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China Law. Do Not Try This At Home. Please.

By Dan Harris on Posted in Basics of China Business Law, Legal News

A reader sent me an email today with a link to a discussion on a LinkedIn group regarding the cost of setting up and doing business in China. The discussion began with someone seeking information regarding the best way to set up a business in China and information about what that will cost. I am not going to link over to the discussion because I have seen these sorts of things a million times before and I do not want to single out this particular LinkedIn group.

The reader sent me the link and requested I make a comment to the discussion that would “set the record straight.” I kept my silence on the discussion itself but I am going to rant about it now. I have no interest in getting involved in a discussion with a bunch of non-lawyers talking about how to set up business entities in China who know nothing of whereof they speak.

The comments that really got to me were the following:

You also might want to consider setting up your office in Hong Kong which offers the name recognition you’re looking for and gives you good access to mainland China. There are lots of benefits to choosing HK from a [sic] ease of doing business aspect. You can have a branch office in China if you need to.

There is no good way to set up a small company in China considering rep. office vs. WOFE; neither gives you much legal authority to do very much. The rep. office is much less money though and you can conduct business utilizing Chinese IE agents to do the legal part.

WRONG. Really wrong.  Setting up a company in Hong Kong is not the same thing as setting up a company on the mainland. Legally, setting up a company in Hong Kong is much closer to setting up a company in Tokyo or New York (at least with respect to the PRC) than it is to setting up a company in the PRC. But probably the most ridiculous statement is that of how a WFOE does not “give you much legal authority to do very much.”  Actually, under Chinese law, once established, a WFOE is a Chinese company and it has the same authority to do what wholly domestic Chinese companies can do. 

Someone else said that 20,000 Yuan is enough for a small company. It is not. That’s around $3,000.  The minimum capital requirement is around $14,000 (it is way more in most places where foreigners want to go) and on top of that, the company must rent space that is appropriate for a WFOE and then it must pay an employee, including employee/employer taxes. It typically takes at least $50,000 to form and run a business in China for the first year.

What is most troublesome about the proliferation of amateur China lawyers is that there are actually people who follow their advice. I just hope you are not one of them.

What do you think?

  • Sally Au

    As for Hong Kong, there remain valid reasons to use one as part of a China structure, and whether to go RO or WFOE is dependent upon whether or not the mainland China end needs to invoice in RMB or not. There’s places to get educated on these sorts of issues, all folk need to do is google sensible questions.

  • BP

    $3,000? Even remotely considering a Rep Office? Ouch…
    Being an avid follower of you and Steve for the last 6 months, I’d say the CLB is required reading for anyone considering market entry (as doing so would prevent such delusions).

  • http://www.procurasia.com Etienne

    One more example of people who seem to loose any common sense once it comes to China.
    It always puzzles me why some people who do not know anything about the way a complex place like China (and often acknowledge that) just refuse to go the the right source of information and enter believe ill informed advices (sometime in good faith, sometimes not) instead of consulting readily available information like on your blog.
    It is not that people would have to pay lots of money to know some basics that would prevent them from heading straight to troubles.
    It seems that people really want to believe there are short cuts to avoid complex situations. Se see this times and times again for company set up, Chinese staff recruitment, work permit, product sourcing, and many others.

  • K

    For the naysayers, I want to confirm the figures quoted in this post. I am currently setting up a WFOE (it really is called a WFOE… What on earth is a TICE?) in Beijing.
    We’ve been told by govt officials in our district that they’ve never approved someone for less than 100,000 RMB registered capital in Beijing ($15,000). In order to register, we’re required to have a physical office address in a building approved for business purposes, which we have not found for less than 4000 RMB per month for basically a closet with a desk and a chair. That’s another 64,000 RMB including refurbishment, deposit and set up fees ($9,600). Add to that our one full-time’s salary, and then the actual expense of running the business, and it’s right up there around $30,000-40,000 for the first year, even if the registered capital is applied toward business expenses this year.
    And that’s for a consulting business with no manufacturing or product costs, and little to no overhead… I imagine it’s higher for many other businesses.
    PS: if you search for free legal advice online, what you find will be worth exactly what you paid for it.

  • http://www.chinataxinsights.com Matthew

    Dan,
    I couldnt agree more. The amount of misinformation out there regarding establising an entity in China is alarming. The comparison in the above post between a RO and a WFOE is obviously laughable.
    Sally Au’s comment that establishing a China WFOE is only needed where you want to invoice in RMB was also a source of mirth for me.

  • Twofish

    Dan: Legally, setting up a company in Hong Kong is much closer to setting up a company in Tokyo or New York (at least with respect to the PRC) than it is to setting up a company in the PRC.
    There is one very big difference between HK and Tokyo/New York. You can legally hold RMB in Hong Kong, whereas you can’t open a RMB account in Tokyo and New York. In July, the PRC removed a lot of the restrictions on RMB trading in Hong Kong, which makes it much easier to set up an entity in HK and then do business in the mainland. What you can do much more easily now is to wire RMB from mainland, and then convert from RMB to USD in Hong Kong.

  • Twofish

    One other thing here is that the purpose of registered capital is to keep undercapitalized businesses from setting up shop. The problem is that if you set up a business with no capital and you fold, the Chinese government is going to have to deal with the mess that you left behind in the form of people that you owe money to.
    If you are trying to do business in China and you don’t have $50K in liquid assets, then I really don’t see how you can set up a business in China purely from a business point of view. Even if you have run a consultancy, you still have to pay rent and other business expenses before actually getting paid.

