Business Policies in China

A WFOE is short for Wholly Foreign Owned Enterprise. A WFOE is a 100% foreign-owned (individual or corporate) limited liability company able to generate profit, invoice clients and hire local / foreign employees in China.

Yes, a WFOE can fully carry out business in China in line with its agreed business scope. It can issue local currency invoices to domestic customers, and make profits from its activities.

Any operating profit made in China can be converted to foreign currency for transfer to an overseas parent company.

The government will take into account a few factors for work visa issuance such as: how long has the company been registered, how much tax history does the company have and how many local employees does the company have. This does not apply to shareholders of a new company, as these individuals (local or foreign) will always receive a work visa. 

Although there is now (since changes in 2016) no fixed minimum requirement, in practice most WFOEs will still require capital injection. The planned amount is reviewed by local authorities during application and it makes business / tax sense to get the level right from the start.

The amount will vary greatly for different types of business – naturally a small consulting company requires much less than a complex manufacturer. As a guide, sufficient funding is needed to cover the WFOE’s financial obligations before the company is self-supporting (often set as 1 year). Note that there is now much more flexibility than in the past regarding the time period over which capital should be injected.

It is important to set the capital level appropriately during formation. If it is set too low, any additional funding must be taxed as income (further capital injection is possible but there is a very time consuming approval process). Set it too high, and of course funds may be tied up that could be used elsewhere (and these will be hard to release).

A WFOE registration is the most complete and flexible option for opening a company in China. It has many advantages over a Representative Office or a Joint Venture operation. Here are some of the key advantages we see in WFOE formation.

Can be formed without a Chinese partner

A WFOE is independent, able to manage its own operations, funding and business development. Without a parent, it does not need to share profits, strategies or Intellectual Property.

Can make profits in China

A WFOE can fully carry out business in China, in line with its agreed business scope. It can issue local currency invoices to domestic customers, and make profits from its activities.

Able to send funds overseas

Any operating profit made in China can be converted to foreign currency for transfer to an overseas parent company.

Able to hire staff directly

A WFOE can manage its own human resources (without using an agency), and hire staff both locally and from overseas.

The best option to protect IPR in China

The WFOE structure provides some level of protection under Chinese law.

1. Apply for name approval and registration

The first step in registering a WFOE in China is to choose an compliant name and get it approved.

The name choice must follow rules set up in Chinese company registration laws. The company name must include the company industry or brand, operating region of the business, and a suffix of “Company Limited.”

The following will be checked during name approval:

• Availability of the requested name. This can be checked independently on the SAIC website (http://www.saic.gov.cn/sbjEnglish)
• Inclusion of restricted words, such as “China”, “State” or “National”
• Inclusion of foreign characters or symbols
• Whether the name is confusing or misleading

Don’t forget the importance of naming strategy and branding. Just as overseas, your company’s name is the first impression of your company. It should clearly reflect the company role and image. Consideration should also be made of the characteristics of the Chinese characters. Many words or characters have similar meaning or sounds which can strongly influence the impact of the chosen name (both positively and negatively!)

Note that the name registration can be done early whilst you prepare further, and to aid trademark registration. It is not necessary to immediately submit company filing to MOFCOM after the name is approved. Note also that it is common to submit more than one name for consideration.

2. Rent office space as necessary

Before submission for WFOE incorporation, it is necessary to have a lease for company space in the city of registration. The contract for this needs to be valid for a year from registration date. It is advisable to include a condition in the leasing contract to cancel the lease in case of registration refusal or difficulties. As with any contract in China, steps should be taken to minimize future problems – such as checking the owner’s details and land rights certificate for the property being leased.

3. Carry out environmental impact assessment – Only for a manufacturing WFOE

If registering a manufacturing WFOE, an environmental impact assessment will need to be carried out by a registered agency. This is done in order to obtain an approval certificate from the local environmental protection authority.

The procedure and required approval varies with the scale of the manufacturing operation and its potential impact, and will include consideration of material used, produced and disposed, machinery to be used, as well as any existing plans for environmental protection.

