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How to set up a Limited Company in China?

How Can A Foreign Investor Set up A Limited Liability Company in China?

If foreign investors wish to enter the Chinese market, they may consider setting up a branch (representative office) first. If foreign investors want to further localize their businesses in China, they may then consider setting up a limited liability company.

This post will focus on how a foreign investor should establish a limited liability company in China, i.e., a foreign-invested enterprise (FIE).

The Chinese Foreign Investment Law

The new Chinese Foreign Investment Law (FIL) has come into effect on January 1, 2020. The laws on Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures and wholly foreign-owned enterprises have been consolidated. German companies now wishing to enter the Chinese market are thus in principle only required to be established under this new (one) foreign investment law. Foreign investors are now also subject to the more flexible, general Chinese company law. The elimination of a much stricter, separate legal framework is seen as a positive signal for investment in China from a German point of view.

The German Supply Chain Act

For a long time, Germany was engaged in a major discussion about a new supply chain law. While the Ministry of Economics generally opposed such a law, the project was vehemently supported by the Ministry of Labor and Social Affairs and the Ministry of Economic Cooperation and Development. A compromise was reached in mid-2021 and on June 11, 2021, the Bundestag ultimately passed the Supply Chain Sourcing Obligations Act (LkSG). On June 25, 2021, the Bundesrat approved the law. German politicians speak of a globally unique and groundbreaking law.

Compliance Due Diligence of a German Target

Compliance due diligence of a German target is of upmost importance in the context of corporate transactions, even if smaller companies are to be sold. Why is that so? It is not the buyer’s fault if the company has not complied with the law in the past before it has been sold to him, or is it? This can be left aside from a legal point of view. German law holds the buyer of a company accountable for violations of the law he has not committed (administrative offense law liability/liability for damages). If you are a Chinese or US investor, you need to know how German law enforcement can bring you or your management to court even being fully unaware of any wrongdoing.

Unpaid Taxes in Germany

At the end of the year, taxes often play an important role. Sometimes taxpayers come to the conclusion that there are taxes they had to pay, but payment has never happened. This can lead to delicate situations as violations of the German tax laws are taken very seriously by authorities. Consequences range from severe fines and other penalties to imprisonment.

What are the basic alternatives taxpayer have when being exposed to this situation?

Business Immigration to Germany – Short and Sweet

As the world’s third-largest export nation just behind China and the USA, it can be worthwhile to get active in Germany, too. If you are a non-EU national, the usual path to start a business in Germany is to apply for a residence permit for the purpose of self-employment according to Sec. 21 German Residence Act.

Before that, you should apply for a so-called “D-Visa” at the German embassy of your country of residence. With that, you can enter Germany and apply for a residence permit for the purpose of self-employment. In order to be considered for such a permit, there has to be an economic interest/regional need for your business, the financing of the business must be ensured according to your business plan and the business is likely to have positive effects on the German economy, first and foremost.

How to set up Representative Offices in China?

If you are about to enter the Chinese market, and your company outside China can conduct cross-border transactions with business partners in China, then, you only need to set up a branch (representative office) in China, through which you can do market research, get in touch with business partners, and contact import/export trade.

If you need to further localize your company in the Chinese market, for example, doing business within China, then you may consider setting up a limited liability company (i.e., “a foreign-invested enterprise”) in China.

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