  • LawDude

    FICE – Foreign Invested Commercial Enterprise. A type of WFOE but used for trading and retailing rather than manufacturing. The registration processes and capital requirements are less than for a WFOE.

  • Tim

    A FICE is a form of foreign invested enterprise and is not limited to just a WFOE. It’s registration process and capital requirements are dependent upon the industry, scope of business and location of its establishment.
    The wealth of misinformation out there is mostly the result of too much inconsistencies and lack of transparency on a process mired in bureaucracy.
    Google, by the way, is not a source of sensible answers to setting up a business in China.

  • Eric Minto

    Please clarify what a FICE is?

  • David A

    that a HK holding company has another advantage as it is some tax benefits in terms of witholding taxes for dividends from the WFOE, but I can also support the numbers stated. When I set up my consulting company, bare minimum registered capital requirement was around 100,000 RMB but preferred were to go higher, so we went in with 150,000 RMB.
    What is often misunderstood is that this money registered (and has to be in a bank account from day 1, which itself is a story of its own) can be used for investment and/or operational expenses so it is not a one-time cost.
    Secondly, once you have a WFOE, registering a subsidiary becomes a lot easier and requires less capital (still unique address).

  • Ben

    I will be the first to say 1) I posted on the linkedin group 2) I am not a lawyer and 3) I am only posting my actual experience, not legal advice, with that….
    1- I have formed a WFOE in China and it took around 4 months. About 2-1/2 months was just getting the right passport and other legal documents from my home country. The actual setup took around 1 month after we got the paperwork together.
    2- First year legal setup costs are as follows [there are other fees but these were the mandatory fees]:
    - 4,000 yuan: Paying a tax firm to do the paperwork
    - 15,000 yuan: 1 year rent on 100 SQM office with bathroom/ac/heat 1 block from the city center
    - 400 yuan: monthly accountant fee
    3 – registered capital 30,000 yuan (The minimum is 100,000 yuan unless you have a co-owner). Please note that we got the lowest legally allowed amount. Most areas will not accept the legal minimum from what I understand.
    4 –other fees (est.)
    - 1300 yuan: 10m internet for the year
    - 300 yuan: basic utilities
    - 3,000 yuan: 4 desks, chairs, misc items
    - 4000 yuan: multifunction printer, supplies, network gear, etc
    5 – We didn’t hire any local Chinese directly (at least not yet) and the other foreign workers are basically partners so there are no salaries. [This is very important as the more salaried staff you plan on the higher your registered capital amount is]
    6- The above does not include other taxes that will vary depending on what you do and your location.
    I did see incorrect information on the group posting. Keep in mind though the information only applies to a small company looking to start with the minimum requirements. If one wants to hire Chinese locals and have substantial operating goals then the above WILL not apply. To be honest it was my goal to see just how cheaply I could setup a WFOE since many of the other firms quoted me very high prices to do the above. Naturally for a larger venture I would certainly use a law firm, no need to introduce risk to save money in China. However if you goal is learn and explorer well then I hope the information above is helpful.

  • LawDude

    Dan,
    Admit it. You love these guys because they mess up businesses that then need to hire lawyers and pay them to get out of it and on those matters you can charge a lot more. So sit back and relax!

  • Marian

    I’ve been setting up a WFOE on my own.
    I spent a lot of time doing research and started collecting paperwork while I was in the US in December.
    I started registration at the end of February and I got the last form necessary to be allowed to open my bank account in the middle of May.
    Because I couldn’t find a reputable firm that knew how to set up a WFOE in Hainan, I ran around from bureau to bureau all on my own spending about two months dealing with government officials who were both astonishingly helpful and willing to take time out to explain things to me. As a general rule, although most of these officials had dealt with people registering WFOEs before, they’d rarely had the foreigner come in in person and had never dealt directly with a foreigner instead of through a translator.
    If I had had a firm helping me out, it probably would have cut the 9 weeks or so to 6, since a large amount of time was spent in hurry up and wait. The firms I spoke to asked anywhere from 6000 – 10,000rmb but didn’t seem to actually know as much about WFOEs as I did when I questioned them and I didn’t see the point in paying for their learning curve. I would not, however, do it again unless it were a case of someone else paying me to set up their WFOE.
    My worst headaches came with the officials who didn’t actually know what they were explaining to me, explained things wrong, forgot to collect papers I had with me at time, didn’t notice a missing signature, or thought I needed something that didn’t exist.
    My two favorite incidences were the woman who made other people stand and wait while she told me line by line how to fill out a form I had originally made a mistake on, and the woman who sent me to the wrong part of the city (that bureau moved to a new location over a year ago) with written directions sending me to the provincial level bureau (not only did I need municipal, but the provincial had never been at that location).
    I do not have a co-owner but they accepted the minimum 100,000rmb for my registration.
    My apartment is co-zoned for commercial or residential so I registered my business at my home address.
    Since I haven’t actually brought the minimum registered capital into the country yet, my costs currently stand at around 1500rmb including an astonishingly huge amount of photocopies, carving the chops, and paying to get all the various forms, cards, certificates, and miscellaneous shiny things from government offices.

  • Rose the extremist

    “Know not whereof they speak” would be more correct.

  • PCP

    $14,000 minimun capital requirement?  That is yesterday’s news. Where you want to have your offices/registration determines the investment amount as there are rules and there are permissions.  Rules may say $14,000, but approval is seldom available for less than $200,000 (25% upfront, balance due within 2 years) in most of Shanghai.  No one said China was easy or cheap anymore.  To run a business that an expat would even consider living?  You are adding another $100,000 to the equation.  PCP