One of the most popular modes of entry for foreign companies is to set up a wholly foreign-owned enterprise (WFOE) in China. A WFOE is a limited liability company wholly owned by one or more foreign investors.
In this article, we will explore the various steps involved in setting up a WFOE in China, including the legal requirements, registration procedures and other considerations foreign investors should consider before embarking on this journey.
What is China WFOE?
A wholly foreign-owned enterprise in China is a limited liability company (LLC) held by shares established exclusively by a foreign investor’s capital (wholly foreign-owned). This business structure is ideal for foreign companies seeking to enter China for QC, R&D, trade, services and production.
Establishing a WFOE is the most common investment vehicle for FIEs to operate commercially in Mainland China. Compared to the other structures, a WFOE is the only business entity allowing a foreign owner to retain 100% control.
WFOEs are typically used to produce the foreign company’s product in Mainland China for later export to a foreign country. A WFOE’s registered capital should be contributed, subscribed to and contributed only by foreign investors.
There are three types of WFOE that can be established:
- Consulting/services WFOE: Licenced as a consulting or services business. This type of WFOE also includes cost-plus WFOE, which operates as the back office of the foreign investor; this structure can provide an alternative to the representative office when the legal aspects and strategy recommends it.
- Trading WFOE: Licenced to conduct trading, wholesaling, retailing and franchising activities in China. These types of companies must make an additional registration at customs to be allowed to import/export goods in/from China. A trading WFOE may also offer consultancy or other services.
- Manufacturing WFOE: Licenced to manufacture and sell products. The process of registering a manufacturing WFOE is quite different from and more burdensome than the WFOEs mentioned above, as an environmental impact assessment must be completed before submitting the business licence application.
While the cost of establishing a WFOE remains relatively high compared to a domestic company, a WFOE is still considered the most beneficial business structure option for investing in mainland China from overseas.
China WFOE in numbers
- Corporate income tax: 25% (lower rates may apply based on size and qualifications)
- Value-added tax: 3% – 13% of sales revenue (exports are exempted)
- Consumption tax: 1% – 45% of sales revenue (exports are exempted)
- Land appreciation tax: 30% – 60% of total transfer gains from state-owned land use rights, buildings and attached facilities
- Stamp duty tax: 0.005% – 0.1%
- Resources tax: 1% – 20%, depending on the specific materials required
Amount of owners
As the name suggests, foreign investors can wholly own a WFOE. There is no limit on the number of shareholders. Both individuals and companies are allowed to be shareholders.
WFOEs in China are governed by the Company Law of the People’s Republic of China and other relevant laws and regulations.
Amount of capital
The minimum registered capital required for a WFOE varies depending on the industry and location, but it can range from CNY 100,000 to several million CNY. Most industries do not require to have registered capital to be injected unless necessary for business operation.
Days required to register
It takes about one to three months to complete all the procedures necessary to register a business in China, which includes obtaining business licences, tax registration, opening a bank account and registering with the State Administration of Foreign Exchange. However, the actual timeline can vary depending on the complexity of the business and the location in which it is registered.
Advantages of setting up a WFOE
The advantages of a WFOE can generally be summed up as the following:
- Foreign investors have 100% control over the company (equity).
- Since a WFOE does not have to partner with a local domestic enterprise, it provides the investors with control/independence related to HR matters, managing operations, and devising growth strategies.
- WFOEs are allowed to conduct direct business activities, including trading, servicing and manufacturing activities (provided they are not illegal, prohibited or restricted by the Chinese government), provided said business is within the approved business scope.
- WFOEs are allowed to issue official VAT invoices in CNY, called fapiao, and collect their sales revenues in CNY.
- WFOEs can employ both foreigners and local Chinese directly without having any limitation on the number of foreigners employed (in most cities), and apply for working visas for foreign experts.
- All profits made in China (once certain limited reserve fund thresholds are met) can be remitted by WFOEs as a dividend directly back to the company’s investors.
Disadvantages of setting up a WFOE
There are also several drawbacks to establishing a WFOE, including:
- The setup process can be challenging, with various endorsements required by multiple authorities.
- Since some industries are subject to prohibitions and restrictions, foreign investors are limited to only the encouraged industries.
- There is a greater liability since you are the official employer of record. Thus, it is imperative to familiarise yourself with complex laws and regulations related to tax, employment, contracts and payroll.
Things to consider before registering a WFOE
Before registering a wholly foreign-owned enterprise in China, there are several important factors that companies should consider. These include the investment structure, registered capital, location and licences required for certain industries. Proper consideration of these factors can help ensure a smoother registration process and a more successful operation in China.
