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Wholly Foreign Owned Enterprises (WFOEs) become one of the investment options for the foreign investor wishing to process, manufacture or assemble in China. It is not necessary to find a Chinese partner and does not require large amounts of registered capital to fund as well. Although WFOEs are essentially to be used for facilities involving production lines, they have under certain conditions also proved suitable for service industries with some restrictions over location.
Legal status WFOE’s are limited liability companies established under Chinese Company Law. The shareholders are 100% foreign, usually an international business who would own the company 100%. Limited Liability is recognized by the amount of registered capital injected into the business. Although this may in fact be a combination of two assets, cash injection and equipment, the total value of these also represents the extent of the WFOE’s liability. This affects situations involving insolvency as the assets may depreciate and the cash is legally allowed to be used as operational capital. Under these quite normal circumstances then it is important to bear in mind that in the event of bankruptcy the parent would be expected to make up, via injection, the difference between the registered capital amount and the actual value of cash and equipment in order to satisfy creditors. Key advantage WFOE can be described with much more simple words, i.e. with complete functions of a company, entitled to perform all duties of a common company, including signing contracts, employing staff, applying for the license of import and export, issuing various invoices, opening various accountants and engaging in financing etc. independently, on which it would be unnecessary for us to go into more details. From the perspective of the dynamic functions of a company, WFOE is far more advantageous than a representative office in its applicability, flexibility and expandability and the customers are expected to choose the organizational structure based on their actual situations. Reduced capital requirements
Besides, the lure of huge market potential coupled with the promise of tax holidays, tax incentives and financial rebates has helped China attract foreign direct investment (FDI) and to become the biggest recipient and utilizer of FRI in the world. A significant factor contributing to that is the reduced minimum paid-up registered capital requirement for the formation of WFOEs. Previous requirements - Consulting/IT/Design/Manufacturing WFOE - USD 140,000
- Retailing WFOE - Not Permitted
- Trading WFOE- USD 200,000 permitted to be incorporated only in the WaiGaoQiao Free Trade Zone (WGQ FTZ) and not eligible for Import/Export (I/X) License.
In the past, only large multinationals and medium-sized corporations were able to afford the above-mentioned registered capital requirements and were willing to take greater risks when venturing into China. However, their subsequent success then created a crucial effect on their supplier/service providers outside of China, including the smaller companies. This then initiated the next phase necessary to sustain the influx of FDI into China. Following the amendment of the Company Law and the Administrative regulations for the Registration of companies, it is now possible to incorporate WFOEs with the following paid-up registered capital: - Consulting/IT/Design WFOE - RMB 100,000
- Retailing WFOE - RMB 300,000
- Trading WFOE inside WGQ FTZ - from RMB 500,000 to RMB 1 million (if 17% Value-Added tax (VAT) status is required). Import/Export License can now be issued
Domestic Trading (i.e. buying and selling of goods within China) can now be added into the business scope of a trading WFOE. To differentiate this newly-approved structure, the term Foreign-Invested Commercial Enterprise (FICE) has been introduced. Minimum paid up registered capital is RMB 500,000 for a small-scale taxpayer and RMB 5 million if 17% VAT status is required but certain districts may allow application with RMB 3 million paid-up registered capital. - Manufacturing WFOE - RMB 500,000 and not subjected to additional paid-up registered capital in order to apply for 17% VAT status.
As an added incentive, the regulations for the administration of the registration of companies paid-up registered capital were amended to allow a longer period of capitalization as follows: - First 3 months- 20% of paid-up capital subject to a minimum of RMB 30,000
- Within 24 months - remaining 80% of paid-up capital.
As part of this significant reduction in the paid-up registered capital requirement for WFOEs, there are now several far-reaching implications for changes in regulations: - The Representative Office (RO) has become more or less a redundant structure due to its inherent weakness.
- A local company formed with two local PRC nationals acting as nominee shareholders is not only severely risky but also unnecessary.
- Trading WFOEs and FICEs with Import / Export License.
- Retail WFOE can be 100% owned by foreigners.
