The China Laws Series. 10 March 2023
Introduction
Opening a foreign branch office in China requires careful planning and compliance with a range of legal requirements. Yet, there is a difference between a foreign office and a branch office. Companies must be aware of the various regulations and restrictions that apply to foreign entities operating in the Chinese market.
In our previous article, we have talked about the variety of ways a foreign business can be set up and registered in China which you can refer to at this link :
Today we will go more indepth in terms of how you can set up your foreign office in China if your business strategy entails you to spend your investments and resources in China given the attraction of the Chinese domestic economy, tax incentives and generally warm investor friendly policies.
1. Snapshot of the foreign office set up laws
Before setting up a branch office in China, companies should become familiar with the relevant laws and regulations, including the Company Law of the People’s Republic of China, the Law on Chinese-Foreign Equity Joint Ventures, the Law on Chinese-Foreign Contractual Joint Ventures, the Wholly Foreign-Owned Enterprise Law, and the Regulations for the Implementation of the Law on Chinese-Foreign Equity Joint Ventures.
The Company Law of the People's Republic of China is an overarching legal framework governing the establishment , operation, and dissolution of companies in China. It is complemented by the Law on Chinese-Foreign Equity Joint Ventures, the Law on Chinese-Foreign Contractual Joint Ventures, the Wholly Foreign-Owned Enterprise Law, and the Regulations for the Implementation of the Law on Chinese-Foreign Equity Joint Ventures :
The Law on Chinese-Foreign Equity Joint Ventures is a legal framework that governs the establishment, operation, and dissolution of equity joint ventures between Chinese and foreign investors. It is supplemented by the Regulations for the Implementation of the Law on Chinese-Foreign Equity Joint Ventures.
The Law on Chinese-Foreign Contractual Joint Ventures sets out the rules and regulations for the establishment and operation of contractual joint ventures between Chinese and foreign investors.
The Wholly Foreign-Owned Enterprise Law is a legal framework that governs the establishment and operation of wholly foreign-owned enterprises in China.
Finally, the Regulations for the Implementation of the Law on Chinese-Foreign Equity Joint Ventures provide additional details regarding the establishment and operation of equity joint ventures between Chinese and foreign investors. All of these legal frameworks are designed to ensure that foreign investment in China is conducted in a fair and orderly manner.
2. A Distinction between Foreign Office and Branch Office/Representative Office
Foreign companies must establish a legal entity in China in order to operate within the country.
This entity can either be a Wholly Foreign-Owned Enterprise (WFOE) or a Representative Office (RO).
A WFOE is a limited liability company established in China with 100% foreign ownership and is the most commonly used form of legal entity for foreign businesses to engage in commercial operations.
Representative Offices are not legal entities, but are instead an extension of a foreign company, and are limited to engaging in non-profit activities such as market research and promotion of their parent company's products. In short, it is similar to a branch office, being an entity established by a foreign company in China to engage in activities that are related to the core business of the parent company, such as research and development, or production. Foreign offices are subject to stricter regulations, including the need for approval from Chinese authorities, while branch offices are subject to more lenient regulations. Additionally, foreign offices are required to register with the Administration for Industry and Commerce, while branch offices are required to register with the local branch of the State Administration of Foreign Exchange.
3. The Joint Venture Agreement
In circumstances where you would be entering into a joint venture with a Chinese company as a partner, inevitably you should pay careful attention to drafting an agreement for a joint venture in China which requires careful consideration of the legal and business environment. The agreement should address key issues such as the structure of the venture, the ownership of intellectual property, the terms of the joint venture, the roles and responsibilities of the partners, and dispute resolution procedures. Additionally, special consideration should be given to any local laws that may impact the venture, as well as any potential tax implications. Finally, it is important to ensure that the agreement is comprehensive and clearly written, to avoid any misunderstandings or potential disputes in the future.
4. Setting Up Process
The process for setting up a branch office in China depends on the type of entity being established, and the purpose of the branch office. For example, a wholly foreign-owned enterprise (WFOE) requires a set-up process that is different from a representative office. Additionally, a branch office can be established for the purpose of engaging in commercial activities or non-commercial activities.
The process for setting up a branch office typically involves the following steps:
(1) selecting a suitable business scope;
(2) obtaining pre-approval from the relevant government authority;
(3) registering with the local Administration for Industry and Commerce (AIC);
(4) opening a bank account;
(5) hiring staff; and
(6) obtaining operating permits and licenses.
The process also requires the foreign company to first submit an application to the relevant Chinese government department. The application must include detailed information about the business, including the purpose and scope of operations, financial information, and the proposed legal structure. Once the application is approved, the foreign company must then register with the State Administration for Industry and Commerce (SAIC) and obtain a business license. Additional permits and approvals may be required, depending on the type of business. Once all necessary permits and approvals are obtained, the company can then set up its branch or foreign office in China.
5. A Note on the Income Tax Laws, Corporate Tax Laws and Capital Gains Tax
As an extension, foreign businesses operating in China must also be ready to comply with the country's income tax laws, corporate tax laws, and capital gains tax laws. The Chinese government has established different tax rates for different types of activities, and foreign businesses must take these into account when operating within the Chinese market.
Income tax in China is levied on both individuals and companies. Individuals are taxed on their worldwide income, while companies are taxed on income generated within the country. Companies are generally taxed at a rate of 25%, though this rate may be higher or lower depending on the type of activity and the location of the business. Corporate taxes in China are imposed on both domestic and foreign businesses. Companies are taxed at a rate of 25% on their income, as well as an additional local tax of up to 3%.
In addition, companies may be subject to additional taxes such as value-added tax and land appreciation tax. Capital gains tax in China is imposed on gains from the sale of assets, such as stocks or real estate.
The rate of capital gains tax on the sale of assets is 20%, though this rate may be higher or lower depending on the type of asset and the location of the business.
Foreign businesses operating in China must be aware of the country's income tax, corporate tax, and capital gains tax laws in order to ensure compliance. Failure to comply with these laws can result in hefty fines, so it is important to understand the rules and regulations and ensure that all taxes are paid on time.
Conclusion
If you are interested to set up such offices in China, our team of experienced PRC lawyers who are well versed in representing multinational companies are on hand to provide advice and assist you suitably. You can email me at brentyap@vikneshyap.com for further enquiries and discussion.