Komal Chalotra – Business Consultant
Offshore incorporation in China is a way followed by many companies that want to enter the Chinese market and start reaching millions of consumers.
In the article, we want to show you what are the 11 benefits of offshore incorporation in China and what are the solutions to start operating in China.
What is the Meaning of Offshore Incorporation?
Offshore implies situated or located beyond one’s national boundaries.
An Offshore Company refers to companies that are registered in foreign countries and are operating outside of its formation country.
The investors of such companies are neither physically living nor doing business physically or in other terms, it refers to a company that is filed outside the country where its principals are residing. The principals could be CEOs, officers, directors, shareholders, partners.
Offshore companies have three characteristics:
1) They must be a registered entity within the incorporation jurisdiction
2) The investors should belong to a jurisdiction outside of incorporation
3) The majority of the business should be transacted outside of the jurisdiction of incorporation
The business operations for such companies can be carried out anywhere in the world.
Investors often utilize multinational operations for enhancing the capabilities and for expanding the business globally and therefore, offshore incorporation is a popular method for foreign companies to grow business operations in China
11 Benefits of Offshore Incorporation in China
China is considered a popular jurisdiction for companies to incorporate. Many investors from different parts of the world have considered forming their business entities because of the various benefits offered by China for those incorporating there.
The following are various benefits of offshore incorporation in China.
1) Tax avoidance
Offshore corporations can be utilized for tax planning purposes. A significant amount of tax can be accomplished by accurately arranging finances. Also using offshore companies for exporting products in anti-dumping regions can be a way to avoid heavy tax. However, a great amount of care should be required as some schemes might lead to illegal tax evasion, rather than legal tax planning.
2) Limited risk
Offshore companies provide a layer of limited liability, removing risk from its valuable parent company.
3) Easy management
There is no requirement of holding annual shareholder meetings nor is the requirement of selecting a place for such meetings. In most cases, the secretary of the company is appointed for preparing any required documents for use within the company. The corporate law of offshore jurisdictions is often very flexible.
The cost of opening an offshore company is low along with the sorted and convenient registration process which can be completed by a professional registered agency or an agent. There is no requirement of the investor to be physically present in the jurisdiction of incorporation.
There is no provision of checking the directors or the shareholders status publicly. This is limited to only the trust management companies and the law prohibits them from leaking important information to any outside parties.
6) Save bureaucratic hassles
The sale of the investment in China can be made by transferring the offshore entity, rather than the stake in the Chinese entity, which saves bureaucratic hassles in China.
7) Zero restrictions
There is no restriction based on the nationality, assets, personal information or background of the shareholders.
8) Business scope
Offshore companies have very limited or no restrictions when it comes to business scope with some exceptions for industries such as Insurance, Banks, Military.
9) Easy incorporation
There is no requirement for foreigners to travel to China for incorporation.
10) Single shareholder
Only a single shareholder is required to incorporate and there is the requirement of at-least one director.
11) Multi-currency bank accounts
Multi-currency bank accounts are allowed for corporations making it easy to conduct international business in major foreign currencies.
All in all, offshore companies offer many advantages to investors, but there are many traps one could fall into. Therefore, sound legal advice should be sought before setting up an offshore company as an investment vehicle in China.
What Are the Kind of Companies to Use for an Offshore Incorporation in China?
There are three different types of company registration in China.
1) Wholly Foreign Owned Enterprises (WFOEs): WFOE is a limited liability company and is one of the most common types of foreign business entities in China.
It is fully established and owned by foreign individuals. Under this entity having a Chinese investor or partner is not mandatory and the shareholder can be an only foreign individual or international business enterprise.
There are three different types of WFOE; Manufacturing, Consulting, and Trading. Out of the three consulting WFOE is the easiest to set up. While consulting WFOE can allow companies to provide consulting and services to clients, manufacturing WFOE allows the manufacturing of products in China and with the Trading WFOE, companies get the import and export license for trading locally.
The capital needed for setting up a WFOE depends upon the business type and the region. China has relaxed the regulations related to the capital and the same has also been provided in tax for encouraging maximum foreign investment in various sectors.
Having a WFOE set up has many advantages for the investors as they get complete control over the business and all the profits belong to them.
2) Representative Offices (ROs) in China: As the same suggests, it is opened for the purpose of representing the foreign company in China. It involves a very simple setup procedure with no requirement of registered foreign capital.
The Rep Office, however, imposes some restrictions on performing business operations in China. It is solely used for the purpose of market research, meeting new clients and suppliers, and to carry out promotions of brands and marketing.
The Rep offices cannot perform any profit-making or revenue-generating activity in China. They also cannot sign contracts on behalf of the parent company neither can they directly hire the staff.
If your company is interested in opening a representative office and at the same time hire employees to work for the company abroad, a PEO is an available solution. This service allows the company to hire employees in China without having a local entity, saving time and costs. In this way, the company could start testing the market and in the future, it can always decide to transfer to a WFOE.
3) Joint Ventures Company: Joint venture is a different type of company registration in China involving both Chinese and foreign entities. With such registration, it is necessary for a foreign company to partner with a Chinese company or an individual to perform business operations in China.
4) Sales Office: Companies interested in entering the Chinese market can choose to set up a sales office in China. This solution is also called an Employer of Record (EOR) or Professional Employment Organization (PEO). Under the structure of a Sales Office, a foreign company is capable of invoicing clients through the local PEO.
A sales office has lower setup risks and time constraints than the longer process of the Rep. office, WFOE, or JV entities. The main requirement is that the sales office must hire at least one employee or legal representative in China.
Steps to Incorporate a Company in China
The following are the steps that need to be followed for company incorporation in China.
• Application Submission: Submitting an application to the company registration authority for the registration of the company.
• Company Registration: The company is registered with SAIC (State Administration for Industry and Commerce) and the MOFCOM (Ministry of Commerce) as a Limited Liability Company. In case the application gets rejected for non-fulfillment of certain conditions the applicant can inquire about the status of the application for the authorities.
• Business license: After the registration is complete, the business license is issued to the individual. Both the dates, i.e the company setup and the business license are the same.
• Creating Company Stamps: Once the business license is obtained, it is important to have the company chops created as it is used on all the official documents. For registering company stamp, certificate of approval, and business license is needed.
Offshore incorporation in China is a way followed by many companies to enter the Chinese market.
We hope that we helped you understand that there are different possibilities of entering China and starting your business.
Depending on your current company structure, budget, and time you can choose different options like WFOE, Rep Office, or the more cost-effective PEO.
HROne is a fully licensed Foreign Enterprises Service Companies (FESCO) in China. We help foreign SMEs operating in China navigating through local employment, HR and payroll requirements by offering fully outsourced solutions.
Contact us if you want to know more about our services and how we can help your company to easily expand to China!