Market Entry and Foreign-Invested Enterprises in China

Setting up a foreign-invested enterprise: the short answer

A foreign investor entering mainland China usually establishes a foreign-invested enterprise (FIE): a company or partnership incorporated in China and wholly or partly owned by foreign investors. Since the Foreign Investment Law took effect on 1 January 2020, an FIE in a sector outside the negative list is set up by registering with the local market regulator, in the same way as a domestic company. Foreign investment information is reported through the registration system and then annually. Where the business needs a sector licence, such as for value-added telecoms, medical services, financial services or food production, that licence is a separate step after incorporation.

The national negative list currently in force is the 2024 edition, effective 1 November 2024. It has 29 items and removed the last restrictions on foreign investment in manufacturing; pilot free trade zones apply their own shorter list, still the 2021 edition with 27 items. Remaining restrictions concentrate on areas such as certain telecoms and internet services, publishing and media, some education and medical activities, and natural resources. If the intended activity is on the list, the rules for that item, such as an equity cap or a requirement for Chinese control, shape the whole structure.

The typical sequence is: decide the vehicle and location; prepare the investor's notarised and apostilled (or legalised) corporate documents; reserve the name and file the registration; obtain the business licence; carve the company chops; open bank accounts and complete foreign direct investment registration with the bank; register for tax, social insurance and housing fund; and then apply for any sector licences. Timelines vary by city, but document preparation and bank onboarding are the steps most often underestimated.

Choosing the right vehicle and location

For most operating businesses the decision is between a wholly foreign-owned company and a joint venture. A wholly owned vehicle gives control over strategy, cash, technology and people, and is simpler to restructure or sell later. A joint venture makes sense where the partner contributes something that cannot be bought, such as a licence, land use rights, distribution or government relationships, or where the negative list requires Chinese participation. Joint ventures formed before 2020 under the old Sino-foreign joint venture laws had until the end of 2024 to adapt their governance to the Company Law; any that have not done so need attention now.

A representative office is the lightest presence, but it cannot invoice customers, and its staff must generally be engaged through a licensed staffing agency. It suits early market research, not trading. Where the business will sell, hire directly or hold assets, a foreign-invested enterprise is usually the better starting point, even at small scale.

Location as a decision point

Location also matters. Free trade zones, the Greater Bay Area (including Qianhai in Shenzhen and Hengqin in Zhuhai) and the Hainan Free Trade Port offer specific pilot measures and, in some cases, preferential tax treatment for qualifying businesses. Since 2024, the Ministry of Industry and Information Technology has piloted wider foreign access to certain value-added telecoms services in selected areas, including Beijing, Shanghai, Hainan and Shenzhen. Beyond incentives, consider the talent pool, the attitude of the local market regulator and tax bureau, logistics, and whether the chosen district will later accept a change of address without lengthy tax clearance. See our Greater Bay Area and Hainan Free Trade Port hubs.

Step by step: registering a foreign-invested enterprise

The process below reflects a typical wholly foreign-owned company in a sector outside the negative list. Indicative timings depend heavily on the city, the investor's home jurisdiction and the bank, so treat them as planning ranges rather than commitments.

1. Scoping (weeks 1 to 2). Confirm that the activities are outside the negative list or meet its conditions, check whether any sector licence is needed, and agree the vehicle, location, registered capital, business scope and officers.
2. Investor documents (weeks 1 to 6). Obtain the investor's certificate of incorporation, good standing and board resolutions, and identity documents for the legal representative, directors and supervisor. China joined the Apostille Convention with effect from 7 November 2023, so documents from other contracting states can usually be apostilled rather than legalised through a consulate. Documents from non-contracting states still need consular legalisation.
3. Drafting (weeks 2 to 5). Prepare the articles of association, appointment letters, lease for the registered address and, for a joint venture, the shareholders' agreement. Articles must follow the Company Law and the regulator's formats; side agreements should be consistent with them.
4. Name and registration (weeks 4 to 8). Reserve the name and file online with the market regulator. Once approved, the business licence is issued, often within days of a complete filing in major cities.
5. Chops and banking (weeks 6 to 12). Carve and record the company seals, then open the basic RMB account and the capital account. Banks conduct know-your-customer checks on the whole ownership chain and the ultimate beneficial owners, and handle FDI registration under foreign exchange rules.
6. Post-registration (weeks 8 to 14). Register for tax and invoicing, social insurance and the housing fund; complete customs registration if importing or exporting; and apply for any sector licences.

Beneficial ownership information must also be filed under the People's Bank of China rules on beneficial owner information, which apply to most newly registered entities from November 2024. Gather this information early, because complex fund or trust structures can take time to map.

Capital and governance under the revised Company Law

The five-year capital rule

The revised Company Law, effective 1 July 2024, requires shareholders of a limited liability company to pay their subscribed capital in full within five years of incorporation. Companies incorporated before 30 June 2024 must, by 30 June 2027, adjust any longer contribution schedule so that the remaining capital is paid within five years, under State Council provisions issued in July 2024. Directors have a duty to check contributions and to call for unpaid capital, and shareholders who fail to pay can lose their rights in respect of the unpaid portion.

For an FIE this means registered capital should reflect real funding needs over a realistic period, not an aspirational figure. Capital can be supplemented later by increases or shareholder loans within the foreign debt limits explained on our SAFE compliance page. In-kind contributions, including intellectual property and equity, are allowed if they can be valued and transferred.

