These company seals, commonly called chops, are mandatory for validating all official paperwork in China. The millennia-old system grants the chop-holder authority to control everything from employee management to financial transactions to company acquisitions. 

It’s no exaggeration to say, “Who controls the chop controls the company.”

Let’s break it down. 

Why Company Chops Matter So Much 

Company chops are official stamps (also called seals) that Chinese businesses use instead of signatures. 

Think of it this way: in the UK, you’d sign a contract to make it official. In China, you stamp it with your company chop. Without the right chops, you simply can’t operate legally. 

These little red stamps pack a mighty punch: 

• Documents stamped with your chop are legally binding 
• They represent your company’s official decisions (not just an individual’s) 
• Anyone holding your chop can potentially commit your company to agreements 
• Once something is “chopped,” your company is on the hook for any consequences 

The Must-Have Chops for Every Business 

Different chops serve different purposes. At minimum, you’ll need to obtain: 

• Official company chop (mandatory) 
• Financial chop (mandatory) 
• Legal representative chop (mandatory) 
• Invoice chop (mandatory for issuing invoices) 

Specialist Chops You Might Need 

Depending on what your business does, you might also need these: 

• Customs chop (for import/export businesses) 
• Contract chop (optional but recommended) 

How to Obtain and Register Chops 

You can’t just pop to the local stamp shop to get these made. Company chops must come from government-authorized providers only. Here’s what to do: 

1. Register your business with the State Administration for Market Regulation (SAMR) 
2. Go to an authorised provider to have your chops made 
3. Register your new chops with the Public Security Bureau 
4. Record them with your company’s bank 

Many businesses find it easier to let their company formation agency handle this as part of their setup package. 

Don’t Let Your Chops Fall into the Wrong Hands! 

This is absolutely critical – whoever possesses your official seal wields significant authority over your business operations.  

British chip maker Arm failed in its attempt to dismiss the CEO of its Shenzhen joint venture in 2020 because he had the company’s official seal! 

When Arm announced, “you’re fired!” to the CEO, what did he do? He simply refused to accept it and issued his own company notice with the official stamp on it! 

This completely cancelled out Arm’s attempt to get rid of him and gave him the legal right to keep running the China division! Don’t let this happen to you! 

To Protect yourself: 

• Only give chops to your most trusted staff 
• Assign specific chops to relevant departments 
• Consider using a third-party custody service 
• Create clear usage procedures and keep detailed records 
• Require multiple approvals for important documents 

Can You Sign Documents Digitally? 

Physical stamping documents in China can be a real hassle, especially for businesses operating from overseas or across multiple locations.

Good news though: digital stamps are becoming more common! These allow you to authenticate documents online without being physically present in China. 

But here’s the catch – you’ll need to go through a separate application process to use them. It’s also worth noting that the software only runs on Windows, so you won’t be using these digital chops Mac! 

The post Entity Essentials: Company Chops in China  appeared first on Kinyu.

Why Companies Close ROs

First up, a quick refresher: An RO is simply a liaison office that: 

• Cannot make sales or generate profit in China 
• Mainly handles market research and product promotion 

Many companies close their ROs not because they’re leaving China, but because they’re growing. Often, businesses start with an RO to test the market, then close it to establish a more substantial entity that can actually sell products and hire employees directly. 

Whether you’re upgrading your presence or exiting China completely, the closure process works the same way. 

If your business is a Representative Office (RO), this guide is for you. If you operate a Wholly-Owned Foreign Enterprise (WOFE), see our guide on how to close a WOFE in China.

Triggering Deregistration 

Time is of the essence when it comes to closing your RO in China. As soon as one of these triggers happens, you have just 60 days to start the deregistration process:

1. Your RO’s permission to operate is revoked by Chinese authorities 
2. Your RO’s registration period expires and you’re not renewing 
3. Your company decides to shut down the RO 
4. Your parent company is closing down entirely 

Miss this deadline, and you could face penalties or complications in the closure process.

