Types of Business in China

Foreign investment in China can be made through a variety of investment vehicles. The best investment structure for your business is determined by a variety of factors, including its planned activities, industry, and investment size. 

Contributing Advisor

Allan Xu

Director, Business Advisory Services

In this section, we discuss the following entity types, their registered capital requirements, timeline for setting up, and key HR positions: 

• Representative Office (RO);  
• Wholly Foreign-Owned Enterprise (WFOE);  
• Foreign Invested Commercial Enterprise (FICE) 
• Joint Venture (JV); and 
• Foreign Invested Partnership (FIP).  

Setting up a Representative Office ("RO") 

An RO is an attractive way for foreign investors to become accustomed with the Chinese market as it is the easiest type of foreign investment structure to set up. An RO is an extension of the foreign company without independent legal personality, unlike more robust vehicles, such as the WFOE. When an RO signs a contract, it is the foreign company that is bound by the agreement. 

There are only a limited number of activities an RO is permitted to be engaged in. ROs are forbidden from engaging in any profit-seeking activities and may only be used to facilitate the activities of the foreign company in China. These are: 

• Market research, display, and publicity activities that relate to company products or services; and, 
• Liaison activities that relate to product sales or services and domestic procurement. 

An RO cannot directly hire Chinese employees. Instead, it is required to employ local staff through a qualified labor dispatch agency. The agency acts as the employer for legal purposes and sends employees to work at the RO for a fee. An RO may directly hire up to four foreign nationals as the representatives who do not need to go through the agency. 

Even though an RO does not earn revenue, it is still subject to Chinese tax. ROs are taxed as a permanent establishment in China, which usually amounts to a liability of approximately eight percent of the total expenses of the RO. 

RO is a beneficial option for companies that are procuring from China and want to keep staff on the ground for quality control, or for maintaining short communication lines with China-based suppliers, agents, and distributors. 

Requirements and registered capital 

An RO doesn’t need registered capital to operate in China. 

Time to establish 

To set up an RO, the overseas parent company must have already been in existence for two years.  

Obtain notarized & legalized documents and requisite certificates – 01 month 

Set up necessary accounts & chops –  1-2 months 

Total time – atleast 2 months 

Key positions in an RO 

ROs should designate a chief representative to sign documents on behalf of the company. In addition to a chief representative, an RO can also nominate three more general representatives. 

Setting up a Wholly Foreign-Owned Enterprise ("WFOE") 

A WFOE is a limited liability corporation with a relatively simple management structure that is entirely owned by one or more foreign investors. 

A WFOE can make profits and issue local invoices in RMB to its suppliers, unlike an RO. A WFOE can employ local staff directly, without any obligations to employ the services of an employment agency. It can also expand to create subsidiaries in China. 

If compared to a JV, a WFOE has better autonomy and flexibility to execute the company policies intended by the investors without considering the Chinese partner. It may also hold certain advantages when protecting the company’s intellectual property and technology. 

A WFOE is not feasible if the targeted sector is listed as “restrictive” in the Special Administrative Measures on Access to Foreign Investment (“2021 National Negative List.”) or the Free Trade Zone Special Administrative Measures on Access to Foreign Investment (“2021 FTZ Negative list”), where foreign investors need to have a Chinese equity partner to form the business. Incorporating a WFOE to engage in these sectors would not be permitted.  

However, the set-up procedure of a WFOE is more complicated. 

There are three distinct WFOE setups available: 

• Service (or consulting) WFOE; 
• Trading WFOE (or foreign invested commercial enterprise [FICE]); and 
• Manufacturing. 

While all three structures share the same legal identity, they differ significantly in terms of their setup procedures, costs, and the range of commercial activities in which they are allowed to engage. Trading WFOEs and manufacturing WFOEs must derive the majority of their revenue from their manufacturing but can also provide associated services. Service WFOEs can conduct trading activities related to their services. 

Requirements and registered capital

 There is no minimum capital requirement for a WFOE to operate in China. Every WFOE has a different amount of registered capital, which it must choose based on its operational needs. 

Time to establish 

Depending on the size of the company, a WFOE can take two to nine months to set up.  

