Business China

The Ultimate Guide to WFOE Establishment

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WFOE Establishment

The original purpose of Wholly Foreign Owned Enterprise was to encourage China’s export, develop manufacturing sector and facilitate transfer of technology. Things changed, when China entered in an agreement with WTO (World Trade Organization).

Now, Chinese government provides foreign businesses more control over their operations and revenue. With help of WFOE, more and more foreign businesses are setting up in trading, consulting and software development sector in China. 

In order to be operational in China, you need to follow a long and meticulous registration process. But in most cases the trouble of the tedious registration process is offset by the various benefits WFOE has to offer. 

Here is a list of benefits you can avail by setting up a WFOE in China. 

- Within the Chinese Business Law, you can open any sort of legal business without the need of a local Chinese partner or government intervention. Your WFOE is an independent business entity. 

- Your business will have the ability to issue invoices and receive payments under its own name.

- You can convert your revenue stream from RMB to the US Dollars and send it back to your parent company.

- Your assets and intellectual property can benefit from superior Chinese policies.

- As long as you follow the Chinese Law, you can hire and fire people on your own will.

- Expand, innovate, and spread your business operations, while remaining in the scope of business highlighted in the registration process.

- Your business is exempted from obtaining an import or export license.

- You can invest in Chinese real estate. 

China offers multiple investment opportunities to foreign investors; they can open a WFOE, start a joint venture, open a representative office or signup for a partnership. Even WFOE takes different corporate structures for different sectors in the economy. 

Generally, you will have the following options at disposal:
1. Trading WFOE
2. Manufacturing WFOE
3. Consultancy of Services WFOE

The paperwork and registration process of all three types are more or less the same, but your business needs to conform to the limitations and scope of business defined by each specific sector. Meaning, you can expand your car manufacturing WFOE, into a car dealer services. For expansion across different sector, you will need a new business license. 

Things You Need To Consider During the Pre-Establishment Phase

Before you start filling in the registration form and gathering required documents, consider all the aspects that may affect the success of your newly formed WFOE.

The Scope of Business

You need to be very particular about the business scope you set for your WFOE. The business scope defines the commercial activity your business will partake, the number of human capital and resources it will utilize and the potential target audience. Changing the business scope, after it has been signed, approved, and officially printed on your business license is a long ordeal, which requires further paperwork and list of approvals.

WFOE requirement

Therefore, chose wisely, the few lines that define your business scope can prove to be the bottleneck in your business growth and expansion. It’s recommended that you thoroughly familiarize yourself with the Foreign Investment Industries Guidance Catalogue, issued by theMinistry of Commerce (“MOFCOM”) and The National Development and Reform Commission (“NDRC”). This catalogue lists the favored, prohibited and restricted business activities that foreign investors can participate in. 

In cases where business scope needs to be changed, make sure you have acquired the following things:
- Shareholders resolution to change the business scope.
- An application to the AIC, requesting the change.
- Filling a new registration form 
- Getting a new business license in accordance with the new business scope. 

Registered Capital 

Chinese government requires foreign investors to show a certain amount of registered capital in order to incorporate as a WFOE in China. The registered capital is the safety net that safeguards the interest of suppliers, employees, and consumers, in situation where a WFOE is unable to survive in the market. However, there are no strict rules regarding the minimum requirement of registered capital, its recommended that sufficient amount to sustain the first year of your WFOE, after establishment, should be kept in the company account.

Keep in mind, if your register with less capital and later transfer funds from your overseas parent company, these funds will be treated as income and taxed accordingly. Increasing the amount of registered capital requires re-registration, which can be a time consuming process. 

The Setup procedure of a WFOE

After joining the WTO, China has eased up on the WFOE setup procedures. The processes are now considerably streamlined and various regulations on some sectors have been lifted.

Before you get a business license you need to follow these procedures and regulations. 

Getting A Chinese Name Approved

start a joint venture

It’s better to opt for a Chinese business name, as it resonates well with the local market and makes your business easily searchable in the national business database. Many companies are registered with a Chinese name, and use an unofficial name, in English language, for international clients.

Chinese company names follow a special structure that must be followed at all time, here is how it goes:

1. Name of the administrative region in which your company was incorporated
2. Brand name
3. Specification of the industry or business
4. The entity type (e.g. limited or Inc.) of your business

Check the availability of your company name by searching Administration for Industry and Commerce (AIC) database. 

The Don’ts of Naming a Company

Conduct market research, before naming your company. Your company’s name should be a reflection of your product/services or values. Moreover, use the right Chinese characters and pronunciation to attract the local market. In addition to this, avoid these common naming mistakes to protect your business from a legal action.

- The company name shouldn’t mislead consumer or hamper fair competition practices. 

- The company name must no go against the social ethics, religion, national unity or culture. 

- Special character, signs or symbols must not be included in your company name.

