An Entrepreneur’s Guide to Incorporating in China

1. FastLane Group ‘ Together We Build Better Business ’ An Entrepreneur’s Guide to Incorporating in China ©FastLane Group February 2020

2. FastLane Group I An Entrepreneur’s Guide to Incorporating in China About FastLane Founded in 2013, The FastLane Group is an accountancy and advisory firm with a presence in Hong Kong and Shenzhen. We combine innovation and technology to provide professional services with a particular focus on entrepreneurs, start-ups, fast growing technology companies, angel investors and venture capitalists.   The FastLane Group provides best in class services for businesses looking to operate in Hong Kong, China and the ASEAN region. Offering a diverse range of professional services, including accountancy, auditing, company formation and payroll management and HR advisory assistance, The FastLane Group is able to provide a holistic and comprehensive suite of services to our clients. Download This eBook is available to download as a free PDF at: fastlanepro.hk/ebook Or make a request to hello@fastlanepro.hk to download a copy.   Get in Touch For more information or to contact the FastLane, please email: [hello@fastlanepro.hk ] This eBook was first published in February 2020 ©FastLane Group 2020   Disclaimer This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Our group entity, FastLane CPA Limited is a CPA practice registered with the Hong Kong Institute of Certified Public Accountants (“HKICPA”) which allows us to provide accountancy and auditing solutions. We are also licensed with Hong Kong Company Registry to provide corporate services in Hong Kong and other jurisdictions.   Our Mission We strive to establish a secure and rewarding partnership with our customers to enable successful business operations within (SME market) Hong Kong.   We facilitate and introduce our customers to cutting edge technologies across a suite of professional services, allowing the autonomy to build efficient and effective organizations.   We are a business builder, professional advisor and accountant. ©FastLane Group November 2019

3. An Entrepreneur’s Guide to Incorporating in China FastLane Group I Table of contents 1 2 How to select the best investment vehicles for your business? Company types Basic structure of a WFOE Benefits of incorporating a WFOE Advantages of forming a WFOE in the Greater Bay Area Profit Repatriation 2 7 What is the WFOE incorporation process? Pre-registration Pre-registration name approval Tenancy agreement / lease certificate Notarization of documents Registration Name search and registration Registration of business license Registration record filing with MOFCOM Post-registration Carving of company chops Opening bank accounts Tax registration Foreign exchange registration Estimated time frame for incorporation Common mistakes when incorporating 3 14 Annual compliance requirements Monthly tax filing Filing of annual audit report

4. FastLane Group I An Entrepreneur’s Guide to Incorporating in China Introduction Interest in expanding into China is gaining given the country’s continued development as an international economic hub. This is because incorporating a company in China has perhaps become the most efficient way to gain exposure to this developing economy. However, what is the most effective way to incorporate a company? What type of company should I incorporate? What are the benefits in doing so? In this eBook, we aim to share insight on how to effectively incorporate a Chinese company through the most efficient investment vehicle for foreigners. ©FastLane Group February 2020

5. FastLane Group I An Entrepreneur’s Guide to Incorporating in China 1 How to select the best investment vehicle for your business? 1.0 Company Types negotiating and signing contracts, issuing invoices and rendering paid services to any organization other than its foreign parent company are prohibited. Furthermore, RO’s are not allowed to remit profits out of China. There are three varying forms of Foreign Invested Enterprise (“FIE”) that are most commonly utilized when foreigners expand into China. These are Wholly Foreign Owned Enterprises (“WFOE”), Representative Offices (“RO”) and Joint Ventures (“JV”). FIE’s will primarily utilize RO’s for the purpose of marketing activities and developing a local network. Each of these company structures carry their own unique set of pro’s and con’s. Representative Office (“RO”) RO’s are FIE entities that allow a foreign company to have a physical presence in China, and will allow them to send foreign staff there to conduct business activities. RO’s have several benefits to FIE’s, but bring about the most value to parties who are just starting to venture into this region. RO’s also allow FIE’s to have an office space in China, granting the ability to meet with potential clients and suppliers. No registered capital is required to set up a RO, meaning that of all the forms of FIE’s available, RO’s are the most efficient to incorporate. In the best-case scenario, the RO incorporation process only requires approximately 2 weeks to complete. However, RO’s possess many disadvantages which inhibit FIE’s willingness to proceed with this form of company. Perhaps the biggest disadvantage is that RO’s are not permitted to conduct any business activities which drives profits. Such activities include ©FastLane Group February 2020 2

