10 Most likely mistakes while setting up a WFOE [1/2]

4 min.

By Manuela Reintgen and Michelle Yan, ECOVIS Beijing

10_WFOE_Set_up_mistakesSetting 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 two-part series, you will find the 10 most important steps where you’re most likely to make mistakes. This first part will go through the first five most common mistakes.

1.     Not choosing enough registered capital

The registered capital (“RC”) is the initial investment into a company and it represents the equity that an investor holds in a WFOE. It can be provided in the form of currency, industrial assets, including machinery & equipment, or intellectual property. Even though there is no longer a regulation regarding the minimum amount a company needs to declare, it is still necessary to give a feasibility report to prove to the local authorities that the amount defined is reasonable and in accordance with the assumptions of the report. Having said this, we could see in practice, that the minimum amount accepted is still 100.000 RMB. The amount of capital contributions in cash shall not be less than 30% of the registered capital A company should properly calculate the amount of capital they need beforehand. We suggest determining the period of time it’ll take until the first China sourced income is expected to be received. With that time frame in mind, you then calculate and define your RC accordingly. The RC is the only chance to get money tax free into China. Most problems are due to miscalculation and defining less RC than needed, which leads to cash flow problems during daily operations. If a company recognizes afterwards that they need more capital, there are several options they can consider. However, all of them require additional work and costs and are generally a bureaucratic hassle. One option would be increasing the RC, which will create unnecessary administrative burdens. The company could also take up a loan from a local bank. However, foreign invested companies might encounter various difficulties here and need to provide collateral. A loan from the headquarters is only possible in an amount depending on the ratio between registered capital and total investment.

2.     Vague phrasing in the “Articles of Associations” document

The Articles of Associations (“AoA”) is one of the most important documents regulating the structure, business scope and framework of a WFOE, as it is the bylaw of a company. The Company law requires that the AoA must be registered with various authorities in China. Moreover, the AoA has to include the details regarding all the obligations and responsibilities of the proposed company. It should contain all topics talked about so far as well as some of the following depending on the situation:

  • Business scope
  • Total investment and registered capital
  • Management positions and organization
  • Accounting and Finance
  • Taxation and Insurance
  • Human resource management
  • Profit Distribution
  • Termination and liquidation

3.     Forgetting to mention the Total Investment in the AoA

The total investment (“TI”) is the total amount of funds that will be invested in the WFOE during its entire planned period of operation. The ratio between RC and TI depends on the amount of investment. If a company forgets to mention the TI in the AoA, they won’t have access to define the ratio in order to get a loan.

4.      Underestimating the complexity of setting up a WFOE

Foreign enterprises tend to underestimate the time necessary to set up a WFOE. It can be anything between three months and a year, depending on location, efficiency of the administrative bodies involved, as well as your own ability to prepare all related documents timely. As an underestimation of time leads to insufficient RC and Cash Flow problems, this can be a dangerous mistake.

5.     Choosing the wrong location

One of the first steps should be the filing of the address of your future office. The location is one of the most important decisions you’ll make, as you have to consider several aspects such as the customer focus, infrastructure or engaging employees. This decision is very important, as every change creates additional avoidable work. If a company wants to change, for example, their address within the same district, there will be amendment procedures. If a company, however, wants to move to another district or even another city, on top of the amendment and procedures, they might need to deregister with their current tax bureau and register at another. Stay tuned for part two of our two-part series where we will tell you more about the mistakes you should be avoiding when setting up a WFOE

with contribution of Brigitte Both (ECOVIS Beijing)

Contact person

Lawyer in Heidelberg, Richard Hoffmann
Richard Hoffmann
Lawyer in Heidelberg
Phone: +49 6221 9985 639
E-Mail