Malaysia Hotline: +603- 2141 8908
In order
to avoid a cumbersome trial-and-error process, it is important to understand
what options foreign investors have to set up a company or extend their
business into China. This article introduces the various types of foreign
business entities, their characteristics and whether or not they accommodate
your needs.
1. Representative Office (RO)
Representative
offices are non-legal entities that are viable foreign investment vehicles.
They are “non-legal” in the sense that any direct profit generating activities
are strictly prohibited. Indirect business operations permissible for ROs are:
- Head office liaison with clients in
China
- Product introduction
- Market research
- Data & information collection
Contracts
cannot be concluded between ROs and other parties in China.
What’s
in it for you?
If you
are a trade agency or in the service industry and you have little initial
investment funds, you may opt for ROs. The set up process and capital
requirement for ROs are more easily obtained compared to that of foreign
invested enterprises.
2. Branch of a foreign
corporation
What is
it?Branches are also non-legal entities for foreign investment and thus cannot
engage in direct profit making operations. A liable Chinese legal
representative must be appointed to the branch. Unfortunately, as an extension
of their overseas head offices, branches are not eligible to the legal rights
and protection that Chinese business entities are entitled to.
What’s
in it for you?
If you
are in the financial services sector or oil exploration industry, you may opt
for branches. Theoretically, all foreign enterprises can apply for branches in
China, but in practice only branch applications from companies in the fields
mentioned above are processed.
3. Foreign Investment Enterprise
(FIE)
A FIE is
essentially a Chinese entity with 25% minimum foreign investment. In other
words, as opposed to non-legal entities described above, FIEs are legal
entities entitled to Chinese company law rights and protection. FIEs can
conduct profit generating business activities in compliance to their government
approved business scope. In general, FIEs encompass the industries such as
manufacturing, processing, trading and/or service activities. There are three
types of FIEs, depending on ownership and shares of profits:
3.1
Wholly Foreign-owned Enterprises (WFOE)
A WFOE,
quite self-explanatorily, offers foreign investors exclusive control of the
enterprise.
What’s
in it for you?
Chinese
partner involvement is not mandatory or required under investment regulations
for WFOEs. Hence, WFOEs are sometimes used to protect technology and
intellectual property. Additionally, the approval process is simpler and the
limitations on business expense payment and local sales volume are more lenient
for WFOEs.
3.2
Equity Joint Venture (EJV)
An EJV
is an independent legal entity with at least one foreign investor and at least
one Chinese investor. Ownership and profit division depend on each party’s
respective contributions to registered capital. Investors hold equity interests
instead of stock shares from public issuing. (More information from Joint Stock
Company section) Equity can be cash, capital, intellectual property rights,
materials and etc with the exception of labor. Directors, who are assigned by
the investors, have voting power instead of shareholders in western country
enterprises.
What’s
in it for you?
The
advantages of Chinese partners are: domestic financing, larger or deeper access
to domestic markets and easier contact with domestic social networks.
Furthermore, as a holding company, an EJV can benefit from economies of scale
in operations and management via collective investments under one corporate
identity. More specifically, EJVs may implement centralized purchasing,
personnel training, project management coordination and product marketing.
3.3
Cooperative Joint Venture (CJV)
Besides
the EJV, it is also possible to establish a CJV. There are two characteristic
differences between an EJV and a CJV. Firstly, while an EJV is always a limited
liability company, a CJV can be a legal as well as a non-legal person. The
latter option is not very common though because it would mean that the partners
of the joint venture would be personally liable for any losses the company
might make in the future. Secondly, in an EJV the distribution of profits must
be proportionally equivalent to each party’s capital contributions ratio.
However, in a CJV the distribution of profits may be decided more flexibly by
the parties.
3.4
Joint Stock Company (JSC)
A JSC is
the only form of FIE that is eligible for public listing on a Chinese stock
market. Other types of FIEs can be transformed into JSCs by converting
registered capital into stock of the company.
What’s
in it for you?
JSCs can
invite shareholders in the company to increase capital and establish
connections with other legal entities in China. Furthermore, JSCs do not
require prior authorization from other partners to dispose or transfer
interests.
Contact
us
If
you have further queries, please contact Tannet
24
hours Malaysia hotline：603-21418908;
24
hours Hong Kong hotline：852-27837818;
24
hours Hong Kong hotline：86-755-
36990589;
Email:
mytannet@gmail.com
TANNET GROUP : http://www.tannet-group.net, http://en.tannet.com.my