Establishing and Running a Business in China

Preparation

Different local authorities will be involved at different stages of the approval procedure for all foreign entities. Throughout the incorporation process you will become familiar with departments such as the AIC (Administration of Industry and Commerce), the BOFTEC (Bureau of Foreign Trade and Economic Cooperation) also known under the name of “Foreign Investment Bureau” in some provincial cities, the administrative committees of development zones, the state and local tax bureaus, and customs. The establishment procedure typically goes through central, provincial, and local-level authority approvals depending on the sector the company is involved and the amount of the intended total investment as well as the establishment location. MOFCOM, the Ministry of Commerce, is the final approval authority for a WFOE or a JV but it delegates part of its power to local counterparts such as the BOFTEC at municipality and provincial levels. Specific industry categories might require additional licensing which usually needs to be obtained at the outset.

Establishing a foreign investment structure in China normally takes between three and six months. The establishment process can vary depending on the foreign investment structures and the intended business scope. As a reference, manufacturing WFOEs usually require an environmental evaluation report; WFOEs involved in trading will have to go through customs/commodity inspection registration. Registered capital requirements vary among different structures. A few years ago, establishing service or consulting WFOEs officially required a minimum of RMB 100,000 and FICEs a minimum of RMB 500,000 due to value-added tax (VAT) purposes. Since 2016 no defined minimum capital is required. In practice, however, capital is still needed but the good news is that it is more flexible for a company to set its own level. Remember that despite these regulation changes, it remains important to set capital levels correctly from the outset as it could be very costly not to do so.

There are many issues to consider before making any firm decision to establish an entity in China. It can be hard to be aware of all the implications, especially if you are trying to make this decision based only on a few visits. Make sure you spend a fair amount of time in China before committing to any form of investment.

Necessary Documents

You need to get familiar with some documents that will be required during the establishment process. Below I am listing and then giving a general description of the most commonly required documents:

Feasibility Study

A feasibility study is a detailed analysis of the company’s business plan that will be submitted and carefully studied by the Chinese authorities in charge of the approval. The competent authorities will check whether the claimed aims are realistic, in favor of the Chinese market and the growth of the Chinese economy and whether the financial, human, and other allocated resources are sufficient. It is an important document and it should be given a lot of attention. The feasibility study should describe the purpose of the business, the intended activities, its products or services, the technology and equipment that will be used, the land area needed, and all the related requirements, conditions, and quantities of natural resources, electricity, water and other energy resources needed as well as all the requirements of public facilities use.

Articles of Association

This is a document that describes the cornerstones of the enterprise and its operation. The importance of this document should not be underestimated because its content can facilitate your operation or make it more difficult. The articles of association will not only be needed for the initial approval but also for every important change during the whole life of the company, such as changes in the number of board directors, an increase of the registered capital, possible liquidation of the company or profit repatriation. The minimum content must include the following:

Environmental Protection Evaluation Report

This report is required especially for manufacturing companies and FICEs and must contain information on raw materials, equipment and machinery, safe disposal of toxic products, and all information regarding the company’s activities likely to have an impact on the environment. Note that the complete list of documents and application forms, language, and notarization requirements can be found out by direct request at the local administrative office in addition to the above documents. I strongly recommend to hire a legal advisor as the requirements differ among industries, authorities, and locations.