6. Best Investment Vehicle 1.1 Joint Venture (”JV”) JV’s are partnerships between a foreign party and a Chinese investor. Together, these parties will share the JV’s profits and losses and will jointly manage this entity. Basic Structure of a WFOE WFOE’s all maintain the following structure: JV’s are incredibly common in China whereby certain industries, dictated by the PRC Foreign Investment Industrial Guidance Catalogue, often require a foreign party enter into a partnership with a local Chinese party. One shareholder, one director, one general manager, one legal representative, one supervisor and one finance controller Shareholder can be a natural person or corporation Local partners offer tangible benefits such as providing access to established distribution channels and business connections, in addition to providing significant knowledge of the local market. Director must be a natural person, there is no restriction on nationality Legal representative must be a natural person, there is no restriction on nationality There are many disadvantages to incorporating a JV as opposed to the other forms of FIE available. Firstly, the incorporation process for a JV will generally take between 4 to 6 months. In comparison to RO’s and WFOE’s, the incorpora- tion process is much more inefficient. For parties who require promptness, this option may not be particularly appealing. Legal representative shall be served by Chairman of the Board (if Board of Directors is established), or Executive Director (if they are the sole director), or General Manager Supervisor must be a natural person, there is no restriction on nationality. However, a Director or General Manager cannot serve as Supervisor at the same time Partnering with a local Chinese firm can often bring about its own set of unique challenges. Conflicting management styles and interests are common, and the division of a JV’s profits to its shareholders may be frequently discussed. Finance controller must be a natural person, there is no restriction on nationali- ty. However, the Legal Representative cannot simultaneously serve as the Finance Controller Wholly Foreign-Owned Enterprise Wholly Foreign Owned Enterprises (“WFOE”) is the most favoured investment vehicle for non-Chinese enterprises. Pursuant to Chinese corporate laws, WFOE’s are recognized as the China-based business entity designated for non-Chinese enterprises to establish their limited liability company in China. Given WFOE’s popularity among foreign parties, the incorporation process for WFOE’s and their unique attributes are further highlighted and detailed below. 3

7. FastLane Group I An Entrepreneur’s Guide to Incorporating in China 1.2 The aim of the GBA is to utilize the varying strengths of each participating city to further develop this hub into a global economic competitor in finance, entertainment and industry. Benefits of Incorporating a WFOE WFOE’s maintain several advantages which make it the preferred investment vehicle for non-Chinese enterprises. Firstly, as WFOE’s are entirely foreign owned and managed, there is no need to locate a Chinese partner to assist you with your business operations as foreign investors have 100% control over the equity of their WFOE. The GBA holds great potential for individuals looking to expand into China. At the time of writing, several policies have been enacted to incentivize both individuals and corporations to participate in the GBA project. Firms looking to utilize their WFOE to aid in their expansion into China will find that this business structure will allow a firm to employ both foreigners and local Chinese directly without having any limitation on the number of foreigners employed. For international busines- ses, perhaps one of the greatest benefits is that WFOE’s allow all profits made in China to be repatriated to the parent company as dividends. For individuals, there are immigration facilita- tion pilot schemes to assist foreigners in establishing a presence in China with higher education institutions and scientific research institutions also being able to utilize such immigration schemes. Corporations can utilize the various tax relief schemes which have been introduced by municipal governments. In order to support the talent development of corporations in the GBA, the Ministry of Finance and State Administra- tion of Taxation have granted individual tax exemption for overseas workers in the GBA. In China, many local businesses will request for the other party to settle invoices in RMB for “fapiao” purposes. WFOE’s, being recognized Chinese companies, are able to open company bank accounts which may handle such matters. All in all, WFOE’s allow greater flexibility and efficiency when operating in China. Individuals who are contemplating incorpora- ting a WFOE can expect greater assistance for their firm. With the various incentives offered by the Chinese government on both a local and company level, in addition to being exposed to the development of the GBA and its internatio- nal allure, there are clear benefits to incorpora- ting a WFOE in the GBA. Advantages of forming a WFOE in the Greater Bay Area The Greater Bay Area (“GBA”) is essentially the rebranding of the Pearl River Delta. The GBA integrates the cities of Guangzhou, Zhaoqing, Foshan, Huizhou, Jiangmen, Dongguan, Zhuhai, Jiangmen, Zhongshan, Shenzhen, Macau, and Hong Kong into a global economic and business hub. Please consult FastLane should you require advice to determine the right business structure for your company. ©FastLane Group February 2020 4

