You’ve done your market research, you’ve set out your marketing strategy and you’re ready to start selling to Mainland China. The next step is to determine whether you need an entity in Mainland China in order to actually start selling, and if so, what structure suits your business best. Below, we’ll discuss the various options you have as a business owner and their pros and cons.
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Do I need to incorporate a company in Mainland China?
If you are testing the waters and don’t plan to have staff on the ground, you may not need a local entity.
If you are selling B2C via an eCommerce marketplace, such as JD.com or T-Mall, you can start selling via your foreign entity without incorporating in Mainland China. The marketplace will arrange the payment back to a bank account in your home country and you don’t have to worry about localisation and integrating with payment gateways. You may, however, consider incorporating an entity in Hong Kong, as there are various benefits of re-exporting your products to Mainland China from Hong Kong, and setting up an entity in Hong Kong is much less costly and more straightforward than in Mainland China.
Similarly, if you’re selling B2B via distributors, it is not strictly necessary to have an entity in Mainland China. As long as you find local distributors in Mainland China who are experienced and can obtain the relevant import licences and distribute your product or services locally, they can contract directly from your foreign company. However, due to Mainland China’s capital controls it may be more difficult for buyers to pay you if you do not have a local entity and local bank account.
Lastly, in some cases it may be legally required to open a company in Mainland China to start selling to the local market, for example if you are operating in a regulated industry.
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Benefits of having a local entity
So, while in many cases it is not absolutely necessary to incorporate a company in Mainland China, you probably want to consider it if you plan to make a big push into the market. Some of the main reasons why foreign businesses decide to open a company in Mainland China are:
- You can hire staff in Mainland China to really drive growth, and your clients will know they’ll have support in their own country and language.
- It may be easier to sell to certain sectors that prefer to buy from local businesses.
- You can issue fapiaos (local tax invoices) which means that your customers can now deduct the costs they incur when buying from you as business expenses.
- Having a Chinese entity will show to your (potential) clients and business partners that you are committed and serious about doing business in Mainland China.
3) What type of local entity can I set up?
Next, you will need to decide what type of entity you want to incorporate. You could opt to open a joint venture, but the most common setup for Western businesses today would be to set up a Wholly Foreign Owned Enterprise (WFOE). By incorporating a WFOE and tying it to a parent company overseas, you will maintain full control over the company and you will also be able to repatriate profits, given that you have the right documentation and have paid the relevant taxes.
Now, there are two main routes that entrepreneurs would typically take when setting up this entity and we’ll discuss the advantages of both options in the next part of the article.
4) Setting up a WFOE via your existing entity
Say, you’re a UK-based company and you’ve got your operating company in the UK. One way to set up your new Mainland Chinese entity is to make it a subsidiary of your UK company.
Pros:
- You only have to incorporate one new entity (the Chinese WFOE)
- You will only have to worry about legal maintenance and accounting for one new entity (the Chinese WFOE)
Cons:
- You cannot benefit from special arrangements between Hong Kong and Mainland China outlined below
5) Setting up a WFOE via a Hong Kong entity
Another common option for businesses in the West is to first incorporate a company in Hong Kong and then set up the Chinese WFOE as its subsidiary. In fact, the amount of investment into Mainland China via Hong Kong entities is ten times as high as its closest contender (Singapore).
Pros:
- Hong Kong has a preferential rate when it comes to withholding taxes for repatriating profits: 5% as opposed to 10% for many other jurisdictions.
- Corporate documents of the parent company only need to be notarised but not legalised. The latter being a lengthy and more costly process.
- The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), a free trade agreement between Hong Kong and Mainland China, makes it easier and cheaper to export goods and services from Hong Kong into Mainland China.
Cons:
- You have to incorporate an additional entity in Hong Kong, costs typically starting at US$650
- You have to make sure to comply with local regulations for your new entity in Hong Kong. For a Hong Kong entity this means at a minimum to have an annual audit conducted, as well as submitting your annual return and tax filing. Typically, you’ll have a corporate secretary assist you with this, costs starting at a few hundred US dollars a year.
In conclusion, while it is not always necessary to incorporate a company in Mainland China in order to start selling, it often makes sense when you start growing. Once you are ready to incorporate your entity, make sure you’re aware of the various options you have so you can structure your company in a way that best meets your needs.
Want to learn more? Read Neat’s more detailed guide to Hong Kong company incorporation and setting up a WFOE.
About the Author
Iris ten Teije is General Manager, Europe at Neat. Neat supports SMEs in growing internationally via fully-digital company incorporation and multi-currency business accounts in Hong Kong and the UK.