China is being considered as one of the big potential markets in the world. As a foreign investor, doing business in China is not an easy thing considering the difference of the political, language, cultural, etc. This article gives a guidance to foreign investors in terms of the six most important things they should consider or understand before they officially start their business or invest in China.
1. Analyze if you need to set-up a company in China or not?
2. Test China Market – Start a business in China without setting up a legal entity
3. Setting up a legal entity in China
4. Understand China Hiring Practice
5. Different Tax obligations for China WFOE
6. Trademark Registration in China
For most of the foreign investors, when they are thinking about investment or doing business in China, they think of setting up a company in China to begin. Company Formation in China is quite complex and time consuming as it involves a lot of formal documentation that could take months to be completed by the foreign investors. Even after company establishment, foreign investors need to complete all the tax declaration on time to ensure the legal compliance. Therefore, establishing and maintaining the corporate operation in China is also not an easy task. Many foreign investors engage a local service provider who can assist them in handling the corporate formations along with dealing with the Tax & Accounting issues since they are not familiar with the local policy.
On the one hand, where establishing a company is not easy, closing a company, on the other hand involves even more complexities than opening. Many foreign investors might think of closing their company just after a few months of operation due to company losses, but closing down business in China is not so easy as simply stopping all the operations and abandoning the company.
Therefore, foreign investors should carefully consider the point if they really need a company setup in China to start their business or not when doing business in China. Before choosing a legal structure, one should think about the different alternatives that exists. For the initial stage, where you just want to test the China market for conducting market research, hiring employees through a local PEO/EOR agency in China without the need to establish a legal entity is the most viable and cost effective method to enter the market. If you are interested in selling your products directly in China, you can then consider of setting up a company in China.
As mentioned before, foreign investors can also choose to doing business in China without setting up a WFOE or RO in the initial stage of entry into the Chinese market. For such a scenario, companies can hire employees through PEO/EOR service to hire staff for conducting the market research, marketing, sales assistance, or client assistance to their oversea entity. This is a cost effective and a smart way for foreign investors for entry into the China market in the initial stage.
Through PEO/EOR agencies, employees are hired and managed on behalf of the company and everything from payroll setup, drafting contracts and legal matters are handled by these agencies so that foreign companies can access and test the market in a flexible and fully compliant manner.
While setting up legal entities in China may require a great deal of time and investment, labor dispatch and PEO solutions are the best alternatives and the most popular options for hiring local employees in China as it requires minimal cost and flexible hiring process.
After a couple of months of doing business in China under this model, foreign companies can then choose to set up a WFOE in China; or they can leave the Chinese market by terminating these employees through the HR agency if they feel the business cannot survive the market. Since both; hiring and termination is handled by the HR agency, it gets very convenient and flexible for foreign companies not only to enter but if required, to leave Chinese market as well.
If you decide to create a legal presence in China, you need be aware of the many legal structures available to get your business up and running in China. The five categories of entities in China are listed below.
Understand more about Company Registration in China.
The general actions and paperwork required to incorporate a legal corporation in China are listed below. Foreign investors should be aware that the documentation may differ from one location to the next, so it is highly recommended that they choose an experienced local service provider or law firm to manage the setup when doing business in China. Extra documentation must also be provided if a particular license is required in a specific business.
Registration Data: This includes, but is not limited to, proposed Chinese name list, registered capital, registered address, company scope, and shareholders.
Notarized documents for the investor’s business license.
Certified Notarization documentation for the investor’s business license were translated.
Legal representative passport. Finance manager passport. Supervisor passport. Liaison Person passport. Investor controller passport.
No matter you decided to set up a company in China or hire employees through HR agency when doing business in China, you should also understand some important hiring practices in China to ensure that your hiring in China is compliant with the local regulations.
Below mentioned are some of the important points that foreign employer should understand.
When it comes to hiring employees in China, the employment/labor contract is the first priority which should be in written and signed with each employee in a timely manner.
The employment contract must include the below mentioned information. In case of an expatriate employee, it is suggested that the contract should be bilingual (English and Chinese).
It is critical to understand how much you must pay to hire an employee in China when doing business in China. The structure of your monthly employee hire cost, as shown below, should be very clear and unambiguous.
Read more about How to Calculate Employee Salary in China.
Mandatory benefits-Social Insurance and Housing Fund
Because of mandated benefits, the hiring cost of an employee in China may be 35-40% higher than the person’s gross compensation.
The Chinese Social Security System is made up of five mandatory insurance schemes (pension fund, medical insurance, industrial injury insurance, unemployment insurance, and maternity insurance) as well as a housing fund (only applicable to Chinese employees).
Learn more about China social security system, Complete Guide on China Social Security System.
In China, mandatory benefit contribution policies are very complicated with each province, cities having their own contribution policies and bases. As an HR company, especially the foreign ones, should be very clear and stay updated about the local policies where their company has the presence.
The central government enacted China’s social security law, but local governments are in charge of administration and detailed specifics. For example, the employee and employer contribution rates and bases differ depending on the local jurisdiction and are subject to annual modifications and reforms.
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