Establishing a China Business Entity

Managing a business in China is like managing JELLO on a hot summer day. The rules are constantly changing, the ethics are fluid, and “getting your hands” around the best path to success is difficult.

Chinese enterprises that are owned by foreigners or have foreign participation are described as Foreign-Invested Enterprises (FIEs). FIEs can take the form of Representative Offices (RO), Wholly Foreign Owed Enterprises (WFOE) or Joint Ventures (JV). Each of these entities has specific capitalization, funding, profit remission, applicable labor laws, operating practices, and corporate tax obligations defined under Chinese law.

In order to register your business you will need a local attorney, a registration agent, an accounting firm, and a business consultant experienced in creating business entities in your target China industry sector. The business consultant should help you in developing a China entry strategy, sourcing and managing support resources, handling logistics, purchasing office equipment, furniture, and if necessary, contracting for office renovation. In parallel with your company registration, you should be making arrangements for your facility, business equipment, and the required external services necessary to run your business.

As an expatriate manager of a foreign operation in China, you will find the success of your operation depends on your sales manager and your chief financial officer (CFO). Your CFO should be the first position that is filled in your operation. You and the CFO should set up the finance and accounting systems (F&A systems) necessary to operate your operation. These F & A systems will be your primary management tools for your operation. Foreign Invested Firms operating in China will have to maintain accounts for the Chinese government, and assuming these firms our multinational companies, for their home country. Company accounting practices, country standards, and financial IT systems will all determine this process.

In 1980 China accepted the Generally Accepted Accounting Principles (GAAP). In January 1, 1997 The China National Accounting Institute (CAS) was founded .On February 5, 2006 China’s Ministry of Finance announced new auditing and accounting standards revised according to the International Financial Reporting Standards (IFRS) for all public listed companies.

Both WFOEs (Wholly Foreign Owned Enterprises) and JVs (Joint Ventures) get tax advantages in China. JVs were popular because they enabled foreigners to participate in certain protected market segments. Presently WFOEs are allowed in most sectors and have become the business entity of choice.

Foreign enterprises utilize a variety of methods to move funds from China to their parent company. These methods include: dividend remittance, royalty payments, transfer price, and fronting loans. A practice called unbundling relies on combining more than one of these methods. By combining methods no one method piques the interest of the host country. A WFOE is free to select the funds remittance method that best serves the parent organization. A JV local partner may limit the ability of the foreign partner’s remittance methods.

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