Legal update: How to do business in China25Nov2006
There are various ways for a foreign (including Hong Kong) company or business to set up a presence in mainland China.
A basic presence can be established in China though a representative office. However, a representative office may not engage in direct business (profit-making) operations and can only carry out activities such as a liaison with clients or customers or market research.
The principal forms of accessing the Chinese market to carry out business are by setting up a Foreign Invested Enterprise (FIE), which includes equity or cooperative joint ventures and wholly foreign-owned enterprises (WFOEs).
Setting up an FIE or a representative office would require approval from the relevant government authority.
The Provisions for Guiding the Direction of Foreign Investment categorise foreign investment projects as “encouraged”, “permitted”, “restricted” or “prohibited”. The Foreign Investment Industrial Catalogue lists specific types of foreign investment that fall into the “encouraged”, “restricted” and “prohibited” categories, so this should always be checked first when considering an investment structure.
Should an equity Joint Venture wish to enjoy the preferential treatment (e.g. reduced tax rates) the aggregate foreign equity interest in the JV must amount to 25% or more. A WFOE (wholly foreign-owned enterprise) typically takes the form of a limited liability company and, because there is no local partner, has the benefit of avoiding partner conflict issues, and allows complete control of management.
However, WFOEs are not available to be used in all areas of the economy.
A foreign investor planning to set up in China may also wish to use its business vehicle in Hong Kong and the preferential rights granted through the Closer Economic Partnership Arrangement between Mainland China and Hong Kong (CEPA). Under CEPA China accords Hong Kong with the advantage of being able to access the Chinese market a few years ahead of other countries under China’s commitments after its accession to the World Trade Organisation (WTO).
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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.