What is a Foreign Invested Enterprise (FIE)?
A Foreign Invested Enterprise, or an FIE, is a legal structure under which an organization can invest financially in a foreign business or a project. The term FIE is primarily prominent in Asian countries, especially China. FIEs usually follow stringent norms and government regulations at several vital levels of the business.
Understanding more about an FIE
Foreign Invested Enterprise or FIE is a setup where a foreign organization partly or wholly funds a business. Depending on the type of FIE, the parent organization can have full or part ownership in the company, the processes, and the profits. FIEs are usually implemented when businesses identify a profitable or upcoming business in foreign countries (mainly China) and invest in them. They can also come into play when an organization acquires a foreign corporation and leverages its brand image, local collaborations, and existing consumer base.
The practice of setting up Foreign Invested Enterprises is majorly popular in China. The Chinese government had put together a strict set of rules and regulations around the same. These rules determine the profits an organization can gain from an FIE and the control a foreign parent can have over the enterprise.
In China, many legal entities can be counted as Foreign Invested Enterprises. This includes Equity Joint Ventures (EJV), Cooperative Joint Ventures (CJV), Wholly-Owned Foreign Enterprises, and Foreign Invested Limited Share Companies. Other forms of invested enterprises are foreign-invested investment companies and foreign-invested venture capital enterprises. These enterprises usually function on a model where multiple investors across the globe set up their entities in China and invest in promising businesses and startups.
China recently updated the laws for Foreign Investments in the country, and the fresh guidelines can be a boon for businesses looking to expand to China.
Updated FIE Laws in China
In January 2020, China revamped all its laws on Foreign Investments. With this new structure, China aims to attract more foreign investment in the country and invite global investors. These new laws also incorporate some of the demands the U.S. government had posed during trade negotiations with China.
The new legal structure in China on foreign investments makes the process more liberal, encourages investment across industries, and reduces restrictions on investors setting up FIEs. Therefore, these new laws make investing, setting up, and identifying opportunities in China easier. China has also implemented rules to protect foreign intellectual property rights and trade secrets, as requested by the U.S. government. Investments are now more secure, and the steps and procedures are regularized and transparent.
Types of Foreign Invested Enterprises
As a business looking to set up an FIE in China, you must understand the different types of FIEs, and evaluate which one suits your needs best. Primarily, there are four different types of FIEs. They are:
- Equity Joint Venture: An Equity Joint Venture is one that comprises a single person with limited liability. In China, these structures are governed by the People’s Republic of China law on Foreign Equity Joint Ventures and the laws on Implementing Regulations for the Joint Venture. This type of FIE is established between the Chinese and foreign parties, followed by the Ministry of Commerce’s approval.
- Cooperative Joint Ventures: CJVs can be set up in two ways. The first one is without establishing a legal entity. Here, the investors bear the profits and losses directly and enjoy full control over the enterprise. The second way is by establishing a legal entity. Here, the liabilities are limited; however, the laws also determine profits and control.
- Wholly Foreign Owned Enterprise: These were initially introduced by the Chinese government to encourage manufacturing businesses that focused on exporting goods and businesses that promoted the use of advanced technology. In this setup, the invested enterprise is an LLC that is fully controlled by foreign investors.
- Foreign Invested Companies Limited by Shares: These types of Foreign Invested Enterprises are the only FIEs whose shares can be listed on the local stock exchange (Shanghai Stock Exchange or Shenzhen Stock Exchange).
Now that you are familiar with the kinds of FIEs and the legal structure they follow, you must understand when a business should set up a Foreign Invested Enterprise.
When should you set up an FIE?
Setting up an entity or investing in China may seem daunting initially; however, it might benefit your business significantly.
Firstly, you must evaluate the kind of market you are entering and its potential. Setting up an FIE may be necessary if you wish to invest in a particular project or product within China. An FIE is also essential if you consider acquiring shares in a China-based company.
Foreign Invested Enterprises can be beneficial as they help you easily collaborate with other local businesses. This is especially beneficial if you acquire a business as an FIE. It will give you access to the existing resources and also allow you to leverage the existing brand name.
Setting up an FIE in China is beneficial for your business if done at the right time. However, you must understand when an FIE is not required as well.
When is an FIE not required?
An FIE is essential if you plan on engaging in a full-fledged business in China. However, it is not required if your business needs are restricted to a small number. In this case, a Representative Office is an excellent option that can help you with a limited number of business activities within China. Things like market research, product landscaping, and financial planning can easily be carried out at a representative office. Major legal activities like the execution of contracts, import & export of goods, or business collaborations are some of the things that a representative office cannot do.
Onboard global talent with Multiplier
If you want to set up an entity in China to hire locals, you can simply partner with an EOR service like Multiplier. Multiplier enables you to hire in any country you wish without the hassle of setting up your own entity. Our state-of-the-art platform can generate legally compliant employment contracts in under 5 minutes and onboard your international employee flawlessly. The user-friendly dashboard presents all the crucial information about your employees and helps you manage payments, payroll frequency, currencies, and more.
With Multiplier, you can attract more employees by using added benefits such as insurance packages, employee stock options, and joining bonuses. Our platform enables you to add all these benefits to the employment contract in a few simple clicks.
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