The China Incorporation Blueprint

The China Incorporation Blueprint

What are the problems for foreign investors?

1. Unfamiliar with the incorporation process
2. Do not understand the timeline
3. Confused by the document list
4. Astounded by the amount of documents
5. No transparency regarding the key considerations needed to be made
6. No time and thought process is being taken into those key considerations

Timeline

A. Establishment Registration Timeline

B. Post-Registration

Document List

1. Certificate of Incorporation
2. Letter of Declaration
3. Articles of Association (Chinese Version)
4. Articles of Association (English Version)
5. Letter of Appointment to Director/Legal Representative
6. Letter of Appointment to Supervisor
7. Letter of Appointment of General Manager
8. Letter of Commitment (Chinese Version)
9. Letter of Commitment (English Version)
10. Application Form
11. Application Form (English Version)
12. POA Form
13. POA Form (English Version)
14. Letter of Authorization for Legal Documents
15. Letter of Authorization for Legal Documents (English Version)
16. Commitment form for business scope
17. Commitment form for business scope (English Version)
18. Commitment form for approval
19. Commitment form for approval (English Version)
20. Company Name Confirmation Form
21. Company Name Confirmation Form (English Version)
22. Ownership Structure Chart
23. Signing Page – Appointed signature of Shareholder
24. Signing Page – Appointed signature of Executive Director
25. Passport of Shareholder
26. Passport of Executive Director
27. Passport of Legal Representative
28. Passport of Supervisor
29. Office Leasing Agreement
30. Office Property Certificate
31. Owner business license
32. Floorplan

Reminders:

• Establishment Setup is an Old-fashioned process
• A stack of A-4 paper has to be printed out
• All in English and Chinese
• Black-ink pen should be used in signing the documents

Key considerations need to be made for the incorporation
– all of these should be decided prior to the establishment of your business

Step 1: Structure

Decision 1: Type of Entities and Business Scope

Type of Entities

• Representative Office (RO)
• Wholly Foreign Owned Enterprise (WFOE)
• Foreign Invested Commercial Enterprise (FICE)
• Domestically Owned Enterprise (DOE)
• Joint Ventures (JV)

Business Scope Consideration

Liability – A RO is not an independent entity. It is an extension of its parent company. As such the   parent company and the RO’s Chief Representative and liability for its operations. A LCC   providers greater protection because it is a form of Limited Liability Company (LLC).
                However, it does not offer the same level of protection as in other jurisdictions, so an            offshore holding company is often inserted between the Chinese company and its ultimate    beneficiary.

Flexibility – It is possible to setup a branch company of LLC in other cities and expand the scope of a     business to include additional lines of business. This is not possible with an RO. RO’s     cannot be converted into a LLC. If you want to re-structure your business, you will need to     setup a new LLC, transfer all assets and people before then closing the RO.

Marketability – A LLC is perceived as a more substantial market presence and suggests to     prospective clients or partners that a company has made a long-term commitment to the                                                      Chinese market. New market entrants often overlook this, but such a perception can be a     significant barrier to business development.

Choose your business activity wisely

• The business scope of a Chinese company lists the services that is legally permitted to provide according to its business registration.
• Inversely, a company is specially prohibited from producing anything or offering services not specifically described in its business scope.
• The business scope of a Chinese company dictates the type of entity that will be chosen.

Templates: 4 Types of Business Scope

1. Wholesale of XXX Product; commissioned distribution (excluding auctions); import and export; and other related services. (Related to administrative permit operation)
2. Wholesale of XXX Product; internal retail of XXX, commissioned distribution (excluding auctions); import and export; and other related services. (Related to administrative permit operation)
3. Development, manufacturing and processing of XXX products as well as related XXX, sales of self-manufactured products; import and export trading, wholesale and commission agency business (auction excluded) of a aforesaid goods, and provision of after-sales services and other related services. 
4. Investment Consulting, Enterprise Management Consulting, Enterprise Planning Consulting (Excluding Advertising), Trade Information Consulting, Environmental Information Consulting, Economic Information Consulting, Scientific and Technical Consulting. (Related to administrative licensing with license management)

 

• Representative Offices are limited to liaison services for its parent company (such as quality control for sourcing from China), while a Limited Liability Company (LLC) is a permitted to generate revenues from the commercial activities prescribed in its business license.
• If a business operating through a RO decides to begin selling products or services in the future, it will be required to re-establish as a new company (noting that conversion is not possible). With a LLC, however, it is possible to expand the business scope to accommodate it.

