What to consider when setting up a business in China?

For foreign investors serious about expanding into new markets, the Middle Kingdom remains an attractive destination in many ways. China’s population of less than 1.4 billion, its steadily growing purchasing power and its dynamically developing economy – all these factors make the country a successful attraction for ambitious entrepreneurs from Poland as well.

However, setting up a company in China and then operating it effectively is a long and complex process – mainly due to the strict formal and legal requirements imposed on foreign investors by Chinese law. In addition, the language barrier and, more importantly, Western entrepreneurs’ lack of familiarity with Chinese business culture often prove to be significant obstacles. This lack of understanding is often the reason why a huge market is no guarantee of success for a business in China. Find out what you need to know to maximise your chances of success beyond the Great Wall.

Starting a business in China and protecting your trademark abroad

Starting a business in China and protecting your brand abroad

China is one of the key destinations around which all global trade revolves. However, the Middle Kingdom is not without its challenges for foreign investors who, before making the final decision to expand into this market, should learn the key details about the most important aspects of this venture. In particular, we are referring to issues such as trademark protection, the legal form of a business and the procedure for registering a company in China.

How to set up a company in China from a legal point of view?

Although the huge consumer scale in China and its high openness to offers from foreign manufacturers may sometimes suggest otherwise, successfully doing business in the Chinese market is a difficult challenge for domestic companies. It requires not only the development of a business plan and a comprehensive strategy tailored to the specific needs of the consumer from across the Great Wall, but also meticulous planning on the formal side. The basic question then becomes: how to set up a company in China and which legal form of business should be chosen?

The foreign investor has several options in this respect. The choice of the optimal solution depends primarily on the subject of the business to be conducted, as well as the degree of involvement of the entrepreneur himself. The manufacturer must answer whether it plans to cooperate with the Chinese importer, removing the need to immerse itself too deeply in the intricacies of the Chinese market, or whether it assumes that its involvement in the entire process will be somewhat greater than just obtaining an order and issuing an invoice.

So let’s look at what the available forms of doing business in China look like in practical application.

Wholly Foreign Owned Enterprise (WFOE) – the most popular type of foreign owned company to invest in China

A wholly foreign-owned business is a legal form of legal entity that is only available to foreign investors; it proves to be a frequent choice among companies that want to manufacture or provide services in China. It is then important to have a trusted partner on the Chinese side – such support is also offered by the specialists at Trademark Partners. As professional intermediaries, we operate locally in the Middle Kingdom, so we guarantee fast and effective assistance at every stage of the process related to brand registration and protection in China.

It is worth mentioning that an important advantage with this solution remains the fact that the entrepreneur retains full control over his/her company and legal personality in China. Importantly, however, he/she must at the same time reckon with the necessity to pay the mandatory initial capital, which usually amounts to a not inconsiderable amount.

Joint Venture – a company in partnership with a Chinese partner

The most familiar form of business in China to foreign investors, and the first to be made available to foreigners by the authorities, is the joint venture, i.e. a company set up in cooperation with a Chinese partner. In practice, this means that the foreign entrepreneur owns only part of the shares – for some industries, such as construction, this is the only cooperation model available.

There are two main types of joint venture activity in the Middle Kingdom:

    • equity JV – profit and loss distribution determined according to the value of the shares;

    • contractual JV  – the distribution of profits and losses takes place on the basis of a special contractual clause drawn up in advance.

Representative Office (RO) for the foreign market

This is another very popular form of business among foreign companies trying their hand at the Chinese market. This is mainly due to the fact that the RO allows foreigners to legalise their stay. In addition, setting up such a business in China does not require too much money to start. From an entrepreneur’s point of view, this seems to be the easiest and most cost-effective solution. Although it is relatively easy to set up a representative office in China, it has some significant limitations:

    • lack of legal personality;

    • up to four foreign individuals may act as representatives;

    • no ability to hire local workers yourself – the use of an authorised Chinese recruitment agency is always required;
    • the costs of the representative office are taxable. As the representative office has no legal personality and cannot sell products or services, it has no tax shield. Therefore, all costs incurred are taxable.

