On paper, seeking to do business in China is the simplest decision any company could make. The Red Dragon boasts the world’s second-largest economy behind the USA, and the opportunities to turn a profit are endless. Significant success awaits if you can negotiate some of China’s cultural quirks.
Does China welcome overseas businesses?
China welcomes foreign investment – to a degree. The authorities will not allow just anybody to start a business in China, as any overseas venture will fall under one of three banners assigned by the Catalogue of Industries for Guiding Foreign Investment. Investigate whether your business model would be classed as:
- Encouraged – you’re unlikely to meet any resistance to starting a business in China
- Restricted – you may be invited to trade, but limitations will be placed upon you
- Prohibited – look elsewhere – your company is not welcome in China
If you are hoping to trade in an industry not listed in any of these categories, you will need to seek permission from the authorities to start a business. Any reasonable request here will not be declined, meaning that such business models are often assigned an unofficial fourth category – ‘Permitted.’
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The Catalogue of Industries for Guiding Foreign Investment is updated every three years based on the needs of the Chinese nation. At the time of writing – Q4 2022 – the latest Catalogue is under construction and awaiting finalisation. If you’re fluent in Chinese, you can read it now.
What industries are most popular in China?
Experts have reviewed the draft of the 2022 Catalogue of Industries for Guiding Foreign Investment and believe that the following industries are labelled Encouraged:
- Healthcare, primarily paediatric and elder care
- Sport
- Rural farming and revitalisation, especially sustainable solutions
- Vocational education, especially in the arts
These are broad industry terms, so you may still find that your proposed business model ends up on the Restricted list. Business models that are most likely to be outright prohibited include:
- News and media – this is invariably managed by the state, not third-parties
- Manufacture of, or discussion of, anything that could be considered harmful to health
- Money lending outside of a formal banking arrangement. The finance sector is very carefully monitored in general
Is it easy to set up a business in China?
If you’re keen to set up a business in China, you should partner up with a Professional Employment Organization (PEO), sometimes known as an Employer of Record (EOR).
Such a body will help with the red tape of setting up your business, meaning you could be trading in a matter of weeks. Go it alone and it could take as long as 18 months. These businesses will also help hire local talent, deal with your taxes, and run your payroll.
Once you have located a PEO, you’ll also need to:
How to set up a business in China
- Find and register a business address
Your PEO advisor may be able to help you with this
- Choose your business structure
See the section of this guide about types of Chinese business entity
- Choose a name for your business
Be cautious of any inadvertent meaning that this name may to Chinese people
- Register your business
Do this with the Ministry of Commerce of the People’s Republic of China (MOFCOM)
- Register as a taxpayer
Do this with the State Taxation Authority (STA)
- Apply for any business license that you may need
Your PEO provider should be able to advise you on this
- Open a local bank account
You cannot do this until your business entity has been created
- Register your trademark
Counterfeit products are rife in China. If you fail to protect your intellectual property, sellers can use online marketplaces like Alibaba and Taobao to abuse your company name and imitate your products
There will be more paperwork to complete, most of which is complex and written in Chinese. This is why it is recommended that you work with a PEO unless you have a business partner or associate that understands the nuances of the local market.
Can I run a business in China while living overseas?
Yes, you do not need to live in China to run a business that trades in the company. If you plan to work this way, you should definitely work with a PEO to ensure a reliable third party handles your tax and payroll affairs.
Cultural considerations when running a business in China
Doing business in China is very different to the west. You must ensure that you understand the cultural nuances prevalent in the nation, which include:
- China observes a strictly vertical business hierarchy. Everybody should be treated with respect and dignity, but expect the most senior person in any room to do almost all the talking – junior staff members are not expected to speak up unless expressly summoned
- Always be on time, dress formally, and address your associates by title unless you have been invited to use given names
- You’ll need to be patient. Decisions are not made quickly in China as every possible risk is assessed. You may need to meet several times and answer a range of questions before you reach a deal
- Relationship-building is critical in China. You will not just meet in a boardroom and thrash out a deal – expect to be invited to social events and meals, possibly even in the family home of your associates. It is considered bad manners to decline these invitations
- Consider partnering with a Chinese local when dealing with a new client, ideally somebody that knows the person in question. It takes time to gain the trust of a Chinese business associate. Bringing in a familiar face can smooth things along
What business structures are supported in China?
