. The complexity of the FIJSC and the novelty and lack of familiarity of the partnership can potentially lead some to turn back to the WFOE structure. However, it is likely a matter of time until the FIPs and FIJSCs become a more popular choice among foreign and domestic investors in China.

Mergers and Acquisitions

Purchasing a company can be a difficult process in China. However, for some foreign companies this can be the right path to accelerate growth. In fact, in certain situations, acquiring a Chinese company can be much more effective than starting from scratch and relying solely on organic growth. Many advantages and drawbacks of setting up a JV with a Chinese partner also apply to a company acquisition. Some of the advantages include access to already established customer relationships and local professional networks, as well as local business knowledge and distribution channels.

The Chinese government generally maintains an influential role in any domestic company acquisition. If a foreign investor wants to purchase a Chinese company, an approval is needed by a number of government bodies. In 2011 a new regulation came into effect aimed at controlling foreign purchases of domestic companies. In fact, acquisitions of majority shares in certain highly regulated industries which are of strategic importance to the Chinese government, such as defense, energy, infrastructure, food and technology, have to pass a special review by the Council of State, the National Development and Reform Commission, the Ministry of Commerce, and other government agencies. Approval normally takes a significant amount of time and effort and depends on a large variety of factors (e.g., industry, investment values, current status of the acquired company).

Relevant government bodies include:

Depending always on the industry sector (this especially applies to highly regulated industries) approval from industry-specific bodies might also be required. When elaborating an acquisition strategy, it is recommended to spend a good amount of time looking for suitable acquisition candidates and to develop a clear and well-defined plan for successfully integrating the company after acquisition. When developing such strategies, foreign investors should consider:

Absence of a well-thought thorough merger strategy is likely to result in future trouble with the target company or even lead to total failure and costs.

There are two main ways of acquiring a Chinese company or parts of it: equity acquisition and asset acquisition. Choosing the right acquisition form depends on several factors, including legal and tax consequences as well as the financial standing of the domestic company. Equity acquisition is the most common way of acquiring a company in China. The foreign investor acquires equity of a Chinese or, in certain cases, an existing foreign-invested company. As mentioned above, that requires approval from various local authorities. In case the acquisition target is a FIE, approval needs to be granted by the authorities that were involved in the formation of that company. If the target is a Chinese company, it will need to be converted into a FIE and the conversion needs to be approved by the relevant government bodies. The reason this is a popular form of acquisition is that purchasing equity is usually the most convenient and fastest way of acquiring a company in China. It is essential to bear in mind that in an equity acquisition situation the buying company also “acquires” the obligations and liabilities of the target company. Should that company have a lot of debts or other financial obligations, the buyer could potentially be exposed to high risks.

An alternative method is to acquire selected assets of the target company. This option enables the foreign investor to cherry-pick the target company’s best or most valuable assets. There is no charge of equity ownership. The acquiring company normally buys some parts of the target company without the need for governmental approval regarding the transfer of the assets. Know, however, that in order to purchase any assets in China, a foreign company has to be legally established, which, again, is a process requiring approval by many government agencies. Generally, asset acquisition is a more time-consuming process than equity acquisition. The advantage, however, is that liabilities of the target company are not assumed by the buyer, hence considerably reducing the risks associated with an acquisition. As opposed to an equity acquisition, all business and employment contracts related to the acquired assets need to be renegotiated and signed by the buying company, which can be a cumbersome process. Moreover, the seller will have to pay higher taxes which, in turn, might be passed on to the buyer. Additionally, if the target company is a FIE and sells its assets, money saved from preferential tax treatments can be claimed back from the government in case the conditions for receiving the incentive have changed.