China's Mainland is playing an increasingly influential role in shaping the world's economic landscape and has been the largest single contributor to global growth since 2008.
Business processes have been simplified in recent years due to a more welcoming attitude from the Chinese government and widespread digital transformation. However, regional complexities require that companies doing business in China's Mainland develop a clear understanding of the local rules and regulations.
About China's Mainland
China's Mainlandis the largest jurisdiction in East Asia. With a population exceeding 1.4 billion, it now has the world's second largest economy by nominal GDP.
As such, it plays an increasingly influential role in shaping the world's economic landscape. It has been the largest single contributor to global growth since the disruptive financial crisis of 2008.
China's Mainlandis one of the world's leading exporters, attracting record totals of foreign direct investment (FDI). And with the world's largest number of new billionaires, outbound investment is also rapidly increasing as billions of dollars flow to other major global business hubs.
Fast Facts
- 2022 GDP - US$17.9 trillion [Statista]
- Currency – Renminbi (RMB, sign: ¥; code: CNY; also CN¥)
- Language – Mandarin
- GNI per capita – US$18,151 in 2022 (a 7.74% increase from 2021) [Macrotrends.net]
- Population – 1.425 billion [Worldometer, November 2023]
- Capital – Beijing
- Key sectors: industrial, services, agriculture, leasing and business services, manufacturing, wholesale and retail trade
- Key cities: Shanghai, Beijing, Chengdu, Shenzhen, Tianjin, Chongqing, Guangzhou, Wuhan
Ambitious companies looking at doing business in China's Mainlandwill find plenty of opportunities to expand their operations. However, there are also significant complexities to navigate. The jurisdiction was ranked 15th in the world for the complexity of its business environment in TMF Group's Global Business Complexity Index 2023.
Doing business in China's Mainlandtherefore requires a thorough understanding of the local economic environment and the rules and regulations that govern Chinese business practices.
Business opportunities in China's Mainland
China's Mainlandremains an exciting growth economy and many businesses are finding success within the jurisdiction. As economic globalisation leads more companies to expand across borders, the jurisdiction has become an attractive market due to the abundance of investment opportunities and massive consumer base.
It is a relatively complex jurisdiction in which to do business, but the environment has been simplified in recent years, driven partly by a more welcoming attitude from the Chinese government towards international investment. In addition, it has experienced a widespread digital transformation of incorporation and operational processes.
The Chinese government continues to invest in efforts to make laws more transparent through timely updates via local social media and the official government website. The most recent influential change is the revision of the VAT Law, the draft of which was jointly issued by the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) in November 2019. After collecting feedback and suggestions from all sectors of society, the revised draft was reviewed for the first time in December 2022 and for the second time in August 2023.
The government has also started to encourage certain industries, such as the chemical industry, to apply alternative ways of working that incorporate ESG factors. Although it is not yet legislation, the shift towards doing business in more sustainable ways is being mirrored by businesses and consumers alike, allowing the jurisdiction to better prepare for future regulatory developments.
When it comes to the best places for doing business China's Mainland, there are a number of cities that can be classed as economic powerhouses, including Beijing, Guangzhou, Shanghai and Shenzhen. The government also provides regional tax incentives to encourage investments in the western cities or certain pilot free trade zones to boost their competitiveness.
Challenges of doing business in China's Mainland
Typical challenges that businesses face when operating in China's Mainlandinclude understanding the differences between cities and regions, which are considerable given the geographical size of the jurisdiction and the regional nuances.
One particular aspect of complexity is the legislation and compliance requirements that vary from province to municipality to city, making up-to-date local knowledge essential for success. Another issue for multinationals is the use of Chinese as the principal language of commerce, creating the challenge of accurate interpretation and the burden of additional administrative processes.
China's Mainlandhas 31 provincial level administrative regions and more than 600 cities. Although the same legal system applies throughout the jurisdiction, in practice there are considerable regional differences.
In such a large market, many companies find it challenging to ensure that all their entities and branches are operating legally and with compliance in different cities.
In first and second tier cities, this is less problematic as there is a reasonably good ecosystem of professional service providers to choose from. However, when a business expands into third and fourth tier cities, it can be difficult to find a qualified service provider to assist in completing the necessary filing procedures with government authorities.
Compliance and the regulatory environment in China's Mainland
While keeping up to speed can be a test for businesses, many regulatory changes are done with a view to encouraging FDI. There has been a general move towards more digitised and transparent operations, with regulators working systematically to open up and simplify industries that can yield the greatest positive impact on the Chinese economy - financial services, for example.
