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Insights A brief guide to Chinese company law

A brief guide to Chinese company law

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updated on 18​ March 2025 | reading time approx. 6 minutes
 
​​Since the introduction of the Foreign Investment Law in 2020, the legal framework for investment in China has been simplified and standardised.​  
  
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​Sh​ort Overview:

​This article provides a comprehensive overview of the various ways in which foreign companies can enter the Chinese market.
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​​Overview of the most important Types of Companies in China

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Wholly Foreign Owned Enterprise (WFOE):​ This type of company is ideal for companies wishing to operate in China without local partners. It is similar to a German GmbH and offers full control and limited liability.
 
Joint Ventures (JV): This type of company enables partnerships with Chinese companies and offers the advantage of being able to utilise their existing structures.
 
Company limited by Shares (CLS): This type is suitable for larger companies that want to raise capital through the sale of shares. It provides access to capital markets, but is more complex to set up.​
    
Partner​ship Enterprise (PE):  ​This flexible and less bureaucratic type is particularly attractive to start-ups and entrepreneurs. There are several variants with different liability rules.
   
Representative Office (RO):​ This option is suitable for companies wishing to explore the Chinese market. An RO is not allowed to do business, but is used for market research and to support liaison activities.
  
Choosing the right type of company depends on the individual needs and objectives of the business. Each option has its own advantages and challenges, which we explain in detail below. Our article is intended to serve as a guide and facilitate the entry of foreign companies into the Chinese market.​
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​Company forms in detail


For companies that have decided to establish a branch in the Chinese market, setting up a local company is a significant challenge.


Following the introduction of the Foreign Investment Law (FIL) in 2020, all forms of foreign investment in China were standardized, with three major laws that previously applied to foreign investment being abolished: the Law on Sino-Foreign Equity Joint Venture (EJV), the Law on Sino-Foreign Contractual Joint Ventures (CJV​) and the Law on Wholly Foreign Owned Enterprises (WFOE). The provisions of the Company Law that apply to solely Chinese companies also apply to these three company forms. This means that the only difference between foreign-invested and purely domestic companies is the shareholder structure.

Therefore, all foreign-invested enterprises in China take the legal form of either a corporation (limited liability company or joint stock company) or a partnership.

 To enlarge​ click on the picture.


Despite the abolition of the aforementioned laws, the terms WFOE, EJV and CJV continue to be used in an economic context for foreign investments.


It should be noted, however, that despite the equal treatment under Company Law, special regulations continue to apply to foreign investments. Such regulations include, inter alia, market access restrictions (regulated in the so-called “negative list”), the requirement of a security review (for investments in sensitive sectors that could affect national security) and foreign exchange regulations.

This article provides a comprehensive overview of the most prevalent forms of foreign investment, along with a general analysis of potential liability concerns for shareholders and company officials.​
  

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​ Wholly Foreign Owned Enterp​​​​rise (WFOE)

Even after the abolition of the law applicable to WFOEs and thus the legal form ‘WFOE’, the term is still used in the economic sense for foreign investments if the company is wholly owned by one or more foreign investors. It is the most common investment vehicle for foreign companies that want to gain a foothold in China without a local partner. It is a limited liability company under the Chinese Company Law and is comparable to a German GmbH. The advantage of a WFOE is that it is fully owned and controlled by the foreign investors. It can carry out production, trading, consulting and other business activities depending on the authorized scope of business. The WFOE is controlled by the shareholders' meeting, whose resolutions are implemented by the Board of Directors and the General Manager.


The liability of the shareholders is limited to the fulfilment of their contribution obligations as set out in the articles of association and the Company Law (in particular, the amount of the contribution and the payment deadline). They are not personally liable for the debts and liabilities of the WFOE in excess of their contribution.

The Board of Directors is responsible for the overall management and decision-making of the WFOE, while the General Manager is responsible for day-to-day operations. Both the Directors and the General Manager must act in the best interests of the Company and ensure compliance with Chinese laws and regulations. They may be held personally liable for illegal activities or breaches of the duty of loyalty and care.
  

