what we think

By Maarten Roos

While concerns remain over geopolitics and economics, we are once again supporting an increasing number of Western companies to establish manufacturing, trading or service subsidiaries in China. One of the key questions for foreign investors that we need to respond to is: where to best locate such a subsidiary?

Every company established in China, whether foreign-invested or not, must have a legal address which is formally registered with the local government departments. This address determines which district authorities have supervisory authority and where taxes are paid.

For companies that have a commercial reason to be at a certain location, this choice is often easily made. But companies that engage in services or trade, including retailers that plan to open stores in multiple locations, have a lot of options to choose from. Moreover, some companies may not be looking for a fixed address at all – for example because they plan to hire staff only later, or they prefer their employees to work remotely. Some of the key factors that our client usually consider when determining the registration address of their subsidiary, are location of employees, convenience of location, available fiscal subsidies, and the ease of doing business.

Choosing for your Employees

In China, a company can pay social insurance only in the city where it has a legal entity. There used to be an easy way around this, but no more. Therefore if employees are based in (say) Beijing, it could make a lot of sense to register the main subsidiary in Beijing as well. However:

• If you want to employ staff in more than one city, then you will need another solution for the other cities anyway. One possibility is to establish the company in Shanghai, and then establish a branch in Beijing for Beijing-based employees.
• Even if (say) Shanghai is chosen as a basis, you will still need to decide in which district to register. Social insurance is paid at city level, but company registrations are completed at district level.

Considering your Registered Office

Chinese law states that a company should be registered at the place of its operations, but this rule is often interpreted rather flexibly. If you want to establish your office in a certain city and district, then registering there could be an obvious solution. Still, it is not uncommon to see businesses registered in one district but having an office or even their main office, in another.

Moreover, some foreign-invested companies do not need a physical office at all, or they prefer to wait with an office until after the company has been set up. Law firms cannot host virtual offices in China because one office address can only register one company. But it may be possible to find a very small office purely for registration purposes. And, in Shanghai, local government committees and local district investment promotion bureaus often actively offer or facilitate a registered address free of charge to entice a company to register in its district.

Can you get Fiscal Subsidies?

Cities, districts, and even industry parks actively compete to attract (foreign) investment, and one of the ways they do so is to offer fiscal subsidies, especially in the form of grants and a refund of some of the taxes paid locally.

For larger businesses, getting advanced commitments from local authorities is the preferred approach. Depending on the nature of the business and expected economic performance + tax receipts, a local investment promotion bureau may agree to sign an investment agreement that details these benefits. For smaller operations, an investment agreement may not be achievable; but in Shanghai for example, fiscal subsidies are often still granted to companies in case of good performance.

Ensure Ease of Doing Business

Laws and regulations for doing business are mostly the same across China, but they can be subject to interpretation. Consequently, some districts are better at dealing with the requisites of foreign investors than others.

We see even more significant differences amongst banks. For example, a bank in Shenzhen will generally require the company’s legal representative to attend the bank opening process in person, while in Shanghai, the original passport or a notarized / apostilled copy is usually sufficient. Banks in major city centers like Shanghai and Beijing can also be more flexible when dealing with cross-border transactions.

Finally, especially for Western businesses that are new to China, Tier 1 cities like Shanghai offer a wealth of support in the form of lawyers, accountant, consultants, recruiters etc. that is much more difficult to find in other cities. Being established in a Tier 1 city also gives a certain level of confidence to business partners and Chinese customers, which can be of significant value.

My Conclusions

China is China, but choosing the right location can make a difference in your future operations. Investors should make informed decisions.

For more about how we can help foreign companies that want to set up in China, but also businesses that have already established but want to optimize their location, please contact roos@rplawyers.com or your usual contact at R&P.  We are here to help you make the best decision.

This was originally published on LinkedIn as an edition of Maarten's China Law Focus Newsletter. Subscribe here to get regular updates.