8. Best Investment Vehicle Profit Repatriation Multinational firms operating in China have always been faced with the issue of profit repatriation. Given China’s strict system of foreign exchange controls, profit repatriation is a highly regulated activity which hinders a business ability to operate efficiently. Individuals looking to utilize a WFOE to repatriate profits to a foreign holding company will find that WFOE’s provide the necessary flexibility in structuring an efficient profit repatriation scheme. In general, profits can be repatriated through dividends payments, inter-company transactions or inter-company loans. However, when planning a profit repatriation scheme, it is important to consider the various factors which may inhibit the ease of profit repatriation. For example, individuals should consider the potential tax liabilities to be incurred under each repatriation method and whether the repatriation amount or method will be scrutinized by Chinese government authorities or the restrictions on the repatriation amount. 5

9. FastLane Group I An Entrepreneur’s Guide to Incorporating in China 1.3 Disadvantages of Incorporating a WFOE The incorporation process for a WFOE is lengthy and can take several months to complete. In addition, an applicant must receive a series of authorizations from various Chinese regulatory bodies such as the Ministry of Commerce and the State Administration for Industry & Commerce. 1.4 What are the important positions to be held in a WFOE? A WFOE must fill at least three positions in their company, General Manager, Supervisor and Legal Representative. General Managers are responsible for over- seeing the day-to-day operations of the WFOE. Their specific responsibilities will be outlined in the WFOE’s Articles of Association. Supervisors are responsible for overseeing the performance of the company’s duties by its directors as well as its senior management. In other words, their primary role is to ensure the smooth and legal operations of the WFOE. Legal Representatives are the focal manage- ment figure of the WFOE and are responsible for the WFOE’s compliance with all relevant laws. As the Legal Representative’s name appears on the WFOE’s business license, they are seen as being responsible for WFOE and its operations in the eyes of the Chinese government. Chinese Company Law does not impose any restrictions on the nationality of the legal representative. ©FastLane Group February 2020 6

10. Incorporating a WFOE 2 What is the Incorporation Process? The process for incorporating a WFOE can be separated into three distinct phases; the pre-registration phase where applicants gather the necessary documentation to submitfor submission, the registration phase whereby the formal WFOE incorporation process begins, and the post-registration phase where a WFOE must ensure compliance with ongoing responsibili- ties. 2.0 Pre-registration Names which may mislead consumers or hinder fair competition, damage or challenge Chinese national unity, policies, social ethics, culture or religion are not permitted. Before the formal incorporation process for a WFOE begins, applicants should devote time to ensure that their documents to be submitted are appropriately prepared. Pre-registration name approval In addition, special characters are not permitted and certain words which can imply business operations in certain industries (e.g., banks or insurance companies) require special approval. Lastly, words such as ‘China’, ‘National’, ‘State’ or ‘International’ also require special approval The first step to incorporating your WFOE is to decide on an appropriate name. Chinese company law dictates that certain requirements must be adhered to when deciding upon a company name. Upon deciding on a company name, the name must be reserved with China’s Market Supervi- sion Administration (“MSA”). If the search indicates that the preferred company name is available for registration, the applicant party will apply for the reservation of the preferred name with the MSA. Typically, Chinese company names must incor- porate the following: Administrative region name of the company’s incorporation Brand name Industry or business the company is operating in The company name must include “Company Limited” Chinese legislation outlines certain restrictions in respect of what is not allowed in a company name or what may require special approval from Chinese government authorities. 7

11. FastLane Group I An Entrepreneur’s Guide to Incorporating in China This step is vital during the incorporation phase as the registered office address will be listed on a WFOE’s business license. In addition, acquiring an appropriate registered office address will assist in routine compliance procedures conducted by Chinese authorities. It is also important to note that careful conside- ration should be made in selecting your city location of incorporation. As certain city names in China carry varying levels of prestige, credibility and support, consideration should be made as to which city is most appropriate for your business. Relocation is a taxing and expensive process and may potentially require registration with a new tax authority, revision of bank account information, business licenses and other company certificates. It is common for Chinese authorities to conduct ad-hoc inspections on Chinese company offices. To the extent that the Chinese authorities does not consider the registered office address listed on a WFOE’s business license is facilitating the running of daily business operations, a WFOE can expect various penalties and fines. Tenancy Agreement / Leasing Certificate Notarization of documents When incorporating a WFOE, applicants must provide documentation to demostrate it has obtained a tenancy agreement (of not less than 12 months) to utilize as a registered office address where the business will operate from. Applicants should submit a document showing their utilization of this registered address in the form of a copy of the lease contract or a property deed. During the incorporation process, it is vital that the documentation provided to Chinese govern- ment authorities have been properly notarized. Notarization of application documents should be performed by a notary firm that has been officially recognized by the Chinese government. Generally, Chinese consulates and embassies are appropriate institutions to perform notarization. It should be noted that under current Chinese laws and regulations, it is prohibited to apply for incorporation when utilizing a virtual office as a registered office address. It is recommended that the address be located in a commercial building. ©FastLane Group February 2020 8

