China - Establishing an Office China - Establishing an Office
Foreign companies have a wide range of options for corporate formation in China, including Wholly Foreign Owned Enterprises (WFOE), Joint Ventures (JV), Representative Offices, and other investment vehicles. Each option has its own advantages, disadvantages, and risks. All companies, IP rights holders and otherwise, should consult closely with lawyers who have extensive experience with the China market, including lawyers based in the United States and China.
Establishing a representative office (RO) is the quickest and easiest way to enter China, as it has no registered capital requirements. However, an RO’s scope is quite limited; ROs may not engage in any profit-making activities, and can only legally participate in market research, investigation, promotional activities of products or services, liaison for the purposes of selling products or services, domestic procurement, or domestic investment. Since an RO is a non-legal entity representing their parent company overseas, the parent company is responsible for signing any sales contracts and must have an established history of more than two years.
Applications for most industry ROs can be applied for directly at the Administration of Industry and Commerce (AIC) in the locality where the proposed RO is to be established. The registration of a RO is required in order to lawfully employ Chinese nationals, to open a bank account, or to use business cards that identify the company’s presence in China. ROs may employ no more than four foreign representatives at a time. ROs are not considered legal entities, and therefore are limited in hiring ability, issuing invoices or receiving payments in RMB.
Wholly Foreign-Owned Enterprise
A wholly foreign-owned enterprise (WFOE) is a limited liability company with complete ownership under foreign investors. By some accounts, nearly 80 percent of new investments are WFOEs, as opposed to Representative Offices or JVs. As Chinese legal entities, WFOEs experience greater independence than ROs, and are allowed exclusive control over carrying out business activities while abiding by Chinese law, and are granted intellectual and technological rights. However, the process of establishing a WFOE can be quite long. The Chinese government drafted a new foreign investment law in the fall of 2016 and also announced new regulations concerning the procedure for registering WFOEs. The rules on registered capital have changed substantially in the past two years. WFOEs generally have to register capital, unless their scope of business relates to consulting, trading, retailing, or information technology. There is no longer a requirement on when the capital must be contributed and there is no fixed rule on the amount of each contribution of capital. However, as a general business rule, there must be enough capital to cover the operations of the WFOE.