Worked example (illustrative). A European equipment maker plans a Shenzhen sales and service company. Its budget shows operating losses for the first two years and working capital needs that peak in year three. Rather than registering a large round figure, it registers capital covering the first three years of need, payable in two instalments within the five-year window, and documents a plan to fund later growth through a shareholder loan or a capital increase. If the business outperforms, a later increase is a simple change registration; if it underperforms, the parent has not committed to capital it must still pay in, and directors are not exposed for failing to call it.

Governance and control from head office

The revised Company Law gives more flexibility in governance design. A smaller limited liability company may have a single director instead of a board and may dispense with a supervisor if all shareholders agree; a company may also set up an audit committee of the board in place of a board of supervisors. A company with 300 or more employees generally needs an employee representative on the board unless it has a board of supervisors that includes employee representatives. The legal representative must be the director or manager who conducts the company's affairs.

Real control rests on a few practical tools: an authority matrix that limits what the legal representative and general manager can sign; documented custody of chops and banking credentials; reserved matters for the shareholder; and a clear process for replacing local officers. Our page on corporate governance and the Company Law covers these points in more depth.

Licences, people and first-year compliance

After incorporation, a foreign-invested enterprise will usually need to deal with the following before trading:

• Sector licences where the business is regulated, such as value-added telecoms (see telecoms), medical devices, food, logistics or import and export operations.
• Employment: written employment contracts, social insurance registration, internal rules adopted through the required consultation process, and work and residence permits for foreign staff (see work permits and mobility).
• Tax: VAT invoicing, enterprise income tax filings, transfer pricing documentation for intra-group transactions and withholding tax on payments abroad.
• Data: personal information compliance and, where data is sent to headquarters, a route under the cross-border data transfer rules (see cross-border data transfer).

The first year brings a set of recurring obligations. The table summarises the main ones for a typical trading or service company; sector-specific reporting comes on top.

Profits can be distributed only after losses are made up and the statutory reserve is funded, normally 10% of after-tax profit until the reserve reaches 50% of registered capital. Dividends paid abroad are subject to withholding tax, at 10% under domestic law or a lower treaty rate where available.

Cross-border holding structures for a foreign-invested enterprise

Who holds the foreign-invested enterprise matters as much as how it is set up. Many groups hold through an intermediate company to simplify a future sale, joint venture or listing, to separate China risk from the parent, or to access a tax arrangement. The right answer depends on the parent's home jurisdiction and its plans.

• Hong Kong. A Hong Kong holding company is common because of language, banking and the Mainland and Hong Kong tax arrangement, which can reduce dividend withholding to 5% where the holder owns at least 25% and is the beneficial owner. Treaty benefits depend on real substance and beneficial ownership; a shell with no people or decision-making in Hong Kong is unlikely to qualify.
• United States. US parents should check whether the planned activity touches the US outbound investment rules, in force since January 2025 and since codified and expanded by Congress, which restrict or require notification of certain investments by US persons in semiconductors, quantum and artificial intelligence in China. Export controls may also limit what technology the new entity can receive. See our China and the US hub.
• European Union. The EU has recommended that member states review outbound investment in sensitive technologies, and some, such as the Netherlands and Germany, apply their own export and screening rules. EU parents should also map supply-chain due diligence obligations that will reach the Chinese subsidiary.
• ASEAN and "China plus one". Groups that run parallel production in Vietnam, Thailand or Malaysia often place regional holding and procurement in Singapore or Hong Kong. Intra-group pricing between the Chinese entity and ASEAN affiliates must be supported by transfer pricing analysis on both sides.

Common mistakes when setting up a foreign-invested enterprise

The same avoidable problems recur across market entry projects. Most cost time rather than money, but some, such as a weak control framework, become expensive later.

• Oversized registered capital chosen for appearance, creating a binding five-year payment obligation.
• Appointing a local manager as legal representative, sole director and chop holder with no authority matrix or replacement mechanism.
• Treating the representative office as a trading entity, which risks penalties and tax reassessment.
• Starting work before the entity exists, for example by having future staff work as contractors for the parent, creating permanent establishment and employment risks.
• Ignoring the bank timetable, so the business licence is issued but capital cannot be injected or salaries paid for weeks.
• Copying head office contracts and policies without adapting them to Chinese employment, consumer and data rules.
• Overlooking the exit: deregistration is slower than registration, so a holding structure that allows a share sale can save months. See liquidation and deregistration.

Buying an existing Chinese business is the main alternative to a greenfield set-up. It brings licences, people and customers immediately, but also its history. An acquisition may trigger merger control, security review and, if the target is in a restricted sector, negative list conditions. Due diligence on licences, tax, employment and capital contributions is essential. See our cross-border M&A page for the acquisition route.

How TRW & Co helps

We help international businesses plan and execute their entry into China. That includes choosing the vehicle and location, structuring the holding chain through Hong Kong or other jurisdictions, preparing investor documents, drafting articles, joint venture agreements and authority matrices, and managing the timetable across registration, banking and licensing. We advise on non-PRC law aspects and international practice, and provide information on the PRC regulatory environment. Where PRC legal advice, filings or applications as agent are needed, we coordinate licensed PRC law firms and service providers so that the client deals with one plan and one point of contact. To discuss a market entry project, please contact us.