Thinking of setting up a WFOE (Wholly Foreign-Owned Enterprise) in China?
If you’re planning to enter the China market as a foreign company, the WFOE is by far the most popular business structure for overseas investors and entrepreneurs.
That being said, doing business in China can be a very different experience from doing business in the West. So, we enlisted the help of the experts at ILS World, to give you a snapshot of what you’ll need to know about establishing and running a WFOE in China.
Firstly, what is a WFOE?
WFOE stands for Wholly Foreign-Owned Enterprise. As the name implies, WFOEs are the business structure for companies exclusively owned by foreign investors (typically under a parent company).
Other popular business structures are joint ventures, where you partner with a local firm, or a representative office.
Typically businesses establish a WFOE when they have long-term plans for China, and want sole ownership (versus partnering with a local firm). It typically takes around 1-2 months to establish. If your business requires licences (for example if you’ll be importing and exporting) you’ll have a lengthier process.
What are the benefits of establishing a WFOE in China?
- The company will have limited liability under Chinese law. It is its own separate legal entity and can be tried as such.
- Profits can be remitted back to the parent company. Because there are strict controls on capital in China, getting money out of the country is often a laborious and complicated process. When you’re operating a WFOE, however, this is one of the few situations where you can remit money out of China, as all capital is technically owned by its foreign investors.
- This set-up gives you the full ability to trade, employ staff, and do all of the other actions in China that a company set up by a Chinese national can. Other set-ups have far more restrictions on the types of activities you can do. For example, a representative office is restricted from direct profit-generating activities, and is typically used for market research or advertising.
What you need to know before setting up your WFOE
You’ll need 3 main roles: a legal representative, a supervisor and a director
To set up a WFOE there are a 3 main roles you’ll need to have filled.
A legal representative is the person who represents the legal authority of the company – you can think of it as the focal management figure who holds the signing power. The legal representative can:
- Enter into binding contracts for the company
- Execute powers of attorney on the company’s behalf
- Authorize legal representation of and litigation by the company
Their name also appears on the business registration certificate.
A supervisor is the main person who supervises the operations of the company to make sure everything is sound, from a legal and regulatory perspective. They’re given the power to inspect financials and take action against any directors who violate laws or act against the company’s interests. Because of the nature of the role, this person has to be seperate from the legal representative. Any employee or shareholder can be the supervisor (except for board members and senior management).
Lastly, you’ll need to appoint a director, who will handle the daily operations of the business. In many small WFOEs they act as the manager. This person can also be the legal representative if you wish.
You’ll have to define your business scope very carefully
A requirement of operating a WFOE is that your business activities are limited to what’s described in your business scope, which is something you define yourself when setting up the WFOE.
The business scope is one sentence printed on your business registration certificate, that outlines the company’s activities in China. Once established, it can be quite a hassle to change. The WFOE needs to go through a number of administrative procedures to get the business scope amended, and depending on what’s changing, you may have to apply for more licences for any new business activities.
The experts at ILS also recommend putting as much information as possible when you describe your business scope. Here’s an example of what this could look like:
"Business Services; Investment Consultancy service; Accounting Consultancy (but not allowed to do any audits, capital verification, audit, and other auditing related services)"
You can see the above statement broadly covers the general services, however when it goes into "accounting" it very specifically excludes auditing activities, as to avoid opportunity for misinterpretation.
The city you set up in can have a significant impact on your business activities
Choosing the right location is particularly important for businesses in China.
China is a huge country and industries tend to be very concentrated in certain areas or cities. So choosing the right city for your industry or business type can have a significant impact on how quickly and easily you can connect with the right people, and access the resources you need.
For example, Shenzhen and Guangzhou are both cities that are well-known for innovation,IT and tech, and therefore attract quality tech talent. So if you are in the tech industry, you might find it easier to locate the right staff if you set up in one of those cities. If you’re dealing with government projects, or are in an industry that’s highly regulated, Beijing could be the place for you.
You’ll need to get a variety of company chops
All companies in China, Chinese companies and WFOEs alike, are required to have a company chop. This is essentially an official stamp that has legal authority – regard it as the signature for the company.
