The Ultimate Guide to Starting a Business in China
The massive size of the Chinese consumer market opens a wealth of opportunities to foreign investors. With domestic consumption increasingly growing in the last couple of years, the country has become a hot bed for lucrative ventures.
However, it is not always that easy for foreign investors to start a business in China. Aside from the language and cultural differences, there are many factors to consider including local government regulations, tax policies, consumer behavior, and various risks.
Still, the vast opportunities for growth in the country is worth considering starting a business in China. To help you prepare for your new venture and understand what to expect, here is a guide to starting a new business in the Red Dragon.
1. Why Start a Business in China
The Chinese market is indeed attractive. But you may still be on the fence whether to embark on a business venture in the country or not. So, let us go over some of the benefits and risks of starting a business in the country.
Benefits of Starting a Business in China
Huge market. The Chinese consumer market is estimated to be over a billion people. With various economic sectors, this gives you a diverse market that sustains business growth.
Vast talent pool. There are millions of skilled workers in the country. This gives you a vast source of young professionals, skilled laborers, and competent staff to employ for your business.
Strategic location. The geographical location of China also opens opportunities for business development in other Asian countries.
Growing economy. China is the fastest growing economy in the world today. Setting up your business there can put you in the global economic chain.
Entrepreneurial environment. China has been empowering innovators and entrepreneurs with more favorable government policies including tax incentives, lower tax rates, and facilitative business ecosystems.
Risks and Challenges Faced by Foreign Investors
Bureaucracy. Getting the required permits and licenses to start a business can be quite laborious with so many processes to go through. However, the government has been revising some of their regulations to make it easier for investors to conduct business in the country.
Local competition. While there is undoubtedly a huge market, the business landscape is extremely competitive. Many local consumers show preference to local companies over foreign enterprises. This makes it more challenging for foreign enterprises to grab a significant market share.
Complex taxation and legal systems. The complexity of China’s policies can be a challenge to fully understand. Foreign enterprises are required to comply with strict rules from product development to marketing campaigns to tax compliance. Many of these rules vary depending on the location and are also subject to constant changes.
These are just some of the benefits and challenges you need to weigh before deciding whether to start a business in China. As with any other business in any location, it is imperative to weigh all the benefits against the potential risks you may face.
2. Preparations for Business Registration
Before you can register your business, you must prepare the documents required by the government. These will be submitted for approval before you can be given authority to operate in the country. Here are some the things you need to do before applying for business registration.
Choose a business location
You will be required to indicate your legal address in China. This will serve as your official headquarters in the country where the government, business partners, and consumers can contact you whenever necessary. So, one of the first things you should do is to look for the most ideal location for your business. This would depend on the type of business you are engaged in and your logistical needs.
Shenzhen is the current hub for IT and electronics with startups mushrooming at a relatively fast rate. Shanghai, Beijing, and Guangzhou are still among the most bustling business centers today. You can also consider special economic zones (SEZ) or free trade zones (FTZ) such as Hainan, Tianjin, Yunnan, Liaoning, and other provinces where foreign enterprises have favorable tax arrangements.
Consider your business needs, products and services, and potential market when choosing the best location to set up your business.
Choose a legal structure
Incorporating a business with an official legal structure can take months, so it is best to prioritize this in your business plans. In China, there are only a few business structures allowed for foreign investors. Here are the most common ones:
Representative Office. This is one of the easiest and least costly structures to establish. However, it has plenty of limitations. Representative offices can carry out only indirect business activities such as trade promotions, market surveys, and product introductions. They are not allowed to engage in direct business activities.
Branch Office. A branch office is not given a legal person status and is limited to just a few business sectors such as insurance and banking. Its main foreign enterprise is also held liable for any obligations it undertakes.
Equity Joint Ventures (EJV). An EJV is a limited liability company formed by foreign and Chinese investors. It has its own registered capital and a legal identity distinct from that of its investors. With an EJV, you can be eligible for preferential policies is your investment is more than 25% of the registered capital.
Cooperative Joint Ventures (CJV). A CJV is similar to an EJV but is more of a business cooperation agreement between foreign and Chinese investors. It may or may not have legal person status. Its profit-loss sharing arrangement does not particularly correlate with capital contributions of investors.