Think carefully about if you need to set up a new business entity to trade in China. The authorities do not make this easy, and opening a Chinese branch of your existing business may be easier – though this could still take as long as eight weeks.
When it comes to doing business in
| Type of Chinese business entity | What is it? |
|---|---|
| Wholly Foreign-Owned Enterprise (WFOE) | A Limited Liability Company that is kept separate from your personal finances and legal affairs. You should work alongside a PEO if you choose this business model |
| Joint Venture (JV) | Teaming with an existing Chinese business. This may reduce the restrictions placed on your trading, and you can lean on a local expert to manage the logistics of your business, so you will not need a PEO, but be very careful about who your partner with |
| Representative Office | A presence of an existing company in China. This will lead to less paperwork, but you will face strict trading restrictions – an RO is designed for research and marketing, not turning profits |
Taxation in China
If you want to do business in China, you must understand the taxation rules and regulations that will impact your bottom line.
What is the corporate tax rate in China?
China’s standard corporate tax rate is 25%, but some industries – most notably those in the tech field – benefit from a reduced tax rate of 15% as China is looking to attract more business in this sector.
The UK has a double taxation treaty with China, so you will not pay taxes in both countries.
What are the employee income tax brackets in China?
Employees in China will need to pay income tax on their wages and a flat fee deduction for social security contributions. Income taxes break down as follows:
| Salary | Income tax rate |
|---|---|
| ¥36,000 or lower | 3%, no additional fee |
| ¥36,001 – ¥144,000 | 10%, plus flat fee of ¥2,520 |
| ¥144,001 – ¥300,000 | 20%, plus flat fee of ¥16,920 |
| ¥300,001 – ¥420,000 | 25%, plus flat fee of ¥31,920 |
| ¥420,001 – ¥660,000 | 30%, plus flat fee of ¥52,920 |
| ¥660,001 – ¥960,000 | 35%, plus flat fee of ¥85,920 |
| ¥960,000 or higher | 45%, plus flat fee of ¥181,920 |
You must withhold your employees’ income tax and social security contributions from their regular wages.
How are taxes paid in China?
The Chinese tax year follows the calendar year – it begins on January 1 and concludes on December 31. Tax information should be filed with the State Taxation Authority at the end of every month. Your Professional Employment Organization can help you manage this process and avoid legal trouble.
Payroll and hiring employees in China
Hiring the right talent can make or break a company. Ensure your Chinese business interests are staffed by the best possible talent, enlisting the services of a Professional Employment Organization to source and hire your team.
Does China welcome overseas talent?
While the Chinese authorities would always prefer that local employees make up the labour force, the country welcomes top-tier talent in desirable industries, going as far as to offer ten-year visas and work permits.
If you are looking to bring employees In from overseas, you are much likelier to be successful if your business model falls into the Encouraged category of the Catalogue of Industries for Guiding Foreign Investment.
Who needs a visa or work permit to work in China?
Any aspiring employee that is not a resident of China or does not hold a Chinese passport will need a visa or work permit to trade in the country.
What employee benefits are compulsory in China?
Employees in China are protected by law and must be offered the following benefits.
- Sick pay ranging from 60% – 100% of full salary for up to six months upon presentation of a doctor’s note
- Payments to a Maternity Insurance Fund to cover maternity leave, or payments made directly to the employee
- Minimum of 98 days of protected maternity leave
- 30 day’s notice upon terminating employment, or a comparable severance package, unless the employee commits an act of gross misconduct
If you team with a Professional Employment Organization to manage your business, this body will ensure you remain compliant with employment and payroll legal considerations.