 

Action Plan for your Business Scope

1. Take a paper and write all activities and product/services you wish to perform NOW, in 5 years and in 10 years.
2. Research your competitors thoroughly by investigating what their business scopes are in China. Even if you are already located in China, this might be a way to update and expand on your business scope.
3. Make your scope as broad as possible (although certain limitations on this now)
4. Be prepared that AIC will amend, adapt, downsize your original scope. This can be taken positively – either additional licensing is required, website up and running, retail lease agreement submitted, for example.

Decision 2: Capital Investment and Term of Validity

What is registered capital?

• There are two numbers which needed to be provided to the CoC:

The total investment amount and the registered capital amount.

• The total investment reflects the total capital required to develop and run the company.
• The registered capital which is the capital amount used to start-up the business until the company has a positive cash-flow status.
• There are no minimum capital requirements in China
• It is important for each company to calculate their projected budget and cash flow needs.
• You should invest sufficient funds to sustain the Company until you expect it to be cash flow positive.
• Too many investors spend too much time finding ways to minimize their capital investments, only to find out that business expenses are greater than anticipated.
• Operating in China is not cheap; office rent, and renumeration of experienced employees can rival that of any developed country.

Action Plan to calculate your registered capital

• The CoC and the tax bureau ‘’like’’ to see companies that have registered capital’s of more than RMB 1,000,000.
• Remember: no business plan is required to be seen by the government bureau.
• Calculate how much capital you need during your start-up phase (3-5 year projection) and make this your registered capital (if this makes sense for you and your company)

When does the capital have to injected?
– does not have to be injected in from day one, it has to be injected in from the term of validity. You need to choose your term of validity.

What is your term of validity?

• Minimum of 10 years
• Maximum of 50 years

Step 2: People

Decision 3: Shareholder – who is going to be the shareholder. Is it an individual or company?

For tax perspective, it is recommended to choose Company over Individual

 

Do I need to consider an offshore holding company?
-You need to check whether it does/has;

• Reduced tax rate based on the Double Taxation Agreements,
• Indirect transfer of assets,
• Place of Effective Management of the Chinese Company
• Investment of a Chinese partner in your holding.

-In order to understand the tax optimization, you don’t only talk to your Chinese tax advisor but you also need to tax to your tax advisor in your jurisdiction regarding this.

Decision 4: Corporate Management in China

When you are setting up a company in China, there are two types of corporate management structure you can create.

First one is for large businesses and the second one is if you want fewer people in your organization.

Allocating power and mitigating risk

-Delegating power always requires a degree of trust BUT there are a few simple measures every foreign investors should consider mitigating the risk its Chinese subsidiary is exposed to.

Example related to Company Chops

-Company Chops is more valuable than signatures in China

• A company is bound whenever a contract or other document is affixed with the company seal or chop.
• This is more straightforward in the sense that one can immediately tell whether a company has approved the content of a document or not.
• What makes it dangerous, however, is that whoever holds the chops can bind the company.
• On top of that, there is the risk of forged chops.

Action Plan: Questions to ask your management about the China operations

1. Who or what is making the investment in China? A Company or an Individual?
2. Who is the China company decision maker?
3. Who will be the Chief Financial Officer/ Finance Manager?
4. Who will be the bank signatory OR who will be approving payments?
5. Who will keep control of the company chops?
6. Shareholder – Who is the authorized signatory?
7. Do you choose a Board of Directors OR an Executive Director?
8. Who will be appointed in the Board or as Executive Director?
9. Who is the appointed Legal Representative?
10. Who is the appointed General Manager?
11. Who is the appointed Supervisor?

Step 3: Location

Decision 5: Company Name for China

• Your company name reflects everything you stand for when you go to market, and if you think about it, it’s the very first thing potential customers get to know about you
• In China, the company name registration process requires that name adhere to certain naming stipulations. This is not to say it is a complicated process, but it can take time to find a name that is available and suitable to your business needs.

 

Company Name + [business type] + [City of Information] + [Company Ltd.]

ABC Management Consulting (Shanghai) Co. Ltd.

• How important is the Chinese name to you? Are you looking to brand your Chinese name?
• Trademark versus Domain versus Chinese Company Name – Is this important?
• Do we need help based on the importance and image of the name?

Strategy

1. Chinese name is the only name registered
2. The company name must be different than any other company registered in your same kind of business.
3. There are two approaches to selecting a Chinese company name. You can pick a descriptive name, or you can pick a name that has no meaning but is intended to reproduce only the sound of the parent company name.
4. You will need a native speaker of Chinese to assist you in choosing the names. Some companies simply work this out with their current staff. Some companies hire public relation or a branding company to work with them on the issue.
5. When you have chosen your names please submit them for a preliminary review. It is important to check and see whether there are any obvious conflicts with existing names.

