Subsidiary Entity Set Up

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Entity Set Up

Global expansion into China generally means that you need to set up an in-country entity. However, by partnering with us you create the possibility to bypass this process and utilize our expertise. By using our PEO service, we take care of the complicated paperwork. Expanding into a new country is always an adventure, but we believe this adventure should be exciting instead of frustrating and time-consuming. Therefore, we have been supporting companies in over a hundred countries with their expansion plans.

In this guide, we will share which documents you need to establish an entity in China, but also where you will need to register your business address and company’s name. We will also break down the advantages and disadvantages of setting up an entity in China.

How to set up a China Subsidiary

First, choose the company type. Typically, foreign companies planning their move into the dynamic Chinese economy opt for opening a limited liability company in the form of a Wholly Foreign-Owned Enterprise (WFOE) or a Foreign-Invested Enterprise (FIE). Opening a branch or a representative office is another option. Incoming investors should research and select which region and cities are best suited to their expansion plans and business activities, particularly in reference to enterprise zones and free trade areas. The subsidiary is a legal entity entirely independent of the parent company and is incorporated in China as a local company. Various documents and procedures must be completed to set up the subsidiary. The application process is undertaken by a Foreign Enterprise Services Company (FESCO) – another complication.

Procedures include:

  • Verify and prepare to register the unique name of the company
  • Obtain a registration certificate for a new company from the State Administration for Industry and Commerce (AIC).
  • Provide details of the owners, nationality and location of the parent company and the planned activities of the subsidiary, with feasibility report
  • Appoint management board, which can comprise foreigners or Chinese nationals
  • Open business bank account and deposit minimum share capital, if applicable, and which will depend on local regulations or decisions from the State Council (not required in free trade zones)
  • Apply for a business license at the State Administration for Market Regulation (AMR), usually through a local office, which is a legal requirement for all Chinese companies
  • Provide and register Articles of Association with the AMR
  • Certain foreign investor information may need to be registered with the Ministry of Commerce (MOFCOM)
  • Register with the State Tax Administration to run payroll, income tax, VAT, and business taxes

What you need to set up a China Subsidiary

  • Articles of Association from the parent company with a statement of its intention to open a subsidiary in China, translated into Chinese by an accredited authority
  • Confirmation from the State Authority for Industry and Commerce that the proposed company name is unique in China
  • Registration certificate for a new company from the State Administration for Industry and Commerce (AIC)
  • Business license from the State Administration for Market Regulation (AMR), usually applied for through a local office and legally required for all Chinese companies
  • Provide any requested foreign investor information to the Ministry of Commerce (MOFCOM)
  • Proof that minimum share capital, if required and dependent on province and sector, has been deposited in a business account
  • Obtain permits and licenses specific to area of operation, such as pharmaceuticals, automotive and construction sectors for example
  • Register with the State Tax Administration to run payroll, income tax, VAT, and business taxes

Benefits of setting up a China Subsidiary

Specific advantages for a foreign company opening a subsidiary in China include not being responsible for the subsidiary’s debts or liabilities. Also, the foreign parent company’s financial statements and accounts do not need to be presented to Chinese authorities, while the subsidiary can operate using the local currency of exchange, the RMB. The subsidiary can operate under a different company name from the parent company and can pursue separate business interests and conclude its own contracts. The liability of the subsidiary’s shareholders is limited to their investment in shares. Subsidiaries operate under Chinese law in the same way as local companies and pay an Enterprise Income Tax (EIT) on corporate income at 25%. Other rates of 5%, 10% and 20% can apply to advanced technology companies and small enterprises. Tax-resident enterprises are taxed on their worldwide income. Shareholders are liable for income tax on dividends paid by the subsidiary from net profits.

Through its subsidiary, the parent company has the advantage of exploring the Chinese market and further afield among other Far East and Pacific Rim nations.

