Establishing operations in China
Types of investment
The basic types of investment structure applicable in China are:
1. Representative office
A representative office is typically a small office that supports sales or purchasing in China or has a technical support or market research role. These are easy to establish and can be relatively low in cost to run, particularly if you employ Chinese staff.
A representative office cannot directly trade in goods or receive income from Chinese customers. No minimum investment capital is required. Representative offices are usually a cost centre and pay only limited tax.
2. Wholly-owned trading company
A wholly-owned trading company is a more complex structure than a representative office. The investor can establish their own warehouse and showroom for distribution of products. They can receive funds from Chinese buyers and repatriate these funds to Australia.
Minimum investment capital is typically around USD $140,000. If established in a free trade zone, imported goods are not subject to import duty until they are sold to the Chinese customer.
3. Wholly foreign-owned enterprises (WFOE)
This structure is used typically for companies wishing to establish a manufacturing or retail business. Minimum capital requirements for small manufacturing activity are generally quite low. Companies will usually be subject to tax at 25 per cent (China abolished favourable tax holidays and rates for foreign investors in January 2008).
These structures offer a higher degree of autonomy and control over joint ventures and offer greater protection for intellectual property. A small feasibility study, outlining the scope of the proposed operation, is required by the Chinese authorities.
4. Joint venture
Joint ventures generally take the form of an equity relationship between two or more parties, in which the parties contribute cash, plant, buildings and intellectual property at an agreed percentage.
Advantages of joint ventures over WFOE are that investment funds required may be less and you gain access to your partner’s business networks in China.
Disadvantages include loss of control, less ability to protect intellectual property and challenges with extracting yourself from the venture if the relationship with your joint venture partner goes sour. These ventures are subject to a 25 per cent corporate tax and a feasibility study is required for registration.
More information
VECCI Global
Ph: 03 8662 5363
Fax: 03 8662 5201
Email: vecciglobal@vecci.org.au