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Investment considerations in the China market

The key points that differentiate investment structures include, but are not limited to:

Business scope

Business scope needs to be detailed and accurate, in order to be accepted by the State Administration for Market Regulation (SAMR), and to have a chance to apply for industry-related tax benefits. At the same time, it is advisable to keep some room open for future business expansion, as amending the business scope at a later stage will be arduous, involving majority of government authorities that are involved in the original corporate establishment process. If approved, such a change will take a minimum of two months to complete.

To change its business scope, a company must:

If the amended scope is approved, SAMR will grant a new business license within 30 days of the approval.

Legal personality liability

Directors and senior managers may bear personal liability to the company under these circumstances:

On the approval of the general meeting of shareholders, listed companies can purchase liabilities insurance for directors, except for liabilities caused by violation of laws and articles of association.

Registered capital

SAMR requires a minimum amount of registered capital before approving an application. This amount does not need to be fully paid up front. The investors may include a capital injection plan in their articles of association.

Investors need to dedicate a minimum amount of registered capital depending on a range of factors:

Investors should make sure to commit sufficient funds to their registered capital, and it is advisable to commit additional capital.

Due to China’s capital controls, the approval process of injecting capital into the foreign-invested enterprise (FIE) can take four to eight weeks. Changing the registered capital during the approval process means restarting the process, which requires these steps:

If the parent company sends funds to the subsidiary in China without going through this process, the Chinese tax authorities will regard it as income, and tax the subsidiary at 25% corporate for income tax.

Only funds wired in from abroad qualify as registered capital; locally earned RMB cannot be used. Investors are advised not to wire any funds to China before the FIE is set up, as the funds need to be deposited in a special capital account to be recognized as registered capital, and such account can only be opened after the business license is issued.

Registered capital can be contributed in cash or in kind, but in kind contributions may not exceed 70% of the registered capital. Common contributions in kind are intellectual property or equipment. Using equipment as capital contribution can be arduous, and the process is subject to strict requirements.

Total investment vs. registered capital

FIEs are still required to abide by the ratio between registered capital and total investment as shown in the following chart. Unlike registered capital, total investment represents the debt of the investment and can be made up by loans from the investor or foreign banks.

Investment-to-Capital Ratios (amount in USD)
Total investmentMinimum registered capital
3 million or less7/10 of total investment
3 million - 4.2 million2.1 million
4.2 million - 10 million1/2 of total investment
10 million - 12.5 million5 million
12.5 million - 30 million2/5 of total investment
30 million - 36 million12 million
36 million or greater1/3 of total investment

Holding company

Many companies choose to establish holding companies, or “special purpose vehicles” in Hong Kong or Singapore, to hold their Chinese entity. Holding companies can:

In the case that an investor wishes to sell their Chinese business, or introduce a third-party partner/shareholder into the structure, the administrative changes can also be done at the holding company level, rather than at the China level, to avoid tough regulations and time-consuming procedures.

The Foreign Account Tax Compliance Act (FATCA) has significantly disrupted the ability of U.S. investors to open or maintain bank accounts through Hong Kong, threatening to cut off the cash flow to their mainland China subsidiaries. Although also a signatory to FATCA, Singapore appears to be less affected by these developments.

Comparing Establishment Options

Comparison of Different Investment Options
OptionsCommon PurposeProsCons

Representative office (RO)

  • market research
  • liaise with overseas headquarters
  • paves way for future investment
  • easiest to set up and maintain
  • cannot invoice locally in RMB
  • must recruit staff from local agency; no more than four foreign representatives
  • heavily taxed if expenses are high

Wholly foreign-owned enterprises (WFOE)

  • manufacturing
  • trading
  • services
  • greater freedom in business activities
  • 100% ownership and management control
  • registered capital requirement for select industries
  • lengthy establishment process

Joint Venture (JV)

  • enter industries that require a local partner
  • leverage partner’s resources
  • can enter industries that require a local partner
  • can leverage partner’s resources
  • split profits
  • less management control
  • technology transfer/IP risks
  • inherit partner liabilities

Disclaimer:

Dezan Shira & Associates

The Canadian Trade Commissioner Service in China recommends that readers seek professional advice regarding their particular circumstances. This publication should not be relied on as a substitute for such professional advice. The Government of Canada does not guarantee the accuracy of any of the information contained on this page. Readers should independently verify the accuracy and reliability of the information. 

Content on this page is provided in part by Dezan Shira & Associates a pan-Asia, multi-disciplinary professional services firm, providing legal, tax, and operational advisory to international corporate investors.

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