The Deregistration Process 

\Plan your timeline carefully! Your business registration AND office lease MUST remain valid until you receive your final deregistration notice from the State Administration for Market Regulation (SAMR) in step 4.

Step 1: Tax Clearance and Audit 

To deregister an RO, you start by applying to the tax bureau for tax clearance and deregistration. This is often the longest and toughest step, taking about six months. You’ll need to hire a local Chinese CPA firm to audit the RO’s accounts over the past three years to generate a tax clearance report for the tax bureau. Meanwhile, keep filing your monthly taxes until everything is cleared with the bureau. 

Step 2: Tax Deregistration 

Submit the tax audit report, tax deregistration application, and other documents to the tax bureau. 

• If cleared, you’ll get a tax deregistration certificate. 
• Any unpaid taxes or issues may require additional action. 

Step 3: More Deregistration 

After sorting your tax situation, you’ve got two more certificates to cancel: 

• Your foreign exchange certificate with SAFE (that’s the State Administration of Foreign Exchange) 
• Your customs certificate with the customs authorities 

Now here’s the bit that catches many people out: You MUST get deregistration certificates from both these authorities EVEN IF you never registered with them in the first place! 

Step 4: Getting SAMR to Say Goodbye 

Now for the main event – getting the SAMR to officially recognize your RO no longer exists.

What you’ll need to hand over: 

• Your deregistration application letter (basically your “please let us close” formal request) 
• That tax deregistration certificate 
• Proof from customs and SAFE that you’ve either cancelled your registrations OR never had them in the first place 
• Any other bits and bobs the SAMR decides they want 

If all goes well, SAMR will issue your “notice of deregistration” – your golden ticket that says “you’re officially done.” They’ll also publicly announce your RO’s closure. 

Step 5: Closing Your Bank Accounts 

The final step is wrapping up your banking affairs: 

• Close all your RO’s bank accounts 
• Hand back any unused cheques and deposit slips (don’t chuck these in the bin!) 
• Transfer any remaining money out of the accounts 

If you’re transferring the money to your parent company, you’ll need to explain why to the bank and get their thumbs up first. It’s not impossible but be prepared for some extra hoops to jump through.

The post Entity Essentials: Closing a Representative Office in China appeared first on Kinyu.

Do You Need a Valid Reason to Close a Company in China? 

No. As a business owner, you can dissolve your company voluntarily through a shareholder resolution without justifying your decision to authorities. 

While you must follow all proper closure procedures, you won’t need to explain or defend your reasons in the documentation. Chinese authorities focus on ensuring you complete the correct process and settle all outstanding obligations rather than questioning why you’ve chosen to close. 

Can You Skip the Closure Process? 

You might be thinking, “Can I just walk away from my China business?” This is particularly tempting for those who aren’t even residing in the country. Please don’t. 

Abandonment strips away your legal protections, making you personally liable for all company debts. It also gets you blacklisted in China for at least three years – blocking future entry, investments and business positions. In serious cases, legal representatives could even face criminal charges. 

Even debt-free companies must follow proper closure procedures to avoid penalties. There’s simply no shortcut worth taking. 

Know Your Exit Options 

Your China exit process will be different based on two simple factors: what kind of business you have and whether you qualify for the quick path or need to take the standard route. 

The fast-track option isn’t available if you’re in a restricted industry, have any legal issues, financial complications, or unfinished business with the authorities. 

For this guide, we’ll focus on foreign-owned companies (WFOEs) going through the standard deregistration process – the most common scenario. 

Triggers for Company Closure in China 

First, before anything begins, one of the following triggers needs to occur. The moment any of these events takes place, you have just 15 days to officially start the deregistration process. 

1. Most common trigger: When your shareholders formally pass a resolution to dissolve the company. This is usually documented in a signed shareholder resolution with a specific date. 

2. Other possible triggers: 

• Your business license expires (and you don’t renew) 
• A court orders your company dissolved 
• Government authorities revoke your company license 

Once the trigger is set, it’s time to get moving. 

