HOW TO SET UP A BUSINESS IN CHINA - THE COMPLETE PROCESS

The new Foreign Investment Law (FIL) entered into force in the People’s Republic of China (PRC) on 1 January 2020. It repealed the three foreign direct investment laws that previously regulated foreign-invested entities (FIEs) – the Sino-Foreign Equity Joint Venture Law, the Sino-Foreign Cooperative Joint Venture Law and the Wholly Foreign-Owned Enterprise (WFOE) Law.

The establishment process for an FIE can vary, depending on the chosen structure, the entity classification and the location. The most well-known and popular classifications are Service Company, Manufacturing Company and Foreign-Invested Commercial Enterprise (FICE).

A trading company, for instance, is required to register with China Customs after obtaining a business licence, while a manufacturing company is required to complete an environmental impact evaluation report. Other options, such as the use of equipment to fulfil registered capital obligations or the use of a foreign loan to finance an operation in China will also influence the set-up process.

It is therefore always advisable to seek professional assistance when considering setting up in China. This article focuses on the set-up process for a FIE in Shanghai that is 100% owned by one or more foreign legal entities. We generally use the blanket term ‘FIE’, but in a few cases, we use the terms WFOE (Wholly Foreign-Owned Enterprise) or JV (Joint Venture) in order to emphasise the type of company or the shareholder structure.

Even though the government process takes about six to eight weeks, we see set-ups in China take anywhere from three up to nine months before operations can commence. This is because the process is highly front-loaded, which means that you will need to make a number of big decisions and obtain a number of documents before you can actually start the government process.

For example, you will already need to have secured a business location. This is a key decision because it can influence what business activities your company is permitted to undertake and what incentives may be available. Selecting a location – and negotiating for the right accommodation at the right price – takes time.

The length of time may also depend on the location of the shareholders and key individuals involved in the FIE. This is because the Chinese authorities only accept ‘wet’ signatures and sending documents up and down the line can take time.

STEP 0 – HAVE A PLAN

It may sound obvious, but a comprehensive, objective business plan is an essential component for a smooth set-up. As a minimum requirement, this plan should address the following questions:

• What are the proposed activities of the business in the short and long term?
• Who will hold the key positions in the entity?
• What investments are needed to make the entity operational?
• How is this investment to be financed?
• What is the cashflow plan for the next 24 months?

All this information will be needed during the set-up process and it will also help guide you to find the most suitable structure and location for your business. Of course, plans can change but having something in place to work off is always good.

STEP 1 – MAKE SOME KEY CHOICES

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