Imagine you're an investor in the US. You came across this news,
“Foreign Direct Investment (FDI) inflows to China are nearly USD 10.85 billion as of May 2023, which is a direct 12 percent jump compared to the previous year.”
Now as an investor, you’re interested in exploring options to invest in China. But you want to have answers to several questions to make an informed decision -
Can I legally set up an entity in China? If yes, how?
- Are foreign-invested enterprise (FIEs) the best way to enter new markets?
- Are FIEs profitable?
- Can I still do business in China without setting up an FIE?
- What does FIE mean?
What is FIE?
FIE or a foreign-invested enterprise refers to a business entity established by a company or investor outside its original country.
An FIE is formed when a company or an investor desires to invest in a foreign company. The investment can be of different types, like a joint venture with a local company or a foreign-owned enterprise. Sometimes FIE is also formed when a foreign company acquires an existing local business.
Establishing FIEs is a complex process and needs the knowledge of local laws and regulations. The applicable laws and regulations depend on government rules set and impact various governing aspects of the business —- like licensing requirements, ownership percentage by foreign investors, sector-specific restrictions, etc.
What are the Types of Foreign-Invested Enterprises?
FIE in China can be of different types. These include:
Wholly foreign-owned enterprises (WFOEs)
A wholly foreign-owned enterprise (WFOE) is a Chinese company with limited liability completely owned by a foreign investor, established under the Wholly Foreign Owned Enterprise Law 2016, which was repealed by China's Foreign Investment Law 2019 on January 1, 2020.
Considering the repealed WFOE Law 2016, no new entities can be formed under this law. However, investors can conduct wholly foreign-owned investments in China based on the Foreign Investment Law 2019.
The corporate governance approach for WFOEs has changed under the Foreign Investment Law 2019. However, existing FIEs established before 1st January 2020 can retain their corporate governance structure for five years up to 31st December 2024. The FIEs must use this period to restructure their corporate governance to comply with the current Chinese corporate and business laws.
Sino-foreign equity joint ventures (EJVs)
As the name suggests, an equity joint venture or EJV is a type of FIE formed when a company, investor, or individual enters a joint venture with a Chinese company, enterprise, or organization under the Sino-Foreign Equity Joint Venture Enterprise Law 2016.
This type of joint venture involves the legal incorporation of a limited liability company. The contract defines how the profit will be distributed depending on the capital contribution of each partner.
Before the 2019 FIL law was implemented, China used to have a bifurcated corporate governance administration system for FIEs and Chinese companies.
Sino-foreign co-operative joint ventures (CJVs)
The CJV is another type of joint venture option in China and is flexible compared to EJV. CJVs work best when you want to conduct an ad hoc project or have a limited period. Although convenient, it has major risks involved - unclear responsibilities and partner obligations, conflicting management styles, and more. Hence, CJVs are less preferred by businesses. Profit distribution depends on the contract agreements decided between the partners.
Foreign-invested partnerships (FIPs)
Foreign-invested partnerships, or FIPs, are a new form of foreign-invested enterprise created under The Measures and Registration Rules in China.
According to this rule, FIPs must register with the local Administration for Industry and Commerce (AIC). If only for investment purposes, the FIP registration should happen at the provincial level AIC. All the capital contributions for the FIP must be made in foreign currency or kind. This may include intellectual property rights, land, and other property usage rights.
Foreign-invested venture capital enterprises (FIVCEs)
Foreign-invested venture capital enterprises (FIVCEs) are a type of foreign-invested enterprise (FIE) that allows foreign investors to invest in Chinese businesses or projects. FIVCEs are legal FIE in China that can engage in a limited scope of business activities, primarily related to venture capital investment.
Benefits of FIEs
Access to new market
Foreign-invested enterprises can facilitate collaboration with local businesses in the host country, which can benefit market entry and expansion. This collaboration can provide valuable insights, resources, and networks for the success of the FIE.
FIEs can be established to invest in profit-making ventures in foreign countries, especially China. They provide a platform for businesses to identify and capitalize on profitable opportunities in foreign markets.
Government support and incentives
Establishing foreign-invested enterprises gives companies a legal presence in the foreign country, ensuring compliance with local laws and regulations. This provides a solid foundation for conducting business operations and mitigating legal risks while receiving government support and incentives.
When Should Businesses Use an FIE and When Should They Not?
When to Use an FIE
If you’re a non-China-based investor and want to set foot in the country, FIE can be helpful. For example, if you want to invest in a profitable business in China, an FIE can help you get started. Or, if you want to expand your customer base in China or set up a project in China that requires collaboration with other Chinese organizations, an FIE will be helpful.
When Not to Use an FIE
However, foreign-invested enterprise is not always helpful in doing business in China. An FIE only is needed when you want to invest in a profitable business or establish your entity. So, you don't need an FIE to hire remote Chinese employees. You can remotely hire, leveraging an Employee Of Record like Gloroots. An FIE is not the best option if you want to conduct non-profit business operations like conducting non-profitable market research.
FIEs in various countries
The Chinese Foreign Investment Law, or FIL, is now a unified body of law that has replaced the previous laws on foreign-invested enterprises in China as of January 1, 2020. The new law offers greater promotion and protection of foreign investment and enhanced regulatory transparency.
The Negative List has been revised, too, and it liberalizes the Chinese market sectors with reduced restrictions. Further, the Encouraged Industries Catalogue aims to identify key industries like agriculture, manufacturing, and technology where China encourages foreign investments.
As the Law of the People's Republic of China on Foreign Investments mentions in Article 4,
The Law on Investment governs the legalities for foreign investment in Vietnam. The law provides for a range of investment models, including foreign-invested enterprises (FIEs), which are required for many international businesses operating in Vietnam.
The Law on Investment outlines the following key provisions related to FIEs:
- FIEs can be established as wholly foreign-owned enterprises (WFOEs), joint ventures, or other legal forms.
- FIEs must obtain an investment license from the relevant authorities before commencing operations.
- FIEs can engage in various business activities, subject to certain restrictions.
- Any disputes between FIEs and Vietnamese authorities are subject to resolution through the Vietnamese legal system.
Whether you plan to set up a foreign-invested enterprise in China or hire remotely, staying compliant with the local law is super important.
The Chinese government takes compliance violations seriously, and strict actions against the violators lead to heavy penalties. The NDRC mentions in Article 37,
Gloroots help you to stay compliant with the legal requirements so that you don't spend a lot of time and effort transferring and managing compliance for employees and contractors in different companies.
Moreover, with Gloroots, you can payout in a single currency instead of multiple currencies and avoid forex risks.
Want to learn how Gloroots can help you?