Personal holiday allocations are a little complex in China. Unlike most countries, annual leave is not accrued by working for a single employer for a set time. Instead, time off in China is based on the years spent in the national labour force, regardless of who the employee worked for. Allocations break down as follows:
- Less than one year in the workforce – 0 personal holiday days
- 1 – 10 years in the workforce – 5 personal holiday days
- 10 – 20 years in the workforce – 10 personal holiday days
- Over 20 years in the workforce – 15 personal holiday days
China also observes 7 federal public holidays, while some regions will also mark additional celebrations.
Employment law considerations in China
If you hire employees in China, you must pay a minimum wage. This is set by region. China also operates a maximum hourly wage. The lowest minimum wage is ¥12.50 per hour in Hunan, while the highest is ¥25.30 in Beijing (conversely, this is also the highest maximum wage in China.) After Beijing, Shanghai is the next-highest paying region at ¥23 per hour.
Working hours in China are a source of much debate. Officially, employees should work a 40-hour week, with Chinese law declaring 44 hours the legal maximum without overtime compensation. Overtime should be paid at 150% of a standard hourly wage.
This is poorly enforced, though, with many Chinese companies operating a controversial “996 culture” – expecting employees to work from 9am to 9pm, six days per week, with no extra pay. This is illegal and has been successfully challenged in court numerous times.
Cultural considerations when hiring employees in China
As with doing business with associates in China, you’ll need to understand some of the cultural sensitivities of working with Chinese employees.
- The Chinese workplace is very hierarchical, so employees expect you to take the lead on projects and tell them what to do – and will work diligently according to your wishes. Do not ask employees, especially junior staff, to think outside the box and solve their own problems
- Taking a short power nap in the afternoon while at work is very commonplace in China – never try to discipline an employee for catching 40 winks unless they abuse this cultural norm
- As a nation, China values the collective over the individual. Be humble, and make an effort to get to know your employees and show that you care about them, encouraging them to fulfil their potential by explaining how it will benefit the group if they speak up and progress at work
- If you need to criticise or discipline an employee, do so privately and with subtlety. Chinese employees place a great deal of emphasis on dignity, and it does not take much to make somebody feel like you are publicly shaming them
FAQs about setting up a business in China
Still have questions or are seeking a swift answer to a basic query? Here are some of the most frequently asked questions about setting up a business in China.
Employees and employers expect a minimum of 30 days’ notice if employment is terminated in China.
You will need a minimum capital of ¥100,000 (around £12,000) to open a business as a sole director in China. If you are opening a Limited Liability Company alongside other founders, this drops to ¥30,000 (around £3,500.)
Trying to set up a foreign business by yourself can take anywhere from 6 – 18 months. This can be reduced to weeks if you partner with a Professional Employment Organization.
A whole lot! Before starting a business in China, you should partner with a Professional Employment Organization that will assist you in getting your business up and running.
Yes, you will need a local business bank account to trade in China.
You do not need to be a resident of China to trade in the country, and you do not necessarily need to have local representation at director level. However, restrictions are placed on who can hold such a role in certain industries, especially the financial sector.
Employment law in China suggests a 40-hour week, typically broken down as working from 8am to 5pm, Monday to Friday. By law, the working week is capped at 44 hours – though this is not always enforced, leading to disgruntled, overworked labour forces.
As China places significant emphasis and respect on their elderly population, offering enhanced retirement packages and life insurance will always be a popular perk.
Chinese law does not recognise “at will” termination unless the employee has demonstrated gross misconduct. You will almost always need to give 30 days’ notice or an equivalent severance package.
Annual leave in China is calculated according to cumulative years in the workforce, not just time spent with one employer. An employee that has spent 1 – 10 years in the labour force is entitled to 5 days of personal holiday, between 10 and 20 years earns 10 days, and over 20 years provides 15 days.