IMPORTANT: Missing this 15-day window can lead to legal complications and potential personal liability for company directors. 

The Deregistration Process 

Step 1: Assemble Your Exit Team (Liquidation Committee) 

The only thing you need to officially do within the 15 days following the trigger is set up a formal liquidation committee. To save yourself stress, we’d recommend getting everybody to agree to the committee before you trigger the closure. Here’s exactly what’s required: 

• Must include at least 3 people 
• Company directors are automatically on this team (legally required) 
• Team members are nominated by shareholders 
• Needs an appointed leader who will sign official documents 

Don’t forget to obtain proof that your committee was formed within the 15-day deadline by preparing a formal committee formation document with all members listed and stamping it with your company chop.  

Step 2: Create Your Internal Exit Plan 

Before drowning in government paperwork, your team needs to create an internal plan that spells out exactly: 

1. How and when you’ll let staff go (and what you’ll pay them). 
2. What happens to all your assets and equipment 
3. How you’ll settle debts with suppliers and others you owe money to 
4. How you’ll wrap up property leases 

Your liquidation plan needs formal sign-off from your shareholders before you can start using it. Get this approval in writing as an official shareholder resolution. 

Step 3: Initial Filings and Public Notification 

Once your liquidation plan is signed off internally, you’ll need to officially announce your closure: 

1. Notify the Market Regulator 

First, tell SAMR (the State Administration for Market Regulation) you’re closing up shop. This is straightforward – just submit a shareholder resolution that: 

• States the decision to close your business 
• Lists the names of your liquidation committee members 

2. Make a Public Announcement 

Next, post an official notice on SAMR’s website letting everyone know your business is closing. This starts the clock on a public notification period: 

• Standard process: 45-day waiting period 
• Fast-track option: 20-day waiting period 

During this time, anyone you owe money to can come forward with claims. Think of it as your “last call” announcement to settle any outstanding business. 

Step 4: Sell Assets and Pay Debts in the Right Order 

Once you’ve completed steps 1-3, your liquidation committee can begin selling the company’s assets. However, you must use the proceeds from these sales in this exact sequence: 

• First: Pay for liquidation costs (like accounting and legal fees) 
• Second: Pay any money owed to employees (wages and social security) 
• Third: Pay outstanding taxes 
• Last: Pay other creditors 

If there’s money left over after all that, congratulations! The shareholders finally get their share. But if you run out of money before paying everyone, you’ll need to file for bankruptcy through the courts. Make sure you keep financial statements reflecting these activities, and compile that into a liquidation report.  

Step 5: Employee Termination 

This is often the toughest part: Handling employee terminations. To do it right, you must give your employees proper notice periods. Then, calculate each person’s severance pay based on their length of service. Next, pay any outstanding wages, bonuses, or benefits to ensure everyone receives what they’re owed. Finally, cancel the social insurance and housing fund registrations for all your employees. 

Step 6: Clear Your Tax Bill 

Getting free from the tax authorities typically takes 4-8 months and is often the most painful part of closing shop. 

The tax bureau wants to see: 

• Your official shareholder resolution 
• Proof you’ve ended your office lease 
• All your tax filings from the last three years 

Before they’ll let you go, you must: 

• Pay every last yuan you owe in VAT, corporate tax, personal income tax, and stamp tax 
• Hire a local accounting firm to audit your books (if you’ve been open more than a year) 
• Return any unused official invoices and VAT equipment 
• The tax folks might visit your office to ask why you’re leaving

Only after all this will they give you the golden ticket: your tax clearance certificate. And remember – you’ll keep racking up tax obligations until you’re fully closed, so don’t drag your feet! 

