Key Takeaways

When setting up your China business structure it is crucial to create the right investment vehicle, whether joint venture, WFOE, partnership, or another business form.
Where you are choosing to invest via a WFOE, you then need to choose the correct operating model whether consulting, trading or manufacturing.
Other key matters to consider include choosing the right company name, directors and business location.

When setting up a business in China, entrepreneurs and investors need to make a whole range of crucial decisions that will affect the company’s operations in the country. In this article, we discuss why it is important to properly structure your entity for future operations and several items that must be structured properly to set up your company for success.

Importance of Properly Structuring Your Chinese Entity

How a Chinese entity is structured during incorporation will affect the process and future operations of the company. Certain structural decisions will require companies to perform additional incorporation steps or apply for additional licenses. Furthermore, not optimally structuring the entity might result in limitations and cause additional administrative procedures to correct issues, leading to unnecessary costs and delays.

As such, companies need to be well-informed during the decision-making process. It is highly recommended that they advise a well-equipped service provider on all aspects of the incorporation process and how decisions impact future operations.

Choosing the Right Investment Vehicle (or Company Type)

Understanding how to access the opportunities in China can be confusing for most, and deciding on the right market entry vehicle is one of the most critical decisions for foreign businesses exploring entry into China. The appropriate entry mode depends on multiple parameters, with the intended activities and industry being the most important considerations. Under the new Foreign Investment Law three primary investment vehicles can be established by legal persons or non-legal persons, namely a Wholly Foreign-Owned Entity (WFOE), a Joint Venture (JV) or Representative Office (RO).

China Representative Office

As an RO is an extension of the headquarters and not a separate legal entity, it is easier to set up but restricted in its activities. It is limited to marketing and liaison activities for the headquarters and cannot engage in commercial activities, import/export, or independently hire Chinese staff. As such, it is only used by companies that are looking to conduct limited activities with limited staff. This could be, for example, on-site support for existing customers, market and field research, or marketing activities.

WFOEs and JVs

The two other options, WFOEs, and Joint Ventures are separate legal entities with similar characteristics, with the notable difference that the Joint Venture includes more than one shareholder.

A joint venture may be set up between two foreign entities. Still, the most common setup is a Sino-foreign joint venture, a limited liability company through a partnership between a foreign investor and a Chinese company or individual. The two main reasons for establishing a Joint Venture are accessing restricted industries in which foreign investment is only permitted through a joint venture or utilizing the existing network of a Chinese partner with local market knowledge and well-established contacts. Generally, when these two reasons are irrelevant for a company, a WFOE is the preferred investment method for foreign companies, ensuring full control over the Chinese entity (see “Vistra – Legal Entity Options for Expanding Businesses in China” for comparison with joint ventures).

What is the Best Structure for Your Chinese Entity?

After selecting the right investment vehicle, the operating model is the next key structuring item to decide on. For a WFOE in China, there are three operating models:

Consulting
Trading
Manufacturing

The choice between a Consulting WFOE, Trading WFOE, and Manufacturing WFOE depends on the activities the company plans to carry out in the short term.

China applies strict regulations to activities companies can perform within their business scope. This means a consulting company with only consulting-related terms in its business scope cannot engage in trading activities. Therefore, it is essential to make a well-thought-out decision on which model is selected, as it will affect the company’s future operations.

Regarding the establishment procedures, whether a company will be manufacturing WFOE or not is relevant, mainly related to the address. Whereas there are generally no additional requirements for Consulting and Trading WFOEs for the address, a Manufacturing WFOE is required to conduct an Environmental Impact Assessment (EPA).

If a company engages in the manufacturing processes, including complete manufacturing or assembly of final products, it will be required to perform an EPA. The purpose of the EPA is to assess the estimated impact that the operations of the intended manufacturing facility will have on the environment. A licensed Chinese third party must conduct the EPA. The complexity and time required for the assessment depends on the planned business activities but can take up to 4 months to complete. Therefore, selecting the address carefully and considering whether a manufacturing entity is required and suitable for the company is essential.

