As you enter the Chinese market, the first step is to create and register your company as a legal entity. Structures, processes and regulations are quite different than those in in the United States and elsewhere in the world. Here’s what you need to know to get started.

Types of Entity Structures

There are three basic types of entity structures permitted to do business in China.

Representative Offices (RO) are generally not allowed to conduct sales or generate revenue. Activities are limited to market research, liaison, etc. Representative Offices are subject to taxation on expenses even if they are not generating revenue. There is a limit on the number of foreign and Chinese staff that can be hired.

Wholly Foreign Owned Enterprises (WFOE) include trading, service (consulting) and manufacturing entities.

Joint Ventures (JV) are structures that join one (or more) foreign company(s) (Investor) and one (or more) local company(s) in China. The percentage stake that can be held by the foreign company may be subject to regulations depending on the type of industry.

New Registration Procedures

Before a company initiates the registration process, management should discuss with a tax advisor or accounting firm the appropriate structure for the company, as well as whether a holding company (e.g., a layer between the parent company and the entity in China) would be appropriate.

The new Company Law effective March 1, 2014, simplified the company registration requirement as follows:

• Typically, there is no minimum capital requirement, though some local administrations for industry and commerce may have their own requirements, and some companies may be subject to local AIC approval.
• The actual capital contributions of the company are no longer a registration item for incorporation. Shareholders of the company will be able to decide on the amount, method and deadline for the subscription of contributions at their discretion (up to 30 years in most cities).
• A capital contribution verification report is no longer required in major cities.

It will take at least three months for a company that is new to the market to complete all the procedures required for registration, and the process may involve one or more of the following government bureaus, depending on the industry:

• Ministry of Commerce (for approval or filing of a new entity subject to if it is restricted industry)
• Public Security Bureau
• Bank
• Taxation Bureau (State and Local)
• Customs
• State Administration of Foreign Exchange (SAFE)
• People’s Bank of China (PBOC)
• Inspection & Quarantine Bureau
• Environment Protection Bureau

Defining Registered Capital

Considering the restrictions and foreign exchange costs required to execute each conversion, consider registering capital in RMB. The company should indicate in its registration documents that the registered capital is in RMB.

Representative Offices do not require registered capital to set up. The RO can receive office expenses from its parent company for its daily operations.

Wholly Foreign Owned Enterprises: The registered capital is the total amount of equity or capital contributions to be fully paid-in by the shareholders of the subsidiary as registered with the governmental authorities in China. It is also the source of initial funding for the subsidiary’s operations.

Thus, the investor should have a solid estimate of their projected expenses and cash flow from operations to ensure that the registered capital can support the company’s operations until it can generate sufficient cash flow and revenue to cover its expenses.

Otherwise, the investor should be prepared to:

• Increase the WFOE’s registered capital. However, the procedure and time to increase the registered capital is similar to registering a new entity, which creates additional costs and administrative burden.
• Support the company through intercompany service trade, which could cause tax liabilities because a service fee is recorded as revenue for the company.
• Borrow from the parent company overseas to support the company’s operation. In this case, the company must have foreign debt quota available. The maximum amount the company can borrow from the overseas parent company is no more than the foreign debt quota. Meanwhile, the company must have repayment capability.

Use of the Registered Capital

The injected registered capital will be credited to the company’s capital account. The State Administration of Foreign Exchange (SAFE) rules for using the registered capital in foreign currency include:

Voluntary settlement of foreign exchange (资本金项目外汇收入意愿结汇). In this case, the company can voluntarily convert the foreign exchange income under capital accounts to RMB when needed in its actual business operation.

Payment-based settlement of foreign exchange (资本金项目外汇收入支付结汇). The company makes a conversion when it has a payment need. The bank will not credit the converted funds to the company’s RMB account, but will pay the beneficiary directly in RMB.

Petty cash. A company can pay by petty cash for up to USD200,000 equivalent RMB per month. However, different bank may have different limit for the conversion, e.g. USD50,000 per time, twice a month.

• The petty cash can be used only for payment of minor general expenses such as meals, transportation, etc.
• Other payments such as rental fees, salaries and payments to vendors must be paid through the capital account to the beneficiary directly.
• The bank will verify the authenticity of the supporting documents for each payment.