To attract foreign talent, the government extended the preferential individual income tax policy for foreigners working in the jurisdiction in August 2023. The extension allows foreign individuals working in China's Mainlandto enjoy tax-exempt benefits for another four years, through to 31 December 2027.
The fast-evolving regulatory landscape makes it essential for companies to work with a partner that has local knowledge and experience in order to avoid any potential business risks.
Hiring and managing talent in China's Mainland
The Labour Law is the basic labour law which has been enforced since 1995. It was formulated to protect the legitimate rights and interests of labourers, readjust labour relationships and safeguard the labour system.
In recent years, the Labour Law has been revised frequently, which has in turn affected HR functions, including recruitment and payroll. It is imperative that companies regularly familiarise themselves with updates to this legislation.
The official version of an employment contract must be written in Chinese. There are typically three types of employment contracts available: fixed-term contract, open-ended contract and project-based contract. Only two fixed-term contracts are allowed before an employee is considered to be permanent.
The Chinese government welcomes foreign investors, high-level administrators and technical staff (Class A Talent) to work in the jurisdiction, however, 'regular' vacancies prioritise the hiring of locals. Foreigners who intend to work here should have more than two years of relevant work experience and a relevant educational background, unless they meet the requirements for Class A Talent.
Compliance with the complex requirements to obtain a foreign
work permit is not easy and can be costly. The Z-visa is the permit
used by foreigners who are employed by a company that has been
incorporated in China's Mainland.
Key stages a company must go through to obtain a work permit for a foreign worker
- Obtain a Notification Letter of Work Permit and invitation letter for the prospective employee
- Employee applies for a Z-visa from their country of origin (although Chief Representatives and Legal Representatives may apply in China's Mainland).
- Employee passes a Health Examination Check once in China's Mainland.
- Employer obtains a Work Permit for the employee (valid for 1-2 years).
- Employer obtains a Residence Permit for the employee (valid for the same period as the work permit – multiple entry).
State benefits are provided from localised funds in urban areas such as Beijing, Shanghai, Guangzhou and Chengdu. Rural employees are not usually covered.
The five social insurances covered by the jurisdiction's mandatory welfare system include pension, medical, on-the-job injury, unemployment and maternity, all of which are part of the existing social security framework.
The financial and tax environment in China's Mainland
There are many financial requirements for foreign corporations doing business in China's Mainlandthat create complexities, such as the non-negotiable statutory reporting regulations. For example, if a company's financial year is different from the local calendar year of January to December, the local subsidiary will have to perform year-end closing twice.
China's Mainlandalso has strict and restrictive foreign exchange controls that are governed by the State Administration of Foreign Exchange (SAFE). All cross-border transactions are regulated and monitored by the People's Bank of China and are executed by local commercial banks.
In recent years, the jurisdiction has been adopting global reporting standards and requirements, including the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA).
The standard Corporate Income Tax (CIT) rate currently stands at 25%. An effective CIT rate of 5% applies to qualified small and thin-profit enterprises with annual taxable income of up to RMB 3 million for the period from 1 January 2023 to 31 December 2027.
In addition, qualified high tech and new tech companies are subject to a reduced CIT rate of 15%. In 2008, a 10% withholding tax on dividends paid to non-resident companies was introduced, with preferential rates applying for dividends paid to certain countries under certain conditions. Dividends paid out on pre-2008 earnings continue to be exempt from withholding tax.
Starting a business in China's Mainland
While the scale of the Chinese market offers plenty of growth opportunities, the complex regulations that govern operations can make it a challenging jurisdiction in which to incorporate and do business.
However, the process of incorporating in China's Mainlandhas been simplified in recent years, with the government reducing the number of required steps and streamlining the registration process.
A wholly foreign-owned enterprise (WFOE) tends to be the preferred foreign investment structure. The foreign invested partnership enterprise (FIPE) is a relatively new form of entity that is gaining popularity amongst young entrepreneurs who are setting up a business in China's Mainlandfor the first time.
Every company incorporated in China's Mainlandmust obtain a registration certification or a business licence issued by the State Administration for Market Regulation (SAMR) or the local equivalent.
TMF Group helps companies expand into China's Mainlandwhile ensuring full compliance with all local regulations. Our local experts will assist with your company setup and ongoing growth.
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