Step 7: Deregister Your Company 

Once you’ve wrestled the tax clearance certificate from the authorities, you can apply to officially deregister with SAMR. You’ll need: 

1. The liquidation report from your exit team. It must clearly state three important things: 

• “We’ve paid all our taxes” (and have the certificate to prove it) 
• “We’ve properly let go of all employees” (with severance paid) 
• “We’ve settled all debts with everyone we owe money to” 

2. A new shareholder resolution that confirms the liquidation has been completed successfully and approves the final liquidation report. It’s essentially your shareholders saying “we’ve reviewed everything, all obligations have been met, and we formally approve closing the company for good.” 

Important Bank Preparation: Before submitting your SAMR deregistration, transfer any remaining money from any RMB general accounts (These are your company’s everyday transaction accounts for business operations) into your RMB basic account (the official core account of your company). Once the SAMR deregisters your business, you’ll have only seven days before all accounts freeze, making transfers impossible. 

Step 8: Cancel Everything Else 

You’re not done yet! Before you’re truly finished, you need to cancel several other registrations. 

Take your SAMR papers to your bank to handle foreign exchange deregistration and close foreign currency accounts (moving any remaining money to your basic RMB account). 

Visit the Human Resources and Social Security Bureau to cancel social insurance, submit a stamped application to customs, and don’t forget to cancel any special industry licenses you might have, such as food production permits, import/export licenses, or healthcare certifications. 

Step 9: Close Your Bank Accounts and Cancel the Chop 

The next step is closing your bank accounts, and this must be done in the right order: 

First, close your RMB general accounts. These should already be emptied (as mentioned in Step 7), but now it’s time to formally close them.

Your RMB basic account must be the last to close.

When closing this final account: 

• The remaining money should transfer directly to your shareholder 
• The amount can’t exceed what’s listed as “liquidation income” in your liquidation report 
• Your specific bank branch might have additional requirements 

Remember: You only have seven days after canceling your business license before all accounts freeze, so act quickly! 

Step 10: Getting Rid of Your Company Stamps 

Before you’re truly free, you need to properly dispose of your company stamps (the official “chops” that give legal power to documents in China). 

In major cities like Shanghai and Beijing, you can’t just throw these stamps in the trash or keep them as souvenirs. You must go to the local Public Security Bureau (PSB) to have them officially canceled. This prevents anyone from using them to create fake documents in your company’s name after it’s closed. 

This must be the very last step, since you’ll need these stamps throughout the earlier stages to sign off on all those government forms and bank documents. 

Only when the police have officially recorded the destruction of your stamps is your China business truly, finally, completely finished! 

Congratulations – you’re likely a year older, several grey hairs richer and your China business is finally closed! 

The post Entity Essentials: Closing a Company in China  appeared first on Kinyu.

This article focuses on recent changes to China’s Company Law that impact registered capital. The 2024 Company Law now requires full payment of the registered capital subscribed by the shareholders within a five-year period.

Let’s explore what this means.

What is Registered Capital?

In China, registered capital is the amount a company declares when registering as a business. It’s the initial investment shareholders or investors contribute to start and run operations. This money finances early operations and serves as a guarantee to creditors of financial stability.

When opening a limited liability company in China, the registered capital is the limit of the company’s liability exposure. For example, if the registered capital is set at 100,000 yuan ($17,000), then 100,000 yuan is the limit of liability for the company.

How Does this Work in Practice?

If a company gets into a dispute with a worker or another company and loses, resulting in a lawsuit for 200,000 yuan — about double the registered capital amount — the company could declare bankruptcy. However, registered capital is the amount shareholders pledge to the company, giving it credibility.

Therefore, if sued for 200,000 yuan and the company lacks funds, the prosecutor could go after shareholders for the registered capital amount.

Why is this Important?

When setting up a company, you can choose the registered capital amount, but you do not need to invest that full amount into the company at that point.

However, you are committing to investing that amount at some point in the future. Previously, you had 20 years to make these contributions, but under the new rules, this has changed to 5 years.

Why Would You Put a Higher Registered Capital?

