Pros and Cons of Setting up a Company in Mainland China
10 minute read
Due to language barrier and complex government regulations, a lot of western companies are hesitant in expanding and setting up their organisations in China. If you’re thinking of setting up, you may be wondering:
Is the business situation in this country really that good? What are the exact benefits of having a company set up in China? What should I be considering when establishing your own business there?
In the article that follows, you can find the answers to these questions and other useful information. Hopefully, that will help you decide whether you should start a company in China.
- Pros of setting up in China
- Cons of setting up in China
- How do I get a business licence in China?
- Hong Kong as an alternative
Pros of setting up a company in China
There are quite a few benefits of having a company in China. Let’s focus on the most important advantages one can enjoy as a business owner in China.
Access to the China market
Many companies from abroad successfully sell in the Chinese market. However, they often have to go through a lot of complex processes and paperwork in order to do so.
On the other hand, the most direct and legal way to appear in the local market is to have your own local company.
When you work as a Chinese company, you can issue formal receipts (fapiao) that can be used for the local accounting. This is very important, as it will make your company trustworthy and legitimate.
Keep in mind that, in general, businesses that cannot issue a legal receipt certainly seem unprofessional and shady.
If you start your own business in China, you can also open a local bank account with the company and start online transactions. This is quite useful, since the Chinese eCommerce industry is on the rise. One method to get a piece of that cake is to incorporate a company in the country.
Lower manufacturing and supplier costs
This is one of the key reasons why many Western companies come to China. After all, every business has a high priority placed on profit margins.
Making money is what keeps a company running. If you are doing business from within China, you have a chance to expand upon the products you are offering while still being able to keep your price points at the low levels you may need.
It depends on the product, but the costs can be cut by up to 80% in China! This figure is something that can be a huge factor affecting your next business decision.
Finding a manufacturer within your price range is also not so difficult in China. You can locate the manufacturing needed at a cost you can afford so you can stay in business both in China and at home.
Opportunity to hire local staff
The Chinese are very capable and crafty people that you can definitely work with. When you run a business in China, you have a chance to hire some of the amazing and diligent Chinese locals that will do everything to help you with your business.
It doesn’t matter if you plan to have an import or export trading business or an eCommerce business in China, you will need workers. Hence, if you have a company in China, you can hire the locals to work for you.
Issuing them an employment contract and giving them insurances and health benefits is similar and convenient. This practice is almost identical in every country in the world.
Finally, many locals love working for foreigners and this means that you could attract top talent to help you reach your business goals.
Acquiring an investment visa
Did you know that China can offer you a visa if you decide to stick around for a longer period of time and work there?
If you are the legal representative of the company/foreign investor, you have a chance to file for an investment visa. This grants your stay in China for up to one year without having to exit the country.
You will be able to issue yourself an employee contract and give yourself a salary. The best bit is that you can be the go-to boss of your company in China.
The extensive manufacturing presence in China means that you can save a lot of time. To be precise, if you have a product to make, there is a good chance that a form of that product is already being produced somewhere in China.
So, just send over your dimensions and the manufacturing process can be duplicated quite fast. This is a major benefit that is almost completely exclusive to the Chinese manufacturing industry.
Cons of setting up a company in China
Every coin has two sides. And this coin is no different. Now that you are aware of what benefits you can enjoy if you decide to set sails for China, let’s see what shortcomings your business might have to deal with in this country.
This is one of the biggest challenges when it comes to doing business in China.
Every now and then, there are cases of intellectual property thefts. And most of the time, Western companies have been victims.
Keep in mind that it will be more likely to step up enforcement of IP rights in a case where someone counterfeits a Chinese designer’s products.
Even when you walk down the street in China, you can see counterfeited products everywhere. However, know that there are steps you can take to protect yourself and the government is willing to help too.
As it was mentioned, it is required that you declare the receipts of your business every month. This is a practice Chinese accountants are familiar with.
To comply, in this case, you will have to pay from 500 to 2,000 Chinese Yuan a month depending on how many transactions you have. The more transactions, the heftier fee will be charged by an accountant.
Complications with transferring money out of China
Due to the nature of the Chinese central bank, it might get a bit tricky to wire money out of China. On top of that, this country is not connected to the internet as we know it. Hence, using PayPal or Payoneer service might not work well with a VPN. Do not forget that using a tool like that is not permitted.
So, bottom line, be extra careful when moving money!
Can foreigners own companies in China?
Technically, it is possible to start your business in China as a foreigner with no assistance. However, know that there will be a good amount of hurdles waiting for you.
Hiring a local consultant can really ease the process if you have what it takes when it comes to budget. A consultant can help you make decisions regarding your business structure, they can organize and file the paperwork, and act as the company representative while you are not in China.
Also, know that there are multiple ways to set up your business in China. Each way has its own advantages and disadvantages.
- Representative office (RO)
- Joint venture (JV)
- Wholly Owned Foreign Enterprise (WOFE)
How do I get a business license in China?
The best option is to obtain a five-in-one business license in China. This kind of license includes five different certificates.
- Business License — the document including key details about the company.
- Business Tax Registration Certificate — the document containing the company’s details (tax number, taxpayer name, etc.).
- Organization Code Certificate — the certificate that shows the legality and legitimacy of the business to customers.
- Social Security Registration Certificate — the mandatory certificate for employers.
- Statistical Registration Certificate — the document issued for statistical purposes.
To obtain a license, it’s best to use the digital method. You can apply online thanks to the initiative by the State Administration for Industry and Commerce.
The system supports the online request filing and the upload of required documents and e-signature. If you need any assistance, do not hesitate to hire a local consultant.
Hong Kong is a great alternative!
It is well-known that foreigners can register and start their own companies in Hong Kong. Compared to China, you will find it a lot easier to incorporate a company.
On top of that, the region is quite beneficial when it comes to doing business. If you decide to start your business in Hong Kong, there are quite a few benefits you could enjoy.
For example, you will need less time to open a company in Hong Kong, but you will also enjoy removed fees for local transactions and transparent way of doing business, as well as simpler regulations and procedures.
Below are listed some additional benefits of setting up a business in Hong Kong.
Starting a company in Hong Kong means that you get to operate in a business environment that has one of the lowest tax rates worldwide. The corporate tax rate is only 16.5%.
On top of that, the region has a single-tier tax system. In other words, you just need to pay taxes for the profit you earn within the borders.
There are no capital gains tax, value-added tax (VAT), sales taxes, and withholding taxes.
Finally, the personal tax rate is low too, it ranges from 2% to 17%.
Hong Kong, as a whole, is one of the most developed places in the world. Its infrastructure is modern and it will satisfy all your needs.
All sectors are quite advanced including transportation, healthcare, education, communications, IT, and so on.
All of these factors affect the quality of life and the overall business landscape. They help you and your business thrive in such a growing environment.
No incorporation restrictions
Contrary to Mainland China, Hong Kong has no restrictions when it comes to the types of business structure foreign citizens can incorporate.
Hong Kong has no specific rules regarding foreign ownership. In other words, you are not limited to just a few business structures if you are not a local.
Most common business structures include:
- Sole Proprietorship
- Limited Liability Company (limited by guarantee or by shares)
If you plan to have operations focused on Mainland China along with the scope of your business, definitely consider starting a business there.
On the contrary, starting a Hong Kong company makes more sense for you if you want to operate a more global business.
This means having worldwide customers, engaging in cross-border trade, and if your main business language is English.
If this is aligned with your goals and needs, consider the option of company incorporation in Hong Kong and contact us today.