Chops are used on legally binding documents such as agreements and contracts.
Each company chop is recorded and registered by the police department. They have their systems linked up to the government’s commerce authority as well. So when you file a report for a lost chop, the government’s commerce authority will also be notified.
Tip: You’ll need the company chop in order to open your bank account.
What you need to know about setting up a WFOE
The process of establishing your WFOE takes around 1-2 months – but besides taking a little while, it’s relatively straightforward.
These are the steps you’ll need to go through to set up your WFOE:
1. Identify your parent company. Many entrepreneurs choose to set up a company in Hong Kong for the sole purpose of being the shareholder of a Chinese WFOE.
2. Obtain approval for the Chinese company name. Applications can be made to the local Administration for Industry and Commerce (AIC).
3. Prepare legal documents to be submitted during the business registration. This includes:
- Notarization or legalization of the parent company documents (such as the Certificate of Incorporation and Business Registration Certificate)
- Structure chart, which outlines the people in the legal representative, director, and supervisor roles and defines the ownership structure.
4. The actual WFOE company registration. Typical practice is to fill out the general business information online first, and then submit your original signed documents in person. You’ll need to receive approval from Chinese regulatory authorities, including the China National Development and Reform Commission, the People’s Republic of China Ministry of Commerce incorporation, and the State Administration of Foreign Exchange.
5. Tax registration. This is done immediately after your business registration document is issued.
6. You need at least 2 bank accounts: an RMB account and a foreign currency account. Opening a bank account will take about 2 to 3 hours, and your legal representative must be present.
Depending on your area of business you may also have to apply for business licences or complete other assessments. For example, a manufacturing WFOE will have to undergo an environmental impact assessment; and if you’re trading cross-border, you’ll have to obtain import-export licence.
Why many businesses choose to use a Hong Kong parent company to set up their WFOE
In terms of setting up the Chinese WFOE, choosing a Hong Kong company as the parent company is going to offer a much smoother process compared to using, say, a US, UK or Singapore company.
When you set up a WFOE the Chinese authorities require the parent company’s documents. These must be legalised, and the process to do so is costly and long, taking about a month at least. If there are administrative changes at the parent company, then you need to go through that process again.
However, documents for Hong Kong companies undergo notarization, which takes only a week or two, and are acceptable to the Chinese authorities. It’s much more cost-effective, straightforward, and also has the benefit of being done bilingually.
What’s more, there are a variety of other benefits of establishing a Hong Kong company to run your WFOE. For example, there are ample tax benefits. Hong Kong gets a preferential rate when it comes to withholding taxes – just 5%, as opposed to the 10% placed on other jurisdictions. You can learn more in this article on the benefits of incorporating in Hong Kong.
What you need to know about maintaining a WFOE in China
There is ample administrative work
There is a lot of administrative work that needs to be done to maintain you WFOE for example:
- Monthly accounting
- Monthly and quarterly tax returns
- Annual renewals that need to be done with different authorities
- Auditing and annual tax filing
- Licence renewals
- Other local administrative filings. For example, in Shanghai occasionally the commerce authority may visit without any formal notice for checks.
What’s more, in China, many businesses need to issue something called fa piao - equivalent to what many may know as an invoice. However, instead of an accountant or computer that issues the fa piao, it’s actually a machine. It’s an approved device that uses special fa piao paper, which is issued by the tax authority in China.
ILS recommends hiring a dedicated staff member specifically to maintain these rigorous administrative duties.
You’ll be responsible for social benefits for your staff, on top of their salaries
In terms of staff, it’s not a cheap market to invest in. When you’re budgeting for your staff, on top of the monthly salary, you may have to factor in the social benefits Chinese workers are entitled to. Each city has varying social requirements, and it can add up to anywhere from 30-42% of their salary. For example, you’ll have to consider different types of social insurance and housing allowance.
Is it time to set up a WFOE in China?
If you’re looking into doing business in China as a foreign investor/entrepreneur, we hope this article has helped shed some light into what opening a WFOE entails.
We want to thank our friends at ILS once again for sharing their insights on everything you need to know about running a WFOE in China!