Wholly Foreign-Owned Enterprises (WFOE). As its name denotes, a WFOE is 100% established by a foreign investor. There is no direct participation of a Chinese partner and provides you more flexibility on business operations.
It is usually set up as a limited liability company with a registered capital and distinct legal identify. However, this structure is prohibited in some industry sectors such as mining and certain telecommunication services.
Aside from these five, there are other business structures allowed for foreign investors including holding companies and companies limited by shares with foreign investment (CLSFI). But these require huge capital investments of around 30 million RMB.
Register Your Business Name
Registering a business name used to take several weeks and was a prerequisite for applying for a business registration. However, new regulations on the administration of enterprise name registration were enforced on the 1st of March 2021. The revisions were made to adapt to an increasingly digital corporate environment.
Instead of the pre-approval process, the self-declaration system has been implemented. Foreign investors can now use the Enterprise Name Declaration System to submit their business name online for immediate use.
To do this, log in to the system and key in the name you want to register. The system automatically checks your business name in accordance with regulations and compares it with existing enterprise names in the database. If no conflicts are found, you can be granted use of that name. You can also have this processed directly at the Enterprise Registration Authority.
To ensure approval for the use of your business name, choose one that abides by the provisions set by the government. Some of the key provisions are:
A foreign enterprise can register only one enterprise name.
An enterprise name shall use standardized Chinese characters.
The shop name and organizational form must be included in the enterprise name.
For some businesses, the administrative division and industry or business characteristics must also be included in the enterprise name.
The font size shall consist of two or more Chinese characters.
Create a Business Plan
In order to get approval for your business registration, you must be able to show that your venture is feasible. You must draw up a comprehensive business plan that includes the following:
Your business plan must convince regulatory authorities that you have the capital to finance operations and a feasible business model that has potential for growth. Aside from this, your business plan will also serve as your map for growth. Prepare this well as foreign enterprises are required to stick to the guidelines that they defined in their business plans.
3. How to Register a Business in China
Once you have an approved business name and all your documents ready, you can start the registration process for your business. Submit the documents you prepared for approval to get the following:
Certificate of Foreign Enterprise Registration. The Ministry of Commerce will go over all your documents to check if you meet the standards set by the government. You will need this certification before you can apply for a business license.
Business License. This is issued by the State Administration of Industry and Commerce (SAIC). An approved business license enables you to start business operations.
Take note that there are still other requirements to complete after getting your business license. Make sure to comply with all of these to avoid fines, penalties, and other repercussions in the future.
Register with the Public Security Bureau. You will not be able to validate any contract without an approved company stamp or corporate seal. Apply for one with the PSB right after you get your business license.
Open a bank account. You would need a corporate bank account to receive payments, pay bills, settle wages, and conduct most financial transactions. You would also need one when applying for taxpayer’s registration, so it is best to open an account with a local Chinese bank.
Register as a taxpayer. As a foreign enterprise, you are required to comply with local tax regulations. You must apply for taxpayer’s registration within 30 working days after getting your business license. Otherwise, you would be subject to investigation by the Tax Bureau.
The exact registration process varies depending on the type of company structure you chose, but in general, you would have to go through the following steps to operate your business in China:
Prepare legal forms of incorporation, business plans, and other documents.
Register your business name with the Enterprise Registration Authority.
Apply for certification of foreign enterprises registration at the Ministry of Commerce.
Apply for a business license at the State Administration of Industry and Commerce.
Apply for company stamps and corporate seals at the Public Security Bureau.
Open a corporate account in a local Chinese bank.
Register as a taxpayer at the State Taxation Administration.
4. Local Accounting and Tax Policies and Regulations
All registered foreign enterprises in China are required to maintain accounting records in accordance with local accounting standards. Taxes are reported on a monthly, quarterly, and annual basis. Official invoice books are required to issue invoices to clients. Moreover, rules and tax rates frequently change. As such, it is advisable to hire an accountant who is familiar with local tax policies.
