Foreigners looking to set up a company in China, Wholly Foreign Owned Enterprises (WFOE) are the preferred choice of investment vehicle. Setting up a company in China may be challenging for organizations or individuals without sufficient experience.
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China, being the world’s second-largest economy and one of the world’s most attractive emerging markets, has become an international economic hub. Foreign investments have increased in China over the past decades. Among the various forms of foreign investment enterprises (“FIE”) that are commonly utilized when expanding into China, Wholly Foreign Owned Enterprises (“WFOE”) is the most preferred business structure for foreign investors and individuals. A WFOE is a China-based business entity designated for non-Chinese enterprises setting up a company in China. It allows non-Chinese enterprises or nationals to establish a limited liability company in China.
Preparation of WFOE
Company name search and reservation
Chinese company law dictates that certain requirements must be adhered to when deciding a company name. An example would be that the company name must be reserved with China’s Market Supervision Administration (“MSA”).
Provision of a registered address in China
This is vital during the incorporation phase as the registered office address will be listed on a WFOE’s business license.
Obtaining company seals
Company chops are essential to the proper management of a Chinese company, as every contract which involves a Chinese company must include a company chop.
Assist with registration with
VAT registration (Value added tax)
General taxpayer status will permit a WFOE to issue VAT Fapiao to its clients and customers. This is an important aspect to Chinese business because Fapiao receipts can be utilized for tax deduction purposes.
Foreign investors have 100% control over the equity of their WFOE, and it is allowed that all profits made in China to be repatriated to the parent company as dividends.
In China, many local businesses require invoices to be settled in RMB for “fapiao” purposes. WFOE’s, being recognized by Chinese companies, can open multi-currency bank accounts, settle and issue invoices in RMB.
There are immigration facilitation pilot schemes in Great Bay Area to attract foreigners with higher education and scientific background.
To support the talent development of corporations in the GBA, the Ministry of Finance and State Administration of Taxation have granted individual tax exemption for overseas workers in the GBA.
Very briefly, the WFOE formation process is as follows:
The above steps are the absolute minimum steps required to set up a WFOE. Upon obtaining your company chops and opening a company bank account, your WFOE will be able to operate normally. However, to the extent that a WFOE engages in industries that require a license, you may need to obtain further licenses and register with the relevant authorities.
Please refer to our blog for the complete guide on the WFOE registration process!
The application time for Chinese business formation can vary. Factors such as the ability of an applicant to gather the necessary documentation and the approval speed of Chinese authorities impact the incorporation process. It is recommended that applicants apportion adequate time to complete the necessary procedures and adjust their timeline.
There are 3 forms of WFOE. Consulting WFOE is the easiest to establish. Manufacturing WFOE allows companies to manufacture in China, and trading WFOE can allow import and export between China and other countries.
WFOEs who have successfully obtained a business license is only allowed to conduct business operations as defined in their submitted business scope. As such, applicants should consider during the incorporation phase what short and long-term business operations their WFOE will conduct.
The WFOE China company formation is simple with clearly defined requirements.
As the registration process can be lengthy and subject to approval from various Chinese Government authorities. To set up a WFOE in China, the process can take approximately 6-8 weeks to complete if all the required documents are in order.
China Company Laws have a reputation of being complicated and rigid. As such, foreign investors will commonly utilize a Hong Kong holding company between their ultimate holding company in their home country and their WFOE in China.
One such benefit of utilizing a Hong Kong holding company is that the profit repatriation process becomes more economical. Companies who are operating in multiple jurisdictions can utilize the various double taxation treaties concluded by Hong Kong and its various co-signatories to minimize potential tax liabilities commonly incurred during the repatriation of profits.
In addition, Hong Kong offers a good option to exit from your investment in a Chinese WFOE. As all equity transfers of companies in China require approval from the Chinese authorities, the process can be considered comparatively inefficient. Aspects of the equity transfer such as the price, condition, and timeline of the payment can be challenged. In comparison, Hong Kong companies are not required to obtain approval for the transfer of shares.
In China, company chops are used to legally authorize documents and are used in lieu of signatures. Company chops are necessary for doing business in China, especially when signing legal documents such as when opening a bank account. Company chop has legal authority over the signature of a WFOE’s legal representative and has the power to validate documents and contracts regardless of who uses them.
WFOE’s can expect to utilize a variety of chops as follows:
During the WFOE registration process, careful consideration should be made to your business scope. The Chinese government maintains the right to prohibit or restrict a WFOE’s business activities if its business scope is deemed to not align with Chinese laws and regulations. To avoid any unnecessary complications upon commencement of your business operations, take time to ensure that your business scope aligns with the long-term goals of your WFOE.