ABC's of Incorporating in China

- Carson Block, China Primer

Discussions of incorporating in China may seem like an alphabet soup, with acronyms such as WFOE, JV (of either the EJV or CJV variety), FIE, and LLC commonly thrown around. Complicating the picture is the representative (“Rep”) office. This article will help you make sense of the nomenclature and substance of Chinese entities. Doing Business in China for Dummies, Chapter 7 has a comprehensive explanation of starting a business in China and foreign direct investment in China.

Chinese LLC's

Putting rep offices aside for the moment, you are most likely to be a “FIE” when you operate in China. FIE means “Foreign-Invested Entity.” Any Chinese company in which foreign parties collectively own at least 25% of the equity (called “registered capital” in China) is automatically a FIE. Most Foreign invested entities are established as LLC’s (“Limited Liability Company”). The LLC is China’s basic form of corporate entity. (There are other forms of entities available, but they are generally impractical for foreign investors.) Unlike United States’ LLC’s, there is corporate-level taxation of the Chinese LLC.

Joint Ventures (JV's) in China

If a Chinese individual or company (non-FIE) owns any of the equity of a FIE, the FIE is deemed to be a “Sino-foreign joint venture.” These are referred to as “joint ventures” or “JVs” for short. In some industries, foreign investors are required to have Chinese JV partners. There are two types of JV’s in China: the “Equity Joint Venture” (“EJV”) and the “Contractual (or Cooperative) Joint Venture” (“CJV”). The EJV is more common, and its precepts are fairly easy to understand. All profits and distributions are distributed according to the partners’ pro rata share of the registered capital. A CJV allows the JV to distribute returns disproportionately to registered capital shares. The CJV adds some complexity in certain areas though.

Wholly Owned Foreign Enterprises (WFOE or WOFE)

Still forgetting representative offices, if a FIE is not a JV, then it is a “wholly foreign-owned enterprise” (“WFOE” or “WOFE”, both pronounced “woofie”). When China first began opening to foreign investment, there were very few industries in which one could incorporate a WFOE. Today, WFOE registrations greatly outnumber JV registrations in China.

Representative Offices (or “Rep Office”) in China

Finally, we turn to the Rep Office. The Rep Office is a bit of a strange creature because it is not technically considered to be doing business in China. It is not actually a corporate entity (no corporation actually exists in China); therefore, it is not a FIE. Rep offices were intended to be used for functions such as conducting research, providing information to potential clients, and supervising Joint Ventures or WFOE operations in China. They were not supposed to be generating profits inside of China. As the restrictions on WFOEs have eased, many investors are opting for WFOEs instead of rep offices. However, rep offices may be required in certain industries (such as legal services). The final point to keep in mind about rep offices is that their taxation is a bit odd. Because they apparently do not generate profit, they are taxed on “deemed profits”, which are usually based on their expenses.

Related Articles: Business Formation Basics, Law Firms in China, How to Choose a Law Firm in China.

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