Setting Up a Company in China — The Legal Perspective

Interview of Nicolas Coster, French business lawyer specialized in foreign direct investment. In this interview, Nicolas Coster answers questions related to setting up a business in China.

1. Could you briefly introduce yourself and your company?

My name is Nicolas Coster, I am a French attorney registered at the Paris Bar. I am an international business lawyer trained in France and the UK and an arbitrator in China. I founded from China the French law firm Coster Associates.

2. Let’s take the case of a foreign company willing to expand in China. What would be the main challenges they would face when opening a subsidiary?

Today, to set up a company in China is not the challenge. You can open a trading or service company within one month in big cities like Shanghai and Beijing. The true challenge is to have the right team to operate the company. Ninety percent of the investment failure in China involved Human capital issues.

3. Could you describe the main steps of the process? How much time would it take on average?

The first step is to notarize and legalize the ID document of the investor in his country. Once this is done, we prepare the article of associations and other investor decisions and we file them online with the Market Supervision Administration (MSA – the Chinese company registry). One thing to be noted is that the lease contract of the company shall be signed before the creation of the legal entity. Upon the online approval, we file the original documents at the cashier of the MSA and receive the business licence of the company within 5 working days. Thereafter, the company needs to register with the local tax office.

In case of industrial company, a preliminary environmental impact assessment shall be conducted.

For trading and services company, it would take about one month. For industrial companies, 3 to 4 months depending on the location. 

For trading and services company, the process of setting up a new company would take about one month.

4. There has been a recent change in regulations: WFOE and JV no longer exist in China. What are the implications for a foreign company willing to expand in China tomorrow?

The main implication is that is faster and safer to set up a company in China. You do not need anymore to register the company with the Chinese Ministry of Commerce. You have one single window approach with the MSA.

Another big step is that it is also easier to purchase Chinese companies for foreign investor as we do not need anymore to change their legal status with the MSA from Chinese invested company to foreign invested company. Merger and acquisition project will definitely benefit from these change.

5. In which city do you recommend setting up first? What are the perks of Shanghai and its region compared to the rest of China?

To choose a city is not a matter of Guanxi (good relations). You need to carefully assess the business environment of the city and its logistics access for your market. If you need to send many foreigners in China, Shanghai is a good place as you do not need for the moment to contribute social charges for them compared to the rest of China. Shanghai is also very business-friendly and foreign mind oriented. It is easy for your expat employees and their family to live there and feel happy. However, the costs of the city for labour, rent, etc. is higher than in most other cities in China and is very similar to an international city. For industry, Shanghai is not so friendly and has a very strict environmental control. It is better to choose a second-tier city nearby Shanghai for such business operations.

You need to be careful about local tax benefit as some of them could be illegal.

6. A word regarding the trademark. It is not always easy to register the original brand name, what do you recommend in that case?

If somebody already register the original brand name, it is very hard to get it back if you cannot proof bad faith filing. Chinese government recently enlarge the definition of bad faith filing and as lawyer we have more legal means to recover of stolen trademarks, but it would be much more expensive that simple registration. So you need to do your homework !

My advice is to register the trademark even before you think to come to China. You need to register your brand name, its translation into Chinese (be careful to choose a beautiful name with the help of a professional) and your logo. The timing to register a trademark if everything is going smoothly is between 9 and 12 months. If you plan to distribute your products in China on online platforms like Alibaba, better to apply several names for one trademark. If not and if your application is rejected, you will lose 6 months to enter on the Chinese market as no Chinese distributor would accept to sell your products without Chinese trademark certificate.

7. Are there any new challenges that companies need to face due to COVID-19? Are there any new regulations?

The biggest challenge is to be able to send your foreign employees in China. However the country is starting to reopen its border and we are confident that the situation shall be back to normal by the end of the year. We can also set-up the company in China without the client’s visit and then he/she would be able to come, we will just give him/her the keys of the companies and he/she can start the operations right after.

Each company has to follow local regulations linked to the COVID situation : mainly records daily the temperature of each employee, use cleaning handwash products at the entrance of the premises and proposes masks.