According to Reuters “China was the largest recipient of foreign direct investment in 2020”. China’s rapidly expanding consumer class is giving foreign entrepreneurs new reasons to expand their operations in China .

Starting a business in China differs from starting a business in other Western countries. Because of the differences in culture, language, and the complexities of local policies, laws, and business culture, it is important for foreign investors to understand and know the fundamentals of doing business in China in order to avoid risks.

For more details, see 8 Steps to Starting a Business in China, which will walk you through the lengthy procedures needed to start a company in China.

Steps:

Step 1. Conduct China Market Research and Make Your Plan.

Step 2. Select a Location & City to Start Business.

Step 3. Test the China Market – Using a China PEO & Employment Agency.

Step 4. Choose a Company Structure/Type.

Step 5. Create Your Company/Legal Entity

Step 6. Opening Corporate Accounts.

Step 7. Protect Your Intellectual Property-Trademark.

Step 8. Start on Monthly and Yearly Administration Operations.

1. Conduct China Market Research and Make Your Plan.

When foreign investors want to starting a business in China, conduct market research prier is very important to knowing the market. While researching and learning, you will determine what the best opportunities available are, where are your target clients, resources, opportunities, risks.

2. Select a Location & City to Start Business.

Furthermore, international investors must choose promising locations in China to launch their startups. Despite the fact that China is big and has over 600 cities, there is still a major difference between them. According to Chinadaily, “the first-tier cities in China are Beijing, Shanghai, Shenzhen and Guangzhou, generally have the best business environment.”

Shanghai – Financial Center

Shanghai is a popular destination for foreign investors, and it is well-known as an international port with the highest GDP of all mainland Chinese cities. “Shanghai Tops Forbes China Ranking of Best Cities For Business”, according to a survey published in the latest issue of Forbes China. The city’s spirit, glamour, and transparency are attracting an increasing number of international investors.

China International Import Expo (CIIE) is the world’s first import-themed national-level expo, which began in Shanghai in 2018 and is expected to draw more foreign entrepreneurs looking to start businesses in China.

Shanghai Free Trade Zone (SFTZ) is launched in 2013 and hosts more than 50,000 foreign companies. The following are some of the advantages of doing business in the Shanghai Free Trade Zone:

  • Tax incentives for trade companies
  • Simplified customs procedures
  • Fewer industries are restricted from foreign investment.
  • Easier foreign exchange controls
  • Simpler company formation process
  • Financial supports to financial institutions
  • Attractive polices for talents working for SFTZ company
  • Industry business centers
Beijing- Capital City

As the capital city, Beijing has quickly become one of the world’s most modern hubs for doing business. Beijing is the political center of China as well as the country’s science, educational, and cultural hub.

Shenzhen & The Great Bay Area

Shenzhen has become one of the best places in China for setting up a new business, especially in the technological industry. The city is considered to be one of the top countries to invest due to investment-friendly climate with a lot famous company like Tencent, DJI, Huawei, BYD.

Shenzhen Special Economic Zone (SEZ) were granted free-marketed oriented policies and flexible government measures to attract foreign investment, offer subsidies for the establishment of R&D center, startups, establishment of headquarters, financial enterprise headquarter, professional service company. corporate talents.

3. Test the China Market – Using a China PEO & Employment Agency.

Establish a company in China is time consuming and costly, after the establishment, you also need to spend extra efforts and budget to maintain it. If your business is not good, it’s also great difficult to close a business in China. The smart way of starting business in China is before you officially establish a long-term presence in China, we highly suggest foreign investors to test the China market in the initial stage by hiring employees in china.

You can hire employees working for you in China before you decided to set up a company. You can hire your China representatives, sales team, consultants to be your first team to test and experience the Chinese market. Such hiring and employment shall go through a China PEO & Employment Agency. The PEO & employment agency will sign a local compliance labor contract with the employees you selected, acting as the employer of record, and handle the employee on-boarding, monthly employee payroll, tax, social insurance to ensure the employment is compliance with local law.