The process
Step 1: Reservation of the WFOE company name
First of all, foreign investors should reserve a name for its prospective WFOE with the local Administrative Bureau for Industry and Commerce ("SAIC"). This is called "Name Pre-registration" in China. SAIC requires that a proposed name and two alternative names be provided.
Step 2: Project proposal and approval
According to the PRC WFOE Law and its Implementing Rules, there should be a Project Proposal Approval stage before the final examination and approval. In practice, these two stages have been combined as one.
Project proposal:
The foreign investor is necessary to submit a Project Proposal to the local approval authority ("Approval Authority") where it intends to set up the WFOE and the Project Proposal covers:
- The purpose of the WFOE, production plan and market forecasts;
- The scope and scale of the business, the products to be produced / services to be provided;
- Financial forecasts and evaluations;
- The technology and equipment;
- Land-use requirements and location;
- Human resources and salaries;
- Any requirement for public facilities (e.g. water, electricity, coal and gas)
Examination and approval: The documents required to submit to the local Approval Authority: - A written application letter for the establishment of the WFOE;
- A Feasibility Study Report, generally a 20 page document;
- The Articles of Association of the proposed WFOE;
- A list of the proposed chairperson and the members of the WFOE board of directors, and appointment letters;
- The incorporation document of the WFOE investor;
- A credit certificate of the WFOE investor issued within 3 months;
- Lease agreement for the premises. An actual executed lease agreement may not be required and it is generally acceptable and common for the WFOE investor to merely show an intention to enter into a lease agreement by entering into a space reservation agreement with the landlord;
- The reply of pre-registration of name approved by the relevant SAIC;
- Other documents that may be required by the Approval Authority.
- For the timing of approval, Approval Authorities are required to make its decision within 90 days from receipt of all the documentation. However, many local Approval Authorities are able to give its decision within 5 to 15 working days upon receiving all the required documentation.
Step 3: Registration for business license Within 30 days after getting the approval certificate, the foreign investor will need to register and apply for a business license for the WFOE from the local SAIC. The foreign investor will need to submit similar documentation to the approval documentation for SAIC filing purposes. This is merely a procedural step and the local SAIC must issue the business license within 30 days. However, SAIC will usually issue the business license within 5-10 days after receiving all the required documentation. Once the business license is issued, the WFOE is deemed to be a legal individual duly organised and existing under China Law and will have full operational rights to operate a business in China within the scope of its business license. Step 4: Registrations with other government authorities Registration is also needed with other government authorities such as tax bureau, Foreign Exchange Control and Customs and so on. Part of the post-established is as below: - Prepare an office stamp
- Open company bank accounts
- Register in the State Tax Bureau
- Register in the Local Tax Bureau
- Apply for “Enterprise Code” and card
- Register in the Foreign Exchange Control Authority
- Register custom documents and information required
The documents and information requiredA list of documents and information are needed to be prepared by the foreign investors prior to submission of application: - The name, address and place of registration of the investor(s);
- The name, nationality and position of the legal representative of the investor(s);
- The investor's incorporation evidence and its credit standing;
- The name and address of the WFOE including the proposed name and 2 alternatives;
- A summary of the proposed scope of the business, the types of products and the scale of production;
- The total amount of investment in the WFOE, including: (1) The registered capital. The amount of registered capital will depend on the location of the WFOE. Generally, a minimum amount of RMB100,000 to RMB1,000,000 is required for most types of businesses; (2) Sources of funds; (3) Method and time limit of contribution of capital;
- The form of organisation, management structure (including directors) and legal representative of the WFOE;
- The main equipment to be used and the age of such equipment;
- The level and source of the production technology and production processes to be used;
- The targeted buyers and areas of sale of the products, including sales channels and methods of sale;
- The arrangements which will be put in place for the receipt and expenditure of foreign exchange. This may comprise of related company transactions to transfer money out of the country and it may also include payment of dividends. It is recommended to seek PRC tax advice from an accountant in respect of such arrangements;
- The establishment and staffing of the structure;
- The details of land to be used (ball park details of lease or space reservation agreement including the total area);
- Minimal energy or raw materials will be required for the operation of the business and that there will be no construction (of premises or other facilities);
- A time line for implementation of the project;
- The proposed term of operation for the WFOE. The standard term is generally 20 to 30 years.
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