14 Pros & Cons Of Starting Joint Ventures In China

 

It's time for China company setup with a local partner

Of the many options available to foreign and domestic companies looking to open up a company, entering into joint ventures in China may prove to be one of the smartest business decisions one could make.

Partnering up with an organization or an individual is a strategic partnership that involves the sharing of various resources between both parties, and if the right local partner is found, will hopefully result in the sharing of greater profits. Anyone looking to expand their market presence and business influence in one of the biggest markets in the world will do well to study up on what a joint venture entails.

In this blog we will take a closer look at how to open a joint venture in China and run you through a breakdown of its own distinct set of 14 pros and cons so you will be able to make an informed decision on whether or not a joint venture is the way forward for your enterprise... 

How to open a joint venture in China?

 
A joint venture is the coming together of two companies/individuals to form a single entity that shares their respective markets, resources, technical knowledge, assets and all of the profits gained from the leveraging thereof.

Joint ventures are of the nature that they enable positive growth, often without the necessity of having to borrow any additional funds or seek the help of other investors. Embarking on a joint venture is often used as a weapon for larger companies to strengthen their position and increase their market share, or for smaller companies to become more competitive. Partners are able to leverage each other's customer database to market their products and services.

In the case of a sino-foreign joint venture, leveraging local assets as well as the expertise and knowledge of local conditions from the Chinese side, and the advanced technical knowledge and management expertise from the foreign side may prove to be a strategic decision resulting in success and mutual benefit.

In China their are two types of joint ventures that foreign and domestic companies can choose to enter into:

• Equity Joint Ventures
• Cooperative Joint Ventures

The China company setup for a JV is similar to that of a WFOE, but it will require not only the documents proving the existence and suitability to form a company of the overseas partner, but also those of the local Chinese partner.
These would include, but are not limited to:

• Business certificate of incorporation
• Shareholders' personal information
• Bank reference letters
• Scope of business for the new company
• Registered capital verification report

 

The pros of embarking on joint ventures in China

 
Much like any relationship worth having, a joint venture involves a great amount of give and take from both parties. Finding the right local partner with the right amount of resources and expertise is obviously the biggest factor to consider when partnering up, and if done successfully presents the following advantages for an enterprise undertaking China company setup:
1. Gain more insider knowledge and expertise in the region

2. Simpler handling of complicated bureaucratic procedures

3. Greater access to a massive market and any existing distribution networks

4. Sharing of all of the risks and expenses with a partner

5. Greater access to local resources and cheaper labour

6. Strengthen a company's position and win even more market share

7. Continue to stay competitive in the world space

8. Open up new business opportunities outside of a company's core business

 

The cons of embarking on joint ventures in China

 
As many pros that there are for venture partners, in the case of a joint venture the old saying of "United we stand, divided we fall" reigns supreme. If one enters too hastily into a partnership without getting to know one's partner and the objectives of the joint venture, it may present the following disadvantages for an enterprise:
9. Miscommunication between partners may result in costly business decisions

10. Sharing all the risks and expenses with an unsuitable partner

11. Conflicting management styles may lead to disparity within the company

12. Mismanagement of resources will lead to higher expenditure and waste

13. An imbalance may occur in what each partner brings to the joint venture

14. Cultural differences may lead to confrontation between partners and a falling out

As is plain for all to see, finding the right partner to embark on a joint venture is paramount to a company's success in China's PRD. The good thing to note is that with joint ventures the pros out weigh the cons if you do happen to find the right person to go into business with!

China Accounting: To Outsource Or Hire An Accountant?

 
China's finance and tax laws are ever-changing, and can often be too complex to deal with for foreign companies.

After all, how many foreigners arrive in China with a comprehensive knowledge of China accounting laws and procedures, or which taxes they need to be paying and how to reduce their tax burden legally?

Not many,or perhaps even none! 

So we can all agree that expert assistance is probably necessary. But foreign companies have a decision to make.

Hire a local accountant, or outsource their China accounting to a 3rd party agency.

In this blog TCBC are going to walk you through some of the benefits and drawbacks of both options which will help you make a decision that benefits your company in China.

Why Foreign Companies Will Require Assistance With China Accounting

 
Before we look at possible solutions for China accounting firstly it's important to consider what it is about dealing with accounting in China that can be so difficult for foreign companies.