When determining which entity should be the direct investor of the WFOE, companies typically consider tax efficiency, complexity, lead-time, (future) co-investors, internal (division) interests, flexibility and future exit. From an incorporation perspective, the jurisdiction of the immediate parent company is only relevant in terms of lead time and complexity since legalised documents must be acquired from relevant Chinese Embassies or Consulates, with some jurisdictions being faster and more straightforward than others.
It stipulates the amount of local or foreign currency that an investor may contribute as capital, free of any taxes, to fund the operations of the WFOE. Deciding on the appropriate amount of registered capital can be challenging and is frequently the result of a multitude of factors. Generally speaking, the capital amount needs to cover the first one to two years of operation costs, which include rental fees, employee salaries, business operation costs, etc.
The consideration of the district of incorporation is very important. Where the company office is located is where the application needs to be made with the local authorities. There may have some tax benefits in some of the special areas. When selecting the ideal district for your investment, it is imperative to take into account the envisaged or present physical office location, the flexibility of local regulations, access to talent, proximity to the city centre, (tax) benefits, vicinity to the key staff’s residences and accessibility to suppliers or clients.
Some activities in certain industries may require extra special licences, for instance, alcoholic beverages, import/export, restaurants, special foods, fresh foods, certain software, apps or platforms, construction, HR and so on. Obtaining these licences necessitates a detailed submission for approval and registration, which adds a few months to the registration process.
Requirements for registering a WFOE in China
A WFOE will have to comply with a number of regulatory bodies, these are:
- Administration for Market Regulation (AMR) – obtaining a business licence and registering a company name
- Ministry of Commerce or Foreign Economic Cooperation Bureau – various business documents approval when necessary
- Seals Office/Public Security Bureau (PSB) – issuance of Chops (Contract Chop, Company Chop, Finance Chop, legal rep. Chop, etc.)
- Tax Bureau – registration of company information
- The State Administration and Foreign Exchange
- Bank for a capital account and CNY basic account opening
- Other governmental departments as required such as social welfare bureaus, customs, etc.
Guidelines on registered capital
Upon registering a WFOE, the authorities require a company to have sufficient registered capital invested at the outset to ensure the business can sustain itself until there is enough cash flow for operations.
The exact amount of registered capital required from a business would depend on the business scope, sector and business plan.
WFOEs must designate a minimum of three individuals (of any residency and nationality) as the structure, including a legal representative, a financial officer and a supervisor. The legal representative must also be the general manager and/or the director of the WFOE (or both).
Steps to setting up a WFOE
To set up a WFOE in China, you must choose an acceptable Chinese business name, gather the necessary documents for the WFOE registration, obtain a business licence, register for taxes, register with various authorities and open a corporate bank account.
1. Choosing a Chinese business name
There are strict regulations in China for selecting an acceptable business name. Due to differences in culture and language, you must choose your business name carefully in order to avoid unintentional associations.
Recently, Chinese authorities have taken steps to minimise the use of foreign words within the names of China-based companies. While large international enterprises such as Apple or Nike can keep their English names, smaller companies must come up with a business name in Chinese.
2. Preparing documentation to register the WFOE
Along with registration forms, you will need to gather passport copies for all the management teams, WFOE lease agreements, Articles of Formation, resume and photos of the legal representative in China; copies of investors’ passports or certificate of Incorporation, by-laws which need to be notarised and legalised in the home country.
3. Applying for the (necessary) business licence
To obtain a business licence, you must submit your application to the local offices of the Administration for Market Regulation (AMR).
4. Registering for taxes
After receiving your business licence, you need to register for applicable taxes at the tax bureau. It will be processed online in an electronic tax system. After that, you will need to activate your CA (verification authority) key at the in-charge tax office, providing a copy of your business licence and your company chop – a stamp that serves as your business signature.
5. Registering with other authorities
You also need to register with the following authorities:
- Seals office
- The State Administration and Foreign Exchange
- Social welfare bureau and housing fund bureau for employees
- Customs and E-port for trading business
6. Opening a corporate bank account
Open foreign currency and Chinese CNY bank accounts.
How Acclime can help with establishing your presence in China
A wholly foreign-owned enterprise (WFOE) in China is a limited liability company solely owned by one or more foreign investors. WFOEs are the most popular investment vehicle for foreign-invested enterprises (FIEs) seeking to operate commercially in Mainland China.
Acclime China offers a comprehensive suite of corporate services to help you navigate the complex process of setting up your business in China, from choosing the right entity type to obtaining the necessary permits and licences, preparing all the necessary documents and negotiating with authorities/third parties; advise on the company structures, etc.
Our experienced team is well-versed in local regulations and can provide tailored advice and support to ensure that your company is set up for success. We can also assist with ongoing compliance and accounting services to help you stay on top of your obligations and focus on growing your business. Contact us today to learn more about our formation services and how we can help you achieve your business goals.
Contact our teams for expert support and further information about entering the market and setting up a legal entity in China.