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China Business Formation

China is a growing manufacturing hub of the world and also the largest market in the world with respect to its population. Hence it is a lucrative destination for foreigners to set up their business. It may seem enticing but setting up a business in China is a complex and lengthy drive. We at SWIFTIBC professionally help and guide foreign investors / entrepreneurs through the set of procedures to set up their businesses flawlessly and within standard government rules and regulations.

Business Possibilities in China - Setting up business in China with a LOCAL ENTITY

Wholly Foreign Owned Enterprise (WFOE)

It is basically a limited liability company wholly owned by foreign investors / entrepreneur. The WFOE can generate income in all major industries as included by the government and simultaneously also will be subject to Chinese taxation.

Benefits and for whom:

WFOE can conduct business in all manufacturing and also trade its products/ services internationally. It is neither restricted by law nor penalized for conversion of RMB earnings to US dollars to its parent company outside China.

Essential Requirements: Pre-Registration

The minimum share capital ranges between US 15000 dollars to US 140000 dollars. To maintain an optimum time probability for completing the registration it is preferred to keep the share capital to US 140000 dollars. 20% of the paid up capital (US 28000 dollars) would be required prior to the registration and the balance to be paid up within 2 years. The WFOE should entail the following:

  • Pre-approval of the business plan by China National Development and Reform Commission
  • Incorporation approval by the PRC Ministry of Commerce
  • Foreign exchange registration with China’s State Administration of Foreign Exchange
  • Submission of a feasibility study including the 1 year plan and budget to the State Administration of Industry and Commerce (SAIC). Project will be cleared upon clearance by local authorities about the strength of the business plan.

Essential Requirements: Post-Registration

All WFOE must register for:
  • Corporate income tax
  • VAT
  • Social security if the company has employees
Post this WFOE has to file:
  • Corporate income returns and provisional payments for each quarter
  • VAT returns and payments in each quarter
  • Social security contributions each month

Post incorporation the WFOE has to report to the Tax Administration Department monthly, quarterly and annually. SWIFTIBC helps you manage this in a reasonable and reliable way.

China Free Zone company

Foreigners who form an export-oriented WFOE and register in a SEZ (Special Economic Zone) are said to have a China Free Zone Company. Certain requirements will vary as per the company location in China; normally it includes minimum number of job created, minimum capital requirement and technology transfers.

China Joint Venture Company

It is also known as an Equity Joint Venture (EJV) company. It is a standard limited liability established between a foreign client and a Chinese joint venture partner. It requires higher share capital and licensing time is delayed. The joint venture company is beneficial if the local Chinese partner is skillful and possesses specialist knowledge

Essential Requirements: Post-Registration

China Joint Venture companies are required to:

  • Appoint a resident company secretary
  • Have a corporate bank account with a local bank
  • Obtain approvals as required by a China WFOE

Other Tax Incentives:

1) Startups enjoy 20% tax

2) High-tech companies enjoy 15% corporate tax

3) Companies involved in hiring handicapped employees enjoy 100% refund on wages

Business Possibilities in China - Setting up business in China with a FOREIGN ENTITY

A) China Branch Office – Foreign investors / clients are not permitted to have branch offices in China. It is only made possible for WFOE and China Joint Venture Company. The use of the China Branch Office is mainly preferred for investors who plan to expand their geographical reach for their existing businesses in China.

B) China Representative Office – The regulations in China allow foreign companies to open representative offices in China. They have simpler procedures as compared LLC’s and Branch Offices since their approval is only administered by the State Administration for Industries and Commerce. These companies best for investors who do not want to pursue any production-related or commercial activities in China.

C) China Offshore Company – This is basically a Hong Kong company. Registering a Hong Kong company helps the foreign investor to avail a better taxation system being in China and also helps in overseeing other productive and commercial activities in China.

Benefits: A Hong Kong company can be used as an international trading arm of a Chinese Business Company and also as the holding company facilitating investment in China.