- Words like ‘Chinese’, China’, ‘National’, ‘International’ or ‘State’ must not be used. The government allows the use of these words under special circumstances. 

Getting an Office

As the name of your company indicates the location of incorporation, you need to lease an office facility or warehouse beforehand. Your office location must be rented for a period of 12 months prior to submitting the registration application. It’s very difficult to change the location or name of your company, therefore be very particular about the leasing contract. 

Approach a registered local real estate agent to lease a legitimate property. Check the legitimacy of the property by acquiring the property documents from the landlord. Moreover, add a clause in your lease contract that states that the down payment made on the property will be returned in case the incorporation application is rejected. Submit the Certificate of Premise of Ownership (CPO) to your local AIC in order to provide proof of your physical existence in China. 

Record Filing For MOFCOM Approval

MOFCOM requires foreign investors to submit the following documents for approval:

- Registration application form
- A commitment letter by representatives of investors or the investors themselves 
- Approval documents under the name of your WFOE for Business License
- List and other personal identification documents of representatives appointed by a Power of Attorney 
- Personal identification documents or certificates your legal representatives and investors

After processing these documents the MOFCOM will issue your company an Approval Certificate. Use it to get your business license.

Business License

open a representative office

The process of getting a business license has been standardized, now instead of issuing a 3 in 1 license the AIC issues a 5 in 1 license, which includes your:

1. Business license
2. Organization code
3. Tax registration certificate
4. Social security registration certificate (new addition)
5. Statistical registration certificate (new addition)

After issuance of business license, your WFOE becomes a legal entity that can conducts business operation in China and carry out transaction on Chinese currency, RMB.

Post-Licensing Procedures

Get An Official Seal 

In China, all businesses need to own an official seal. This seal has the power to validate and accept any type of contract any document. By nature an official seal needs to be round and must include the company’s name. Since, an official seal have legal authority it needs to be kept in a safe location. 

In order to get your official seal visit the local Public Security Bureau (PSB), and make sure you use it to authenticate all your contracts and business dealings. 

Setup An RMB Foreign Exchange Account

In order to conduct business transaction, make and receive payments and share revenue with the parent company, you need a foreign exchange account. It allows a WFOE to withdraw cash, make tax payments and send and receive capital from parent company. 

Approach a bank that provides international services and facilitates business transactions on an international scale. China has many international bank’s branches, like, HSBC and Bank of America, open your account in a bank that meets your needs. 

China WFOE Tax

Here is a list of taxes that are applied to all WFOE, therefore run your business operations accordingly.

- Consumption tax:1% to 56% of sales revenue of goods. Export is exempted.
- Corporate tax: 15% to 25% (tax might differ according to your location)
- Income tax: rates up to 35% of business profits
- Land appreciation tax: 30% to 60% of gains on transfer
- Personal taxes :( wages/salaries) 3% to 45%
- Resources tax: 1% to 20% depending on material
- Stamp duty tax: 1%

Withholding taxes

China WFOE Tax

- VAT: 17% / 13% for certain food, goods, books and utilities.
- Social Security tax: 37%
- Royalties tax: 20%
- Real Estate tax: 12% on rental value
- Interest tax: 20%
- Dividend tax: 20%
- Deed tax: 3% to 5%

Mistakes You Need To Avoid

Registration and incorporation process can be overwhelming and confusing, which gives room to errors and poor decision making. Therefore, avoid falling for these common WFOE setup mistakes:

1. Lack of planning can cause delays in approvals and every day that you wait for your business to become operational will cost you more money. Draw a timeline and plan your application process in a timely manner.

2. Avoid using vague and informal language in the development of Article of Association and Business Scope. These two documents need to be precise and accurate, so be farsighted, when formulating them.

3. Know about the Chinese labor policies and draft an employment contract for every labor hired. An HR consultancy can also be approached to attract the right kind of talent pool to your business.

4. Pay attention to location details. Determine the requirements of your business activities. Do you need to be near the port, or near the city? What is the transportation expense? Is your office located in a location accessible by road, rail or air? Know all the aspect that mighty impacts your business, before selecting a location for your office. Keep in mind changing office location is a very detailed process. 

5. The first thing to do, before filing for incorporation is to get your trademark registered. Your previous declaration of trademark means nothing in Chines market. Therefore, be the first one to declare its ownership.

Starting a new company in China can be difficult. Most of the paperwork is in Chinese and the registration process can be mind boggling. Let Business China simplify and streamline the registration process for you.

WFOE requirement

We approach the right signing authority to provide you a quick and hassle-free setup process. Our English-proficient consultants will deal with all the complexities of entering the Chinese market and provide comprehensive solutions. 

Along with providing assistance in the registration and incorporation of WFOE, joint ventures and partnerships; we also offer premium accounting and company management services to all our clients. Email us your Business Plan and we will get back to you with a simple incorporation plan within 24-hours. Call +86-020-2917 9715 to know more about our services.

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