As China moves further and further into its role of being a global powerhouse, it is becoming more prevalent for US taxpayers to want to expand their business and/or open new business in China.
Although China’s corporate tax rate is somewhat higher than many other foreign countries, it is still significantly lower than the United States. Moreover, China has a very specific business entity structure that must be considered in light of a foreign businesses goals and objectives.
The following is a summary of China business entity formation followed by a brief summary of FATCA (Foreign Account Tax Compliance Act)
The most common business formation options available in China are as follows:
A JV is one of the more common types of business structures for global investment strategies. A joint venture is an LLC in which one party is a Chinese company and the other party is a foreign investor. The joint venture is limited to certain industries and the JV has significant complexities and operating the day-to-day business. The biggest hurdle with the joint venture is that it requires continual agreements between the foreign investor in the Chinese investor, which is not always work out as planned. Moreover, depending on the type of industry you operating, the law in China may require that the Chinese investor have final control over the decision.
As in many foreign countries, a representative office is an extension of the foreign business into China without the ability to sign contracts or generate revenue. Rather, the representative office is designed to provide for business and opportunity to advertise and market in China in order to develop contacts and improve the foreign business relations in China.
Wholly Foreign Owned Enterprise
This may be the most common and preferred type of business in China. With an WFOE, the foreign investor can maintain sole control over the business activities in China – as long as it is operating in an accepted industry. Unlike some of the other business structures, this type of structure is a limited liability company, which means the owners only liable up to their investment amount. Moreover, the rules and regulations are somewhat lax compared to other entities in that the money can more for easily leave China and back to the investor. Of course, this type of enterprise is not without its own headaches, and the WFOE does require a certain minimum investment amount.
Individually Owned (IO)
An IO is an individually owned business in China that is similar to a sole proprietorship. This type of business option will only be limited to individuals who are Chinese nationals. Depending on the type of business you want to operate in China, a individually owned business may be a good choice. The main issues negatively impacting the selection would be that the person is solely liable for the business operations and could be held personally liable for the debts and liabilities of the company. Moreover, the individual will be taxed at the personal income tax rates, which in China can reach as high as 45%.
A PE in China is a company owned by relatively small group of individuals, and the company does not have any ownership by the government. The company must obtain a business license, but does not require any approval from the Ministry of commerce and does not have a minimal investment requirement. Even though this type of business does not need to pay business income tax, the private enterprise is very limited in the type of industries it may operate.