India China Education Series Establishing a business presence in China – A Guide for Indian Companies
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India China Education Series Establishing a business presence in China – A Guide for Indian Companies

Bar & Bench

Bar & Bench brings to you the fourth column of the India-China Education Series written by DH Law Associates Partner and Head of China Practice, Santosh Pai on how the Indian companies can establish business presence in China.

Bar & Bench brings to you the fourth column of the India-China Education Series written by DH Law Associates Partner and Head of China Practice, Santosh Pai on how the Indian companies can establish business presence in China.

There are more than 250 Indian companies which have invested in establishing a physical presence for their business in China. This means they operate a factory, an office, or both, have employees, etc. in China. Some of these companies belong to large business groups. Others are engaged in sectors such as commodities and chemicals where having a presence in China is essential. A majority of the rest are trading companies operated by Indians who are longtime China residents.

There are many Indian companies which actively engage with China without having a permanent physical presence. Their representatives either travel to China frequently or ‘borrow’ the business presence of another company to conduct business. Most of these companies are in the sourcing or procurement business. Their main business is to identify sources for specific products, place orders and manage shipments from suppliers. There are also larger companies which have established supply chains in China which do not have a business presence in China.

Indian companies looking to establish a presence in China can choose from the following five types of legal entities:

(1) Representative Office: Under the Management Rules of Registration of  Resident Representative Offices of Foreign Enterprises (effective March 1, 2011), a foreign enterprise may establish a resident representative office within the territory of China for the purposes of conducting non-profit-making activities, in relation to the business of that foreign enterprise;

(2) Joint Venture: Under the provisions of the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures (effective March 15, 2001) and the Law of the People’s Republic of  China on Chinese-Foreign Contractual Joint Ventures (effective October 31, 2000), a foreign investor may establish either an Equity Joint Venture or Contractual Joint Venture, respectively, with one or more Chinese company joint equity holders;

(3) Foreign-funded Partnership Enterprise: Under the Provisions of the Registration of  Foreign-funded Partnership Enterprises (effective March 1, 2010), a foreign investor may establish a foreign-funded partnership enterprise, with one or more Chinese individuals or companies;

(4) Wholly Foreign Owned Enterprise: Under the Law of the People’s Republic of China on Foreign-funded Enterprises (effective October 31st, 2000), a foreign investor may establish a company wholly owned by the foreign investor(s); or

(5) Foreign Joint Stock Limited Company: per the Provisional Regulations on the Establishment of Foreign-Funded Joint Stock Limited Companies (effective January 10, 1995), a foreign investor may establish a foreign owned joint stock limited liability company.

In other words, an Indian company without a Chinese joint venture partner has only two options: a Representative Office or a Wholly Foreign Owned Enterprise (WFOE).

Just like in India, a Representative Office of a foreign company in China can only undertake limited non-profit making activities such as:

a) Co-ordinating the parent company’s business activities with Chinese counterparts;

b) Promoting parent company’s business; and

c) Conducting market research.

A Representative Office in China will need to be fully funded by its parent company as it cannot undertake any revenue generating activities.

A WFOE, on the other hand, can be designed to undertake more or less everything that is permissible for a foreign company to undertake in China.

Several years ago, setting up a representative office in China was considerably easier than setting up a WFOE. However, in recent years, the Chinese government has consciously steered the choice in favour of the WFOE with a view to encourage investments levels and tax revenues. As a result, the complexity of the process for setting up a WFOE is now more or less on par with that for a Representative Office. The process of converting a Representative Office into a WFOE is also a complex process just like the process of converting a branch office or representative office to a wholly owned subsidiary in India so Indian companies would do well to opt for a WFOE when they decide to establish a formal business presence in China.

Certain requirements like minimum capital requirement for establishment of a WFOE vary from province to province in China. Tax benefits, concessions for obtaining land leases, etc. also vary considerably depending on the choice of location. Obtaining clarity on these issues from the local government is an integral part of the incorporation process as it might vary from industry to industry and also the origin country of the foreign company.

However, the documents required to file an application for establishment of a WFOE is more or less uniform. The list reads as below:

a) Certificate of Incorporation;

b) Memorandum and Articles of Association;

c) Letter of good standing from its bankers;

d) Scope of business with other supporting material such as brochures, annual report, etc.

e) Business plan for first year;

f) Lease agreement for office/warehouse/factory space in China;

g) Employment policy

More documents might be required depending on the nature and complexity of the proposed business. Unlike their counterparts in India, Chinese regulatory agencies are likely to negotiate terms of incorporation, tax benefits and the like so it is advisable for Indian companies to conduct a thorough study of the available options before zeroing on a location for their WFOE in China.

Due to the two-way communication between the regulators and the foreign company, it takes anywhere between three to six months for an Indian company to register a WFOE in China.

Santosh Pai is a Partner at D.H. Law Associates, which is the only Indian law firm to have an active China practice since 2010. He is based in Beijing and can be reached at santosh@dhlawassociates.com. He regularly blogs about India-China business topics here.

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