10 most likely mistakes while setting up a WFOE [2/2]

By Manuela Reintgen and Michelle Yan, ECOVIS Beijing

Setting up a Wholly Foreign-Owned Enterprise (“WFOE”) in China requires full commitment. You can’t just do it alongside, it has to be carefully planned and many things have to be taken into consideration in order to avoid problems later on. In this article, you will find the 10 most important steps where you’re most likely to make mistakes. In the second part of the two-part series, we will give you more suggestions on how to avoid mistakes when setting up a WFOE

6.     Deciding on the wrong type of WFOE

A company needs to define the business scope of the WFOE as early as in the application stages. A WFOE can only act within this scope. There are three different types generally:

• Service (Consulting) WFOE
• Trading WFOE (Foreign- invested Commercial Enterprise, “FICE”)
• Manufacturing WFOE

There are significant differences in the setup procedures, costs and their working field. A company needs to fulfill certain criteria for the different types of WFOE. The service WFOE is the easiest type to set up. It not only requires the least amount of capital but it also is also the least time intensive compared to the other business scopes. Since a trading WFOE is engaged in import and export activities, the registration at customs is required. The manufacturing WFOE requires a factory space in advance, which will also be your registered address and be checked by the local Administration of Industry and Commerce. As China is facing environmental problems, the Environmental Protection Bureau will also require an estimated environmental impact of the factory.

7.     Underestimating the comprehensiveness of the labor law

An employer should always provide an employment contract to the employee. Having an employment handbook in place is an addition in order to secure both sides interests. As we mentioned already in our HR Brochure last week, the Chinese labor law is quite comprehensive and there are many things an employee needs to pay attention to. The employer, for example, is responsible for his employee having the right visa. Working visas must first be issued by the authorities, which could in practice turn out as a problem. We observed already in that the higher the RC is, the more number of working visas can be given and vice versa.

8.     Forgetting the importance of chops

There are a couple more things you have to take into consideration before the company even formally exists. One big issue is the chops, which in China represent what the signature is in other countries. Most foreign companies never used chops before, but as they represent the most important executive instrument in China, you should carefully decide who gets the power of possessing them. There are many different chops, however, the most important ones are:

• The company chop
• The legal representative chop
• The contract chop

Ecovis suggests to disperse the power over those executive tools by having them held by different people. For some companies, who do not have the manpower to do so, we suggest having them maintained by a third trusted party, such as Ecovis.

9.     Choosing a wrong representative

A WFOE has different positions which need to be filled. The main positions are:

• Executive Director/Board of directors
• Legal representative
• General Manager
• Supervisor/board of supervisor

You need at least two natural persons to set up a WFOE, as the Supervisor has to be someone different than the other three. The Executive Director, Legal Representative and General Manager can be the same person. As already mentioned, the company needs to decide carefully who is in charge of what. A daily contact person, as well as a person in charge of finance has to be registered with the tax bureau. The daily contact person is usually a local Chinese person who is in charge of the bookkeeping process. A failure to understand the importance of all these roles can cause damage to the company, as each representative has a freedom of action, which may ultimately not be in your favor.

10.     Missing the trademark and intellectual property registration

To ensure your trademark and intellectual property is secure and yours, you should register this long before setting up a WFOE. Keep in mind that even if your company only manufactures in China whilst retaining all other business processes overseas, and henceforth having your trademark registered in another country, it does not ensure that it is protected in China. It is important to take note that China has a first-file principle. We recommend to take this process into consideration before entering the Chinese market, as it is almost too late at the point of set up.

Establishing a business in China is a challenge filled with paperwork and bureaucratic red tape with many gaps to fail. Ecovis can guide you through this process, as we have comprehensive knowledge on the important aspects involved in legally and properly registering a WFOE.

with contribution of Brigitte Both (ECOVIS Beijing)