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Foreign Invested Enterprises - FIE


The following categories of Foreign Invested Enterprises (“FIEs”) can be used to invest in China:

  • Representative Offices;
  • Joint-Ventures;
  • Wholly Foreign Owned Enterprises;
  • Others (Foreign Invested Partnerships & Variable Interest Vehicles).
 
The main differences between those categories rely on legal liability, registered capital, and on business scope.
 
REPRESENTATIVE OFFICE - RO
 
A RO is a liaison office of its parent company in China. It is the easiest type of structure to set-up, it requires no registered capital, but presents some important drawbacks. Its activities are limited to market research, promotion, and networking activities, in connection with the parent company's business. ROs cannot carry commercial activities and more generally any profit-seeking activities. Hence, ROs cannot issue invoices.
 
Besides, ROs have no legal personality, meaning they do not possess the capacity for civil rights and conduct, cannot independently assume civil liability, and are limited in their hiring ability. Local employees can only be hired through government HR agencies and no more than four (4) foreign employees can be hired per RO. Foreign staff working for ROs should have an employment relationship with the parent company abroad, and any disputes should be settled under the laws of that country.
 
ROs are taxed as permanent establishments of their parent company in China, which generally results in an overall tax burden of 11-12% of their total gross expenses.
 

JOINT-VENTURE - JV
 
A JV is a limited liability company established by a foreign investor and a Chinese company. Generally, the foreign investor of a JV shall own at least 25% of its total shares. More often, JVs are chosen because (i) the targeted industry is restricted, and Chinese law requires foreign investors to invest in such industry through a JV, or (ii) the foreign investor wants to enjoy the sales channels and network of his Chinese partner.
 
There are two (2) kinds of JV in China:
 
  • Equity Joint-Venture - EJV
In an EJV, profit distribution and the distribution of surplus assets upon liquidation must be in proportion to the shareholders' equity in the company’s registered capital. The same principle applies to the allocation of seats on the EJV's board of directors.
 
Transfers of equity interest in an EJV to third parties are subject to the consent and exercise of statutory pre-emption rights of the other shareholder(s).
 
The board of directors is the highest authority of an EJV. It decides on all major issues relating to the operations of the company. Certain important decisions require unanimous board consent.
 
  • Cooperative Joint-Venture - CJV
CJV may be incorporated as a limited liability company or exist as an unincorporated entity without legal personality, although such alternative is less common.
 
While key features of CJVs resemble those of EJVs, CJVs typically offer more flexibility to investors. This includes: (i) the possibility for Chinese parties to provide non-equity "cooperative conditions" to the company; (ii) the possibility to distribute profits and allocate seats on the board of directors freely, regardless of each party's proportional shareholding in the registered capital of the company; and (iii) the possibility for foreign investors to recover their investments before the CJV's termination, provided that all of the CJV's fixed assets are transferred to the Chinese partner(s) free of charge upon termination.
 
Transfers of equity interests in a CJV to third parties are subject to the consent and exercise of pre-emption rights of the other shareholder(s).

 
WHOLLY FOREIGN OWNED ENTERPRISE - WFOE
 
WFOEs are limited liability companies with 100% foreign ownership. They are the most commonly used foreign invested structures.
 
Unlike ROs, WFOEs enjoy legal personality, can carry commercial activities, make profits and issue invoices in RMB. Meanwhile, the liability of its shareholders is limited to the assets they contributed to the company. In terms of HR resources, WFOEs can hire local staff directly, without requiring the services of any employment agency. In principle, the number of foreigners hired by a WFOE is not limited. In practice however, a reasonable ratio between local and foreign employees shall be maintained in order to obtain working visas for foreigners.
 
The only limitation on the use of WFOEs depends on industry restrictions. Indeed, foreign investors cannot use WFOEs in all sectors. Main restrictions in this respect are listed in the Foreign Investment Catalogue. If allowed, WFOEs enjoy significant advantages for foreign investors, including organizational flexibility and the autonomy of not having to negotiate with a Chinese partner.
 
Three (3) kinds of WFOEs are available:
  • Service (or Consulting) WFOE;
  • Trading WFOE; and
  • Manufacturing WFOE.
They differ significantly in terms of incorporation process, costs, and business scope. Manufacturing and Trading WFOEs require special certificates (e.g. Environment and Safety Certificate, Energy Impact Assessment Approval, etc.) which imply longer registration process; while Consulting WFOEs do not require special certificates, which shortens the registration phase.
 

OTHERS
 
  • Foreign Invested Partnership - FIP
 
FIPs offer some interesting advantages, including the ability for domestic and foreign investors to invest as corporates and/or individuals, tax savings (through transparent taxation mechanisms) and the ability to hire foreigners. However, the general partner of an FIP bears unlimited liability for the debts of the partnership.
 
  • Variable Interest Entity - VIE
 
To circumvent the rigidity of regulations applicable to some industries, foreign investors have used another investment structure which is called Variable Interest Entity (“VIE”). In a VIE structure, typically, (i) the foreign investor incorporates a WFOE  in China; (ii) the foreign investor finds a Chinese party (the "Operative Company") which operates specific activities, holds the licenses and permits and is in charge of the commercial relationships with the clients; and (iii) the WFOE provides the Operative Company with consulting and/or other services, allowing a significant part of the profits of the Operative Company to be repatriated to the WFOE by means of consulting/service fees.

However, Chinese authorities have strengthened the control of VIE structures and several regulations, including the recent Draft Foreign Investment Law (published on January 17th, 2015) have been issued, discouraging or prohibiting their establishment. 

October 2015

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