Joint Ventu​​res (JV)

​Until the abolition of the relevant laws, there were two different forms of JVs, namely Equity Joint Ventures (EJV) and Contractual Joint Ventures (CJV). EJVs were the second most common form of foreign investment, while the CJV legal form was only rarely chosen. These were typically limited liability companies, although other legal forms were possible for CJVs. Following the reform of the investment legislation, JVs are no longer a separate legal form but, like WFOEs, are limited liability companies under Chinese Company Law. However, in the case of a joint foreign investment with a Chinese partner, the term JV is still used in an economic sense.

The main characteristic of a JV is that the shares of the company are held by at least one foreign and one Chinese shareholder. The advantage of a JV is often the ability to use the existing business structures of the Chinese partner (e.g. with suppliers, customers, etc.). On the other hand, coordination with the Chinese partner is always necessary. As with the WFOE, influence in the JV is exercised through the shareholders' meeting, whose decisions are implemented by the Board of Directors and the General Manager. Once the shareholders have made their contributions, only the company is liable for the liabilities of the JV. The liability of the company's organs ( Board of Directors, General Manager) is the same as that of the organs of a WFOE.

   

Company Limited by Shares (CLS)

In addition to the establishment of a WFOE or JV, foreign investors can also establish a Chinese CLS. Prior to the implementation of the FIL, the legal form of a “Foreign Invested Company Limited by Shares (FICLS)”, which was subject to specific regulations, existed for CLSs that were founded exclusively by foreign investors or in collaboration with Chinese investors. These have now been abolished in the reform of foreign investment legislation, meaning that the provisions of the Company Law now apply to CLS that are founded exclusively or with the participation of foreign investors.


The establishment of a CLS requires between 2 and 200 founders, of whom more than half must be resident in China. CLSs offer companies the opportunity to raise capital by issuing new shares to existing or new shareholders. Furthermore, CLSs can facilitate greater shareholder diversity and provide access to the capital markets. Shares in CLSs can be traded publicly. The CLS is more suitable for mature large companies and is characterized by a stricter and more complex formation procedure, making it less suitable for start-ups and small and medium-sized enterprises (SMEs). The bodies of an CLS are the Annual General Meeting, the Board of Directors and the General Manager.

Shareholders' liability is limited to their outstanding contributions. With regard to the liability of the Board of Directors and the General Manager of an CLS, the corresponding provisions of the Company Law also apply, so that reference can be made to the above comments on the WFOE..
   

Partnership En​​​terprise (PE)

Partnership enterprises (PEs) are another form of foreign investment. PEs are very popular with start-ups and entrepreneurs due to their relatively low bureaucratic requirements and flexible structuring options. They are partly similar to German partnerships.


A PE can be formed in just a few steps by at least two partners, and there are three subtypes in terms of legal form. In the first type, the “General Partnership”, all partners are liable for the partnership's liabilities with all of their assets, similar to the German GbR or OHG. The second variant is the “Limited Liability Partnership”, which requires at least one partner with unlimited liability, while the liability of the other partners is limited to their capital contribution. It is possible to appoint a company as the partner with unlimited liability, and this second type of partnership is equivalent to a German limited partnership. The third type, the so-called “Special General Partnership”, was developed for professional services such as legal or tax advice. This partnership structure involves general liability among all partners for the partnership's liabilities, with an exemption for liabilities arising from the willful or negligent misconduct of a partner.

  

Representative Off​ice (RO)

For foreign investors who are initially exploring the Chinese market or who wish to establish a presence in the country, opening a RO can be a suitable option. According to Chinese law, a RO is not an independent company or a legal entity of another kind, but rather a branch office in the sense of commercial law.

 

A RO may not conduct business or conclude contracts, not even as a representative of the parent company. Instead, its purpose is to carry out non-profit activities related to the parent company's business. Such functions include conducting market research, organising exhibitions and promotional activities related to the parent company's products or services, and assisting in liaison activities related to the sale of products, the provision of services or the parent company's domestic procurement and investment.

 

A major advantage of a RO is the relatively straightforward process of setting it up. Once established, a RO can rent office space, open bank accounts and apply for work permits for foreign employees. The registration of a RO is generally valid for one year and must be renewed at least 30 days before the expiry date.


Further information on selected topics​:​ 

​Foreign Investm​​ent Law: 

At a glance: the implementation of China’s Foreign Investment Law​ 

​

Company Law:

Rights and duties of the corporate​​ bodies:

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