Tax Rates for Foreign Enterprises
To give you an idea on what taxes you might have to pay, here are some of the usual taxes levied on foreign enterprises:
Corporate income tax. Filed monthly or quarterly, this tax is levied at 25% on the total income less allowable deductions. At the end of the year, all tax payments are reconciled with the year-end audit. Depending on the final amount, additional tax is paid or a rebate is applied.
Withholding tax. Foreign enterprises that derive income from China are subject to withholding taxes. The rate used to be 20% but has been lowered to 10%.
Individual income tax. Foreign individuals are also subject to individual income tax, which is computed at progressive rates from 5% to 45% depending on the amount of taxable income.
Value Added Tax. VAT is based on a percentage of the sales of goods and services. There are currently three tiers for tax rates depending on the types of goods and services provided. The rates are 6%, 10%, or 16%. Some sectors are exempted from this type of tax.
Business tax. Foreign enterprises that engage in taxable activities such as insurance services, construction activities, entertainment business, and sales of immovable property are also subject to business tax. The tax is levied on gross turnover and ranges from 3% to 20%. However, this is no longer applied today and has been incorporate into the VAT system.
Consumption tax. Foreign enterprises engaged in manufacturing and sales of non-essential goods such as tobacco, liquor, cosmetics, and jewelry are levied consumption tax that ranges from 3% to 45%.
Tax Incentives, Special Tax Rates, and Privileges
To encourage more investors to set their businesses in the country, China regularly amends its tax regulations and policies. The country provides several tax incentives to attract investors in various industries.
Special tax rates and privileges for companies in special economic and free trade zones.
Lower CIT rate of 20% for low-profit companies.
Reduced VAT rates of 3% for small-scale taxpayers.
VAT refund for procurement of equipment of R&D centers.
VAT exemption on interest income for financial institutions.
5. Local Employment Matters
Foreign enterprises are also required to comply with local labor regulations. You need to be familiar with the specific regulations in the area where your business is located. Make sure you abide with these regulations when you set employment conditions and hire your employees.
Your employment contract must clearly define the terms and conditions for employment. State the work hours, wages, job descriptions, and the remuneration details in the contract.
Wage. Foreign enterprises are given great autonomy in setting the wage levels of their employees. However, you must comply with the minimum wage requirements mandated by the local government.
Work hours. There is a mandatory 40-hour work week set by labor authorities. Overtime work can be scheduled, but employees are entitled 150% to 300% of their normal wage.
Remuneration. In China, the typical remuneration package includes the basic salary, subsidies, allowances, and work benefits. You can include performance-related bonuses if you wish to do so.
Leave entitlements. Employees are entitled to paid annual leave, the duration of which usually depends on their length of service. They are also entitled to 20 or 30 days of paid home leave if they work in another locality from where their spouse or parents reside. Other leave entitlements include sick leave, marriage leave, and maternity leave.
Welfare benefits. All foreign enterprises are required to allocate a portion of their profits to welfare benefits. These include but are not limited to basic medical insurance, accident insurance, maternity insurance, pensions, unemployment allowances, and housing benefits.
Rules for termination. To avoid problems with labor unions or authorities, set the grounds for termination in the employment contract. Set out circumstances when the contract may be terminated by either party and what sufficient causes are considered reasonable.
There are several ways foreign enterprises can hire local employees. If you have a Chinese joint venture partner, they can recruit workers through the recommendation of their local staff. If you have no local partner, you can get recommendations from local employment centers or the local labor authorities.
You can also recruit workers directly through ads or with the help of headhunters and foreign service companies.
Partnering with a PEO
Professional Employment Organizations (PEO) help foreign enterprises hire local employees directly. They can help with your staffing needs so you can start business operations within days of getting your business license. Consider working with one or any employment solutions provider to simplify your workforce management and ensure compliance with local labor regulations.
Hiring foreign workers
Foreign enterprises are encouraged to hire Chinese nationals for most of their business operation needs. Foreign individuals who are not holding senior management positions must secure approval from the local labor authority before they can be hired. If you will be hiring foreign workers, you must help them secure a China Work Visa (Z visa) and the necessary work permits.
