Here is a quick guest post on how to setup a wholly foreign own enterprise (WFOE) in China from our friend at FDI China. Enjoy…
With several factors of economic growth, such as an extension of the market share corresponding to technology advancement and innovation, many overseas investors and business owners became aware of business opportunities in China. However, doing business China can be intricate because of a different legal system, constantly evolving regulations and company formation proceeds.
When it comes to creating a company in China, it is critical to select the most appropriate structure. The Wholly Foreign Owned Enterprise (WFOE) is one of the most frequently used entities among overseas invested companies. A WFOE is a Chinese-based company formation which is completely owned by foreign investors. This formation allows foreign investors to operate independently.
The WFOE is the corporate structure or business entry model that better suits profit-making activities in China for foreign enterprises. Firstly, WFOEs allow foreign companies to establish a business without a Chinese partner, meaning that a companies’ operations, funds, strategies, profits, and developments are fully managed by the foreign investors. Another WFOE’s benefit is that it can directly hire local and foreign employees. Furthermore, when addressing international transactions, WFOEs can repatriate funds earned in China to the company’s oversea headquarter.
However, the setting up of a WFOE requires a complicated application procedure. First of all, the procedure involves numerous government departments and the abundance of paperwork needing to be completed and the application process takes more than two months. Besides, in order to apply for WFOE, there will be minimum requirements and implications associated with different industries.
WFOE Procedures
Recently, the government has simplified the process for setting up a WFOE. However, the application procedure remains time-consuming and still involves numerous documents. The process needs to be done correctly, as the smallest mistakes can delay the whole procedure.
Here is the list of the overall steps for setting up a WFOE:
- Name registration (5 working days)
- Renting working space
- For a manufacturing WFOE: Achieving environmental impact assessment (5 working days)
- Online registration with MOFCOM (3 working days)
- Apply for a “5 in 1 Business license from local Administration of Industry and Commerce (AIC) (around 30 days)
- Having official company chops (1 working day)
- Opening bank accounts
- VAT registration (10 working days)
- Applicable for trading WFOEs only- Customs and import- exit- registration
- Issue contracts and complete necessary registration for employees
WFOE Pre-Establishment Consideration
The WFOE structure is commonly used by foreign investors. But setting up a WFOE is a long and complicated process. Here are several keys that will help you decide whether this business formation is made for your business or not.
1 Company ownership declaration
Recently, there have been changes in the rules for setting up a WFOE. The new policies regarding the company ownership structure state that the “controlling person” of the WFOE has to be declared. In practice, this new declaration requirement leads to an identification of all the company’s investors, including individual and public companies. As some companies wish to keep their investors undisclosed, this can be problematic.
Here is an additional link about WFOE controlling person regulation, how this new policy impact business, and what could be done to prevent related problems.
2. Management in the WFOE
Roles in the WFOE need to be established clearly. The chairman of the board, the executive director or the manager of the company shall act as the legal representative of the company. There are three layers of management:
Board of a Directors – The board of directors is composed of three to thirteen directors. A company may have one executive director instead of a board of directors. The board of directors is responsible for the company’s business plan and investment plan, and other important corporate decisions. In addition, note that the board of directors or managing director is not limited to Chinese nationality.
Manager – the General manager is appointed by the board of directors. He is responsible for daily management operation in the company corresponded with authorizing banking relationship and allow to contract directly with Chinese government associated with tax difficulties. There is no law stated that general manager should be a Chinese citizen, however, it is advisable to have a Chinese general manager as this role is in charge of the WFOE’s day to day business operation and works with the local government.
Supervisor – The board of supervisors shall have no fewer than three members. A small company may have one or two supervisors instead of a board. The supervisor account on keeping the continuous record on board and the general manager’s performance as a representative of the shareholders. Note that according to Chinese WFOE’s regulations, the person who is in charge of a board member or general manager cannot be a supervisor.
3 Consider WFOE capital requirements
Since 2016, the WFOE capital requirements have changed (here is an article for additional information). Chinese law does not require a minimum registered capital anymore. However, this change is only theoretical. Local authorities will review the planned budget of the company during its registration application.
Regarding the amount registered, it is related to the type of business of the WFOE. For example, a small consulting company or a start-up will require less capital than a manufacturing company. Injecting capital afterwards could seem more flexible. Nevertheless, adequate funding is necessary to cover the WFOE financial needs before the company becomes self-supporting, usually within one year.
It is advisable to set the capital level accurately when establishing the WFOE. If the funding level is overset, funds are likely to be tied up and could be difficult to release. In the other hand, undersetting initial funds could bring the need to re-inject funds that could be taxed as income.
4 Draft an appropriate business scope
A WFOE has a double limitation regarding its business scope. The business scope must be compliant with the restrictions stipulated in the Foreign Investment Market Access Special Administrative Measures (Negative List) (2018 Version). Also, the business scope in China must be detailed and needs to cover all the present and future activities of the WFOE. The Business license will include a short description of activities approved by MOFCOM and AIC.
It is possible to redefine the company business scope, however, keep in mind that the process is long.
5 Choose an appropriate company name
Choosing a company name can be time-consuming. A WFOE in China must have a Chinese name, with a specific format, and be registered with the local Administration of Industry and Commerce (AIC). The AIC will make sure the chosen name does not involve restricted words; and will check the name according to company industry, occupation area and company brand.
6. Intellectual Property (IP) protection
China uses the “First to File” principle for trademarks and patents, meaning that the first entity to register trademarks and patents right will be its lawful owner. Chinese authorities do not consider the first user if it was not registered. Therefore, the registration should be done as early as possible. If another company registers your trademark or patent first, they will own the right to use it legitimately and to prevent you from using it. Furthermore, it is possible and recommended for foreign companies to apply for trademarks and patents registration before the WFOE is set up in China.
7. Taxes
Setting a WFOE up involves understanding tax requirements and additional implications.
Here is an additional link related to tax compliance in China. This article will give you an overview of the China tax system and tax rates. The China taxation system is not straightforward and is frequently varying. However, it is paramount for every company operating in China to fully understand both.
8. Business Address
The business address should be wisely considered before registration. A company’s business address is one of its registered information. Any change in this information would involve a complex procedure
In conclusion, it is crucial for overseas businesses to understand the insights of WFOEs and how your company can benefit the most from this common type of legal entity. Beside from giving overseas companies the opportunity to run their own business independently without Chinese partners, WFOEs also enable companies to hire employee directly, to send operating funds earned in China abroad to be converted to home country’s currency. On the other side, the registration process is lengthy. It involves numerous documents and parties. It is advisable to contact a local agency to run through all the document to get the procedure correct before operating.