The required registered capital depends on the type of business planned in China – it’s about establishing credibility in the market and protecting customers and suppliers from risky companies. For new companies, startup capital is needed to maintain operations before getting paid by customers. But in some industries, a certain registered capital amount is mandatory. Here are some examples where it’s important:

1. If you want to run an international logistics company, the registered capital should be:
   • Road logistics: 2 million yuan
   • Air logistics: 3 million yuan
   • Sea logistics: 5 million yuan
2. If you want to exhibit at the Canton Fair – as Kinyu did in 2023 – companies need 300,000 yuan in registered capital.
3. Employees may view registered capital as an indicator of a company’s stability before accepting job offers.

How Will the New Law Affect My Sourcing Office in China?

The new company law essentially states that whatever registered capital amount is chosen must be paid into the company within five years. So if a high registered capital is desired to attract talent, exhibit at the Canton Fair, or carry out logistics services, shareholders must ensure they have the cash to back this up and pay in the full capital within the five-year period.

How Can The China Desk Help?

At Kinyu, we recognize committing and paying a certain registered capital amount to a Chinese entity that’s essentially a department of your company can be a pain point.

The China Desk at Kinyu is an industry-focused Employer of Record with a high registered capital, and a strong manufacturing and supply chain services track record.

With The China Desk, you can hire your China employees through our platform so they are secure with the tools to excel, without the headache of entity admin.

If you have an entity set up and want to close it, check out our free download on how The China Desk can support this process.

If you’re hiring on the ground for the first time and unsure about setting up an entity, check out our Salary Calculator or read a case study.

The post Entity Essentials: China’s New Registered Capital Rules – What to Know Before Incorporating appeared first on Kinyu.

Engaging professional services, such as accountancy or law firms, is often the first step in navigating the initial complexities of registered capital, location, and other aspects. However, what may not be apparent at first are the ongoing costs of maintaining your operation.

Unforeseen Challenges

In promoting The China Desk by Kinyu, we’ve encountered numerous business leaders who have faced challenges and regrets after opening their entities in China. Having established our own entities in Hong Kong, Guangzhou, and a branch companies in locations across China, we’re well-positioned to shed light on the often-overlooked operational admin that is not clear from the outset.

These unexpected hurdles include:

• Profit Handling: Many overseas firms setting up in China aim to just cover costs without posting a profit, risking an official audit. China’s strict regulations require even profits earned abroad to be taxed.
• Capital Controls and Reporting: Unprepared companies may stumble on China’s capital controls and regular tax reporting requirements.
• Fragmented Social Insurance policies: Hiring and paying mandatory social insurance in multiple locations in China cannot be done with a single entity – every city has its own rules.
• Changing Office Address: Registering a new office address in China might take three months and cost up to $5,000.

Introducing the Kinyu Entity Essentials Series

The path to successful business operations in China is riddled with both expected and unexpected challenges. This guide aims to shed light on both, providing you with the tools and insights needed to thrive in one of the world’s most dynamic and intricate markets.

From the initial setup to cultivating a robust, united team, this series explores every twist and turn.

Administration-focused:

• Entity Setup: Chinese mainland vs. Hong Kong – What’s the Difference?
  • Explore the legalities, benefits, and challenges of both regions
  • Compare tax systems, laws, and business regulations
• Beware of the Shared Office as Registered Address
  • Understand the risks and regulations regarding shared office spaces
  • Learn how to choose the right location for your business
• China Permanent Establishment
  • Grasp what constitutes a permanent establishment
  • Discover the impact on taxation and regulatory compliance
• China’s New Registered Capital Rules – What to Know Before Incorporating
  • Understand China’s new registered capital rules effective July 1, 2024
  • Learn implications for foreign businesses incorporating in China
• The Role of the Legal Representative
  • Understand the duties, responsibilities, and liabilities
  • Learn how to choose the right legal representative for your business
• Exiting China – Key Things to Consider
  • Understand that closing an entity in China is just as cumbersome as setting one up
  • Learn how to plan for managing redundancies and severance payments

People-focused:

• Hiring Across Multiple Cities in China
  • Explore the implications for foreign companies hiring across multiple cities in China
  • Understand China’s new employee management policy
• Different Options for Hiring Your Team on the Ground
  • Contracting vs. full-time hiring
  • Navigate labour laws and cultural nuances
• Social Insurance Essentials for Hiring in China
  • Understand how employer contributions can vary across China
  • Learn the key factors affecting contribution calculations
• Tips for Engaging Your Remote Team in China
  • Tackle common HR challenges, from recruitment to retention
  • Discover strategies for building a strong, cohesive team

Many companies jump straight into setting up an entity. However, the aim of this series is to allow you to pause and ask yourself: do you really need to set up an entity? We hope this series will help you find answers to common questions and insights into challenges that might not be readily apparent!

If you need personalized advice or have any questions about setting up or managing your business in China, our experienced team at The China Desk is here to help. Book a meeting with one of our team members to discuss your specific needs and challenges.

The post Entity Essentials: If & When to Open a Company in China appeared first on Kinyu.

Why is there such a range? The variation in social insurance rates depends on the location of employment and the employee’s salary. Let’s dive in.

Overview

China’s social insurance program, known as “Five Insurances and One Fund,” consists of five insurance types and a housing fund, with both employers and employees required to contribute.

• Pension (Endowment Insurance) – Employers and employees both contribute to this scheme, part of China’s national pension system for laborers in retirement. The required employer contribution can be up to 20% of an employee’s salary.

• Medical Insurance – Both employers and employees contribute to this insurance, which covers medical expenses if an individual is injured. The employer’s contribution ranges from 6-12% of the salary, while the employee contributes 2%. Part of this fund goes into the individual’s medical account, and part goes to the health system’s public accounts.

• Unemployment Insurance – If an individual becomes unemployed, they can claim unemployment benefits from the state, provided they have paid their unemployment premiums for at least a year. Both the employer and employee contribute to this insurance.

• Maternity Insurance – Employers pay into this fund to cover maternity-related medical expenses and the employee’s salary during maternity leave.

• Work Injury Insurance – Employers solely contribute to this fund, usually below 0.5% of the salary, to cover costs associated with work-related injuries. If an injury occurs at work, this fund covers various costs, and the employer must pay the injured employee’s wages. This fund is different from Employer Liability Insurance.

• Housing Fund – In addition to the five insurances, employers and employees must contribute to the Housing Fund, administered by the Ministry of Housing. Eligible employees can use the funds in their individual accounts for a down payment on a house or a mortgage. Most cities have a minimum required contribution percentage, such as 5% in Guangzhou and 7% in Shanghai, but employers can choose to pay more as a supplementary allowance, typically up to around 12%.

How to Calculate Social Insurance

So, now you know what “social insurance” is, how do you calculate what you need to pay? The payable amount depends on the salary and location.

However, almost every city has its own policy on social insurance, complicating matters. Therefore, the employer contributions for your team member in Guangzhou will differ from those in Tianjin, even with the same salary.

The table below shows the percentage of salary and total payment for social insurance contributions in Guangzhou and Tianjin, highlighting the differences in employer obligations between these two cities.

There are variations like this across China, and the rates are subject to change, so you should seek professional advice to ensure you are paying the correct amount. For personalized support in calculating social insurance costs for the city and salary you plan to hire for, check out our Salary Calculator.

How Do You Pay Social Insurance?

Employers with an entity in China must open a local bank account eligible for handling payroll and sign agreements with relevant insurance bodies for monthly direct debits. Note that not all banks, such as HSBC local accounts, meet this requirement.

For those without an entity in China, employing team members through a third-party service provider is an option. The China Desk, for example, can manage all payroll and social insurance matters with full transparency.

Key Points to Note

Along with the overview and calculations, keep these key points in mind:

• Some cities have salary caps for social insurance calculations. For example, Tianjin currently has a cap of 22,434 yuan. Salaries above this cap will not increase the premium.
• You cannot pay social insurance in a city where your company is not incorporated.
• Rates and salary caps change regularly, so it’s essential to check for updates.
• The state can alter the housing fund rate.
• As a general rule (though not a strict policy), social insurance rates tend to be higher in cities where average salaries are lower. Beijing is an exception, with both high social insurance rates and wages.
• Paying social insurance is mandatory by law.

