What is a foreign invested enterprise (FIE)?

Since 1979, China has opened the door more and more to foreign investment.¹ They’ve opened their economy and amended legal structures to increase their competitiveness.

If you’re looking to invest in or establish a profit-making enterprise in China, then you may need to establish a foreign invested enterprise (FIE).

Let’s look at the laws, benefits and some examples of foreign invested enterprises.

What is a foreign invested enterprise?

A foreign invested enterprise is an enterprise established and registered in China. It’s either partially or wholly invested by foreign investors.²

It’s a legal arrangement that enables foreigners to engage in the Chinese economy.

Foreign Invested Enterprise (FIE) Law

As of January 1st 2020, China implemented a new Foreign Investment Law (FIL), consisting of 42 articles across 6 chapters.³

The New Law encourages foreign investment. It bolsters its protection, while imposing new legal liabilities on both foreign investors and Chinese regulators.

Likewise, China’s 2019 Negative List and Encouraged Industries Catalog further promotes and supports foreign investors.³

The Negative List aimed to remove restrictions on foreign investors in specific sectors. For instance, the oil and gas exploration sector no longer requires you to have a joint venture with a Chinese partner.³

The Encouraged Industries Catalog, in contrast, provides incentives to invest in certain sectors. Among these sectors are:

• Pharmaceuticals
• Modern agriculture
• New materials
• Intelligent manufacturing
• Advanced services and technology

Investors in these sectors, among others, will enjoy preferential benefits such as:

• Exemptions from customs duty on imported equipment for self-use
• Income tax rate of 15% for certain sectors and operating regions
• Land supply given on a priority basis for qualified investments. Plus a 30% discount on the minimum price for granted land use rights³

Additionally, the Encouraged Industries Catalog includes a sub-catalog. The sub-catalog promotes foreign investment in certain regions within western, central and eastern China.

You’ll enjoy the same preferential benefits mentioned above by in these specific regions.³

The Encourage Industries Catalog can help you select the best sectors and locations for investment in China.

Foreign invested enterprise types

China has categorized the types of legal foreign invested enterprises into four categories.

Let’s now take a closer look at the differences between them.

Wholly foreign-owned enterprise (WFOE)

A Wholly Foreign-Owned Enterprise (WFOE) is a business registered and established in China that is completely operated and owned by foreign investors.⁴

A WFOE comes with the benefit of full control for the foreign investors. But, you're still restricted by the laws and regulations of the Chinese economy.

It still remains that in some sectors, WFOEs are banned from being established. But, with the 2020 FIL and 2019 Negative List, the amount of sectors banning WFOE is declining.⁵

Equity joint venture (EJV)

An Equity Joint Venture (EJV) is a business co-founded and operated by both a Chinese enterprise and a foreign (non-Chinese) enterprise.⁶

EJVs are subject to the business laws and regulations of China. They must also be approved by the Chinese government.

An EJV operates as a Limited Liability Company (LLC). This means the personal wealth and assets of the investors are protected from business losses. Additionally, profits are distributed in proportion to the amount of capital invested by each partner. For example, a partner who invested 60% of the capital will receive 60% of the profits.⁶

Cooperative joint venture (CJV)

A Cooperative Joint Venture (CJV) is much like an EJV, but allows more flexibility in the agreement.⁷

Again, it’s a business co-founded and operated by both a Chinese enterprise and a foreign enterprise.

A CJV can decide to be set up as either an LLC, or with unlimited liability.

Additionally, in a CJV, partners can decide the way in which profits are allocated. It doesn’t need to be proportional to capital investments.⁷

Foreign invested companies limited by shares (FICLS)

Foreign Invested Companies Limited by Shares (FICLS) are joint stock LLCs. In an FICLS, capital is split into equal shares which confer equal voting rights.⁸

For an FICLS, a Chinese and a foreign enterprise are required to incorporate together into a stock-ownership based entity.

An FICLS can issue publicly owned stock to create capital both inside and outside of China.¹

China’s original inclusion of FICLS was geared toward attracting foreign investment. FICLSs imitated the legal economic framework US investors were familiar with.¹

When to use a foreign invested enterprise as a business

If you want to invest in or establish a profit-making venture in China, then using a foreign invested enterprise would be a suitable decision. A foreign invested enterprise gives you a legal presence in China, which comes with certain benefits.

For example, if you want to invest in or establish your own business in a growing Chinese industry, then you’ll need to use a foreign invested enterprise.

Likewise, if you want to become a partner in a Chinese enterprise, or expand your customer base in China, then a foreign invested enterprise would help you achieve those goals.

Cases where you do not need to establish a foreign invested enterprise

Just because you want to do business in China doesn’t automatically mean that you need to establish a foreign invested enterprise. Depending on your business goals, there are various options for operating in China.

For example, you may only need to set up a Representative Office (RO) in China. This would be the case if your main goal is market research. As an RO, your economic activities will be limited.

Similarly, if you want to employ workers based in China for your foreign based business, then you also won’t be required to establish a foreign invested enterprise.

Examples of foreign invested enterprise in China

To summarize, if you’re establishing a foreign invested enterprise in China, your business will fall under one of the four following categories:

• Wholly foreign-owned enterprise (WFOE)
• Equity joint venture (EJV)
• Cooperative joint venture (CJV)
• Foreign invested companies limited by shares (FICLS)

As a foreign invested enterprise, you may need to pay local suppliers, employees and regulatory costs.

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All sources checked March 21, 2023.