Two weeks ago we looked at the two simplest ways to open a business in Shanghai, via a Representative Office or by opening a Hong Kong LLC. Please check the previous blog post for more details on these two options.

Now let’s look at what it takes to start a profit-seeking company on the mainland.

This can be done by starting a Foreign Investing Partnership Enterprise, Joint Venture, or Wholly Foreign Owned Enterprise.

The Foreign Investing Partnership Enterprise (FIPE) is a new designation that started in 2010 that allows a business to be formed with unlimited business liability and has no registered capital requirements.

Reasons to consider forming an FIPE include:

1. There is no corporate income tax, only regular income taxes which are usually lower than the 33% for non-manufacturing (see tax section at the bottom).

2. No minimum on capital requirements.

3. Partnership can be formed between a foreigner and a Chinese person.

4. The income distribution can be pre-decided in a contract at startup.

Drawbacks for forming a FIPE include:

1. No personal bankruptcy laws in China.

2. All debts must be paid by libel partners.

3. A company cannot use the word “Company” in the name of the business.

4. Trading businesses have the disadvantage of not being able to apply for the Value-Added Tax rebate that corporations are able to collect.

There are three choices for an FIPE if you choose to go down this path. Government fees will be approximately 5,000 RMB.

1. General Partnership Enterprise: General Partners must pay all debts incurred by the partnership.

For example If there are 3 partners and each partner is equal with a 33.33% share and there is 100,000 RMB in total debt, then each partner would be responsible to pay 33,333 RMB each to pay off the debt.

2. Limited Partnership Enterprise: A combination partnership with General and Limited partners. Limited partners must pay all debts accrued by the partnership based on the percentage of capital (value of shares) each Limited partner holds.

For example if there is 1 General Partner company and 2 Limited Partners, the Limited Partners each have 50% of capital, and the total debt is 100,000 RMB. Then, the General Partner would owe 0 RMB, but each Limited Partner would owe 50,000 RMB, which could come from their personal cash and or assets.

3. Special General Partnership Enterprise:Similar to a General Partnership Enterprise, but only for professional service institutions that offer services that require special professional knowledge and skills. This is similar to limited liability partnerships in Europe and the US. If one or a group of partners are found liable for misconduct or negligence, the other partners not found liable will not be responsible for losses.

For example if there are 3 General Partners in a Consulting Service business, 1 General Partner gives fraudulent information to a client, the other 2 General Partners are not involved in this transaction, and the fraudulent negligence is valued at 100,000 RMB. Then, the 2 General Partners not involved owe 0 RMB, but the 1 General Partner who gave the fraudulent information owes 100,000 RMB, which could come from their personal cash and or assets.

FIPE Tax Rates
Profits are taxed as regular income tax each month:

The income tax is progressive. You only pay the percentages for the income range.
Your taxable income is income after the deductable which is:

• 800 RMB if income is under 4,000 RMB
• 20% of income if over 4,000 RMB
• 4,800 RMB for foreigners

Example: A foreign partner in an FIPE business has a total profit/income of 20,000 RMB



FIPE’s are low cost in startup, however the risks and costs involved if the business fails are quite high. Your personal wealth could be wiped out if the business fails under an FIPE entity. Check back in two weeks for part 3, which will be a very detailed discussion of starting a Joint Venture business in Shanghai.