12. Incorporating a WFOE 2.1 Registration Contact FastLane now to reserve your preferred company name Name search and registration As previously mentioned, upon deciding on a company name, the name must be reserved with China’s Market Supervision Administration (“MSA”). During the incorporation process, the name may be formally registered. Registration of Business License Upon receiving approval for a WFOE name and obtainment of a registered office address, a business license must be obtained from the local State Administration for Industry and Commerce (“SAIC”). To prepare for document submission, it is important that applicants compile the following documentation: Documentation evidencing that their company name has been approved Proof a registered office address Business scope (the incorporated WFOE will only be able to conduct business activities the outlined business scope) Identification documents of the shareholders Proof of registered capital to be injected business license are only allowed to conduct business operations as defined in their submit- ted business scope. As such, applicants should take careful consideration during the incorpo- ration phase as to what short and long-term business operations their WFOE will conduct. On average, it takes approximately 7 business days to obtain a business license. Although there are post-registration activities to comple- te, a WFOE is deemed to be a legal person duly recognized to conduct business under Chinese law upon obtainment of a business license. The WFOE will then have full rights to operate as a business in China within the scope of its Business License. Registration record filing with MOFCOM Pursuant to Chinese Company Law, WFOE’s must complete the relevant company registra- tion process during their establishment, alteration or termination. Registration should be made with the Ministry of Commerce of the People’s Republic of China (“MOFCOM”). FastLane can help assist applicants register An important consideration to factor is that companies who have successfully obtained a 9

13. FastLane Group I An Entrepreneur’s Guide to Incorporating in China 2.2 Post-registration when conducting daily business operations in China. Given that majority of local Chinese firms prefer to conduct business in RMB, a local bank account is imperative for WFOE’s. As this account is the only bank account whereby a WFOE is able to withdraw RMB cash, this account will be necessary for settling payments and tax invoices to other parties. Although successfully obtaining a business license will grant a WFOE full rights to operate as a business, there are incorporation steps to address in the post-registration phase. Carving of company chops Company chops are essential to the proper management of a Chinese company as every contract which involves a Chinese company must include a company chop. This is because company chops are used in lieu of signatures to legally authorize documents on behalf of the company. Company chop’s have legal authority over the signature of a WFOE’s legal representative and has the power to validate documents and contracts regardless of who uses it. Because WFOE’s are entirely foreign owned, profit repatriation is often a key consideration when planning a company’s business opera- tions. The Chinese government allows WFOE’s to repatriate their profits out of China to the extent that prior approval has been granted by the Chinese State Administration of Foreign Exchange. In addition, a foreign exchange account is necessary for a WFOE to receive capital injection from overseas entities. Given that the rules and requirements surrounding Chinese company chops vary among each city, and multiple forms of company chops exist, it is important to consult a relevant professional service provider to fully understand which type of company chop is applicable to your firm. FastLane can help assist you with opening a local company bank account with your prefe- rred bank. A business license is required when opening a bank account FastLane will help apply for approval for the making of your WFOE’s Office Stamp (Office Seal) with the Public Security Bureau and arrange the carving of your company chops. FastLane can help to assist the bank account opening with your preferred bank Opening bank accounts A WFOE is able to establish a bank account with both Chinese and international banks. To facilitate their business operations, a WFOE will typically utilize a minimum of two bank accounts; an RMB bank account and a foreign currency bank account. RMB bank accounts are absolutely mandatory ©FastLane Group February 2020 10

