Foreign Investment Options in China
Posted by Li Wei on December 28, 2009 under China Law | 
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A foreign investor has several options that it can use to establish a business presence in China. The option selected will vary, depending on the type of business activity, and the business plan formulated by the investor. The following are the common legal structures that can be used for foreign investment in the China:
- Representative Office
- Joint Venture (Cooperative or Equity)
- Wholly foreign owned enterprise
- Partnerships (see here http://www.chinataxblog.com/?p=86)
Representative Offices (ROs)
ROs are not separate legal entities but rather are extensions of the parent company. They are limited in the activities that they can undertake. Permitted activities include the general promotion of the parent company, market research and arranging contracts with customers of parent company. Importantly, they are not permitted to engage in direct sales activities nor sign any contracts. Employees of ROs are employed through special employment agencies. ROs are generally being phased out with the growing liberalization of China’s foreign investment laws – at one time ROs represented one of only ways that some foreign companies could enter China. One of the problems with ROs today is that they are generally taxed on a revenue basis as opposed to a profits basis. Previously, it was not difficult to obtain tax free status for ROs to avoid such a method of taxation. However, the tax authorities no longer generally provide such status for ROs.
Wholly foreign owned enterprises (WFOEs)
As the name implies, WFOEs are entities that are wholly foreign owned. There are restrictions on WFOE establishment in China and, as a result, the WFOE structure can only be used in certain business sectors. The amount of business sectors permitted to use a WFOE has grown over the past 5 years as China has implemented its WTO commitments. As WFOEs have minimum registered capital requirements. Under the Company Law of China this requirement is a mere RMB30,000. However, in practice the authorities in China have demanded significantly more capital depending upon the nature of the industry. A unique feature of China’s corporate laws is that all companies must have a prescribed business scope and are strictly only permitted to operated their business within that scope. The required registered capital is tied to the nature of the business scope. Registered capital is required to paid in within 2 years of the company first being established.
Joint Venture (JV)
The JV is the most traditional form of operating structure for foreign investment in China and, previously, was the only vehicle available to foreign investors for many years. There are two types of JV structures: Equity Joint Ventures (“EJVs”) and Cooperative Joint Ventures (“CJVs”). The major difference between the two structures is that partners in an EJV must pay in registered capital and derive profits directly in proportion to the equity invested, with the assets owned in proportion to equity holdings. As the industries in which WFOEs have been permitted to operate have widened, the use of JVs have decreased. There are a number of horror stories of failed JV experiences in China. However, there have also been some very successful cases. With the greater liberalization of China’s foreign investment restrictions, the relevance and need to use the JV model has lessened. Although, in the right circumstances JVs still remain an important business model for operating in China, particularly where the relevant industry is restricted by China’s legal guidelines.
