BUSINESS IN CHINA
Since the late 70s of the last century, China has carried out a number of reforms and made a smooth but very effective transition from a centralized economy to free market principles. State-owned enterprises gained considerable autonomy, fiscal pressure on business decreased, the share of the private sector increased, the stock market developed rapidly, a modern banking system was built, foreign trade reached incredible levels and investments poured into the country.
The results of the competent policy of the Chinese authorities are known to the whole world. Today, the People's Republic of China has the second largest economy on the planet after the United States, if nominal GDP is taken into account, and in terms of such an indicator as GDP in purchasing power parity, it is even ahead of the American state. Despite the relatively low per capita income, salaries in China are growing rapidly and the quality of life is improving. Let's talk about how to open a business in China next.
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Features of doing business in China
One of the priority tasks of the Chinese government is to increase domestic demand and reduce the economy's dependence on state subsidies, exports and some heavy industries. Special attention is paid to innovation and scientific and technological developments. Modern Chinese citizens receive quality education abroad or in prestigious Chinese universities and many of them prefer to open a business in their country instead of wage employment. Consequently, competition in the market is only increasing.
In order to live on Chinese territory and successfully conduct business, foreigners, need to take into account the mentality of the locals, the peculiarities of culture and traditions, and most importantly, the language barrier. Without the help of Chinese business partners, accountants, lawyers and consultants, it is very problematic to start your own business. That is why many entrepreneurs adopt promising ideas or study the issues of doing business with China while staying in their own country, which is a more realistic option.
According to Doing Business, China ranks 46th out of 190 countries in terms of accessibility of starting a business. Market reforms are implemented slowly, so compared to many developed regions of Europe and Asia, the procedure for foreigners to register a company in China is very complicated. The dominant role in the economy still belongs to the state, which rather tightly controls both local businessmen and entrepreneurs from abroad.
Forms of ownership in China
Chinese legislation allows foreigners to register companies of several forms of ownership, each of which has certain advantages and disadvantages. Consider the three most popular and accessible:
Representative Office (RO). The most affordable way to open a business in China is to register a representative office of a foreign company. However, this form of ownership minimizes business options. Issuing products, accepting payments, importing and exporting are prohibited. Essentially, it will be a marketing structure suitable for attracting the attention of Chinese customers to goods and services produced and distributed in another country.
Joint Venture (JV). A wider field of activity for foreign businessmen is offered by a joint venture. There are no major restrictions, but the main condition and risk at the same time is a partner from China. It is hard to find a proven and reliable person in the field of business even in the native country. All documents must be thoroughly checked and legally executed. Especially, what concerns the ownership shares in the company.
Wholly Owned Foreign Enterprise (WOFE). This type of company is the most difficult to register in China, as 100% of the assets may be owned by a foreigner. In addition, this form of ownership gives the foreign entrepreneur equal rights with local businessmen. Most WOFEs operate as LLCs similar to domestic LLCs, where the liability of the owners for obligations is limited to the amount of contributions to the company's authorized capital.
Company registration in China
Since statistically more than half of foreign entrepreneurs in recent years prefer to open companies in the form of WOFE, let's consider the procedure of business registration in China on the example of this form of ownership. But note that without the help of Chinese intermediaries or specialized domestic consultants to pass this way is almost unrealistic.
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Selection of the sphere of activity for business. Some areas of entrepreneurship in China are completely or partially inaccessible for foreigners. For example, medicine, education, telecommunications, sea and air transportation, and the banking sector.
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Collection and preparation of documentation. Let's highlight the main ones:
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Certificate of incorporation and constituent documents of the company, certified by the Chinese Consulate.
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An official letter from the banking institution where the foreign businessman is served, confirming good reputation and availability of funds.
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a copy of the foreigner's passport, certified by the Chinese Consulate.
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a photo and a brief resume of the Chinese business partner.
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eight name options for the company in China.
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information about the location of the company's office in China, such as copies of the lease agreement or real estate ownership certificate.
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a detailed description of the scope of business and a business plan.
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Submitting an application for business registration in China to the authorized government agencies, in particular, the Ministry of Commerce. The review period is usually at least 2-3 months. It all depends on the city, direction and scale of the future business. The approval process may be accompanied by numerous negotiations with regulatory authorities and payment of various registration fees.
In case of a positive decision, an application for a business license in China is submitted within 30 days, and the company is registered with the Administration of Industry and Commerce. The list of documents is specified by the staff of the department. At the last stage, an account is opened in a Chinese financial institution.
Taxes in China
Chinese tax legislation provides for equal tax rates for both local and foreign entrepreneurs. At the same time, in recent years the country has seen significant liberalization of the fiscal sphere, which is an additional incentive for investors and favorably affects the development of the economy.
Tax rates in China in 2024
Corporate income tax – 25%. In addition, from January 1, 2017 to December 31, 2019, small companies with annual turnover up to 500,000 yuan could pay corporate tax of 20%.
Income tax is between 3% and 45%
Dividends (interest, royalties) – 10%
VAT – 13 (basic rate), 9, 6, 3 and 2%. In particular, the 9% rate is provided for retail trade, catering services, real estate and construction, transportation and logistics.
Social contributions – up to 39.02% of the payroll.
Property tax – 1.2% of the value of the object or 12% of the amount of rent.
Construction and maintenance of city infrastructure – 1, 5, 7%.
Business visa to China
In order to make single or multiple trips and conduct business activities on Chinese territory, a foreigner must apply for a business visa to China. The local legislation provides two options.
M visa. A new business visa to China, effective from September 1, 2013, which is issued to foreigners to carry out commercial and trade activities in Chinese territory. The maximum validity period is one year with the right to extend for another 180 days.
F visa. Formally, visa F does not allow to carry out commercial activities and is intended for foreigners invited to China to participate in scientific, technical, educational, cultural, medical and sports activities. But in fact, some entrepreneurs use this type of visa to solve business issues on the Chinese territory.
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