It is crucial to have someone to help navigate the market while deciding how to access the Chinese market or start a company in China as a foreigner. Although this does not guarantee that the sailing will be easy, it will at least help you escape certain traps that might be involved in the way a company is formed. You need a partner when you are deciding how to do business in China. A local Chinese firm or local affiliate should be the guide or partner. The partner will encourage you to learn and be competitive on how to do business in China.
A WFOE (Wholly Foreign-Owned Enterprise) is, and for a sensible reason, the most common structure used in China by foreign firms! We look at what this is and whether it is right for your set-up in China in this guide to WFOEs.
What is a WFOE?
A WFOE (Wholly Foreign-Owned Enterprise) is one of the large corporations open in China to foreign firms. Let’s start from scratch. The better defined FIE (Foreign Invested Enterprise) concept applies to any company with foreign investment in some form (greater than 25 percent). The Representative Office (RO) and Joint Ventures (JV) are other traditional mechanisms, but these are more limited in range than WFOEs.
With the opening up of China and subsequent accession to the World Trade Organization, the WFOE system emerged. Permitted operations and sectors available to international firms have expanded and continue to do so steadily. Among foreign investors, WFOEs have become the most common framework. In business activities, they give the most freedom, as well as complete independence, as there is no need to function with a Chinese partner.
WFOEs were initially used more commonly for industrial enterprises, with multinational firms being able to set up operations in China without partnering. The number of WFOEs operating in other fields, such as trading, consultancy, and high-tech advancement, has increased as the essence of the industry in China has shifted and constraints on foreign firms have significantly reduced.
It is possible to register WFOEs as one of three major types-WFOE manufacturing, WFOE trading, and WFOE consulting. These days, the distinguishing factor is in the company scope of each one. In their authorized operations, WFOEs are limited by a concise description of Market Scope. In China, all WFOEs are entirely legal entities and are regulated by Chinese corporate law.
Incorporation Process of a WFOE in China
The Chinese government continues to promote the opening of foreign companies in China, especially in key industries and sectors that are desired. As such, they have made a set of reforms in recent years to ease the method of incorporation of foreign firms in China. It involves:
- “The implementation of a single “5 in 1” license requirement (as opposed to lengthier individual applications for each required previously).
- Moving a substantial portion of the digital application process.
- Relaxation of specifications for WFOE capital. The officially defined minimum capital thresholds have been abolished and WFOEs will determine the levels of capital and the timeline of injections that fit their business plans.
Other than that, it appears to be a bureaucratic mechanism that includes contact with many government departments and also needs a lot of paperwork! However, things are smoother and quicker than in previous years, and changes continue to be made.
For complete WFOE registration and setup information, see our China WFOE registration guide. This includes the following steps in summary:
For foreign businesses, one of the first moves is to concentrate on a suitable name for the Chinese industry. The Regulations on the Registration and Management of Enterprise Names and the Compliance Steps on the Registration and Management of Enterprise Names are the main pieces of legislation regulating this, outlining how a Chinese business name can be organized. It encompasses:
- ‘Company Limited’
- Brand name
- Industry or business
- Administrative region name of incorporation.
Additional rules limit the content of titles, restricting the utilization of content that either misleads or hinders equal competition from consumers or harms national solidarity, laws, social ethics, history, or faith or undermines them. Special characters are not allowed, such as Arabic numerals, foreign symbols, or alphabets, and only under certain conditions can certain words such as ‘China’,’ Chinese’,’ National’,’ State’ or ‘International’ be used.
Office/facility space lease
As the name of the company includes the city of registration, before hiring an estate agent or landlord, due consideration should be taken. In certain cases, activities may be influenced by the city name, as some city names hold reputation and credibility that can influence revenues, market growth, and government relations. Relocation is a taxing and costly operation, in particular cross-district, as it may require registering with the new AIC and tax authorities, in addition to the procedures for MOFCOM filing reports, business licenses, bank documents, and other company certificates that need to be updated.
Environment impact assessment (for manufacturing WFOE)
The environmental impact assessment is set up to monitor the environmental impact it will have on a manufacturing company. According to the Catalogue for Classified Environmental Impact Assessment Administration, manufacturing projects may be classified as having either a “significant”, “moderate” or “small” environmental impact that dictates whether they need to have a “statement”, “report” or “registration form” environmental impact assessment, respectively.
MOFCOM approval or record-filing
As long as the business spectrum of a company is not constrained by the Foreign Investment Negative List (in free trade zones) or is not subject to the Special Administrative Steps for Foreign Investment Exposure, the application may go through a streamlined registration process recently implemented by MOFCOM’s Provisional Measures for the New Filing Scheme. This system requires:
- Power of attorney appointing the delegates and the representatives’ name document.
