Business, China, Legislation, Markets and Companies

International Internet Magazine. Baltic States news & analytics Wednesday, 07.06.2023, 08:27

Business in China – the status of the juridical person

Evgeny Kolesov, general director of Optim Consult Company, Guangzhou, China, 29.08.2008.Print version
The successful working results of many Chinese enterprises and foreign companies depended mainly on the tax legislation of China. There is no use in tax evasion; you should know all the details of the tax legislation to have fewer payments.

We should pay great attention to the subject “How to start business in China?” Before starting any business affair or activity, we should point out the basic stages such as:

1. The critical analysis of industrial zones and areas on the territory of China.
2. Chinese Legislation concerning the company activity.
3. Registration procedure.
4. The minimum working staff – staff selection.
5. The business project budget.
6. The specific of doing business with China and other peculiarities.

Below you can find the concrete explanation for every stage.

1. The critical analysis of industrial areas in China

Let us take an example. In 2003 one of the Moscow companies specializing on sanitaries made up a conclusion to establish their own representative company on the territory of China, with the business project budget of 100000 USD. The group of three specialists left for China on a business trip to make the company registration, to rent a warehouse, to establish long-term business relations with Chinese manufactures. One of the specialists was the Moscow company director, a businessman with a 15-year experience. He was regarded to become the general director of the company established in China. The other person was his assistant.  The third one was an interpreter. He was a professional lawyer, the master of Chinese.  Besides he had a 4-year working experience on the territory of China. It was decided to hire two Chinese specialists: one of them - for working with suppliers, the other – as an accountant.  In general,   this team’s work wasn’t very successful; they made some principal mistakes planning their business in China. The first specialist who was sent for China was the interpreter, he had to analyze Chinese market of sanitaries and determine those industrial districts to establish and develop a representative company in. After two-months work he made a conclusion that the most profitable and further-perspective industrial zone was considered to be the Eastern China. It was definitely the industrial area with a number of manufactures specializing in sanitary. Actually, the critical analysis of industrial areas of China, made by the interpreter, was a success. But it was not accepted. The other specialist made his decision to start their business on the South of China. The idea of living somewhere on the seacoast prevailed. Unfortunately, this idea was totally incorrect. That was the reason they crashed and failed.


The critical analysis is the basis of business starting in China. Making your plans concerning China, the first thing you should do is to make a research: a marketing research, business research, whatever… First, you should definitely know the region to start your business in.  Having ignored this stage of business relations the company, which had spent 100000 USD on the territory of China, was a complete failure.

2. The Legislation of China

The other main point concerns legislative rules and regularities of business relations in China.  One of the most successful rule of doing your business is regarded to be high-educated and aware of that country legislation.


The basic legally-standard statements are the following:
1. The Law of “Enterprises with 100% foreign investments”, dated on April, 12, 1986. 
2. The Law of “Companies in China” dated on June, 1, 1994.
3. The Law of “Venture Enterprises and joint organizations”, dated on July, 1, 1979.


It is a well known fact, that in December 2004 China celebrated its three-year-old anniversary of membering in the World Trade Organization. That is why China has already taken serious measures to restrict the legislative regularities and to escape the discrimination policy.   Undoubtedly, China cannot disclose all possible ways for foreign companies. The WTO companies are against making China be “the conqueror” of the world market.  Having no protection measures by the state, Europe cannot resist the power of China. 


According to the Legislation of China there are three legal-organizational forms of enterprises with the state status: representative company, a joint organization or venture enterprise, and a company with 100 % of foreign investments. The government statements and rules which ought to regulate business activity of all the companies have got additional local legal-standard acts.  Registration procedures are not the same in different districts of China. 


The difference usually concerns the registration order in the local authorities. But the main difference is taxation measures. Successful results of many Chinese enterprises were achieved due to the flexible policy of Chinese Legislation. There is no use in tax evasion. You’d better know the Legislation of China in details. In this case you can apply for the companies and specialists who can offer you a professional service concerning the problems of the law and other legislative acts. 
Unfortunately, we cannot give you detailed information of all the organizational forms, so we can present you the information about a representative company on the territory of China. 


The registration of such a company takes less foundational costs. What is more – the registration procedure takes fewer difficulties. However, this sphere of the company activity becomes accentually narrow, in comparison with influence of some other enterprises and companies. 

3. Registration procedure

This paragraph is devoted to the establishment of a foreign representative company on the territory of China and its registration measures. The main specialization of so-called “representative company” is meant to be marketing searching, advertising procedure, exhibition participation, signing contracts on behalf of general offices, manufactures inspections. Making a decision to establish a delegation organization of your main company on the territory of China, it is very important to compare your aims with your possibilities and the government regularities. In some cases the government is not responsible. You should take these facts into consideration while selecting the status.


To establish a representative company the following documents must be necessarily filled up:
- the resolution of the Council of Directors;
- petition-letter concerning the establishment of a representative company;
- the document of the general representative assignment;
- power of attorney document proving the fact of presenting the company interests;
All these documents should be signed by the superior organization, stamped below.


Also you will definitely need:
- the document copy of the rent contract;
- the copy-document of the permission for leasing.


There are some documents taken by the general representative:

- 12 colored and 6 black/white, 2-inch photos;
- the passport copy;
- resume.


Besides, you should fill in the application form, have all the documents in Chinese, make an apostil. Then, all the documentation should be handed for conformation and registration.You should get Ratification Certificate made in two copies in 30 days after all the documents were accepted by the local authorities. One of the two copies is brought to the local Chamber of Commerce and Industry that can make the registration certificate. The Certificate can be effective for three years. The registration can be prolonged every year. The other copy is handed to the tax organization. According to the Certificate taken in the tax authorities a  representative company should pay taxes: expenditure tax and income-tax. By the Legislation of China, the minimum salary of a foreign specialist should be obligatorily more than 500 USD. The salary of less than 500 USD should not be taxed.


