What Do You Need to Know Before Starting A Business in China?
When it comes to moving manufacturing to another country, China is the premier destination. It offers the perfect combination of cheap but skilled labor, political stability, stable currency, powerful infrastructure, and an excellent supply chain. A lot of countries move the key part of their production line (especially manufacturing) to China and retain segments like “assembling” in their home country.
Whether you are moving your whole manufacturing line to China or only a small fraction of it, there are a few things you need to know.
Chinese Government Catalogue for Foreign Investors and Legal Business Entities
You can’t open any business in China.The country has a catalog for foreign investors in which it has divided businesses into three categories:
Encouraged: These are the businesses that the country encourages you to expand or move to China. It includes farming, mining, most manufacturing industries, power supply, communication businesses, etc.
Restricted Business: In each category, there are some businesses that are only allowed to operate in China with some restrictions. Like producing grain, potatoes, cotton, and oilseed. Mining precious metals and manufacturing certain pharmaceutical products is also restricted. These businessesmight require a higher level of local involvement.
Prohibited: Certain businesses are completely prohibited in China. Like constructing and operating a power network or cultivating a country’s rare precious breeds.
Before you move to any other formalities, it’s a good idea to check this catalog and see where your business falls. If it’s encouraged, you might find it easier to start the business in China and engage the local labor. But restricted business categories might face several problems.
China: Business Entities
In China, you can start your business as one of five legally recognized entities. Out of them, the three most important are:
- Wholly Foreign-Owned Enterprise (WFOE): This is the most coveted business model for foreign businesses and investors since it gives you most of the rights, limited liability protection, and 100% ownership of the business.
- Joint Venture: When you bring in a local partner, a lot of doors might open for you in China, including restricted businesses. A local might also understand the market and labor conditions better, but strict monitoring and clear lines of communication are imperative.
- Representative Office: For all intents and purposes, an RO isn’t a proper business entity at all. Its core function is coordination and communication with locals. It can’t sign legal contracts or operate a fully functional bank account.
Steps to Start A Business in China
There are a few steps you’ll need to take to establish your business in China.
- Identify your business needs and choose a location. While all of China might be open to a foreign investor/business, certain zones (China Free Trade Zones) offer some tax benefits. The proximity to certain trade routes is also a key factor in deciding on a place to set up your business at.
- Decide whether you want to expand there on your own, seek out a global expansion partner, partner up with the locals, or conduct business through an RO or a PEO. Each choice has its own benefits and repercussions, and you should weigh your options as per funding available and your business needs. If you are simply testing the waters, investing a significant sum in establishing a business in China might not be prudent because it is a bit difficult to close your business in China.
- Choose your legal structure. Your choice to work with or without a local partner might dictate the legal entity you choose.
- Establish a business plan. Even if you don’t need to present one when choosing a location or to establish a legal entity and you aren’t approaching local financial bodies, it’s still important to have a viable business plan on hand. The plan should be tailored to the location you are establishing a business in, and it should be to the point but not binding.
- Taxes are an important part of establishing or expanding a business in China. There are a few different taxes you will need to pay, like the Corporate Income Tax (CIT), which is 25% for all companies operating legally in China. If you are selling products in the country, you will also need to comply with Value-Added Tax (VAT). Some foreign businesses might also be subject to withholding tax which can vary between 10% and 20%. There are also taxes related to certain documentation. You will get your tax registration certificates when you establish your legal business entity.
- For business deals, hiring staff, paying your taxes, and for many other financial requirements of a business, you’ll need to open a bank account in China. While a foreignbusiness that is not established in China can open a Non-Resident Account, it’s highly restrictive. When you have the right certificates and documents (like RMB account opening permit, FE registration certificate, business license, etc.), you can open your business bank account with minimal fuss.
- Protecting your Intellectual Property (IP) in China is an important part of establishing your business or expanding to China. Look into the local IP laws and see how you can prevent your competitors from mimicking your products and designs.
- Navigate the local labor laws. While China is known for cheap labor, the labor laws can be difficult to navigate for a foreigner, especially thanks to the language barrier and cultural differences. The first thing you have to look into is the labor contracts. Understand the legal language, rights, and responsibilities of the employer and the employee, compensation, and benefits, legal cause for termination (very important), social security, etc. The laws concerning probation periods and leaves are also very specific.
These are just some of the common steps you’ll need to take while establishing a business in China.
China is a business-oriented country, and even though it’s not as open to foreign investors and capitals as it was in the past, the rules and practices are well-established, although they have been known to change frequently. The language and cultural barrier would be the most difficult to overcome, but if you have lived in China and understand the culture or you have trusted local partners that can help you navigate the local business landscape, you can draw amazing benefits from your Chinese business expansion. To learn more, visit us at: www.aadmi.com.