- Letter of commitment from all investors or their delegates
- Investors’ certificate or identity card and legal representative for the proposal
- Application form
Five-in-one business license
Registration and application for a business license will be made to the local AIC within 30 days of receipt following receipt of an Approval Certificate from MOFCOM. As with the record-filing process, with the advent of the five-in-one business license, which replaced the former threein-one license, the business license application has recently been greatly improved.
The new business license scheme is followed by an online business registry system that enables the exchange of information between all departments participating in the registration operation, thus simplifying the overall process of establishment. It is possible to apply one application form and one package of application materials to the application terminal at the local AIC, minimizing the process from one month to only 15 to 25 days.
Unlike Western traditions, the official seal of a corporation in China has legitimate jurisdiction over the signature of a legal representative and has the power, regardless of who uses it, to verify documents and contracts. Therefore, its possession and whereabouts are of paramount importance.
An official seal, which is round in shape and bears the official company name in Chinese and, where appropriate, in English, is required for all companies operating in China. Since successfully registering with the AIC, a business seal can be received from the local Public Security Bureau (PSB). The other side often must ensure that the contracting party’s seal is authentic before signing a document; if not, the contract is not legally binding. In the case of theft or conflicts, the PSB also retains a duplicated copy of the official business seal.
Open foreign exchange and RMB bank account
In China, a WFOE ought to have at least two bank accounts: a simple RMB account and a contribution account for foreign currency capital. For the everyday business activities of the WFOE in China, an RMB simple account is a must. This account is the only account that the company can borrow RMB cash from, which also serves as a dedicated tax payment account. To accept capital injections from abroad, a foreign currency capital contribution account is required. Approval can be obtained from SAFE to open this account.
Pros and cons of opening a WFOE in China
For a great cause, a WFOE is common. It has several benefits over a Representative Office or a Joint Venture’s other traditional options. Those benefits include:
- Can make profits in China
- The best option to protect IPR in China
- Able to send funds overseas
- Can be formed without a Chinese partner
A WFOE has as much flexibility as possible for a foreign company to operate in China within its given market framework. There is nothing ideal, however, and when contemplating WFOE or starting a WFOE registration there are a few significant constraints:
- The complicated and lengthy setup process
- Permitted activities limited to defined Business Scope
- Limited capital for setup
Current management of the WFOE
Anyone who opens a WFOE should be conscious of the ongoing specifications to work beforehand. Like every company, WFOEs are subject to different taxes and may also undergo yearly detailed financial and tax audits and reporting.
The primary taxes to be considered include
- Withholding tax prosecuted, including dividends, royalties, interest, and rent, on payments to non-resident companies. The current rate is 10%.
- Stamp Duty, at a rate of 0.005% and 0.1%, was imposed on several contracts, permits, and accounting books.
- Company income tax/earnings. Corporate Income Tax (CIT) is the largest tax, imposed at a rate of 25 percent on earnings. Some discounts are in effect and CIT reforms are a common means of providing economic benefits to local authorities.
- Consumption/indirect taxes, like VAT, are imposed at rates of 16%, 10%, or 6% on various goods and services.
- Consumption Tax of between 1% and 56% on different consumables and luxury products made or imported.
Things to take care of during the company setup
- Beware of regional differences.
- Remember it is easy to make mistakes in the registration process.
- Choose the correct venue and, from the beginning, set an acceptable market scope.
- Don’t underestimate the time and resources needed.
- Apply for Intellectual Property (IP) rights registration as early as possible.
Cost to set up a WFOE in China
The conclusion is that it depends on whether you are going to hire professionals to help you through the process, or whether you are opting for a DIY plan, which is not advised because of the process’s difficulty. If you employ a foreign law firm to advise you, setting up a WFOE in China could cost you up to $100,000, but there are more affordable alternatives by local consultants.
Steps are constantly being taken to simplify the WFOE set-up process. The developments with the company license are most notable. The five-in-one business license departs from various authorities’ need for multiple sets of application materials, and with it, the streamlining of management, which is getting more closely knit and efficient. Knowledge exchange by way of automated and digitalized management systems enables not only shorter application times, but also more reliable means of ratification and review. Nevertheless, items like the Catalogue and other standards and laws are still in the process of being revised. Therefore, for the establishment process to run smoothly, it is necessary to stay on top of these changes, particularly as the various business intentions of WFOEs may influence the design and steps of the setup process.
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