Regarding the company’s future operations, it is also advised to consider the operating model carefully. For example, suppose a company will initially only hire local employees to support the quality control of the products and leave the import/export procedures to a third. Still, it wants to start trading through its entity in a few years. As noted by RegistrationChina – Foreign Invested Enterprise Structures in China, changing the business scope can be complex and time-consuming. In that case, it may still be best to establish a Trading WFOE from the start. As changing the operating model and business scope can be time-consuming and costly, it is best to consider the company’s concrete plans for the future before making a decision, as the decision could affect the company’s operations in the future and potentially cause delays and extra costs when a change is required.

Comparison of WFOE Operating Models

Operating Model	Typical Activities	Key Regulatory/Operational Requirement	When to Choose
Consulting WFOE	Advisory services, project management, and support functions.	Lower address/licence requirements; no manufacturing footprint required.	When your business provides professional or consulting services only.
Trading WFOE	Import/export, wholesale, and retail of goods.	Requires import/export licences, customs registration, and VAT compliance.	When you plan to trade or distribute physical products in China.
Manufacturing WFOE	Production, assembly, or fabrication of final goods.	Requires Environmental Impact Assessment (EPA); higher setup cost and lead time.	When you intend to produce or assemble goods locally in China.

Key Structural Details

To proceed with the applications with the Chinese authorities to establish an entity, several structural details that impact the company’s future operations must be decided upon. Here are some of the critical items:

Registered Capital and Total Investment

In order to register a shareholder’s investment in a Chinese entity, the company will need to select the amounts for registered capital and total investment. Registered capital refers to the total amount of equity or capital contributions to be paid by the shareholder(s).

Registered capital is a tax-free contribution that can be paid either in cash (foreign currency or offshore RMB) or in technology, machinery, and other assets. Generally, it is advised that the registered capital be paid in foreign currency.

The total investment refers to the amount of funds that a foreign-invested enterprise needs to carry out the company’s production or operations as set out in their Articles of Association (AoA). A WFOE company must also specify in the AoA what the total investment contributed to the company would be. To learn more about registered capital and total investment, you can read our article here.

Companies must select a reasonable and appropriate amount for both registered capital and total investment, as this affects the company’s financing. Read our full article to learn more about financing an entity in China.

The difference between registered capital and total investment is that registered capital can be brought into China as a loan issued by the parent company, and the overseas parent company becomes the creditor of this loan. As such, this difference is also known as the financing gap.

Additionally, as the registered capital is a tax-free contribution, it is generally the easiest and most cost-effective method of bringing funds into the Chinese company. Other options to finance a company are generally more complex or incur taxes. Typically, it is advised to ensure that the registered capital can finance operations for 6 to 12 months or until the entity can fund itself.

If the amount is set too low, the company might have financing issues and be required to increase the registered capital later on. If the amount is set too high, the company may face difficulties meeting capital contribution obligations, as the revised Company Law generally requires registered capital to be fully paid within five years from the date of incorporation.

Changing the registered capital after incorporation will require updating the company business license and Articles of Association, which in turn means that all authorities will need to be updated about the change, including the bank, tax bureau, customs authority, and others, if applicable. Therefore, changing the registered capital in the future can be time-consuming and expensive, and setting the right amount during the setup process is key.

Business Scope

The business scope is an official description of a company’s plans to engage in activities in China. It is mentioned on a company’s business license and is publicly accessible by any individual via the company registry on the AMR website.

It is important to note that a company can only conduct operations specified in its business scope. If a company performs activities outside of its business scope, it can be subject to fines, and in some instances, the company’s business license can be revoked.

Therefore, investors should carefully consider the business activities the company wants to engage in in China when establishing the legal entity and any activities the company plans to engage in in the future, as changing the business scope can be complex and time-consuming.

Address

All companies are required to have a registered address, of which proof must be provided during registration. Since it is a requirement during the company name registration procedure, you should have a lease agreement before submitting the documents for (pre-)application with the AMR.

