Every company that decides to explore international expansion has two options – establishing a legal entity or employing an EoR.

This article compares both methods to help you decide which expansion model suits your business best.

Incorporating a business in China

Incorporation is the process of establishing a fixed offshore firm that conducts business with a legal and physical presence in a foreign country. The process typically involves registering the firm with the local government, setting up a branch office and, eventually, a subsidiary company within the host country.

There are three common business structures that foreign investors can set up in China:

• Wholly foreign-owned enterprise (WFOE)
• Representative office
• Joint venture company

Wholly foreign-owned enterprise

A WFOE is a 100% foreign-owned entity that can be established without needing a Chinese partner investor. The WFOE is a limited liability company with a separate legal entity from its investors. WFOEs are allowed to recruit employees directly. WFOEs can carry out business, issue invoices, and receive payments

Hiring employees

It can directly hire local employees without going through employment agencies. There are no restrictions on employing foreign staff; however, the WFOE’s investment, tax payment as well as the local employee numbers are the key factors to determines how many foreign employees it can hire.

Minimum registered capital

The Chinese Company Law provides that the minimum registered capital should be as determined by the shareholders and the board, and a minimum of RMB 1.00.

However, in practice, the Government normally reviews that the suggested amount is sufficient to cover the working capital of the business for the first 1-2 years.

Set up time

Setting up a General WFOE in China takes about two to three months excluding the special license.

Representative office

A representative office is prohibited from conducting business activities that generate profit and cannot collect payments or issue invoices, buy property or import production equipment. It is typically used to conduct marketing and research in order to understand the Chinese market.

Hiring employees

The representative office cannot directly employ staff and must engage with an employment agency. It is also restricted to hiring up to four foreign employees.

Minimum registered capital

There is no capital requirement.

Set up time

The process of setting up a Representative office may take about one to two months.

Joint venture

A joint venture is a limited liability company formed by a foreign company or investor(s) and a Chinese company, with the foreign company owning at least 25% of the business entity.

Hiring employees

A joint venture can directly hire local staff without going through an employment agency and can employ both local and foreign employees.

There are two types of joint ventures: an equity joint venture and a cooperation joint venture.

Minimum registered capital

There is no minimum capital requirement.

Set up time

The process of setting up a joint venture may take about two to four months.

Work permits

Currently all foreign workers are regulatorily split into three categories – A, B and C, normally most of applicants are belong to category B.

To apply for the visa under category B, the applicant should apply for FWP (Foreign Work Permit) notification letter with SAFEA (State Administration of Foreign Experts Affairs) first, then apply for Z visa with Chinese embassy in the home country. The Z visa normally vailed for 30 days after entering China. Applicant needs to apply for FWP after arrival and followed by Work-typed residence permit with PSB (Public Security Bureau).

Below are some of the benefits of incorporating in China:

• Incentives for foreign and local businesses
• Access to the world’s largest market
• Affordable production and manufacturing costs
• Limited personal liability
• Creation of corporate identity

Using an employer of record service in China

An employer of record (EoR) is a service that enables a client firm to recruit new talent without establishing an entity in a foreign country.

The EoR has a physical entity in place and will be listed as the legal employer on official documents while all decisions related to hiring, decisions relating to the employee’s role and dismissal will be handled by the client firm.

During a business expansion, an employer of record can assist by providing the following:

One of the main reasons companies choose to partner with an EoR is the ability to launch their business in another country within a very short period – firms can start operating as soon as they have made a hire in a said country.

Other benefits of working with EoR include the following:

• Avoiding the potential risks of being non-compliant with the labour laws and regulations of a host country
• Minimising the risks involved in expanding to new markets due to not having an established subsidiary
• Allowing businesses to expand into multiple countries simultaneously
• Efficient staff recruitment within your new market
• Local experienced HR experts run and keep track of employee payroll on a business’s behalf with full operational knowledge
• Low project setup cost and recurring costs compared to traditional company formation service
• EoR will become the legal employer of your employee taking away all the liability from your end
• Support with exit strategy with company deregistration, EoR is also a good alternative allowing you to maintain staffs even after closing your entity.

