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1.1.2. Specific Uses of Available Legal Entities

Uses of Representative Offices (Rep Offices)

Rep. Offices may conduct market research, develop partnerships and business channels.

Uses of Foreign Invested Enterprises

For Foreign Invested Enterprises, the nature of the business must be declared during the licensing phase of the registration process. The intended scope of operations in China and the capital investment the company is willing to make determines the category of business that a foreign company declares. The following categories are by far not exhaustive but represent the most common uses of foreign invested enterprises operating in China today.

Uses of Wholly Foreign Owned Enterprise (WFOE)

Service Company

As the name implies, the foreign firm provides services to either companies or consumers. In most cases, the company may not manufacture or trade goods. Examples of service companies include consulting, training, restaurants, and management service providers.

Manufacturing Company

The nature of this business allows the foreign company to produce goods for sale on premises as well as sell finished goods domestically and internationally. Manufacturing companies do not require an intermediary to sell goods locally or internationally and may import raw materials for production. The registration process, however, might be more complicated than other business categories as manufacturing plants may require additional certifications.

Foreign-Invested Commercial Enterprise (FICE)

A FICE allows foreign companies greater flexibility in terms of business activities. These activities include retail, wholesale, and franchising operations. Once established, a FICE is granted both import and export rights. FICEs may also buy and sell products freely in China without an intermediary. It is also possible for manufacturing FIEs to apply to extend their business scope to include FICE capabilities and vice versa.

Uses of Joint Ventures

Uses of a JV can include those listed for WFOE, and also allow access for foreign investors to industries which are prohibited by the Catalog for Foreign Investment.

Uses of Foreign Invested Partnerships

Like FIEs, the nature of the business of an FIP must be declared during the registration process. They are allowed to engage in the same types of business as WFOE’s, those which are not restricted or prohibited in the Catalog for Foreign Investment. FIPs are rarely used as a vehicle for investment given the potential liability of partners. When it is used, it is typically for establishment of CNY denominated funds by private equity and venture capital firms.

The use of FIPs has been limited as the taxation of foreign partners, especially limited partners, has been unclear. In determining the taxation of FIPs, the tax bureau has considered three aspects: the general taxation of partnerships, the nature of investments in a partnership, and whether or not a foreign invested partnership constitutes a permanent establishment.

Branches

Given that in practice only financial and oil exploration related companies are allowed to register branches, their use is limited.

Specialized Entity Uses

Foreign Investment Company Limited by Shares (FICLS)

The FICLS structure is a share issuing company with limited liability with capital divided into shares of equal value and voting rights. A FICLS may be established as a new company or converted from an existing FIE (WFOE or JV). Unlike common JVs, which only Chinese companies can invest in, the FICLS structure allows Chinese partners to invest through companies or as individuals. In addition, all decisions made by the board of directors or by the shareholders require only a two-thirds majority, so a single shareholder can exercise full control of the company if they hold at least two-thirds of the shares or by virtue of a shareholders' agreement.

They are often used to acquire less than 100% stakes in existing businesses and can also issue shares to the public and be listed on the Shanghai or Shenzhen stock exchanges, or an overseas exchange upon government approval. The business scope of a FICLS includes that of a WFOE, if formed as such, or of a JV.

China Holding Company

China holding companies can invest in and coordinate the activities of foreign invested China subsidiaries. They are often used by foreign investors with multiple projects and large capital investment needs in China and can be setup as WFOEs or EJVs. Holding companies allow for the consolidation of sales, R&D, back office functions, etc. They also allow for the use of the terms “holding company” and “China” in the company’s name. These terms are restricted in use in the names of other company types and can raise the perceived status of the company.

Regional Headquarters

Regional headquarters are FIEs that can provide management and support services to subsidiaries in China and elsewhere in the region. Under PRC law, the requirements and benefits of a regional headquarters are dictated by where it is established. The options include Beijing, Shanghai, Guangdong, Guangzhou, Shenzhen, or national.