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3 mistakes to avoid when setting up a foreign company in China

China has recently made it easier for foreign companies to establish themselves and have a presence in its country. But as the registration process is still notoriously time-consuming and fairly complicated, it’s still easy for investors to be caught out in the process. Here are 3 mistakes to avoid when setting up a business in China:

Error 1: Not injecting enough registered capital 

When submitting your application for a WFOE in China, you must declare your registered capital. Although there is no fixed rule for the amount of minimum registered capital, it’s essential to estimate how much money you need to run your business in China in its initial stages. If you fail to inject enough registered capital, your company will have severe cash flow problems which may even result in the complete failure of your business. In such a scenario, you may find yourself needing to inject more capital, but your company may run out of its initial capital before it arrives, having a disastrous effect on your business operations.

It is therefore advised that companies inject sufficient registered capital at the beginning of the application process to avoid the risk of business failure. In terms of estimating registered capital, things you may want to consider include your WFOE’s industry, region of incorporation, and labour costs. With years of experience in WFOE consulting, INS Global offers a summary of the typical registered capital for WFOEs in different industries and can advise you on the best figure for your company incorporation in China.

Error 2: Failing to accurately define your business scope

When setting up your company in China, your business scope will define your business operations. The business scope should be described correctly and precisely in one sentence. A company can only run its business within its business scope, which is approved by the Chinese authorities, so you must ensure that it is well defined in the Articles of Association.

If you don’t read the WFOE policies thoroughly and your business scope includes prohibited foreign investment activities, your application will be rejected. Changing your business scope is time-consuming and challenging, which will have a negative impact on your daily operations. If your business scope is too wide or too narrow, it may cause problems with the tax bureau and customs if you’re applying for tax breaks. If you don’t run your business within your business scope, your business risks being fined, or having its license cancelled.

To avoid these mistakes, it’s important to read through the Foreign Investment Industries Guidance Catalogue. INS Global offer expert guidance on drafting an appropriate business scope to ensure your WFOE succeeds in China.

Error 3: Not choosing the correct business address

When registering your company, there are certain requirements for its registered business address. Choosing your company’s address is one of the first steps when registering a WFOE. Chinese Company Law requires that all WFOEs should have a registered physical address in China. Failure to do so will result in your application being rejected. Some investors try get around this by registering their company at a virtual address, however, the Chinese authorities will inspect and audit companies, so they often have to relocate offices, receive a fine or even have their license terminated for non-compliance.

It is also worth noting that there are rules that dictate a lawful company address. A WFOE’s business address should be registered in a commercial office building and not a residential building. Registering a company at a residential address is illegal and may jeopardise your business operations in China. 

To avoid such errors and to help your business run smoothly in China, INS Global offers assistance every step of the way to help you find the perfect, legal company address.

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DATE December 9, 2019
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