Incorporation vs EoR in China: Which one to choose for your business

If you are a business looking to expand to China, do you need to hire staff as a first step? If so, you have the following options, depending on the reason for hiring:

Reason #1: Explore the market

Many businesses expanding to a new market wish to have key business development staff on the ground in order to fully explore the market potential, grow contacts and plan for a successful market entry. Hiring staff and having them legally registered in China to undertake this kind of work is possible prior to incorporation. Here are some options:

Representative office

• Must employ staff
• Can support work permits for foreigners
• Must rent an office
• Cannot trade (i.e. raise invoices or accept payments)
• Must close and form a WFOE or JV if the office needs to trade in the future

PEO providing EoR service

• Legally employ staff
• Low overheads

Reason #2: Support existing customers/suppliers

If the need is to have staff to support your company’s Chinese customers, conduct marketing activities or work with suppliers on export from China, there are options to become an employer without setting up a company. These options assume that your company will be conducting invoicing/payments from outside China.

Representative office

• Must employ staff
• Can support work permits for foreigners
• Must rent an office
• Cannot trade (i.e. raise invoices or accept payment)
• Must close and form a WFOE or JV if the office needs to trade in the future

PEO providing EoR service

• Legally employ staff
• Low overheads

Reason #3: Start trading immediately

f your China expansion project has an immediate need for your business to start invoicing and making payments within China, you have to incorporate. The options are:

Joint venture

Foreign companies partner with Chinese companies and can own at least 25% ofthe business equity

Can directly hire employees

Wholly foreign owned enterprise

• 100% owned by foreign company
• Can directly hire employees
• Can conduct business activities and issue invoices

Of course, with either of these options, you may decide to outsource the employer of registration duty and HR requirements to a PEO to reduce administration.

Other important factors to consider

Familiarity with the rules and regulations of China

When it comes to the regulations regarding international incorporation, one should never assume that everything will operate in the same way as it does in their home country. The laws and regulations might differ greatly from one nation to another and breaking them can result in non-compliance risk and hefty fines.

Working with an EoR can help reduce that risk while allowing you to concentrate on other aspects of the business expansion.

The scale of a business expansion

It’s important to establish how much you are willing to invest into a new market. Determine if this is only an experimental move, or if you strongly believe that this market has a great growth potential for your business and is worth your investment.

Keep in mind that you can always start out by working with an EoR to estimate the possible risks and benefits and if everything goes well for your business, you can proceed with incorporation.

The economic state of China

China’s economy remains one of the most attractive destinations for investors and companies seeking to expand their global presence.

In the new version of the Catalogue of Encouraged Industries for Foreign Investment (2022 Version) implemented from 1 January 2023, China continues to guide foreign investment in advanced manufacturing, modern service industries and advantageous industries for the central, western and north-eastern regions. Business and personal travelling have resumed as the restrictions are removed in early 2023. If more favourable policies emerge after the Two Sessions in March 2023, international business for domestic and foreign companies will be further encouraged.

However, entering the market can be a complex process, particularly for foreign businesses. While a Wholly Foreign Owned Enterprise (WFOE) may be the traditional choice, an Employer of Record (EoR) model offers a faster, more cost-effective way to expand into China. With the EoR model, companies can outsource their employment and HR functions to Acclime, where we will handle all compliance, payroll, tax filings and other regulatory requirements.

How Acclime can help

Choosing the best option will mainly depend on the company’s global expansion strategy, the number of new hires, and if the firm is recruiting in multiple countries.

Regardless of your choice here at Acclime, our goal is to stand by you at every stage of your journey. So, whether you decide to partner with an EoR or are willing to seek out support amidst establishing a new legal entity, our various business solutions can be customised to suit your evolving needs perfectly.