fenwick & west
As China’s strength in the global economy continues
to grow, businesses need to consider the prospect of
establishing operations within its borders. In order to
successfully transact business in China or with Chinese
enterprises, foreign investors, including financial investors
and entrepreneurs, should consider setting up a subsidiary
in China. This article provides general information on
establishing a subsidiary by foreign investors, to help
provide guidance and demystify the process.
Purpose of Establishing a Subsidiary in China
Establishing a subsidiary in China should be considered
by those who have long-term business objectives in China.
Although foreign companies can enter into some commercial
contracts with Chinese enterprises, such as sales contracts,
license agreements, and distribution agreements, they
cannot do business directly in China without an approved
business license. Doing business in China through a
subsidiary is at least advantageous—and sometimes
a necessity—in overcoming certain legal and business
restrictions on foreign companies.
Some foreign companies may already have a resident
representative office in China. Such representative offices
function as internal liaisons for their parent company.
However, they may not do business in China directly. Because
resident representatives are not recognized as independent
legal persons under Chinese law, they may not assume
independent civil liabilities to a third party, which prevents
significant commercial activities such as signing commercial
contracts with a third party. Nor may they directly hire local
Chinese employees. There are limited exceptions, however,
such as a lease contract for office space.
Companies that desire to invest directly in China, hire local
people, conduct research and development, manufacture
products, and market their products or services directly
to the Chinese market, should consider establishing a
subsidiary in China.
Incorporation Forms of Subsidiaries
“Subsid