WFOE Pre-registration Considerations

Setting up a WFOE in China is a time consuming and sometimes frustrating process. Early consideration of some key areas however will help greatly. Our pointers here will help clarify if a WFOE is right for you, and get you ready to start the application process.

– Establish the most appropriate company ownership structure

Having the correct company structure in place for a WFOE is very important. This not only facilitates complex investment or ownership of the Chinese company, but is also essential for profit repatriation.

It has long been popular to use an overseas holding company and whilst this is still common, recent regulation changes have made this more complex.  It is now a requirement to identity all investors in a WFOE, down to the individual or public company level (no private companies are permitted). Thus such structures can be used to facilitate complex ownership, but not to hide the identity of the owner or owners. For some companies (for example with multiple or unknown investors) this can be of concern, and should be considered as early as practical.

– Consider management roles within the WFOE

Appropriate roles within the WFOE will need to be established. 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.

– Consider WFOE capital requirements and prepare funds

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).

– Draft an appropriate “business scope” describing company operations

A WFOE is limited in the work it can do by it’s pre-defined “business scope.” This is simply a short description of business activity, which ultimately will appear on the business license. This has to be approved by MOFCOM (Ministry of Commerce) and AIC (Administration of Industry and Commerce), and is thoroughly assessed before approval.

Getting this description wrong can be a problem. It affects the WFOE’s ability to issue “fapiao” (invoices) to clients, and domestic clients may be unwilling to work with a company wrongly listed. Changing the business scope after incorporation is possible, but it can be a long and complicated process.

– Choose an appropriate company name

Just like the business scope definition, choosing a name takes a lot of thought – and will require approval from AIC. As well as ensuring no banned or restricted words are used, they will check the name appropriately describes company brand, industry and operating region

– Research into necessary IP protection and file as appropriate

In general, China follows a “first to file” policy for patents and trademarks, and applications should therefore be made as early as possible to avoid problems. Companies should check what has previously been registered in China, as there could be issues that arise here. Patents and Trademarks can be filed by foreign companies in advance of WFOE setup by using a registered agent in China. No formal registration of copyrighted items is required, but early listing with the National Copyright Association is advisable.

– Consider tax requirements, and plan appropriately

Naturally, any company planning to operate in China needs to fully understand the tax requirements and implications. This is of particular importance in the establishment stage due to the way China taxes WFOE’s during the “pre-operation” phase (the period between issue of the business license and first issue of invoices or generation of revenue). Many of the costs incurred during this period are eligible for income tax deduction.

– Operating location

The province /city where the WFOE is located should be carefully considered before registration. This will be included in the company name, and thus forms a major part of company branding. Also note that it can be very difficult to move a company once registered (from Shanghai to Beijing for example), and this would likely involve a lengthy re-registration with the new local authorities.

WFOE Required Documents

There is no denying that registering and opening a WFOE is a very paperwork intensive process. Recent changes to allow online filing and the introduction of a single application for multiple business licenses have helped this, but it still remains a complex and changeable process.

At FDI China we have plenty of experience putting together the right documentation, for many different types of WFOE. We will guide you through what is needed, complete much of this on your behalf and, critically, aim to get it right first time!

The following is a guide to what is needed for all WFOEs, but note this can differ slightly depending on type of company and investor, and region of registration:

• For investing company – Copies of business license in home country, articles of association and certificate of incorporation. All must have Chinese translation notarized by Chinese embassy.

• For individual investor – Copies of investor’s passport and photographs.

• Copies of passport, photographs and CV of all proposed directors.

• A bank reference letter for investor (company or individual) declaring time with bank and good standing.

• Copy of passport and photographs of Chinese Legal Representative.

• Lease contract for proposed Chinese office location (valid for at least one year).

• Documentation proposing company name (with multiple choices; 8 is common).

• “Articles of Association” document for the new WFOE (to include business scope and plans for registered capital and injection timeframe).

In addition, for a trading WFOE, the latest annual audit of the parent company is required.

And for a manufacturing WFOE, documentation is needed to support the required environmental impact assessment. Amongst other things, this needs to include a detailed description of the planned operations, materials and equipment, as well as details on proposed utility usage and environmental protection measures employed.

WFOE Procedure

So, how to start a business in China? How to register a company in China? We guide you here through the process for China WFOE registration, step by step!

Changes in recent years have somewhat simplified, and sped up, the setup process for a WFOE. With the Chinese government still keen to attract relevant foreign investment and market experience, such changes are likely to continue.

Despite recent simplification, the registration and setup process remains far from straightforward! There are many separate tasks which need to be completed, often with different government authorities. And whilst some of the process is now online, in general it remains a bureaucratic and paperwork heavy process.

It is important to understand the full process (as well as all the documentation required) as errors or misunderstanding in one area can cause lengthy delays further down the line. To minimise such problems, and make the application as smooth as possible, it is highly recommended to get professional guidance and advice.

At FDI China, we understand the process well. The steps below are based on our experience going through the process many times, but do note it will continue to change!

From our experience we would expect the setup process to take between 5 and 8 months (as much as a couple of months faster following recent simplification). Of course, this can vary in some cases either due to delays from the Chinese authorities or delays in collecting and preparing the necessary documentation.

Note that there are some differences depending on the type of WFOE being setup (for example an environmental impact assessment for manufacturing WFOEs and customs registration for trading WFOEs).

1. Apply for name approval and registration

The first step in forming a WFOE is to choose an appropriate name, and then get this approved. These are two very important tasks!

Name choice must follow rules set up in company law. In particular the company name must include company brand, 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

As well as the rules for naming, don’t forget the importance of naming strategy and branding. Just as overseas, your company name gives the first and lasting impression of your company. It should clearly reflect the company role and image. Consideration should also be made of the characteristics of Chinese language. 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 name registration can be done early (as a placeholder) 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 minimise 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! Also, it should be noted that there is a somewhat greater burden with online submissions to have all details correct and finalised. 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, 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 the newcomer to Chinese business, 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 etc.

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 will need at least two accounts, preferable with 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.