Key positions in a WFOE 

Shareholders and executive director (or board of directors) 

The board of shareholders represent the highest authority of the company, whose decisions regarding company operations are executed by the executive director or board of directors.  

Supervisor(s) 

WFOEs must have at least one supervisor to oversee the execution of company duties by the director(s) and senior management personnel.  

To ensure there are no conflicts of interest, a company’s director(s) and/or senior management personnel cannot concurrently serve as supervisors. Where a company has a relatively small number of shareholders and is small in scale, one or two supervisors will suffice. For larger companies, a board of supervisors composed of no less than three members is required. 

General manager 

A general manager is responsible for day-to-day company operations. This position may be concurrently filled by the executive director or chairman of the board of directors.  

Chief financial officer 

Chief financial officer (CFO), or financial employee in charge, is key personnel of a company who has primary responsibility for managing the company’s finances, including financial planning, finance and accounting compliance, taxation, cash flow tracking, as well as financial reporting analysis. 

CFO is senior management by nature and reports to the general manager of the company. This position may be concurrently filled by a member of the board of directors. CFO is of special importance in China during the company setup stage, where the CFO needs to go through real name authentication and be the contact person with the authority in charge. 

Legal representative 

Every business established in China, foreign or domestic, is required to designate a legal representative, i.e., the person responsible for performing the duties and powers on behalf of a company.  

Under the FIL, the executive director, the chairman of the board of directors, or the general manager are all eligible to be legal representatives.  

Powers and responsibilities of a legal representative 

The Company Law does not clearly define the powers of a legal representative. However, a legal representative is authorized to perform all acts of the general administration of a company according to the company’s aims and objectives. This may include: 

• Acting (legally) to conserve the company’s assets; 
• Executing powers of attorney on the company’s behalf; 
• Authorizing legal representation of and litigation by the company; and 
• Executing any legal transactions that are within the nature and scope of that company’s. 

Setting up a Joint Venture ("JV") 

A JV is formed by one or more foreign investors, along with one or more Chinese parties. After the enactment of the FIL, Chinese individuals can now become shareholder in a JV, providing greater flexibility in selecting business partners. 

There are mainly two reasons for foreign investors to choose a JV structure: 

• The foreign investor wants to invest in a restricted industry sector, where the law permits foreign investment only via a JV with a Chinese partner; and 
• The foreign investor wants to make use of the sales channels and network of a Chinese partner who has local market knowledge and established contacts. 

Before the FIL was enacted, there were two types of JVs in China, and they differ primarily in terms of how profits and losses are distributed: 

Equity Joint Venture (EJV):

• Profits and losses are distributed between parties in proportion to their respective equity interests in the EJV; 
• The foreign partner should hold at least 25 percent equity interest in the registered capital of the EJV; and 
• An EJV should be a limited liability. 

Cooperative Joint Venture (CJV):

• Profits and losses are distributed between parties in accordance with the specific provisions of the CJV contract; and 
• A CJV can be operated either as a limited liability company or as a non-legal person. 

The newly formed JVs are subject to the terms of the Company Law following the implementation of the FIL(2020), which necessitated adjustments in several areas, including governing structure and operational procedures.  Read about the impact of Foreign Investment Law on Businesses in China. 

JVs created before January 1, 2020, in accordance with the previous EJV Law or CJV Law, will have a five-year transitional period to make necessary arrangements to comply with the new standards.  

Requirements and registered capital 

There is no minimum registered capital required for a JV. 

Time to establish 

A JV's incorporation takes five to six months. 

Key positions in a JV  

Same as WFOE.  

However, JV’s established before January 1, 2020 will need to transition their governing structure by 2025 to the three tier structure, in accordance with the company law. Read more about the new foreign investment law's impact on key positions in FIEs.

Setting up a Foreign Invested Commercial Enterprise ("FICE") 

A FICE, which can be set up either as a WFOE or a JV, is a type of company for retail, franchising, or distribution operations. A WFOE or JV can be established exclusively as a FICE, or can combine FICE activities with other business activities, such as manufacturing and services. 

