When contemplating setting up a business in China, one needs to consider what structure to use. But before deciding on the structure, it is important to lay out a strategy. Strategy must lead structure. First consider why you want to make an investment in China, and then find out just what you should be doing, before determining just how to do it.
Are you looking to sell to China or do you only want to set up a small representative office? Do you need a Chinese partner or can you go it alone? These are just a few of the key issues to consider before establishing a business on the Chinese mainland. We will discuss some of these issues, the various options available and the establishment process.
There may be several motivations in play of course, but almost every China investment boils down to one or more of these. Understanding which applies in your case will help you decide what the correct structure should be.
Equally, when choosing an appropriate investment vehicle, many factors must be considered, as these will lead to different legal and tax considerations. You will need to address questions such as:
- Do you require an entity on the Chinese mainland or is a Hong Kong incorporation sufficient to reach your aims?
- Do you need to invoice locally for services or products?
- Are you getting a feel for the market or have you decided to commit to a larger scale operation?
- Are you planning to set up a production-oriented entity or do you need only a representation in the country to carry out market research or liaison activities?
- Will you be involved in trading, manufacturing, services or a combination of these?
- Is the sector you are investing in fully opened to foreign participation or do you still require a local partner?
- Would you need to conduct the business alone, or would you require a Chinese company chipping in with assets or distribution networks?
- Where should you be? You will need to consider issues such as proximity to any China suppliers and raw materials; proximity to any Chinese customers; proximity to ports and other related infrastructure; costs of land and staff; and available incentives.
Once you've clearly defined the needs and goals for your China investment, it's time to consider the legal form your China entity should take. Foreign investors have several choices for structuring a China enterprise: the representative office, the joint venture, the wholly foreign-owned enterprise and the foreign-invested commercial enterprise. These structures have different features that can help or hinder your China venture, so choosing the appropriate vehicle from the outset will be invaluable for the long-term success of any investment.
Wholly foreign-owned enterprises
The wholly foreign-owned enterprise (WFOE) has become the investment vehicle of choice for the international investor wanting to manufacture, service or trade in China. In addition to the WFOE's expansive business scope, its unrivaled popularity arises from multiple other factors:
- 100-percent foreign ownership and control
- Security of technology and intellectual property rights
- Self-developed internal structure
- Insertion of existing company culture
- Profit repatriation
- Domestic sales
Your organization has decided to invest in China. Deciding which entity to establish based on your short and long-term plans is the next step.
(Part 2 of this article will appear in Issue 45)
The author is Senior Legal Associate of Dezan Shira & Associates Beijing Office (www.dezshira.com)