6. How to Register a Trademark in China
Your trademark sets you apart from your competition. It helps develop brand recognition that spurs business growth. In some countries, trademark rights are acquired automatically when a business uses a name or logo for commercial activities.
In China, however, trademark rights are given to the first entity that registers it regardless of which one used it first. So, it is best to register your trademark as soon as possible.
Why register a trademark
Imagine building your brand for years and having someone else copy your branding to sell their own products. With a registered trademark, you can avert situations like this. Registering your trademark protects your brand by preventing competitors from using names, images, or logos similar to what you are using in your products.
Creating a Chinese trademark
When conducting business in China, it is also advisable to register trademarks in both English and Chinese characters. A trademark in Chinese characters adds more protection for your brand against the local competition. Moreover, a Chinese trademark also boosts brand recognition in the country and motivates local consumers to patronize your products and services.
How to register a trademark
Trademark registration in China involves three basic phases: Examination, Publication, and Registration. All of these are handled by the State Administration of Industry and Commerce (SAIC). The entire process takes a year or so and costs a little over a thousand dollars. Once approved, your trademark registration becomes valid for 10 years.
Here is a quick run through of the trademark registration process:
Trademark search. The China Trademark Office (CTMO) has an open database where you can search for registered trademarks in China. You can search for similar trademarks and get comprehensive information about existing trademarks.
Submission of application forms. Go to the SAIC to get an application form with the list of documents that you need to submit. Once complete, hand in all the requirements and wait for the next step.
Application assessment. SAIC checks your application and the documents you submitted. They will notify you if there are other documents required. Otherwise, they will proceed with the registration process.
Publication of the trademark. After the preliminary examination of your application, your trademark is published at the Gazette. Other parties can raise opposition within three months of the date of publication.
Approval and issuance of trademark. If there are no oppositions raised for infringement or other issues, your trademark will be approved. You are then given a certificate of approval granting the use of the trademark for ten years.
Get Professional Assistance
While the trademark registration process seems pretty straightforward, it can be daunting to complete a thorough trademark search and handle trademark oppositions. Similarities in graphics, phonetics, and other details can be difficult to identify especially with trademarks in Chinese characters. Choosing the trademark class to register in can also be confusing.
To make the entire process easier to handle, you can get professional assistance from qualified agencies. They can carry out all the cumbersome tasks and necessary formalities in registering your trademark in China.
7. Grow Your Brand
With your company all set up, you can now focus on building brand awareness and growing your business. Here are some ways to grab a huge chunk of the Chinese market.
Understand the culture
The Chinese culture greatly values traditions and family relationships. You must understand this culture and adapt your brand to resonate with the local market. Know what images, texts, or colors to avoid using in your logos, product packaging, marketing materials, and other things that can be related to your brand.
The Chinese market is increasingly mobile. Many consumers prefer doing business transactions on their smartphones or tablets. Having your own mobile app will bring your goods and services closer to consumers and provide them the convenience of purchasing online.
Register in e-commerce platforms
Be where consumers are. Set up accounts on e-commerce platforms where there is already a large number of potential buyers. Register a business account in Taobao, Tmall, Xiaohongshu, or Pinduoduo. Ride the waves of the sudden rise in popularity of Bilibili and market your products there.
Leverage Chinese social media
Like in most parts of the world, social media plays a key role in the purchasing decisions of consumers. Create an account and engage with social media users. Post informative and entertaining content to build and maintain an active following. The most popular channels you can leverage for building your brand are WeChat, Douyin, and Kuaishou.
Build a Chinese website
To reach Chinese consumers, you must design your website with them in mind. From web design and language to content and format, your website must resonate with the Chinese audience. A .cn domain registration is critical to secure a website with a local flavor.
Use Mandarin, check out the latest Chinese web design trends, and optimize for Baidu. There’s no Google in China so your SEO initiatives must be aligned with the largest search engine in China, which is Baidu.
Maintain high-quality products and services
Growing your business requires more than just building awareness for your brand. You must maintain the quality of your products and services to retain your existing customers and attract new ones. Strive to continually improve your services and enhance your products to address changing consumer needs.