Let us have look at income-tax rates:

4001 – 4500 RMB – 5%;
4501 – 6000 RMB – 10%;
6001 – 9000 RMB – 15%;
9001 – 24000 RMB – 20%;
24001 – 44000 RMB – 25%;
44001 – 64000 RMB – 30%;
64001 – 84000 RMB – 35%;
84001 – 104000 RMB – 40%;
104001 and more  – 45%.


The bank account can be opened in any bank of China. Having the documents applied for tax organizations you should have the bank documentation about the total amount of investments paid by the general company to let a representative company do its business in China.

Actually the process of registration is not very complicated. You should only pay attention to some bureaucratic peculiarities connected with the registration procedure.

4. Staff selection

The Staff of a representative company is determined by those functions which are entrusted on it and also by the functional volume. For example, monthly you ship about 20 containers to Russia.  Your freight is of a different kind, starting with poly bags, cups for plastic bottles, toys and finishing with flexible feeders, metals, etc.  In this case, high rejection is virtual. How to avoid it?  The answer is to establish a representative office for constant monitoring of the situation at a place. The constant monitoring allows solving all problems or difficulties as soon as they arise, monitoring can influence the production procedure when there is no need in great powers or resources, but there is a very strong possibility of getting successful results.  


At a first glance, you will need a general representative and at least two helpers (preferably Russians) for charging control and for holding connection with the main office. Also two Chinese managers will be needed for holding negotiations with manufactures, coordinating different working moments and for business trips. At the prime time no accountant is needed, you can take the advantage of service which is provided by Chinese companies, they will pay taxes, prepare and hand tax accounts for the taxation authorities. The cost for such service is different, depending on you representative company’s location, but usually it can not be higher than 200 USD per month. In the question of the revenue law I recommend you to find the best consultants; qualified, professional help in this branch of legislation is priceless. Also, there is no need to hire a lawyer, the status of the representative company doesn’t allow concluding treaties, accordingly, in case of any problems and exigencies use the help of professional lawyers from legal advice companies. With these companies you may sign service agreement - for example, for one year. The cost for the service depends on the status of the company which you chose - in general, it can vary from 3 to15 thousands of USD per 1 year. It is up to you to decide, but according to my experience at the beginning of a representative company activity there is no special need in this crevice. By means of this simple and quick calculation we see that for work of the representative company only 5 people are needed. It will be your own decision how much you will spend on wages, but it is always better to hold on to the golden mean.


The salary level depends on the content and difficulty of the job, on the needs for possessing special skills, on the educational level, experience of the workers, etc. In any case, if you want to have a success you need to create a team which will be able to work hard for achieving good results. The success of the organization depends on hard efforts of the whole team; the aim of the leader is to “unite the best people under his banner”. The Budget of the project is what you have to decide from the very beginning. Paradoxically is that for the exact determination you have to have maximum concrete information about all points and specialties of representative company’s work. What kind of office do you need? In what region? How well-equipped will it be? What about the staff? If your staffs are not able to speak clear, straight and laconically - your phone bills will be measured by thousands of USD. If you are thinking of counting on the Internet, you are wrong! There are some kinds of people, only guillotine can help them, I wish you never meet them and especially never ever have them as your staff. We have noticed only a few points of expenses that you have to think about. But also there are accommodation rent fees, visa fees, flight ticket costs. This is what we call situation of Business theory and practice. Theory is connected with getting maximum profit, and practice with minimal risks of any loss. To avoid the situation in which theoretically calculation plan is great, but practically you didn’t take into account many important moments, so now all the calculations can not hold any water, you should apply for professional help, so you can confirm high level of your status. You can never know everything, but to know where to ask is a very high skill. Do not be deluded that the budget of one hundred thousands of USD can provide you an absolute success. The author of this article several times was a witness of cases, when people invested five thousands USD and in half of the year were dealing with 3 containers supplying monthly, but also there were cases when companies invested dozens thousands of USD, but went broke and were prosecuted by the government of PRC. 

5. Particular features for doing business with China

On realization of the point #1, it is important to place more emphasis on the following subjects.
1. During the analyzation of industrial zones, while getting in touch with manufactures for clearing up the price, you may get unreasonably high prices. Remember - this is overpricing. Call to your mind some simple laws of logic. The identity can not be true if only one of the comments is false. If you are deluded by overprice, your conclusion will be wrong. 
2. Observe the rules of complex analysis. If you are satisfied with the price – it is very good.  Find out everything about the delivery, electricity quotas in the region (it may happen that factory is able to produce only 1 container per month, while you might need 2 containers).  During the realization of the point #2 please remember that bureaucracy does exist in China. First of all, you should foresee some measuring which will help you to make the authorities register your company during short period of time. Secondly, entrust the registration of your company to the professionals that fact will save your precious time on standing in lines trying to visit different instances. There is one more peculiarity. If you don’t want to ‘blow up’ your staff too much, by taking too many people, I recommend you to hire good-experienced people.  “For every commission only one particular person has to hold responsibility”. I think Bismarck really hit the nail on the head. It is also a fundamental statement for China. But, of course, this statement can be referred only to some easy commissions, which don’t include any team work.  Finally, people who work with China are certain that one of the most necessary strain for doing business with China is patience. Be patient and surely you will get a success! 


Optim Consult Company presents the group of professionals possessing a high level of theoretical acknowledgement, a great practical experience, definite technology schemes and methods.

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