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Foreign Investment in China
China is located on the west coast of the Pacific Ocean and eastern Asia. It is separated by the Yellow Sea and the East China Sea, facing South Korea, Japan, the Ryukyu Islands, and the Philippines across the sea. To the south, it is separated by the South China Sea, facing Indonesia, Malaysia, and Brunei. China is the world’s second-largest economy and actively participates in various free trade agreements, including the World Trade Organization (WTO), Free Trade Agreements (FTA), the Eurasian Economic Union, ASEAN Plus Three, etc. In November 2023, China became a member of the Hague Convention, and for countries that are the members of Hague Convention, documents related to investment in China only require to be Apostilled.
Major Types of Entity
There are four major types for foreign investment in China:
| 1. |
Wholly Foreign-Owned Enterprise (WFOE) is a limited liability company. The foreign investor has full managerial and operational control over the business. The WFOE has been the most popular investment vehicle to conduct business in China for foreign investors. |
| 2. |
Joint Venture Company is a limited liability company jointly set up by both Chinese and Foreign investors (usually hold over 25% shares). Joint Venture Company could engage in a broader range of activities and sectors than Wholly Foreign-owned Enterprises (WFOEs). |
| 3. |
Contractual Joint Venture Company (CJV) – the contract specifies all issues regarding the terms of cooperation, management and business operations of the venture. In a CJV, the foreign company typically provides the advanced technology and required funds, whereas the Chinese party offers the land use rights, factory buildings, necessary facilities, and occasionally a certain amount of capital. |
| 4. |
Representative Office – to carry out non-profit activities relating to the business of the foreign enterprise concerned. A representative office is not a separate legal entity. |
Major Taxes in China
For encouraged industries located in western regions (such as Guangxi, Chongqing, Sichuan, Yunnan, etc.), a preferential tax rate of 15% is applied to corporate income tax until December 31, 2030.
The standard value-added tax (VAT) rate is 13%, with the ability to offset input and output tax amounts. However, for small-scale VAT payers, a 3% tax rate is applied, but the input and output tax amounts cannot be offset against each other.
① Shanghai City
CIT - Corporate Income Tax
PIT - Personal Income Tax
WHT - Withholding Tax
To further support the development of "small low-profit enterprises", which meeting the following three conditions: annual taxable income not exceeding RMB 3 million, the number of employees not more than 300, and the total assets not over RMB 50 million, the inclusive tax reduction policies below will be implemented:
| 1. |
The VAT is levied at 1%. If the monthly sales is less than RMB 100,000 (inclusive), the VAT is exempted. |
| 2. |
The corporate income tax rate for micro and small-sized enterprises is 20%. Until December 31, 2027, a two-level system of preferential tax rates is adopted, with the following rates:
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Example: small low-profit enterprises with annual taxable income of 2.4 million, the corporate income tax = 1 million*25%*20% +(2.4 million-1 million)*50%*20%
Employment
According to China’s “Labor Contract Law”, employees must sign a labor contract within one month of hiring. The contract should specify company rules and regulations, as well as matters related to labor remuneration, working hours, rest and leave, labor safety and health, insurance benefits, employee training, labor discipline, and labor quota management.
Employees who have worked for 1 year but less than 10 years are entitled to 5 days of annual leave; those who have worked for 10 years but less than 20 years are entitled to 10 days of annual leave; and those who have worked for 20 years or more are entitled to 15 days of annual leave.
The "five insurances and one fund" refer to the coverage of China's social insurance system. The "five insurances" are mandatory social insurance, including pension, medical, work injury, unemployment, and maternity insurance. The "one fund" refers to the housing provident fund, which is not mandatory but commonly paid by enterprises. The employer's contribution to social insurance varies by city, including the housing provident fund, with rates like 20%-21.98% in Dongguan, 33.66%-35.02% in Shanghai, and 29% in Suzhou.
Land Ownership
In China, land ownership belongs to the state and collective. When land is granted for use, different terms apply depending on the type of development. The maximum term for residential land use rights is 70 years, for industrial buildings and comprehensive use land it is 50 years, and for commercial building land it is 40 years.
Foreign investors can establish factories by purchasing land use rights and constructing their own factory buildings, or by leasing land and factory buildings. When foreign investors purchase land for self-built factory buildings, they can sell or transfer the land use rights within the term of use, and pay a land VAT of 30%-60% on the appreciated value.
The income obtained from the transfer of state-owned land use rights is reduced by the balance of deductible items, which include: the amount paid for obtaining land use rights, the cost of land development, and taxes and fees related to the transfer of land use rights.
Company Establishment Regulations
Company Name: should include the regional name (city of location), serial number, industry, and organizational form. For example, "Shanghai Power Point Technology Development Co., Ltd." or "Beijing Power Point Trading Co., Ltd." Company names prefixed with words like "China," "Chinese," "Central," etc., are subject to strict scrutiny according to regulations. Company names are approved by local industry and commerce bureaus, and companies in different regions and industries may use the same serial number.
Common Organizational Forms for Companies: include "Limited Company," "Limited Liability Company," "Joint Stock Company," "Joint Stock Limited Company," etc.
Registered capital: since March 2014, China has implemented a system of subscribed capital registration and abolished the minimum registered capital requirement, and there is no time limit or requirement for shareholders to fully pay up their shares. The "Company Law" was amended on December 29, 2023, and came into effect on July 1, 2024, requiring shareholders to fully pay up their subscribed capital within 5 years of the company's establishment.
Total investment: Companies can set a total investment amount. The difference between the subscribed capital and the total investment amount can be borrowed from shareholders, with the proportion in compliance with national regulations.