JSC China PEO & employment solution enables foreign companies hire employee in China without a legal entity to test the China market in an easy and flexible way. If business is going well and foreign investors have high faith in the Chinese market, they can decide to officially set up a company after the test period. However, if the company is not performing well, foreign investors can easily exit the Chinese market by notifying the China PEO & employment agency to terminate all employee relationships.

4. Choose a Company Structure/Type.

In China, you have different options to choose if you would like to set up legal entity. Choosing the right company structure for your company is a crucial move for any company looking to join the Chinese market. China WFOE, representative office, and joint venture are the most common entity forms among foreign companies.

Wholly foreign-owned enterprise (WFOE)

Wholly Foreign Owned Enterprise (WFOE or WOFE) is a limited liability company wholly owned by the foreign investors. It is the most welcomed entity type as it gives full autonomy and control to the foreign parent company. Three types of WFOE are most common in China which is consulting WFOE, trading WFOE, Manufacturing WFOE. It is very important to know that different business scope require different pre-license or post-License application. Only when the company obtained such license, the business is officially allowed to operate in China.

Representative Office (Rep Office & Ro)

Representative office is also known as rep office, ro. A rep office is a local Chinese arm of a foreign company. It allows a foreign company to have a physical presence anywhere in Mainland China to do market research, networking activities, and also allows them to send foreign staff here to undertake business activities as the representatives.

However, Representative office is not a registered company in China, so Ro office in China is not allowed to engage any profit seeking activities. Ro is also not allowed to hire employee directly and sign labor contract, the only feasible option is hiring through the PEO & Employment agency. WFOE is able to hiring employees in china directly.

Joint Venture (JV)

Joint venture is also named as JV, it is a limited liability company that is formed through a partnership between a foreign-invested enterprise (FIE) and Chinese investors, who share the costs, shares, liabilities and the management of the joint venture. In China, a lot of business are not allowed for WFOE to operate, so many of the foreign investors choose to form a JV with their Chinese partners to legally operate the busines. Establishing a JV in China is complex, time consuming, cost is also very high, usually a law firm shall be involved.

5. Create Your Company/Legal Entity

Once you selected your company type, you can start to prepare the required documents to form the entity. It’s better for you to engage a experienced company formation vendor in China to complete all the process which is more fast and convenient for foreign investors.

Below are the general WFOE Incorporation Process & Timeline for your reference.
StepsGovernment Processing Time
1Rent office spaceDepends on Client
2Apply for name approval and registration1 working day
3Apply for a “5-in-1” business license from AIC7 working days
4Carving chops for the new company1 working day
5Customs and import-exit registration – Only trading WFOE10 working days
Required documents for forming a WFOE:
  • General registration information: including company name, shareholders, business scope, registered capital, etc.
  • Certified Notarization documents for Business License of investor
  • Translated Certified Notarization documents for Business License of investor
  • Legal representative passport/ID
  • Finance manager’s passport/ID
  • Supervisor’s Passport/ID
  • Liaison Person’s passport/ID
  • Controller of the investor’s passport

The actual registration process and required documents are differ from city to city, and may update by the local government. For more details about regulations for starting a business in china, the Chinese government has set up an excellent English-language resource at their Ministry of Commerce website.

6. Opening Corporate Accounts

After you have completed your company registration and obtained your business license, you must open your mandatory corporate accounts before you can officially begin doing business in China.

Bank Accounts

There are two kinds of banks foreign investors can choose. Local banks including but not limited to China Merchants bank, Bank of Communications, Agricultural Bank of China, Bank of China, Industrial and Commercial Bank of China, China Construction Bank. Setting up a local bank required the chief representative to be onsite to open it. A local bank can easily connect to the government tax and benefits account which allow auto deduction. Popular foreign banks in China like HSBC, CITI may not require the chief representative to be onsite, however, the bank fees are more expensive and might required more documents, most importantly, most of the foreign banks are not allowed auto payment by the tax and social benefits bureau.