• Language - accounting in China is undertaken in Mandarin Chinese.
• Accounts are filed monthly - this is a lot more regular than in most Western countries
• Tax is based on profit - the authorities may scrutinize companies who make a loss closely, and in certain circumstances will tax them on expenses instead of profit
• A yearly audit is required - must be issued by a CPA (certified public accountant in China)
• It may be easy to pay too much tax - inexperienced accountants could miss opportunities to reduce a foreign company's tax burden, such as tax rebates

Whilst filing taxes is nothing new for companies, the regularity that they're required to be filed, who they need to be filed with, and the fact they need to be filed in Chinese, are all challenges for foreign companies in China. Also, in the case of a yearly audit, who should be doing this and where are they to be found?

Finally, how can we be sure that an accountant is doing the best possible job for us, firstly making sure that the company is following accounting procedures legally and secondly paying only the tax that is necessary? Someone's qualifications and an interview may not be enough to ascertain these.
Very few foreign companies will be able to answer all of these questions immediately, or know those that do, hence the need for expert advice and assistance with accounting in china.
 

Hiring An Accountant: Benefits & Drawbacks

You may choose to hire an accountant as a part of your staff in order to look after accounting in house.

This is understandable for the following reasons:

• You keep control of your accounts
• Accounts are 100% confidential to only members of your company
• A local accountant on your staff could be an asset when it comes to filing accounts legally and paying the right taxes
• The local knowledge of your company increases
• Your accountant is devoted only to your company
• A good accountant should be able to help your company avoid paying certain taxes legally

However, bringing an accountant in-house could have the following drawbacks:

• An accountant who can do a good job and communicate effectively in English will command a high monthly salary
• It is hard to know if the accountant is truly qualified until they have been working for you for a few months
• Firing the accountant if things don't work out will be costly
• One person in your company holds considerable responsibility and power
• That person is privy to private information, such as staff salaries

Financially a competent accountant could be a high cost to your company, but if they are great at their job the benefits should outweigh the drawbacks. The main issue is that it can be hard to find staff at this level, especially if you're new in China.

Also, are you prepared to risk putting so many 'eggs in one basket?'

Outsourcing Accounting To An Agency: Benefits & Drawbacks

 

Outsourcing your accounting in China to a 3rd party agency is an attractive option for many companies for the following reasons:

• An accounting agency has a team with a great deal of cumulative knowledge
• They are used to dealing with many different kinds of companies who have probably been in your position
• The monthly accountancy fee is probably lower than an in-house accountant's salary, social insurance, and housing fund's costs
• Less risk to your company, as the agency can be changed quickly, whereas hiring and firing staff is costly and time-consuming
• Frees up time for you to focus on matters other than tax
• An accounting agency may have good relationships with the relevant government bodies, enabling them to offer faster, more effective, and better solutions to problems with accounts and tax

Hiring an agency to handle tax could throw up these negatives though:

• You make your company's private information open to others who don't work with you
• An agency may not be able to deal with your matters immediately as they have other clients to serve
• It may take time to send them documents or go to their premises to meet

In terms of risk, outsourcing your accounting is far better than hiring an in-house accountant. Especially for companies who are new to China, an agency offering China accounting services offers an efficient and low risk solution. You'd have access to an expert team (assuming that you have checked testimonials and that the agency is recommended), but are able to change your agency should you need to without an expensive dismissal package.

Most agencies are bilingual as well, and so although accounting is done in Chinese you can expect to be reported to in English so that the entire process is transparent.

Conclusion

Perhaps larger and longer-established companies in China may prefer to hire their own accountant, and this makes sense in some ways, as they will have the contacts to find good staff, the money to support them, and perhaps have enough accounting issues that they need someone who can deal with them immediately.

But for newer companies convenience is everything, and the ability to kiss goodbye to monthly accounting and tax payments as a task is worth its weight in gold, leaving them the time to focus on building up their business. Agencies also offer a ready source of expert information, but at a lower cost than an in-house accountant, and so is a good way to quickly get advice even if you are new to China.

Both options have privacy concerns. Only you can decide if you'd rather entrust your company's private information to an accountant on your staff, or to an agency. This depends on your relationship with either.

