China presents itself as a coveted destination for setting up a subsidiary because of the array of advantages this business form possesses and the conducive market of the country. Foreign Invested Enterprises or FIEs as subsidiary businesses in China are also a popular form of business for foreign entrepreneurs and investors. They can enjoy 100 percent ownership of the parent company’s share capital while having flexibility in operating the business.
To ensure that the incorporation of a foreign subsidiary in China is legal, you need to be aware of certain things such as the governance structure of the corporate market, available vehicles for business, currency regulations, foreign investments incentives, limitations, and tax employment laws.
So, let us learn more about how to register a subsidiary company in China.
Definition of a Foreign Invested Enterprise or Subsidiary
A subsidiary in China is a sub-company owned by a foreign parent company that can obtain the certificate of incorporation of a wholly-owned subsidiary in China and a license for opening and registering a subsidiary by paying tax.
The shares of a wholly-owned subsidiary in China or Wholly Foreign Owned Enterprises (WFOE) are entirely owned by the foreign company. However, if the shares are owned by foreign shareholders and those of the local market, you must set up a Joint Venture or JV in China.
Thus, to understand which type of company structure would be apt for you, it is imperative to know the differences between business entities in China.
What are the Types of Subsidiaries in China?
- ~A Representative Office is a business structure that allows foreign investors to have a bird’s eye view of the market by entering the mainland without a registered capital. They do not require an elaborate establishment process and if often completed in one to three months. Since ROs do not have the liberty to enter into commercial contracts, they are primarily set up to undertake research, marketing, liaison activities, or publicity activities without any direct generation of revenues.
- ~A Wholly Foreign-Owned Enterprise is licensed to carry out several business activities and incurs higher establishment costs. It is a Limited Liability company that can implement many business activities, including signing contracts, issuing special tax invoices, and collecting payments. A Wholly Owned Foreign Enterprise must bear separate liabilities from the foreign parent company. The minimum requirements for establishing and registering a WFOE varies according to the business entity. It takes two to four months to complete the registration process.
- ~A Branch of a company in China is mainly established when you wish to operate the business under the same name as the parent company, which should, in turn, be a registered Chinese establishment with an approved license and certificate for business registration.
- ~A Joint Venture is a Limited Liability Company owned partly by a foreign company and partly by a Chinese company. The former enjoys more than 25 percent of shares as part of profits and losses, supplying investment and managing responsibilities.
How to Set Up Subsidiary in China?
Setting up a subsidiary in China requires you to have a list of legal documents ready comprising the articles of incorporation, authorization letters, audit reports opening a business bank account, and having a legal representative to help you with the legal matters.
The steps for incorporation of a subsidiary of a foreign company in China include:
- ~Preparing documents- Two sets of authenticated and notarized certifications, including the office address register number, Employer Identification Number, and other registered certificates. Apart from these, the executive director notarized and authenticated passport, and corporate supervisor passport copies also need to be prepared. Chinese embassies can help you with the details of all the legal documents required. Employers must courier all documents to the SMEs China Corporation registry.
- ~Naming the subsidiary- Once documents are prepared, you need to choose a name for your company that can be a similar brand name as the foreign parent company or a separate name that requires approval in two languages.
- ~Scope of business- The incorporation of the wholly-owned subsidiary in China includes an explicit mention of the scope of your business with a business license. In the case of a consultant firm, subsidiaries can get import and export permits for conducting trade. Other business activities include IT, domestic trading, engineering, consultancy, etc.
- ~Signing and submitting- The local supervision market's application forms for setting up a subsidiary in China must be duly filled and submitted.
- ~Approval- The approval comprises that of Certificate of name, 5 in 1 Business License, Company Stamps and Seals, Certificate of Registration of foreign-invested enterprises. This takes about 20 to 30 days.
Benefits of Setting Up a Chinese Subsidiary
As a company seeking to incorporate a subsidiary in China, you can enjoy several advantages.
- ~Less Taxation- Subsidiary companies in China are considered private enterprises, and thus, the government does not impose pressure on such entities for taxation. Hence taxation of foreign subsidiaries in China is relatively minor. They also enjoy tax incentives and are encouraged by the Chinese government to boost economic growth.
- ~Labour Market- China takes pride in a skilled workforce, which can contribute substantially and efficiently to the foreign subsidiaries in the country. The Chinese labor market is one of the main reasons foreign investors seek to establish subsidiary businesses in China.
- ~Growing Market- The Chinese market is growing globally, and establishing a subsidiary corporation would lead to higher profits. Moreover, foreign companies can successfully prosper in China with the right business strategies and qualified labor, foreign companies can successfully prosper in China.
- ~Independent Operation- Managers of Subsidiaries in China have the freedom to run their business according to their chosen business style in sync with China’s culture and operate without the intervention of the foreign parent company.
Foreign companies seeking an expansion in the Chinese market can enjoy many benefits by setting up a subsidiary in China if they have clarity over the type of business structure and maximize the potential of the Chinese market. The best part is that it allows them to exercise control and implement all operations independently and yet enjoy all the tax incentives offered by the government.