14. Incorporating a WFOE Tax registration Upon successful incorporation, a WFOE will be immediately required to comply with the various monthly, quarterly and annual filing and reporting requirements. Such filing requirements include monthly and annual tax filings to be submitted to the State Administration of Taxation (“SAT”) and annual reports to the relevant government authori- ties. For completeness, submitted annual reports must be issued and signed off by a local CPA firm. In addition to reporting requirements, it is important for WFOE’s to register their VAT taxpayer status with the SAT. General taxpayer status will permit a WFOE to issue VAT Fapiao to its clients and customers, an important aspect to Chinese business whereby Fapiao receipts can be utilized for tax deduction purposes. Foreign exchange registration Given the Chinese government’s policies towards capital outflow, profit repatriation has often been a topic of discussion for foreign parties conducting business in China. As previously mentioned, one of the primary reasons why WFOE’s are the favoured invest- ment vehicle among foreign parties is due to their ability to remit profits out of China. To the extent that remittance of profits is vital to a WFOE, approval to remit profits can be obtai- ned from the State Administration of Foreign Exchange (“SAFE”). Once initial approval has been obtained, no further approval is required for subsequent profit repatriation. 11

15. FastLane Group I An Entrepreneur’s Guide to Incorporating in China 2.3 Estimated Timeframe for Incorporation The incorporation process for a WFOE typically follows the below timeframe. However, the approximate completion time is determined by the ability of the applicant to gather the necessary documents and the approval speed of Chinese authorities. StepDescription Working Days Preliminary Investor's schedule Investor's schedule Investor's schedule 1 Legalisation Of Incorporation Documents Tenancy (Lease) Agreement And Leasing Certificate (for the office to be used by the WFOE) 2 3 Other Documents Application for registration 4 Name Availability Search 1 5 Application For Approval And Reservation Of The Proposed Company Name 1 6 Application For Business License 3-5 7 MOFCOMRegistration And Record 3-6 Post Registration Procedures 8 Application For Approval And Carving Of Company Seals 2 9 Opening Of RMB Basic Account 20 10 Perform Foreign Exchange Registration 10 11 Opening Of Capital Account 10 Approximately 8-12 Weeks Total estimate timeline ©FastLane Group February 2020 12

16. Incorporating a WFOE 2.4 Common Mistakes Although WFOE’s are very common in China and are the preferred investment vehicle for foreigners, common mistakes are often made during the incorporation process. Miscalculation of the time required The application time for incorporating a WFOE can vary. Factors such as the ability of an applicant to gather the necessary documentation and the approval speed of Chinese authorities impacts the incorporation process. It is recommended that applicants apportion adequate time to complete the necessary procedures and to adjust their timeline as necessary. Failure to correctly define business scope WFOE’s who have successfully obtained a business license are only allowed to conduct business operations as defined in their submitted business scope. As such, applicants should take careful consideration during the incorporation phase as to what short and long-term business operations their WFOE will conduct. 13

17. Compliance Requirements FastLane Group I An Entrepreneur’s Guide to Incorporating in China 3 Annual Compliance Requirements Upon successful incorporation, a WFOE will be immediately required to comply with the various monthly, quarterly and annual filing and repor- ting requirements. As the financial year in China follows the calendar year, WFOE’s should begin preparing to complete their annual compliance procedures at the end of each year. 3.0 Monthly / Annual Tax Filing Companies in China must submit monthly and annual tax returns. China’s State Administration of Taxation (“SAT”) is responsible for handling all monthly and annual tax returns submitted. The deadline for submitting a WFOE’s Corporate Income Tax (“CIT”) return is due May 31st each year. WFOE’s must also be prepared to provide supporting documents upon request by the SAT. 3.1 Filing of Annual Audit Report An annual audited report must be submitted every year. This audit report must be completed by a Chinese registered accountancy firm. However, it should be noted that Chinese companies adhere to Chinese Generally Accep- ted Accounting Principles as opposed to the globally recognized International Financial Reporting Standards. The SAT will issue annual guidelines every year on how to appropriately reconcile tax returns and will determine if all tax obligations have been complied with. Failure to do so can incur heavy penalties and fines. As such, to the extent that consolidation of various audit reports must be conducted for the WFOE’s parent company, careful consideration should be made to the differing accounting practices to avoid inaccuracies. ©FastLane Group February 2020 14

18. Conclusion WFOE’s have many inherint advantages to them which make them the preferred choice of investment vehicle for foreign parties. The FastLane Group can assist in the incorporation process of a WFOE, and various other forms of enterprises, in the GBA. Please contact the FastLane Group if you have any enquiries! 15 ©FastLane Group February 2020

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