These warnings might feel daunting, but with proper budgeting and advice on social insurance calculations, you’ll be fine.

For support with social insurance costs for your employees in China, check out our Salary Calculator or contact one of our team members.

The post Social Insurance Essentials for Hiring in China appeared first on Kinyu.

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!

The post Entity Essentials: Entity Set up in Mainland China vs. Hong Kong appeared first on Kinyu.

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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This week, we focus on China’s Administrative Supervision Measures for Social Insurance Funds (Ministry of Human Resources and Social Security (MOHRSS) Order No.48). To keep things straightforward, we’ll refer to it as “China’s Bermuda Triangle of HR.” It’s a policy directive with significant implications for foreign companies intending to establish operations in more than one Chinese city.

The policy essentially mandates that entities and their employees operate from the same city. While this works for many, it poses challenges for those needing employees spread across China. Let’s delve deeper!

Understanding China’s Bermuda Triangle of HR

In March 2022, China unveiled its new employee management policy. This “Bermuda Triangle of HR” entwines an employee’s labour contract, social security payments, and individual income tax within a single city’s borders.

In essence, an employee’s work address, location of social security payments, and tax payments must all converge in the same city. For example, if an employee’s labour contract is registered in Shenzhen, their social security contributions and individual income tax should also be aligned with Shenzhen.

Here’s where it gets stormy: To fulfill these city-specific obligations, the entity employing them must be harbored in that same city.

Hiring Across Multiple Cities in China: The Big Dilemma

What should companies do when they’re hiring in several Chinese cities? Imagine you want to hire someone based in Shanghai, but your company is registered in Beijing. There are basically three options:

Option 1 – Establish a Regional Entity

You can set up a separate company entity in the employee’s city. At first glance, this might seem like an optimal solution, especially if you have a growing team in another city. Setting up an entity solidifies your presence and ensures full compliance.

However, if you have just one employee stationed there, this becomes a massive investment – both in terms of time and resources – for just a single person’s compliance. Moreover, for teams dispersed across China, this strategy can morph into a logistical and fiscal maze, requiring multiple entities in different locations.

Option 2 – Negotiate a Remote Contract

You could ask your Shanghai-based employee to sign a contract stating they work in Beijing, even though they don’t. This means their social security would also be based in Beijing. However, this is a move that many Chinese employees are uncomfortable with.

Many people are hesitant to change their social security base due to the Hukou system. This household registration ties benefits to a specific city or region. Moving social benefits from one city to another can impact various aspects of life, such as children’s schooling, medical services, and even property-buying abilities.

A remote-work contract could also be an option, but this entails similar problems.

Option 3 – Use an Employer of Record (EOR)

Sometimes, it’s wiser to charter a seasoned ship! An Employer of Record (EOR) is an organization that legally employs workers on behalf of another business, managing all administrative, payroll, HR, and tax matters, while the company steers the day-to-day activities of the employee.

Using an EOR means you won’t be burdened with the labyrinthine paperwork and compliance related to multi-city hiring in China. With them at the helm handling the administrative complexities, you can focus on charting your business’s course.

By partnering with an EOR, you can sidestep the intricate challenges of multi-city hiring in China and focus on your business’s core operations. For companies aiming to smoothly navigate this landscape, The China Desk by Kinyu is an optimal choice. We specialize in supply chain-focused EOR services, with expertise in regions including Guangzhou, Tianjin, and Ningbo.

Need A Compass?

Kinyu is here to help you set your course. As China and supply chain specialists, we ensure you don’t get lost in “China’s Bermuda Triangle of HR.” We specialize in helping companies seamlessly operate under this new framework. If you’re looking to hire talent on the ground in China, please book some time with one of our team members, or download a case study!

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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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