Documents to Prepare When Opening a Subsidiary in China
You require the following documents for establishing a subsidiary in China:
- ~Approved business name
- ~Registered office address
- ~Registered capital
- ~Feasibility study and budget plan
- ~Legal representative identification
- ~Company supervisor identification
- ~Information of shareholders and directors
- ~Notary documents for shareholders
- ~Articles of Association and Memorandum of Association
What Business Forms can Chinese Subsidiaries Take?
- ~Representative Office - A business structure permitting investors to enter the market without a registered capital.
- ~Wholly Foreign-Owned Enterprise - WFOEs can carry out many business activities as a Limited Liability company.
- ~Company Branch - An extension of a parent company with valid Chinese permissions to conduct legal business operations in the country.
- ~Joint Venture - Limited Liability Company is almost like a partnership with structured shares and responsibilities split between the venture participants.
Chinese Subsidiary Laws
Although incorporating a subsidiary in China or a WFOE does not require any minimum capital registered requirements, this criterion may differ from one city to another. A PRC entity is required by foreign investors seeking a subsidiary company formation in China to play the role of a sponsor. In the case of foreign investors who cannot apply for documents directly, the PRC helps in the application process.
Post Incorporation Compliance
All foreign subsidiaries in China must ensure complete compliance with the government laws, local regulations, and industry standards. This allows for smooth business functioning, keeping companies out of trouble with legal authorities.
Once you form a subsidiary in China, you must meet several administrative and legal compliance requirements monthly, quarterly, or annually.
The most basic structural compliances are -
- ~Maintaining a record of accounts
- ~Contributions to social security insurance
- ~Contributions to housing provident fund
- ~Tax filing submissions, including but not restricted to Value Added Tax, Corporate Income Tax, Individual Income Tax, and Surtaxes.
Monthly compliance requirement
- ~Maintain a record of accounts as per Chinese Accounting Standards or Chinese Generally Accepted Accounting Principles
- ~Balance sheet
- ~Income Statement to in-charge authority
- ~VAT and other Surtax filings (if relevant)
Quarterly compliance requirement
- ~Filing for VAT and other Surtaxes (if relevant)
Annual compliance requirement
- ~Statutory audit every year by a qualified CPA
- ~Corporate income tax filing
- ~Annual publication report
Taxation of Chinese Subsidiary
All foreign-invested companies in China are mandatorily required to fulfill all tax filing compliances. Generally, tax registrations must begin within one month after an entity starts operating legally in China.
For meeting legal requirements, a company must apply for these tax registrations:
- ~Basic registration with the National Authority
- ~Basic registration with the Local Tax Authority
- ~General VAT Status registration
- ~VAT invoice or “Fapiao” registration
- ~Company registration for Social Security and Housing Fund
- ~Registration with Foreign Experts Bureau
Tax Incentives for Businesses Setting Up a Subsidiary in China
With its array of foreign investment policies and incentives and an open-door approach for foreign investors, China has become a preferred destination for foreign investment. In addition, many incentive schemes are specially meant for foreign investors setting up subsidiary businesses in China.
Some beneficial incentives for taxation of foreign subsidiaries in China are -
- ~Lower-income tax rates for low profit and small-sized companies
- ~Information Technology Outsourcing, Knowledge Process Outsourcing, and Business Process Outsourcing enjoy a Corporate Income Tax rate of 15% and a deduction cap of 8% for higher education.
- ~Projects related to environmental conservation, high-tech development, energy conservation, preservation, and water conservation are eligible for tax incentives.
- ~Companies reinvesting their profits in any local Chinese companies can enjoy tax reductions.
- ~The Special Economic Zones in China also offer unique tax benefits to businesses, such as a lower corporate tax of only 15%, three+three years tax holiday for specific environmental and essential infrastructure projects, and tax exemption for the first two years, followed by 12.5% interest rate for the next three years.
Other Important Considerations
Setting up a subsidiary in China is a time-consuming process. Creating the business setup and making it fully operational might take months. You cannot hire an employee unless you have officially established the subsidiary. This might lead to losing human resources.
Also, remember that the total cost of opening a subsidiary (wholly foreign-owned category) in China is around 17,000 RMB. So, you must prepare your expansion plan accordingly.
How Multiplier's Employer of Record Can Help You Hire & Expand in China?
If you wish for a hassle-free process of incorporating a subsidiary in China, Partnering with a third-party service provider may help you launch your subsidiary smoothly. A global employment solution partner like Multiplier helps know the compliance rules for foreign subsidiaries in China while seamlessly managing everything, from registration to account for a successful business venture.
We know that establishing local entities in numerous countries is time-consuming for many companies. With us, you can quickly employ, onboard, and pay full-time employees while staying inside the confines of local labor rules. You won't have to worry about forming a local entity or figuring out how to stay up with changing labor laws in your area.
You can book a demo and speak with one of our specialists to learn more!
Frequently Asked Questions
Who is eligible for setting up a subsidiary in China?
Entrepreneurs of medium-sized companies abroad who wish to establish their sway over the Chinese market and grow their business can contemplate setting up subsidiaries in China.
How quickly can one register a subsidiary in China?
With all documents in place and accepted and approved by local institutions, registering for a subsidiary business in China is relatively fast and straightforward.
Do subsidiaries require VAT Registrations?
Yes, subsidiaries in China require a VAT registration of 13% for all taxpayers. However, in the case of certain businesses, lower VAT rates are levied.