An on-the-ground operation to manage your China supply chain is crucial. However, it is sometimes unclear whether to establish a regional office in Hong Kong or venture directly into an entity set up in mainland China.

In this guide, we’ll dissect the complexities and nuances of setting up an entity in Hong Kong and the mainland.

Whether you’re a newcomer to the region or looking to enhance an existing foothold from a regional hub in Hong Kong, this comparison aims to illuminate the path that best aligns with your goals.

Entity Set up in mainland China vs. Hong Kong – What’s the Difference?

The first big surprise is that the transition from the UK to Hong Kong is much easier than from Hong Kong to China. Here’s why:

With a legal system rooted in English common law, English as an official language, and a low and simple tax system, Hong Kong offers a straightforward setup process, relaxed capital controls, and fewer reporting requirements.

However, if your business plan calls for direct sales in China or investment into the market, your Hong Kong entity will not be able to support operations in the mainland. The obvious option is to set up an entity on the mainland, but be prepared; China’s strict capital controls and monthly audit reports add layers of complexity.

Put simply: Hong Kong offers a business experience akin to most major economies. At the same time, the mainland, though more challenging, is your gateway to building an established footprint in the Middle Kingdom.

In What Scenario Might You Need to Set Up a Mainland Entity?

• Direct Employment in China: If you want to sign employment contracts with your employees, a mainland entity is necessary.
• Selling Products/Services in China: A mainland setup is essential for products/services requiring certain licenses.
• Selling to Chinese Companies: Setting up in mainland China may facilitate payment collection.
• You operate a Trading Company in Hong Kong: A Hong Kong company can be useful for trading but beware of the permanent establishment risk. If your activities on the mainland are substantial enough to be considered a permanent presence, you may be subject to China’s corporate income tax and compliance requirements. This could lead to unexpected tax liabilities and double taxation if also taxed in Hong Kong.

Timeline and Required Documents

Hong Kong: In Hong Kong, setting up a company is a relatively quick and straightforward process, typically taking about four to six weeks. The required documents are standard and include the Article of Association, Acceptance of Appointment, First Board Meeting, Form NNC1, and Share Certificate. Additionally, the appointment of a company secretary is mandatory, and this role can be filled by either an individual resident or a corporate entity with a registered office in Hong Kong.

Mainland: In contrast, setting up a company on the mainland is more intricate and time-consuming, potentially taking over half a year. You’ll also need to assign a legal representative, a role with significant powers and personal liability.

Presence on the ground while setting up is essential. The requirements vary significantly depending on the locale, business type and industry. Generally, the following documents are needed:

1. Business License Application Form: Completed and signed by authorized representatives.
2. Feasibility Study Report: Outlining the business plan and operational details.
3. Articles of Association: Detailing the company’s rules and regulations.
4. Passport Copies: For all foreign directors and shareholders.
5. Bank Reference Letters: Confirming the financial credibility of the investors.
6. Lease Agreement: For the proposed office location in China.
7. Other Relevant Permits and Certifications: Depending on the industry and region.

Given the complexity of the process, collaboration with a local agency experienced in Chinese business regulations is often necessary. This partnership can guide you through the maze of requirements, ensuring that all legal and regulatory obligations are met.

Opening a Bank Account

Hong Kong: Opening a corporate bank account in Hong Kong can be complex, especially if you don’t reside in the region. Strict due diligence processes often lead to unsuccessful applications. However, the rise of digital banking solutions like Currenxie and Air Wallex has provided viable alternatives, easing this challenge.

Mainland: On the mainland, physical presence is necessary when opening a bank account. Except for international banks like HSBC, English-language services are rare. The company’s legal representative must be physically present to open the account, adding another layer to the process.

If you plan to employ personnel, you will need to open an account with a local Chinese bank. HSBC and other foreign banks do not have the ability to contract with a local social security office!

Ongoing Commitments: Understanding the Differences

Ongoing administrative tasks are vital to maintaining your business, but the requirements vary significantly between Hong Kong and mainland China.

Mainland: Entities in mainland China are required to submit reports to relevant tax bureaus every month. Additionally, the legal representative must frequently sign documents for the entity set up in mainland China. Therefore, choosing someone either in China or comfortable with frequent travel is advisable.

Hong Kong: In contrast, Hong Kong requires only annual reporting, making the ongoing commitment less demanding.

The Final Call: Weighing the Pros and Cons

Hong Kong: With a business environment akin to most major economies, Hong Kong offers a more familiar and accessible entry point. Its streamlined processes and annual reporting make it an attractive option for many international businesses.

