Investment considerations in the China market
Before investing in the China market, decide which type of presence you need for your company. There are several things to consider to choose the right type of entity:
- Considerations for representative offices
- Considerations for wholly foreign-owned enterprises
- Considerations for joint ventures
Considerations for representative offices
You may opt for a representative office (RO) if you:
- are a trade agency
- are in the service industry
- have few initial investment funds
The set-up process and capital requirement for ROs are easier to obtain than with other types of entities.
Advantages of ROs
- Easy to set up
- No minimum share capital required.
Disadvantages of ROs
- Limited operational range
- Subject to several different taxes depending on the business plan, location, etc.
- Can only hire local staff
Considerations for wholly foreign-owned enterprises
- Chinese partner involvement is not mandatory or required under investment regulations for wholly foreign-owned enterprises (WFOEs), thus WFOEs involves a more flexible decision-making process compared to joint ventures.
- WFOEs are sometimes used to protect technology, innovations, and intellectual property.
- The approval process is simpler and the limitations on business expense payment and local sales volume are more lenient.
Advantages of WFOEs
- Ability to provide a wide variety of services within their business scope—, unlike ROs
- Suitable for a long-term presence in China
- Avoids the 11-12 % tax on expenses that ROs pay
- Can sell China-made products directly to Chinese consumers
Disadvantages of WFOEs
- Can only be established within a specific business scope
- Inability to engage in certain restricted business activities
- Investors must provide foreign funding for the company’s registered capital
Considerations for joint ventures
Equity joint ventures
The advantages of Chinese partners are:
- domestic financing
- sharing financial risks
- access to domestic markets
- easier contact with domestic social networks
- China-specific knowledge
As a holding company, an Equity JV can benefit from economies of scale in operations and management via collective investments under one corporate identity.
Cooperative joint ventures
- CJVs can be short-term and project-oriented and can serve as flexible instruments for economic cooperation between foreign and Chinese companies.
- A minimum stake in the company is not required and contributions do not necessarily have to be financial.
Advantages of joint ventures
- Can use your partner's network to establish good relations, avoid administrative issues and other bureaucratic complexities.
- Allows you to use the labour force and the existing facilities and sales channel of the local partner.
- Shared risk
- Access to restricted business segments
Disadvantages of joint ventures
- Risks associated with the technology transfer and management of intellectual property.
- The two parties may not share the same strategic or commercial interests.
The Canadian Trade Commissioner Service in China recommends that readers seek professional advice regarding their particular circumstances. This publication should not be relied on as a substitute for such professional advice. The Government of Canada does not guarantee the accuracy of any of the information contained on this page. Readers should independently verify the accuracy and reliability of the information.
Content on this page is provided by Dezan Shira & Associates a pan-Asia, multi-disciplinary professional services firm, providing legal, tax, and operational advisory to international corporate investors.
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