Any entrepreneur operating in Poland in the form of a limited liability company or joint-stock company may establish a representative office in China if it has been operating on the market for at least two years.

Key steps to setting up a business in China

As mentioned above, although China offers the prospect of relatively easy business, it is a demanding and specific market, and history shows that numerous barriers to entry have deterred even market giants such as Tesco. This proves that to do business successfully in China, it is essential to have a thorough understanding of the conditions and rules that govern the Chinese market, as well as the complex web of relationships between individual importers, distributors, wholesalers or retail outlets. In the midst of these challenges, it is also important not to forget the important obligations and formalities that accompany the process of registering a company in China – the protection of the trademark and the Chinese brand name are crucial in this regard.

Company name in Chinese

A well crafted company name is an important element in protecting a brand in China and a strategic step in competing successfully in the Asian market. Foreign investors need to be aware that in today’s reality, the importance of having a Chinese brand has increased significantly, and Western companies have to compete not only with other foreign companies, but also with local Chinese brands. In addition, the Chinese version of the company name is much easier for local consumers to remember and much easier to find, for example in an internet search engine, where Chinese users primarily use the Chinese spelling of brands.

However, the most important thing to remember about a Chinese company name is that registering a trademark in the Latin alphabet does not guarantee protection against unwanted use of the trademark in the Chinese version. Therefore, in order to obtain full protection, an entrepreneur should apply for registration of a trade mark in Chinese characters as well.

At Trademark Partners, we specialise in the creation of Chinese brand names and work closely with Chinese naming experts. With the support of qualified native Chinese speakers, we can develop brand names that are perfectly adapted in sound and meaning to the requirements of the Asian market.

Why is it important to register a trademark in China?

Any foreign investor should bear in mind that registering a trademark in China is not just a formality, but above all a way of effectively protecting a brand in this competitive market and an essential security tool for both exports and imports from the Middle Kingdom. By registering the trademark with the Chinese authorities, the entrepreneur also acquires the exclusive right to use it in the country, thus eliminating the risk of unauthorised use of the trademark by third parties.

It is worth noting that in China there is a first-to-file priority rule which states that the right to a particular trademark is acquired by the person who registers it first. Therefore, entrepreneurs should not delay with this formality – it is best to register a trademark in China before starting actual business.

Trademark protection in China

Protecting a trademark in China is the most important responsibility that falls on both importers who outsource production in the country and companies involved in exporting goods and services beyond the Great Wall. The primary benefit that follows is the effective protection of the brand against so-called bad faith registration by unauthorised third parties, which could ultimately lead to measurable financial losses for the company. In addition, by filing its trademark for protection, the company also gains a tool to control the distribution of its products.

How long does it take to set up a company in China?

The formal procedure for setting up the simplest type of WOFE in China takes approximately one month from the date of application for registration. The registration process for more complex types of company takes between three and up to six months and can be broken down into several key stages:

    • issuance of an official approval by the Chinese authorities to the investment proposal put forward by the entrepreneur;

    • submission of a detailed business plan accompanied by a feasibility study;

    • completing and submitting the required documentation in Chinese (including the Articles of Association of the company to the Inspection and Ratification Department) and obtaining the Certificate of Approval for Entrepreneurs with Foreign Participation;

    • official registration of the company with the Department of Industry and Commerce.

How to monitor the services provided in China?

As you can see from the above, doing business in China undoubtedly requires considerable commitment. Entrepreneurs should also remember to monitor their services on an ongoing basis, keeping trade statistics and advanced analyses of online transaction data and posted comments on the manufacturer’s offerings.

A huge market and significantly lower production costs are important arguments that successfully convince many foreign investors to do business in China.

Setting up your own business in China remains a highly profitable investment, but it takes experience and in-depth knowledge of Chinese law to operate successfully in the Asian market. At Trademark Partners, we guarantee substantial support from qualified professionals. We form a multi-disciplinary team and work closely with professional lawyers and patent agents.

Are you looking for comprehensive support and confidence that your interests in China will be adequately protected? Contact the experts at Trademark Partners!

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