How to Sell Services, Conduct Trade, and Manufacture Goods in China Without Owning a Local Company?

At first glance, doing business in China might seem daunting—especially regarding regulations and processes for foreign companies. But it’s worth noting that you don’t necessarily need to set up a local subsidiary to enter the market. It’s possible to sell services, import goods, or even manufacture products in China without a formal presence. Of course, each route has its considerations, and understanding the rules upfront can help you avoid unnecessary complications.

Approaches for Doing Business in China Without a Local Entity

1. Trading in China

If you’re importing products into China, you can partner with a local distributor or client with the right certifications. They handle import procedures, pay the required taxes, and convert local currency into foreign currency for your payment. Key points include:

Taxes:

• VAT on goods: Typically 13%, though certain products qualify for an 9% rate.
• Customs duties: Vary based on the product’s HS code.
• Consumption tax: Applies to luxury items or products that might affect consumer health.

Your local partner acts as the withholding agent, taking care of VAT, customs, and any other related taxes.

2. Manufacturing in China

If your products are made in China, the local manufacturer handles production and export. Many goods exported from China don’t face export VAT, and Chinese suppliers often qualify for tax rebates, making the arrangement mutually beneficial. If you involve a Hong Kong company in the chain, there might be additional tax advantages.

3. Selling Services in China

Offering services to Chinese clients without a local entity is possible, but it comes with extra layers of taxation and administration:

• VAT on services: Usually 6% if your Chinese client is a general VAT taxpayer or 3% for small-scale taxpayers.
• Surtaxes: Around 12–13% of the VAT amount.
• Corporate Income Tax (CIT): If the foreign service provider is considered to have a “Permanent Establishment” in China, CIT may be due based on a deemed profit rate. The Chinese client usually acts as the withholding agent.

Because these processes can be cumbersome, many larger Chinese companies prefer working with foreign firms with a local presence.

Essential Considerations When Operating Without a Local Entity

Official Invoicing (Fapiao)

Only companies registered in China can issue fapiao, the official invoices needed for corporate tax deductions and VAT input credits.

Some Chinese clients may hesitate to work with foreign suppliers without a fapiao since they can’t deduct these expenses from their tax benefits.

Hiring Local Staff

Foreign businesses without a local entity can’t directly hire employees in China. Labor dispatch agencies can work around this, but this tends to be a short-term fix and may not suit long-term business strategies.

Foreign Exchange Controls

China has strict foreign exchange regulations. Transactions above certain thresholds require extra documentation and approvals, which can slow down payments. This is especially noticeable when dealing with service-related fees, as your client might face delays in sending funds overseas.

Considering a Local Entity

If these challenges become too unwieldy, setting up a local company might be the smoother path in the long run. Options include a Wholly Foreign-Owned Enterprise (WFOE), a Joint Venture (JV), or a Representative Office (RO). While WFOEs or JVs require more upfront investment, they let you issue fapiao, hire employees, and manage foreign exchange more smoothly.

A Representative Office is easier to set up but is limited to activities like market research and liaison work, so it won’t address all the abovementioned issues.

Conclusion

It’s possible to do business in China without establishing a local entity. That said, the choice isn’t one-size-fits-all. It depends on what you’re selling, who you’re selling to, and how involved you want to be in the local market. If the hurdles of operating remotely become too significant, it might be time to consider setting up a local presence.

If you need guidance on the best route for your specific situation, feel free to contact MSA. Our team can provide personalized advice on navigating the Chinese market and help you decide whether or when to establish a local entity. For more information, contact us.