Social Insurance & Housing Fund Account

Before you started hiring a Chinese employee in China, you shall open your company social insurance and housing fund account after your obtained business license and complete your bank account registration. These two accounts are used to complete the on-boarding and off-boarding process required by the local social security bureau and contribute the mandatory monthly social insurance and housing fund through the account.

Corporate Tax Account

After company registration complete, each company’s finance supervisor is required to go to the local tax bureau in person to complete the company tax account and corporate tax rate confirmation.

7. Protect Your Intellectual Property-Trademark

Intellectual property (IP) is a longstanding, critical concern for companies doing business in China. There is no formal protection for your intellectual property in China if you hasn’t register your corporate patents, copyrights and trademarks yet. Thus, it is very important for foreign companies to register your IP as early as possible after you start doing business in China.

8. Start on Monthly and Yearly Administration Operations

Doing business in China required WFOE to complete mandatory operations based on local policies, which primarily covered the sectors of human resources and employment, as well as tax and accounting. You can complete the below tasks in-house or outsource them to a payroll and employment agency once you found the candidates.

  • Monthly payroll: salary in China is calculated and released to employees on the monthly basis.
  • Tax Declaration: individual income tax shall be declared by employer monthly. Corporate income tax is declared quarterly, while VAT shall declare monthly.
  • Mandatory Social Insurance & Housing Fund Contribution:
  • Book-keeping
  • Annual tax return & Audit

To conclude, starting a business in China can be a complex process, doing comprehensive research and engaging experienced service provider is critical to ensure the China market entry is smooth and compliance.

Frequently asked questions for payroll and hiring employees in China.

No, you do not need.

If you don’t have a company in China, you can hire employees through PEO service through the employment agency in China.

a) Hire employee through the PEO/employment service.

If you don’t have a legal entity in China, this is the only compliance way to have employee working for you in China.

b) Hire employee under WFOE.

If you already set up a WFOE in China, you can sign the labor contract with employees directly. You can either choose to handle their payroll land benefits yourself, or you can choose to outsource.

c) Hire employee under representative office (Ro)

Representative office in China is not allowed to hire employees directly. The only compliance way is hire employees through labor dispatch agency under PEO service

PEO refers to a professional employment organization, in China it’s also called employee outsourcing, labor dispatch. Foreign companies can hire staff in China through a PEO agency without setting up a legal entity in China.

Severance payment in China is based on the number of years employee has worked for the company.

Each full year employee worked for your company, one month salary shall be paid as severance payment.

For the working periods that are less than 6 months, half month salary shall be paid.

If employee’s monthly salary is higher than 3 times local average monthly salary, each year of the severance payment compensated shall be 3 times local average monthly salary.

If employees are in the probationary period, both employee and employer shall give 3 days as notice period for termination.

After probationary period, both employee and employer shall give 3o days as notice period for termination.

If employer need immediate termination, employer shall compensate one month salary.

No, You shall have a company registered in China to sign a written labor contract with each of your employee.

In practice, employer will sign a fixed term contract with their employee. However, when it goes to the third time renewal of the contract, then the contract becomes to a permanent contact.

Sign a two years or three years contract is more common in China.

Labor contract in China shall be at least in Chinese, and including but not limited to:

 Company details including full name, address and legal representative or person in charge.

 Employee details including full name, ID number, address.

 Term of the employment contract; (E.g., 2 years, 3 years…).

 Position (job title), location(city), working hours, holidays, leaves.

 Package: gross salary, bonus, commission, social insurance, other benefits.

 Occupational safety, and occupational hazard prevention.

 Other terms which laws and regulations required.

You need to set up a company in China and then set up a separate Social Insurance and Housing Fund Account. After the company has been set up, you can contribute the benefits to the employees who have signed a contract with you.

The most popular job portals in China is: Zhaopin.com, Liepin.com, zhipin.com. However, these three job portals only accept a registered company in China.

If you don’t have a company in China, you can search candidates through Linkedin.com or engage a headhunting or recruitment firm to help you search the candidates.

In China, employees’ individual income tax (personal tax) shall be declared monthly by the employer, and yearly by employee themselves.

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