A FICE is inexpensive to establish and can be of great assistance to foreign investors because it combines sourcing and quality control activities with purchasing and export facilities, thus providing more control and a quicker reaction time compared to sourcing exclusively via an overseas headquarters. 

FICEs are also the ideal choice for foreign companies that need to source from China to resell to its domestic consumer market. Without a Chinese trading company, the alternative would be to buy from overseas, and have the goods shipped out of China before then reselling them back to China (which would mean additional logistical costs, customs duties, and value-added tax). 

Requirements and registered capital 

There is no minimum capital requirement for FICE.  

Time to establish 

A FICE can take four to six months to set up before fully operational.  

In some instances, a FICE may require foreign investors to inject capital within a certain period, especially for businesses located in industrial parks and in specific industries. 

Other entity options 

Foreign Invested Partnership ("FIP") 

An FIP can be newly established by foreign investors contributing to the partnership, or by acquiring the equity interests in an existing domestic partnership. The FIP needs at least two investors to transact business. Therefore, the option would not be suitable for foreign investors seeking to establish a company that they fully control.  

A partnership is not a separate legal entity, but a contractual arrangement between two or more parties to do business together under a common name and is registered as such with the government. Instead of having to stay within the boundaries of the Company Law, a partnership affords investors broad freedoms to make internal arrangements as they see fit. For example, the profit shares and voting rights need not be aligned with the investor’s capital contribution. The investor can transfer their share in a partnership without having the unanimous approval of all other partners. 

Variable Interest Entity ("VIE") 

VIE structures are adopted by many foreign investors to engage in sectors that are restricted or prohibited to foreign investment in China as provided in the negative lists, such as telecommunication and education. 

Under this model, foreign investors retain final control over the China domestic operating entities through a series of contractual arrangements rather than direct shareholding. There are risks that the investors’ control over the structure might be threatened by the intentional breach of the contractual arrangements. 

What’s next for VIE’s? 

The government’s attitude towards VIE structure remains vague. There is no clarification in the new FIL whether it is legitimate and whether it falls within the scope of ‘foreign investment’. However, in a legislative draft released in 2020 regarding pre-school education, VIE structure is explicitly prohibited in the sector. VIE structure could be regarded as illegal in such sectors that are not yet open to foreign investment. On the other hand, the China Securities Regulatory Commission (CSRC) – the China security watchdog – confirmed that qualified companies with VIE structures can still go public on foreign stock markets. Foreign investors interested in this structure are recommended to closely follow the regulatory trends. 

The Foreign Investment Law (FIL) for business entities 

The FIL went into effect on January 1, 2020, creating a new guiding document for foreign investment. Among the incentive, management, and protection measures, FIL Articles 31 and 42 clarify issues concerning the organizational form, governing structure, and operating rules for foreign investments. 

• Article 31 of the FIL states that, similar to businesses founded by domestic investors, the organizational form, governing structure, and operating guidelines of FIEs shall be subject to the provisions of the Company Law, the Partnership Enterprise Law, and other applicable legislation. 
• The Law on Wholly Foreign-owned Enterprises (WFOE Law), the Law on Sino-foreign Cooperative Joint Ventures (CJV Law), and the Law on Sino-foreign Equity Joint Ventures (EJV Law) were simultaneously repealed upon the FIL's entry into force on January 1, 2020, in accordance with Article 42 of the FIL. 

FIEs established before the FIL took effect - and in accordance with the three laws on WFOE, CJV and EJV - may keep their original organizational forms for five years after January 1, 2020.  

For foreign investors who are looking to establish new operations in China, the impact of the FIL is limited.  

Investment structures, such as a CJV, will no longer exist since the FIL came into effect. Foreign investors need to set up their businesses in accordance with the provisions of the Company Law, the Partnership Enterprise Law, and other applicable laws, similar to domestic investors. 

Foreign investment law's impact on key positions in FIEs 

Considering that WFOEs are generally limited liability companies, which are basically in line with the Company Law, the new FIL has a limited impact on key positions in WFOE.  

For existing FIEs in the form of a CJV or EJV, they need to change their governing structure within the five-year transitional period to the three-tier structure (the board of shareholders, the board of directors, and the general manager), in accordance with the Company Law.  

Below, we take EJV as an example.