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Further Outlook On Chinese Economy

Aug 18, 2007
Guangdong is perhaps China's leading provincial economy in many ways. It has the largest GDP among all provinces and municipalities, accounting for 11.7 per cent of the national total, and the highest industrial output value among all the provinces and municipalities, accounting for about 13 per cent of the national total.

It also has the largest export value among all provinces and municipalities, accounting for 32.3 per cent of the national total and the largest retail sales value of consumer goods which accounted for about 12 per cent of the national total.

It is reasonably complicated for a foreign firm to set up a business in China. The three typical methods of doing so are through representative offices, wholly foreign owned enterprises and joint ventures.

The regulations, tax treatment, business categories, and requirements for each type of business are different. These differences are not only limited to the types of business, but are also specific to each province, city and sometimes district.

Representative office
As the name suggests, a representative office is set up for representing the parent company in China. It is an easy and cost-effective way of establishing a presence in high profile cities such as Shanghai, Beijing, Shenzhen, Guangzhou, and Tianjin.

Representative offices are only permitted to conduct non-profit making activities in China such as liaison with clients, market research and quality control. Applicants for setting up a representative office must show a 12-month plus trading record in their home jurisdiction.

A set of translated corporate documents has to be notarised, apostilled and authenticated by a China embassy then lodged with authorities. Depending on the province, city and/or district, taxation of the representative office is assessed on declared expenses at the rate of seven to 10 per cent. The funds for the representative office must be transferred directly from the parent company.

Wholly foreign owned enterprise
A wholly foreign owned enterprise (WFOE) is the most popular choice for the foreign company seeking to do business in the fields of international trading, manufacturing, processing, assembling or other profit making activities.

A WFOE is a Chinese limited liability company which is established with 100 per cent foreign capital and is therefore totally under the foreign investors' control. The registered capital may be paid up through a combination of equipment and cash.

A WFOE's operations are governed by the articles of association. The minimum registered share capital is normally US$140,000 but the registered share capital can be significantly higher for certain heavily regulated areas of business.

The tax rate for WFOEs varies based largely on where it is registered. Generally, a WFOE is subject to a business tax of five per cent for selling goods or services in China. A rate of between 15-33 per cent on profits tax will be charged by the provincial and city governments.

Many cities in China now offer incentives via special economic and free trade zones to WFOEs primarily engaged in exporting and re-exporting. These zones provide tax breaks for FDI and the rates and terms usually differ according to location. Certain areas of business, such as high technology, manufacturing and agriculture are favoured.

For companies seeking to access the local market it is important to know that the Chinese government defines foreign goods and services under three categories: 'encouraged', 'limited' and 'prohibited'. Each has its own requirements and regulations that guide the activities of the WFOE.

China's internal reform of the legal, financial, accounting and tax standards is an ongoing and often confusing process that is evolving to meet World Trade Organisation requirements.

Joint venture
A joint venture is a legal entity in China that is usually composed of foreign investor(s) and Chinese investor(s). T

his business arrangement is usually set up by equity or co-operative methods. The main difference between equity joint ventures and co-operative joint ventures is the allocation of profits.

The co-operative joint venture offers more flexibility than the equity joint venture. The Chinese government favours and encourages this form of arrangement for obtaining advanced technology, modern administration and management skills.

Although China has developed greatly in the past 30 years doing business there can often be confusing, frustrating and damaging to one's financial well-being should experiences and competent professional advice not be obtained!
About the Author
The Zetland Financial Group provides the offshore investor with fiduciary Services, investment management and corporate advisory services , offering personal service and professional advice with total confidentiality.
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