For a registered address to be suitable, it must satisfy the following two requirements:

The address can be used for commercial purposes.
No other company is registered at the intended address.

Some companies have registered with virtual addresses and conducted actual operations from a different location. However, this creates a level of company compliance risk.

Many local governments and industrial parks/areas offer tax incentives, benefits, and subsidies to companies operating in their area. Depending on the industry and activities to be performed, this can be an excellent opportunity for starting companies. As such, conducting a location search before deciding on an address is advised, as benefits may be available.

Registered Personnel

Any foreign-owned limited liability company in Mainland China must appoint a Legal Representative, an Executive Director or Board of Directors, a Supervisor, and optionally a General Manager separate from the Legal Representative. Those positions must be determined during the company establishment phase.

These registered persons can be of any nationality and do not have to reside in China. From a practical perspective, it is advised to ensure that the registered personnel will have continuity with the company. With complex procedures in place to change a registered person, particularly in the case of a legal representative, it is best practice to appoint individuals who are expected to remain with the company for a long period of time to avoid unnecessary administrative procedures in the future.

Company Name

China’s official legal company name is Chinese, and it will be registered with all major Chinese governmental authorities. The Chinese legal name has to follow the following legal format:

Company’s chosen name;
Major business activity the company will perform (i.e., Consulting, Trading, Technology, etc.);
Region or place of incorporation (i.e., Shanghai);
Legal structure of the company (i.e., Company Limited or LLC).

In addition to Chinese names, companies can also choose unofficial English names. The English name will be registered with the Ministry of Commerce (MOFCOM), may be represented on the company chop, and can be used when registering with the bank. However, the English name does not hold the same legal power as the Chinese name, the only official company name.

When choosing the company name, the following items are essential to consider:

Specific notable names in Chinese, such as ‘China,’ ‘State,’ or ‘International,’ are only permitted if the company meets particular minimum registered capital requirements. The rules are less strict for the English name.
In cities, districts, and industries where many companies have already been registered, it cannot be easy to obtain approval from the government on the desired name. The government will compare the proposed company name with other companies in the same region and industry. If the name is deemed too similar, the name will be rejected. Therefore, we advise clients to prepare a range of possible company names (at least 5) for the application. However, in certain cities and industries, finding a suitable name is becoming increasingly difficult due to the vast number of already existing companies, causing higher chances of the proposed name being too similar.
Changing the Chinese company name in the future is particularly risky. As the Chinese company name changes, the company chop will also change. This will open the company up to the risk that clients, suppliers, or other business partners will not recognize the updated company information and no longer honor existing contract obligations or use the situation to renegotiate terms.
In line with the other structural details discussed above, updating the address is also complex and time-consuming, so choosing the right name is essential.

Shareholder

In the past, companies would first set up a holding company in Hong Kong and subsequently invest in the Chinese subsidiary. Nowadays, most companies invest directly in the Chinese entity from the headquarters.

For larger companies with several different companies within the organization, it is essential to consider which group entity will be the direct shareholder of the Chinese entity. The direct shareholder will be the entity that must make the registered capital contributions and the entity that will receive dividends.

As China has varying arrangements with different countries through specific Double Tax Agreements, the applied taxes for dividends, royalties, and other payments may vary based on the home country of the direct shareholder. However, it is notable that the Tax Bureau will generally request ultimate beneficiary owner (UBO) information for dividend distributions. Which means that if the direct shareholder of the Chinese entity is located in a country that has agreed a 5% dividend rate with China, but the UBO is located in a country that does not have preferential rate agreement with China, the preferential rate will not apply.

Lastly, it is important for companies to choose the right shareholder upon incorporation, as a future share transfer of the Chinese entity within the group may have a tax impact in either China and/or the home country.

Choosing between a WFOE, JV, or representative office shapes your tax obligations, liability exposure, and operational flexibility for years to come, making the structural decision one of your most important early choices. China company registration advisors at MSA Asia compare scenarios specific to your business model and growth plans. Reach out to evaluate your entity structure options.

Once you’ve chosen the right structure, the next step is to incorporate in China.