4. Online registration via MOFCOM

The registration process has been significantly simplified in recent years, and now makes use of an online filing submission. This is much faster than the previous methods, but still requires a lot of documentation! It should be noted that there is a somewhat greater burden with online submissions to have all details correct and finalized. The process of “blind submission” does not allow for discussion with authorities during submission.  If rejected, the application will need to be revised and resubmitted.

5. Apply for a “5 in 1” business license from local AIC

Following approval from MOFCOM, the application for a business license with the local Administration of Industry and Commerce (AIC) needs to be made. This is another process that has been greatly simplified and quickened in the past couple of years. An application is now made for a so-called “5 in 1” business license, which covers all the major licenses required for a new company. Previously each of these required separate applications and naturally this was much more time consuming.

Again, this is now an electronic submission, accompanied by significant documentation (see section on documents required). Once submitted the AIC will share documentation with other relevant authorities to issue licenses – a major time improvement!

The 5 licenses issued by the AIC are:

• The business license
• Tax registration certificate
• Organization code certificate
• Social security registration certificate
• Statistical registration certificate

The company now exists and is licensed to do business in China, and the remaining set-up steps can be considered “post licensing” tasks. We would expect to reach this point in 2-3 months.

6. Carving chops for the new company

To Chinese business newcomers, the importance of chops is often a surprise! Every company requires a set of chops, or seals, to be used as representation for signing official documents.  These hold the final say, above individual signatures.

Chops can be applied for through the Public Security Bureau (PSB) following company set up. Several additional chops are needed for different business areas (e.g. financial, invoice sealing and customs if appropriate). Each will have the company name in Chinese and English if required.

7. Opening bank accounts

Once chops are obtained, they can be used to open the WFOEs Chinese bank accounts. A WFOE should have at least two accounts, preferable with the same institution (Chinese or foreign banking institution are equally acceptable depending on company preference).

• A local currency RMB standard company account. This can be used for payments and receipts in RMB, as well as for company tax payments and day to day operating costs.
• A separate capital contribution account, designated in foreign currency. This is the official account through which capital can be injected from overseas.

8. VAT registration

WFOEs must be registered for VAT payments with the local tax bureau. There are two different categories for VAT registration for all companies – “general” and “small scale” (with low sales volume).  A new WFOE which qualifies for small scale may choose to register under either category.

In general, a lower VAT rate is paid for companies that qualify as small scale, but there are some potential advantages in registration for general status (such as the ability to deduct input VAT). Discussion of individual situation with a tax expert is advisable here.

9. Customs and import-exit registration – for trading WFOEs only

For trading WFOEs involved in import-export there are several additional registrations required, which are not automatic under the AIC business license application. These must be made separately following company incorporation and the exact requirements depend on the company operation area, but will likely include the following:

• Import-export license
• Customs registration certificate
• Registration with Entry-Exit Inspection and Quarantine Bureau (for quality inspection)

10. Issue contracts and complete necessary registration for employees

Whilst this is not formally necessary before the company starts trading, it is best at this stage to ensure everything is set up correctly. Formal contracts need to be issued from the new WFOE for all local employees. Also, registration will need to be made for employee tax and social benefits accounts.

Companies may well already have local employees working for them, often through a previous representative office structure or employed on their behalf by a Chinese agency. The new WFOE can now employ them directly.

A WFOE requires an executive director or board, as well as one or more separate supervisors who oversee director and company performance. A general manager (who can also be a director) is needed with responsibility for day to day operations. Ratios and requirements for boards are defined and depend on company size.

A WFOE is the best option to protect your IP rights in China. There is no need to share business information with a partner, and the WFOE structure provides some level of protection under Chinese law.

A WFOE can manage its own human resources (without using an agency), and hire staff both locally and from overseas.

A WFOE is independent, able to manage its own operations, funding and business development. Without a parent, it does not need to share profits, strategies or Intellectual Property.