Chinese company name
versus
Trademark registration
versus
Domain registration

Decision 6: You need to sign a lease agreement for a “registered office address”

Legal consequences of selecting your location in China

Registered Office Address is a MUST for any type of company registration, and it MUST be your operational office as well.

Virtual office address are ILLEGAL and should be avoided

• Bank accounts can become frozen
• Random government inspections 

A one-year lease agreement must be signed: any agreement shorter than this will be denied during the registration process.

Type of property is of utmost importance as it indicates your entity choice and business scope.

• Factory/Warehouse – manufacturing business scope
• Commercial – trade/services business scope
• Retail shop – retail business scope

The key is remembering that, unlike other jurisdictions, the only ONE company can be registered in ONE registered office space.

You are suddenly realizing that the location (i.e., city) you have chosen is not a success for your business and now you wish to change cities

Tax consequences of selecting your location in China

Each city in China is made up of districts. When you choose an office space, remember:

• You are registering your company in that city
• You are registering your tax status within that district in the city.

Should you wish to change office space and move to a new district in the future – understand the tax consequences!

Tax incentives may be offered by the State, Local or District government.

Step 4: Finance

Decision 7: Bank

Steps during the incorporation process (i.e., opening of the bank account):

1. Do your homework…which bank do you choose?
2. Obtain the document list upfront at point of starting the incorporation
3. Inform bank once business license is issued – have your market entry advisor submit all originals 
4. Under COVID-19, banks requires zoom conference call meet the Legal Representative who shows their original passport. Video will be recorded.
5. Or in places, like Shenzhen, bank will require you to still meet in person at the bank branch with your original passport.
6. Bank is required by the PBOC to visit your REGISTERED OFFICE ADDRESS to prove that you are NOT in virtual office location. (Since August 2020)

Whole bank account opening process can take between 25-30 working days for the full capital account and RMB basic account to be opened.

1. Then you need open your online banking operation which is separate from the account opening procedure. This may take an additional 10 working days as key tokens need to be flown to the operative individuals of the account.
2. Capital is remitted from SHAREHOLDER.
3. In order to use the capital initially, you need to show proof of upcoming payments to the bank – such as office rents, salaries, additional expenses, before you can exchange the capital from the capital to the RMB basic account.

 

REMEMBER:

• The account opening process should NOT determine how you choose your banking partner!
• This partnership will last for the full validity of your organization (hopefully!).

Decision 8: Value Added Tax Status

VAT is a Sales Tax. It is a major source of tax revenue to the Chinese government. They therefore impose very rigid rulings and system to tackle tax avoidance.

• If an LTD in China applies for General VAT Taxpayer status (GVAT), the company can reclaim or offset the VAT on purchases, sales of goods and modern services.
• If an LTD does not apply for GVAT Taxpayer status, then they are considered a Small-Scale GVAT Taxpayer, and they cannot offset the Input VAT. There are varying turnover thresholds to determine when an LTD is going to be upgraded to the GVAT Taxpayer status. In general, the threshold is RMB 800,000 in the fiscal year.
• If you have GVAT Taxpayer status, then the VAT payable is due on a monthly basis. As a small-scale taxpayer, the VAT payable is due quarterly.

Definition of a General VAT Taxpayer

VAT = Output VAT – Input VAT

The sellers of goods/services can make out ‘’VAT special invoices” or ‘’VAT general invoices’’.

The ‘’VAT special invoices’’ made out by the sellers of goods/services can be verified and deducted within 180 days by the other party.

Definition of a Small-Scale Taxpayer

• Apply to a 3% VAT rate.
• The sellers of goods/services can only make out “VAT general invoices’’ and collect them in full and the above VAT general invoices cannot be deducted by the other party EXCEPT if the ‘’special VAT invoices’’ are applied for at the tax bureau and requested by your customer.
• Small-scale taxpayer cannot deduct the input tax (yet) and can only use the costs to deduct the income tax payable.

Decision 9: Appointment of the Finance Manager

Why would you choose to outsource the finance in China?

The advantages of outsourcing

• Cost
• Talent
• Recruitment
• Focus
• Specialization
• Technical skills
• Turnover of the staff
• Language & Culture

The disadvantages of outsourcing

• Another look at talent
• The other side of recruiting

For any information on how to incorporate your company in China, please contact our team by email at  info@opkofinance.com or by phone at +852 2654 8800/+86 187 177 31958