Possible legal forms for foreign investors to invest in China include: equity joint venture, contractual/cooperative joint venture, wholly foreign owned enterprises (WFOE), branch of foreign enterprise, Chinese holding company (CHC), regional headquarter (RHQ), and representative office (RO). Foreign investors may participate in business in China through merger & acquisition (M&A). A particular legal form is sometimes mandated by regulations. For instance, foreign life insurers are allowed to do life insurance business only by setting up equity joint ventures with their equity up to 50% of an equity joint venture. In addition, there are specific regulations on individual forms.
In recent years, more and more foreign investors have adopted WFOE, mainly because they can fully control management of such enterprises. The CHC normally functions as a parent company, offering certain shared services to its Chinese subsidiaries, but its scope is restricted with respect to financial services. The RHQ usually functions as a management company providing services to its affiliates. In recent years, one popular channel through which foreign investors directly invest into China is acquisition of the equity of an existing local Chinese company, upon approval of competent Chinese authorities. Some foreign investors particularly use this type of transaction to target those state-owned enterprises with outstanding assets (e.g. trademark) or sales network.
The legal form of a foreign investment is thus often based on management considerations. However, tax planning is still relevant as tax treatments differ between these forms. Many examples can be given, for instance, import of certain assets into foreign invested enterprises (FIEs) is exempt from import VAT and import duty, while ROs would not enjoy this privilege.
A limited liability company shall be established by not more than 50 shareholders that have made capital contributions. The registered capital of a limited liability company shall be the total amount of the capital contributions subscribed to by all the shareholders that have registered in the company registration authority. If any law or administrative regulation prescribes a relatively higher minimum amount of registered capital of a limited liability company, the provisions of that law or administrative regulation shall be followed.
A general partnership enterprise may be formed by private corporations. The partners shall be responsible for the properties of the partnership enterprise and bear unlimited, joint, and several liabilities for the debts of the partnership enterprise.
A limited liability partnership enterprise shall be formed by general partners and limited partners. The limited partners bear the liabilities for its debts to the extent of their capital contributions. The name of a limited partnership enterprise shall be indicated by the words “limited partnership”.
A limited partner may make capital contributions in money, in kind, or intellectual property right, land use right or other properties. However, a limited partner can’t make capital contributions in labour services. They shall make full payment of the capital contributions within the time limit as stipulated in the partnership agreement. If they fails to do so, they shall be obliged to make up the payment and shall bear the liabilities for breach of contract to the other partners. A limited partner may not execute the partnership affairs, nor may they represent the limited partnership enterprise before outsiders.
A branch of a foreign enterprise is not an independent entity with a legal enterprise status. An RO which has no legal enterprise status is limited to engaging in non-profit seeking activities, such as market research, providing potential customers of its home company with product information, etc. Foreign companies often sell products by managing distribution through a network of ROs in China. An RO would be subject to Chinese taxation if its activities exceed the legal limits for this form.
An independent company, operates as a Limited Liability Company.
A limited liability company that may sell shares to the public in China, and has limited liability.
A Joint Venture can be classified into equity joint venture and contractual /cooperative joint venture. Both require cooperation with a Chinese partner. Subject to the approval of the appropriate foreign investment authorities, a contractual joint venture can be structured with unlimited liability of its partners, and thus it can enjoy partnership status for tax efficiency.