Establishing a Foreign Investment Commercial Enterprise in China

As part of its World Trade Organization accession process, China ratified regulations that permit foreign companies to establish fully operational wholly foreign-owned enterprises that can distribute, act as an agent, retail and wholesale domestically, source domestically, and import and export, and as of 2005, do so all over China.  These companies, known as foreign-invested commercial enterprises, also enjoy the 100 percent foreign ownership by which WFOEs are defined.  If you and your company are interested in exploring the possibility of establishing a trading enterprise in China, it is important to know what barriers, advantages and incentives await your organization.

FICE activities

FICEs are capable of doing the following activities:

• Import, export, distribution and retailing
• Retailing–i.e. selling goods and related services to individual persons from a fixed location, as well as through TV, telephone, mail order, internet, and vending machines
• Wholesaling – i.e. selling goods and related services to companies and customers from industry, trade or other organizations
• Representative transactions on the basis of provisions (agent, broker)
• Franchising

These activities can also be achieved through other means such as agents.  A FICE will, however, bring the control needed to secure quality, service level, etc., bring you closer to your suppliers as well as enable you to invoice your clients in Chinese currency.

There are limitations, however. A FICE cannot change the nature of the product but only sell what is has purchased. Additionally, certain products – such as books, periodicals, newspapers, automobiles, medicines, salt, agricultural chemicals, crude oil, and petroleum – face some ownership barriers. Namely, if a foreign investor in China has more than 30 retail stores that distribute the above products from different brands or suppliers, the foreign investor’s share in the retail enterprise is limited to 49 percent.

Otherwise, for those that do not distribute the above goods, there are no limitations on ownership share or retail units. Foreign investors interested in international trade should also know that FICEs can now obtain their own import/export license. Obtaining additional licenses for importing and exporting specific goods can become difficult though it is necessary in certain cases.

Establishing a FICE

The establishment process for a FICE is very similar to that of the WFOE (please see the WFOE investment guide). However, FICEs do not have to file an Environmental Protection Valuation Report as they do not manufacture or process.  Also, FICEs are required to obtain a special Import-Export License Record with the Customs Bureau.  As with the WFOE, special care also needs to be given to the Articles of Association, specifically the inclusion of a General Manager Article, a Trade Union Article, and a Supervisor Article.  These are topics that are best explained by a professional.

Registered capital

Minimum registered capital requirements have been reduced compared to a decade earlier.  Secondly, the whole of China is now available for FICE establishment.  The legal minimum for establishing these types of enterprises is RMB30,000, yet the presence of foreign investment usually causes an increase to around RMB100,000. Nonetheless, the market has now opened to some entrants who previously could not afford to get started in China.  The concerns within the WFOE investment guide regarding working capital and registered capital’s relationship with total investment also hold true for the FICE.  See the WFOE Investment Guide for further advice regarding working capital and total investment versus registered capital.

Value-added tax treatment

In regards to VAT exemption on exports, if the refund rate is lower than the levied rate, the company must bear the additional VAT cost on exportation.  The VAT cost is calculated as follows:

VAT cost = (the cost of purchased raw materials) X (levy rate – refund rate)

General VAT payers have the right to issue VAT receipts to their clients and then deduct the input VAT from purchases when it pays output VAT for sales, as well as get a VAT refund when exporting.  Qualifying for general VAT payer status is easier now than it has been in the past. A FICE need only meet one of two conditions to achieve this status:

• The company has annual sales in excess of RMB800,000
• The registered capital is at least RMB5 million and the total number of employees is over 50

For general VAT payers, the VAT rate is mostly 17 percent, but the refund rate can vary from 0 to 17 percent.  VAT status and regulations are often subject to change depending on China’s political and economic climate. It is important to keep issues like these in mind when initially injecting your capital – underestimating operation requirements could leave you unable to pay your bills.

Application Procedures

Applications are made at a provincial or municipal level, though the local offices of state-level bureaus contribute their input as well.  The five special economic zones, which have independent economic authority in such cases, process FICE applications at their discretion. The application process for a FICE can be divided into three separate stages: pre-registration, post-registration and tax planning.

Dezan Shira & Associates is a specialized foreign direct investment practice, providing business advisory, tax, accounting, payroll and due diligence service to multinationals investing in China, Hong Kong, India, and Vietnam. Established in 1992, the firm is a leading regional practice in Asia with nineteen offices in four jurisdictions, employing over 170 business advisory and tax professionals.  To contact Dezan Shira & Associates please email info@dezshira.com or visit www.dezshira.com