Mainland: Though more challenging, the entity set up in mainland China provides direct access to the vast Chinese market. It enables closer engagement with local customers, suppliers, and regulatory environments but comes with more complex requirements and ongoing commitments.

The China Desk by Kinyu: For those seeking the advantages of a mainland entity without the associated complexities, The China Desk by Kinyu offers a tailored solution. Talk to us or download a case study to find out more!

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When receiving enquiries about The China Desk, they usually come from companies considering their options for setting up an operation in China. Companies that come to Kinyu SCM are generally looking for the following functions:

• Hiring employees on the ground.
• Establishing an export and trading company function to take advantage of tax rebates.

Setting up your branch entity in China would be a logical strategy to fulfil these requirements. However, it’s important to understand the impact of international agreements on Permanent Establishment and how China’s Corporate Income Tax (CIT) fits into this.

What is a Permanent Establishment?

China has bilateral agreements with most major economies regarding the “establishment” as described by PWC:

An “establishment or place” is defined in the CIT regulations as an establishment or place in China that engages in production and business operations, including the following:

• Management organisations, business organisations, and representative offices.
• Factories, farms, and places where natural resources are exploited.
• Places where labour services are provided.
• Places where contractor projects, such as construction, installation, assembly, repair, and exploration, are undertaken.
• Other establishments or places where production and business activities are conducted.
• Business agents who regularly sign contracts, store, and deliver goods, etc., on behalf of the non-TRE.

Many articles address permanent establishment, but they typically target multinational companies. However, how can this impact SMEs?

What Does This Have to Do with Tax in China?

The entire issue of permanent establishment is all about tax, specifically paying the appropriate corporate tax in China. If you have a “Permanent Establishment” (PE), then the profit generated, which is tied to the operation of that PE, may be subject to the CIT in China.

China has bilateral agreements with most major countries regarding this matter. For instance, you can reference Article 5 of the United States-The People’s Republic of China Income Tax Convention.

Moreover, if you aim to export out of the China entity and benefit from the VAT rebate on exports, you might need to add a significant profit margin to the goods within China. Subsequently, you would pay tax on that margin. The standard corporate income tax rate in China stands at 25%.

Therefore, it’s crucial to carefully consider your strategy and seek advice on whether your plan to establish an entity is tax-viable.

Turn Your ‘Man on the Ground’ into ‘Management on the Ground’

Another concern revolves around having boots on the ground. If you contract with a freelancer in China, there’s a chance you might trigger a permanent establishment. This could mean that a portion of your HQ profits, attributable to the operation in China, might be subject to CIT. The method by which authorities determine the portion attributable to the operation in China can be arbitrary, with the outcome likely favouring the tax coffers.

Therefore, when considering the reasons for setting up a team on the ground, it’s crucial to be mindful of the concept of permanent establishment. Outsourcing your management operations can help distance your organisation from triggering a PE. There are various methods to achieve this, each with its own implications. Thus, it’s essential to seek advice from an accountant who specialises in this sector.

In the end, the concept of permanent establishment should be a consideration in your global organisational structure and decision-making process.

Please note, this article does not constitute advice. China can change its policies over time, so you might find the information in this article outdated when you read it. Kinyu SCM is not responsible for any actions taken based on this article. If you wish to learn more about this topic from Kinyu, and how Kinyu can assist, please feel free to book a call here.

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Establishing an entity in China requires understanding a crucial role: the Legal Representative.

This position, typically filled by the company’s executive director, chairman, or general manager, is a statutory requirement for every enterprise in China. Given this role’s significant weight and potential risks, choosing the right individual as the legal representative is a crucial decision when establishing an entity in the Middle Kingdom.

The Power and Responsibility of a Legal Representative

Authority and Core Responsibilities

The legal representative has the power to act on behalf of the entity. Any work-related decisions they make are considered actions of the company itself, and their name is even inscribed on the entity’s business license.

Their authority enables them to:

1. Bind the company to contracts and other legal obligations with their seal.
2. Execute powers of attorney on the company’s behalf.
3. Hold the company’s official seal used to sign transactions, contracts and legal documentation.

Liability

But remember, with great power comes great responsibility, or in this case, liability. This means that any liability – civil, criminal, or corporate – stemming from the company’s operations could fall squarely on the shoulders of the legal representative, including:

1. Administrative penalties,
2. such as personal fines.
3. Criminal liability, possibly leading to charges and imprisonment.

Conversely, the actions of the legal representative can have direct legal consequences for the company.