China Manufacturing Company Advantages:

  • 200 + National development zones + Coastal Development zones + SEZ’s
  • Low local labour cost
  • Easy to lease land
  • Foreign investors are exempted from custom duties
  • Free trade zone programs available in Shanghai, Tianjin, Guangdong and Fujian (manufacturing setup haven)
  • Foreign investors can apply for 2 year exemption in corporate tax by investing in underprivileged areas or investing in high tech activities in Shenzen, Hainan, Shanghai and Pudong.
  • Infrastructure projects or environment projects can help the investor avail 3 years tax exemption and 50% tax exemption for 3 consecutive years.
  • Companies engaging in forestry, agriculture, fishery or animal-husbandry can avail 50% corporate tax benefit
  • Companies in technology transfers can avail tax exemption on income up to US 750000 dollars
  • Software development companies avail complete tax exemption for 2 years and 50% for following 3 years
  • Investment by foreign investors upward of US 1.2 billion dollars avail a 5 year tax holiday and 50% tax exemption for following 5 years post setup

Free Trade Zones Benefits:

  • Fast company incorporation procedure
  • Registration of company without minimum share capital and physical office
  • Possible listing of the company in Hong Kong Stock Exchange
  • Borrowing of RMB funds from overseas banks as well as issuance of RMB denominated bonds in the zone
  • Outward RMB payments via specialized forex bank accounts without government approval

China Labour Procedure and Rules:

  • 44 hours weekly work, not more than 8 hours per day
  • Working beyond official hours will avail 150% of normal wages
  • Working on holidays will avail 300% of normal wages
  • Hourly minimum wage ranges between US 1.3 dollars – US 2.8 dollars
  • Employers need to hand written contracts to employees within 1 month of hiring and can hire them for seasonal contract, open-terms or fixed.
  • Employers need to withhold income taxes of employees which should be remitted to the state authorities by the 15th of each month

China Export-Import Considerations

  • Companies need to obtain trade and customs registration certificates from Chinese Ministry of Commerce (MOCO) and Chinese General Administration of Customs (GAC)
  • Restricted and prohibited goods may be permanently banned from being imported to China OR maybe subjected to tariffs or quotas
  • Companies who are registered need to acquire export-import licenses which are valid for 1 year for import and 6 months for export. Goods imported for further processing or re-export do not need licenses.
  • Inspection and certification of goods imported in necessary and done by General Administration of Quality Supervision (GAQSIQ) and also Certification and Accreditation Administration (CAA)
  • Imported goods are subject to custom duties and have an average tariff of 9.8% as of 2015

China Tax System:

  • The corporate income tax (CIT) is flat 25%
  • CIT is 15% for companies in High-Technology or operating in area of Guangdong, Fujian or Hainan
  • Capital gains are taxed at CIT though 5 years is given to recover losses if any
  • Dividends, Interest and Royalties are levied a withholding tax of 10%
  • China Value Added Tax (VAT) is 17% which however can be 13% for certain foods, goods, books and utilities

Filing Requirements:

1) Annual statutory audit under Chinese GAAP framework requires companies to prepare their respective financial statements

2) VAT returns are to be filed before the 15th of every month

3) Tax returns to be filed with local tax authorities before 15 days of the end of each quarter

4) Annual tax returns and settlement to be submitted within 5 months post the completion of the tax year

5) Non compliance to full settlement will attract 0.05% on the unpaid fees daily

Legal and Compliance – Human Resource

1) Retirement scheme, medical insurance and unemployment insurance need to be complied- with by the companies

2) Termination of employees within the employment tern needs to be justified with proper reasoning

3) US 300 dollars is considered as the minimum monthly wage in China

4) American citizens are required to file all the details of the Chinese holdings with the Internal Revenue System. Failure to do so incorporates 10 years of imprisonment OR US 50000 dollars fine.

Legal and Compliance - Corporate

1) A lease agreement of company premises must be pre-approved by local government and municipal authorities before incorporation

2) In accordance to the Companies Law of Peoples Republic of China a Chinese public accounting firm needs to audit and certify the paid up capital

3) China Company will need to employ

  • 1 shareholder and 1 Director
  • Chinese Legal Representative
  • Chinese board of Director

4) Registration of the controlling person of the WFOE has to be done through China’s foreign invested enterprise online filing

5) Article 38 of the Companies Law of the Peoples republic of China states that the appointed Chinese legal representative can act on behalf of the company to conclude contracts and submit reports. He also has the authority of a director and shares.

6) Limited Liability Companies (LLC) need to have certain shareholders and employees as the board of supervisors who are serving as a government reporting body. They can report directors, supervisors or senior officers during any breach

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