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Online CBA: How Should One Decide Which Type of Company to Set up in China?

Photo: Foreign-invested enterprises
Photo: Foreign-invested enterprises

Q: How Should One Decide Which Type of Company to Set up in China?

A: There are currently four types of foreign-invested enterprises in China according to the equity share and proportion of the registered capital and assets of the foreign enterprise concerned and its legal features. These are: 1. Sino-foreign equity joint venture; 2. Sino-foreign cooperative joint venture; 3. wholly foreign-owned enterprise; and 4. foreign-invested partnership.

1. Sino-foreign equity joint venture (EJV)

An EJV is an enterprise formed within China jointly by a foreign company, enterprise or other forms of economic organisation or an individual together with a Chinese company, enterprise or other forms of economic organisations. The characteristics of an EJV include:

  • The parties to an EJV may comprise: a Chinese company, enterprise or other forms of economic organisation + a foreign company, enterprise or other forms of economic organisation or individual.
  • It has the status of a legal person within the territory of China in accordance with Chinese laws. As such, it must abide by Chinese laws and regulations.
  • It is a limited liability company.
  • The parties to an EJV will jointly contribute capital and jointly operate the venture by complying with the principles of equality and mutual benefit and will share profits, risk and losses in equal proportion to their respective contributions to the venture’s registered capital.

2. Sino-foreign cooperative joint venture (CJV)

A CJV is a type of contractual enterprise established in China by a foreign enterprise, by other forms of foreign economic organisation or by a foreign individual with a Chinese enterprise or other forms of Chinese economic organisation. By entering into a cooperative agreement, Chinese and foreign parties will agree on the conditions of cooperation, the distribution of profits, the sharing of risk and losses, the recovery of investment, the methods of operation and management as well as the ownership of remaining assets at the end of the cooperation.

3. Wholly foreign-owned enterprise (WFOE)

A WFOE is an enterprise established in China according to Chinese laws by a foreign company, enterprise, other forms of economic organisation or individual where all the capital comes from the foreign investor. In contrast to an EJV or a CJV, a WFOE is characterised by the followings:

  • The enterprise is 100 percent foreign owned and no Chinese investor is involved. It can be invested by a single foreign investor or jointly invested by a number of foreign investors.
  • The enterprise is operated independently by a foreign party without the participation of any Chinese party. It will not be subject to interference when operating in accordance with its approved articles of association.
  • It assumes sole responsibility for its own profit and loss. All operating incomes will be owned and allocated by the investor(s) after tax payment.

4. Foreign-invested partnership enterprise (FIPE)

An FIPE is a partnership enterprise formed in China by two or more foreign enterprises or individuals, or it can be formed by foreign enterprises or individuals with Chinese natural persons, legal persons or other types of organisations.

(The HKTDC provides one-on-one China Business Advisory Service free of charge to assist companies in resolving problems encountered when doing business in China. For enquiries and appointments, please call (852) 1830 668 or register online.)

Content provided by Picture: HKTDC Research