5 careless WFOE setup mistakes foreigners make in China

In this post we will take a look at 5 careless WFOE setup mistakes that foreigners make when opening a WFOE in China so that you don't make the same for your business... 

Setting up a WFOE in China

 

For many foreigners looking to register a company in China, setting up a WFOE (Wholly Foreign Owned Enterprise), or WOFE as it is otherwise known, has long been a favored platform to help foreign business people make inroads into the Chinese market.

WFOEs provide foreigners with many unique advantages such as having complete control of their own business, being able to hire low cost local staff and protect their intellectual property, and perhaps most importantly, being the sole recipient of all the profits.

The Chinese government has made registering and starting a business in China a lot easier in recent years, but as good news as this is for foreigners, it also presents the problem of people possibly rushing into something without doing the utmost to ensure that one can set up and manage a successful company. Business owners need to do careful planning lest a silly mistake is made!

5 WFOE setup mistakes that could prove costly to new businesses!

 

1) Choosing the wrong place to set up your company

 

Location, location, location! Finding the right place to set up shop is by far one of the most crucial decisions business owners will have to make. The deciding of a location for one's business may be influenced by a number of things such as the industry one is involved in, a place's infrastructure, its proximity to shipping ports and customer focus to name but a few.

Certain regions in China are more suitable for specific industries. For example in the South or PRD region (Pearl River Delta) sourcing/logistics/IT operations are more suitable, whereas in the North industries that are related to government are a better fit. It is important to do some research on each viable location as switching to another will lead to troublesome amendment procedures and having to de-register and re-register at different tax bureaus.

Long story short, you wouldn't impulse buy a house in a random country or area without scoping it out first, so don't do the same for your business!

2) Not making allowance for the amount of time it takes to register a WFOE in China

Registering and setting up a China WFOE can take anywhere from just around 2 months up to a year depending on things like where it will be registered, how fast you yourself can gather the necessary documents and how efficient the consultancy is you are working through 

Time waits for no one, and especially not for your business, so it is of vital importance that you account for the estimated time that will be spent setting everything up and then some. Not doing this might result in cash flow problems that could disrupt major areas of your business and leave you down and out before you even get out of the gate.

3) Not clearly defining a company's business scope in the Articles of Association (AoA)

 

A company's business scope serves as a description of the industry that a company is permitted to operate in, as well as all of the business activities it participates in. Once the relevant Chinese authorities have approved the business scope it is up to the company to engage in only those activities that were defined in the AoA.

Companies that engage in operations that fall outside of their business scope run the risk of being fined by local authorities or even having their licenses revoked. It is important for foreign business owners to clearly define the entire scope of their business operations in the AoA so as to avoid having too narrow a scope and transgressing the law.

4) Not understanding the labor law

When it comes to finding employees for your company, it is important to know what laws are in place to protect the interest of both parties involved. It is advisable for new employers to have an employment handbook at their disposal as their are many things that one has to be privy to.

The registering of a WOFE qualifies a foreign company to apply for work visas for their foreign staff. The number of visas available are related to the amount of RC invested. As visas are issued by governmental authorities, it is important to know the number of work visas one's company is eligible for so as not to exceed the limit and land one's company and employees in hot water.

Knowing as much as one can about the labor laws will help to ensure your company runs smoothly, and your employees are taken care of. At the end of the day the 'vehicle' of your company is only as strong as the people who are making the wheels turn.

5) Employing the services of an unqualified consultancy to help you register your WFOE in China

As I have mentioned above, the registering and setting up of a WFOE in China can be a lengthy process that requires foreigners to negotiate Chinese bureaucratic processes that may prove troublesome. For these reasons a lot of foreigners opt to seek out the aid of cheap consultancy services to help them register WOFEs, but more often than not end up with a sour taste in their mouths.

There are many consultancies or agencies that claim to be the best priced and promise you the world, but the reality is that they can't deliver what they say. When vetting different consultancies it is important to first check their website for additional information, see whether or not there is a high level of transparency regarding their services and if the English used is up to scratch. Additionally, it is helpful to read up on other customer testimonials so you can put your mind at ease.

Make sure that you do your homework before giving your business to anyone. Your company is a direct representation of who you are as a businessperson, and as such you need to work with people that understand your unique needs and challenges so that both parties can foster a mutually beneficial business relationship.

