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VOL.5 December 2013
Legal Vehicles for Investment Into China
Doing business in China, while lucrative, can be a mine-field to the uninitiated. Each month, for the next six months, Deloitte will provide specific information to give businesspeople the tools they need to facilitate the process.
By Kevin Ng

A foreign investor (whether corporate or individual) wishing to make a direct investment intoChinahas a number of options: 

Available legal forms

1)Representative Office (RO): A representative office inChinaof a nonresident enterprise or other organization.

2)Wholly Foreign Owned Enterprise (WFOE): A Chinese limited liability company established by one or more foreign investors.

3)Equity Joint Venture (EJV): A limited liability company established by one or more foreign investors with one or more Chinese investors.

4)Cooperative Joint Venture (CJV): A cooperative agreement between one or more foreign investors and one or more Chinese investors.

5)Foreign Invested Partnership (FIP): A partnership enterprise established by two or more foreign investors or by foreign investors jointly with Chinese investors.

6)Joint Stock Limited Company (JSLC): A share-based company, this is the only entity that can serve as a vehicle for public listing on Chinese stock markets (both A and B shares).

7)Branch of a foreign company: Only foreign financial institutions are allowed to set up branches inChina. 

Since JSLCs and branches are rarely used by foreign investors, the focus is on the first five options.

Comparison of legal vehicles

In assessing whether to set up an RO, a WFOE, an EJV, a CJV or an FIP, a foreign investor should consider the following factors: (i) market entry restrictions, (ii) capitalization, (iii) requirements for foreign investors, (iv) establishment procedures and complexities; (v) flexibility regarding profit distributions and (vi) tax compliance issues. This article will look at the first five factors; the tax compliance issues will be addressed in subsequent articles. 

Market entry restrictions

An RO of a foreign company may only engage in indirect business activities inChina- it may not engage in profit-making activities (except an RO of a foreign law firm). Should the contemplated business activities inChinabe limited to liaison and market research activities, the use of an RO could be worth considering.

WFOEs, EJVs, CJVs and FIPs can engage in profit-making business activities, but are subject to the Foreign Investment Catalogue (FIC), which generally applies to all Chinese entities with foreign investment. Before a foreign investor decides to make an investment inChina, it should first analyze the FIC. 

Capitalization

There is no registered capital requirement for an RO as it is not a legal entity. Similarly, no minimum registered capital is required for an FIP.

The current minimum registered capital requirement for a WFOE, an EJV and a CJV is $4,900. 

Requirements for foreign investors

The head office of an RO must have been in existence for at least two years before an RO can be established.

The number of investors of a WFOE, an EJV or a CJV cannot exceed 50, while a WFOE cannot have any Chinese investors, but an EJV and a CJV must have at least one foreign investor and at least one Chinese investor. The benefit of a Chinese investor is their local knowledge and resources.

An FIP may be the subject of an investment by two or more foreign investors or by foreign investors jointly with Chinese investors.  

Establishment procedures and complexities

The establishment of an RO, a WFOE, an EJV or a CJV must be approved by the relevant government agencies before the entity can be registered with the registration authority. An FIP can be registered directly without pre-approval, unless it is in a specialized industry that requires some or other type of approval. 

Flexibility as to profit distributions

An RO is not allowed to engage in profit-making business, but a WFOE is required to make an annual allocation of 10 percent of its after-tax profits to a surplus reserve account until the account balance is 50 percent of the registered capital.

Meanwhile, the board of directors of an EJV or a CJV can determine whether to make allocations to a reserve account before the distribution of profits, while profit distributions of an FIP can be determined by the partnership agreement.

While there have historically been many restrictions on foreign investors doing business inChina, the general trend is to relax these restrictions, making doing business in the country increasingly easier. 

 

For further information, contact Kevin Ng (kevng@deloitte.com.cn ) and Delia Ndlovu (delndlovu@deloitte.co.za) or visit www.deloitte.com/za

 

 

 

 

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