Replacing a Legal Representative: Easier Said Than Done

If issues do arise, getting rid of the legal representative isn’t always simple. In most cases, a legal representative can’t be shown the door unless they willingly step through it. This is because they need to stamp their own termination agreement.

For this reason, various law firms recommend having legal representatives sign and stamp undated termination-related documents as a precaution.

Can You Be Your Own Legal Representative?

You may be contemplating whether you could assume this role yourself. The short answer is “Yes, but tread carefully.”

Chinese law doesn’t generally require the legal rep to be a Chinese national.

There are some sectors where local or national regulations impose additional restrictions or requirements. However, a nominee from your parent company abroad is perfectly acceptable in most sectors. But before you don the mantle, consider the journey ahead.

It’s a role that demands not just presence but expertise. The role requires frequent travel to China and an understanding of the labyrinth of compliance issues. And as mentioned, if your entity violates regulations or becomes involved in commercial disputes, the legal representative may face consequences.

In the most extreme scenarios, Chinese courts can bar the representative from leaving the country, entering it, or renewing their visa.

The China Desk: Your Solution to Legal Representative Challenges

Opening a company in China requires careful navigation of legal complexities, especially when selecting your legal rep. Choosing the right individual is a mission-critical decision.

But what if you could avoid the intricacies of this process altogether?

If your primary goal is to manage your supply chain, setting up an entity in China might not be the right option. There are alternatives that can simplify the process, and this is where The China Desk by Kinyu can add tremendous value.

The China Desk offers a tailored solution that bypasses the need for a traditional legal representative, providing a workspace for your team members and ensuring compliant hiring practices. By partnering with The China Desk, you can focus on your core business objectives without getting entangled.

If you want to learn more about how The China Desk can work for you, please book some time with one of our team members, or download a case study!

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Welcome back to our series of blogs exploring the challenges and complexities of managing your entity in China. At Kinyu, we have firsthand experience in setting up entities in China, thanks to our provision of turn-key HR solutions through The China Desk. Through this process, we’ve discovered that while information on entity setup is widely available, the subsequent costs and administrative burdens only become clear after you’ve committed to the endeavor. In this post, we’re looking at shared office choices in China!

Office Address Debacle: Navigating Office Choices in China

Like every country, your entity in China must have a registered address. When setting up an entity in China, this means you’ll need to rent office space. To prove the address, you’ll typically need to provide a one-year rental contract and building blueprints to the local authorities.

A flexible option that many businesses find appealing is using a shared co-working space like WeWork. In such spaces, you can set up a single desk, which is often sufficient for the entity setup procedure.

If you continue to use that co-working space, that’s perfectly fine. However, it’s worth noting that such spaces can be expensive and may not be the most efficient way to expand your operation. If you decide to leave the shared office for a more affordable long-term solution, you’ll need to change the registered address of the entity. And that’s not cheap!

What are the Costs?

This process is both expensive and time-consuming.

Time Cost – This process can take up to three months to complete, especially if you include the necessary bank changes. The legal representative will need to visit offices in person. If you change districts within a city, you must first de-register with one district bureau before registering with another.

Advisory Fees – The process is not straightforward, so we recommend seeking professional assistance. If you engage a Chinese accountant or lawyer, they will charge fees for this service. Kinyu received quotes ranging from $1000 to $5000 USD. Additionally, changing details at the bank can be complicated, with procedures varying from bank to bank.

Travel Fees – As previously mentioned, the legal representative must be present at many stages of the process. If you are the legal representative and are not based in China, you’ll need to plan for at least two trips or one extended trip to handle this.

Virtual Office Fees – Ideally, your registered address should be the same as your operational address to avoid excessive costs and administrative burdens. Virtual office locations are available, but it’s crucial to work with a trusted partner, as many virtual offices may not have the proper setup to provide a compliant solution.

Considerations for Choosing an Office in China

So to summarise – think carefully about your choice of office before setting up an entity. Ask yourself these essential questions:

• Is it a long-term and scalable location?
• Do I need to be in the center of town?
• Where are my employees going to work most of the time?

Another question you should ask yourself: Do I really need to set up an entity in China?

Exploring Alternatives: Hiring a Team Without Setting Up an Entity in China

If you are simply looking to hire a team to manage your supply chain, setting up an entity in China might not be the right option for you. There are various alternatives that can simplify the process – you can read more about them here.

This is where The China Desk by Kinyu can add tremendous value. The China Desk offers a workspace for your team members and provides a compliant hiring solution.

If you want to learn more about how The China Desk can work for you, feel free to book some time with one of our team members!

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