How To Set Up A WFOE In China By Converting From A China Rep Office

 

A China rep office is an excellent first port of call for companies who are doing business in China as it gives you a concrete presence there allowing your parent company to deal with local suppliers and customers, conduct market research, and have staff based in China.

However, a representative office has both benefits and limitations, and it's the latter that may cause you to look into how to set up a WFOE in China.

In order to understand whether your company needs to convert from a rep office to a WFOE we need to look at some of the features of each, and the process involved.
Keep reading as we take a look in more detail...

Have We Outgrown Our China Rep Office?

 

We have already looked in detail at representative offices in China
In a nutshell, a China rep office will offer foreign businesses a direct route into Mainland China in the following ways:

• Your company will have an actual office address in China
• Only taxed on running expenses
• Can hire local and foreign staff through a government agency, such as FESCO
• Open in only 2 weeks
• Can conduct market research in China
• Will have staff on the ground who can meet suppliers, customers, and conduct QC
• Can conduct marketing and promotions in China
• Can share technology and ideas with other organisations in China

Although all of these functions are useful, you'll notice that there are a few glaring omissions from activities that a normal company can conduct.

This is because a rep office is not a normal company in China. It is merely a branch office of the foreign parent company.

In fact, a rep office does not allow:

• Making sales
• Issuing invoices
• Signing contracts
• Storage of products and goods
• Remittance of profits out of China 
• Use of a virtual address as the office address

So basically, a rep office can only support your parent company's business in China, but may not conduct actual business itself.

You may well have outgrown your rep office if you need to conduct any of the above within Mainland China. If that is the case then you may need to open a WFOE.

 

WFOE Tax Benefits Over A Rep Office

 
Since a rep office is not a legal entity in China, being a branch of a foreign organisation, there are tax implications which may cause you to consider a WFOE instead too.

Essentially there is a flat rate of around 12% tax on expenses for a rep office.

This means that regardless how much money you spend on upkeep for the rep office and its staff and activities, there is no tax relief whatsoever and it will only become more expensive to run.

However, as a 'real' company in China, the WFOE, may deduct expenses from revenue, and may reduce tax by implementing a service agreement between itself and its foreign HQ in order to benefit from a 10% of actual profit rate in this case.

Finally, depending on the WFOE's scope of business, it may well be liable for tax breaks, such as VAT exemption between 2014-2018 for logistics WFOEs, whereas a rep office will never receive these.

Certain industries may also be eligible for reductions in CIT (corporate income tax) which can affect both company and staff members, for instance service WFOEs incorporated in the QianHai zone of Shenzhen.

How To Set Up A WFOE In China If I Already Have A Rep Office?

 
The good news is that it is possible to convert a rep office into a WFOE.

The bad news is that, like most China company registration processes, it is complex and bureaucratic and will likely require expert assistance.

The actual process is that you must apply to register a WFOE in the same way as if you were a foreign company setting up in China for the first time, and you must also deregister your rep office.

Success is gained when the two processes overlap in such a way that you're able to transfer your staff from the existing rep office to the new WFOE without any hassle. For instance, the WFOE must have bank account and capital in place to immediately be able to pay staff.
Since the rep office may only employ people through FESCO, a government accredited 3rd party labour agency, you will need to transfer the employees by:

• Notifying FESCO that you are going to terminate the employment of all employees due to the deregistration of the rep office
• Employees will start work at WFOE immediately as soon as their employment through FESCO is confirmed to be ended
• New employment contracts between staff and WFOE should be signed within 30 days
• WFOE needs to set up 2 social welfare accounts for staff members: The corporate social insurance account & corporate housing fund account, both of which must be attached to individual accounts of each member of staff
• WFOE must hold the personnel files of each member of staff (formerly handled by FESCO)

So there you have it. 
You can indeed switch from rep office to WFOE, but to avoid falling foul of labour laws the WFOE must be in place first in order that it can immediately re-hire the staff whose contracts are dissolved by the deregistration of the rep office.

Your Turn...

Have you been through the process of converting a China rep office into a WFOE?
What were the greatest challenges, and what was trouble-free?
Which tips would you offer for companies interested in doing this?
What benefits do you have now that the rep office couldn't give you, and how have they affected your doing business in China?