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Other Market Entry Options in China

Foreign-invested partnership

A foreign invested partnership enterprise (FIPE) is an unlimited liability business entity without any minimum registered capital requirements. It is becoming increasingly popular as it does not require registered capital but can hire staff, collect payments, issue invoices, apply for work and residence in China.

Minimum number of partners required is two, and both partners can be foreign nationals. There are three types of FIPEs:

 Can be formed by general partners who share unlimited liabilities for the debt of the partnership.

Formed by a combination of general partners and limited partners where the limited partners bear the liabilities for the partnership's debts to the extent of their capital contributions.

This form of partnership resembles a general partnership except that it must be a professional service institution offering services requiring professional knowledge and special skills. The structure shields co-partners from liabilities due to the willful misconduct or gross negligence of one partner or a group of partners.

Advantages and disadvantages

AdvantagesDisadvantages
  • No requirements on minimum registered capital;
  • Less procedures comparing with Wholly Foreign Owned Enterprise or Joint Venture
  • Capability of converting RMB profits to US dollars for remittance to its parent company outside of China;
  • Foreign Enterprise or Individual is allowed to establish a Partnership Enterprise with Chinese individual (While Chinese individual is not allowed to have Joint Venture company with foreign investor)
  • The profit distribution of a FIPE could follow an informal negotiated agreement as adopted in the partnership agreement (While for LLC, profit distributions is according to the percentage of investment of shareholders)
  • There is no corporate income tax if partners are individuals. The individual partners shall pay their respective share of the partnership income. Corporate income tax applies if partners are companies.
  • Unlimited liability: A partnership must pay all its debts with property contributed to the partnership by the partners. If the partnership is a general partnership, then the partners bear joint and several liabilities;
  • Limited business names options: Can't have business name with "Company" in it, ex.  can't have name like XYZ Co., or XYZ Co., Ltd. and could only choose names like: XYZ Firm (Partnership enterprise), XYZ center (Partnership enterprise);
  • Transferring property rights of partnership enterprise to a third party as according to the Partnership Enterprise Law is difficult.
  • China has not adopted Natural Person's Bankruptcy system, hence the credibility of the partners would be hard to maintain if FIPE gets into a hard situation;
  • As for trading business of a FIPE, it would be difficult for FIPE to get value-added tax (VAT) status initially.

Foreign-invested joint stock company

A Foreign-invested Company Limited by Shares (FICLS) (or joint stock company) can be set up by foreign investors and it is the only form of foreign investment entity (FIE) whose shares can be listed on a China stock exchange.

Capital is divided into shares and a FICLS must have a minimum of two and maximum of 200 initial shareholders (or promoters), which must include at least one foreign investor, and half of the shareholders (or promoters) shall have a domicile in China.

The FICLS is to be set up by promotion or share offer, if by promotion, the promoters must hold all of the shares. If by a share offer, the promoters must subscribe to at least 35% of the shares and offer the rest to the public. Establishment by share offer is subject to the approval of China’s securities regulator when offers shares to the public.

The FICLS is liable for its debts to the extent of its assets, while the liability of its shareholders is limited to the amount of their respective shareholdings.

A FICLS is more commonly used when expanding an existing business, converting an equity Joint Venture (EJV) into a FICLS or when acquiring a China based company, rather than when setting up a new business.

The founders of a FICLS are restricted to a three-year lock-up period after listing during which they cannot dispose of their shares.

Advantages and disadvantages

AdvantagesDisadvantages
  • Can hire local employees directly
  • Can be co-owned by Chinese individuals
  • Heavily regulated
  • The founders of a FICLS are restricted to a three-year lock-up period after listing during which they cannot dispose of their shares.
  • Cannot be used in certain restricted industries

Holding company

A holding company is an umbrella-structure arrangement which enables a foreign company to hold together its Joint Ventures and Wholly Foreign Owned Enterprise (WFOE) investments in China…

Operating without an entity (permanent establishment)

An “establishment or place” is defined in the corporate income tax regulations as an establishment or place in China engaged in production and business operations, such as:

Cross border e-commerce (replacing holding company)

Through cross border e-commerce, overseas firms can:

Cross-border ecommerce retail goods are now subjected to import tariff as well as VAT and consumption tax. The Chinese government continues to update regulations concerning cross border e-commerce including increased taxes and restrictions on products sold via cross-border channels.

Advantages and disadvantages

AdvantagesDisadvantages
  • Via cross-border e-commerce in contrast to domestic e-commerce brands can avoid the need to establish a legal or physical business presence in Mainland China preceding their e-commerce ventures
  • Comparatively a low-cost entry method for the Chinese market
  • Reduces operating risks
  • Products can then only be sold on e-commerce platforms;
  • Over-saturated Chinese e-commerce market and competition from major local players
  • IP rights violation by copycats

Disclaimer:

Dezan Shira & Associates

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 in part 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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