Other benefits for a subsidiary:

  • Easier to obtain regulatory approvals, loans and finance and enter into contracts with other Chinese and Asian companies
  • More impact with clients and suppliers, as subsidiaries imply more permanency than branches
  • Employees feel there is more stability and job security than from being with a branch
  • In the wider commercial sense, opening a subsidiary makes a statement of a company’s commitment to expanding into foreign economies, in this case the opportunities offered by the Asian economy

Chinese Subsidiary Laws

The over-riding legislation applying to all companies is the Company Law of the People’s Republic of China (PRC). Wholly Foreign-Owned Enterprise (WFOE) limited liability companies and Foreign-Invested Enterprises (FIEs) have been governed by the Foreign Investment Law 2019 (FIL) as of January 1, 2020. The FIL brings in new laws for organizational structure and operating procedures. These replace regulations that were previously codified under three separate pieces of legislation. China’s Company Law does not set minimum levels for share capital. This is decided at provincial level based on company size and sector of operations. The Securities Law of the PRC also imposes rules on shareholders, directors, and management in terms of corporate governance. Guidelines for a Wholly Foreign-Owned Enterprise and Foreign-Invested Enterprises:

  • Registration and Documentation
  • Before registering, select a unique company name and designate a finance officer.
  • Obtain approval from the Ministry of Commerce and State Administration of Industry and Commerce, to receive a business license. Branch offices, which remain wholly owned by the parent company, need not register with the Ministry of Commerce.
  • Obtain business license from the State Administration for Market Regulation (AMR), usually applied for through a local office. This is a legal requirement for all Chinese companies.
  • Articles of Association from the parent company with a statement of its intention to open a subsidiary in China, translated into Chinese by an accredited authority.
  • Confirmation from the State Authority for Industry and Commerce that the proposed company name is unique in China.
  • Registration certificate for a new company from the State Administration for Industry and Commerce (AIC).
  • Registration with the relevant local Social Insurance Bureau and Housing Fund Bureau.
  • Registering employees’ contracts with the tax and social security authorities.
  • If employing foreigners, accounts need to be registered with the Services System for Foreigners Working in China along with applications for Foreigner’s Work Permit and the Notification Letter prior to employees applying for their work visa.
  • Registration certificate for a new company from the State Administration for Industry and Commerce (AIC).
  • Provide any requested foreign investor information to the Ministry of Commerce (MOFCOM).

Accounts and Taxation

  • Register with the State Tax Administration to run payroll, income tax, VAT, and business taxes.
  • China’s Company Law does not set minimum levels for share capital. This is decided at provincial level based on company size and sector of operations.
  • Subsidiaries operate under Chinese law in the same way as local companies and pay Enterprise Income Tax (EIT) on corporate income at 25%. Other rates of 5%, 10% and 20% can apply to advanced technology companies and small enterprises.
  • EIT returns must be filed quarterly and annually, with VAT returns files monthly.
  • Tax-resident enterprises are taxed on their worldwide income.
  • Shareholders are liable for income tax on dividends paid from the subsidiaries’ net profits.
  • Filing annual employee tax returns between March 1 and June 30 of the following year, in Chinese and with accounts in local currency, the yuan.

Management

  • A limited liability company can have between one and 50 shareholders, who generally have no personal responsibility for the debts or liabilities of the subsidiary.
  • Shareholders or directors of foreign subsidiaries are not required to hold annual general meetings, although one director’s meeting a year is normal.
  • Amendments to the Articles of Association must be approved by more than two-thirds of shareholders.
  • A director or executive director, general manager and supervisor are required.

Take a faster route into the Chinese economy

The cost-effective and time-saving alternative to the expensive and lengthy process of establishing your subsidiary in China is to work alongside a Professional Employer Organization (PEO) and Employer of Record (EOR) such as Bradford Jacobs. We have over 20 years’ global experience and our in-country specialists will steer you through the complexities of setting up operations by locating and onboarding new local employees, then ensuring compliance with all employment and tax regulations. You retain day-to-day control of your staff – who are in place and operational within days rather than the months it could take to incorporate a legal entity. There is no reason for international borders to stand in the way of your international expansion. Contact us today for more information!

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