Unlocking Opportunities – Establishing a Chinese WFOE Step-by-Step
In the bustling landscape of China’s market economy, one legal entity stands out as a beacon for foreign investors seeking autonomy and profitability: the Wholly Foreign-Owned Enterprise (WFOE). A WFOE, as its name suggests, allows foreign investors, whether corporations or individuals, to establish a fully owned subsidiary within China’s borders. Unlike the restricted scope of a representative office, a WFOE boasts the ability to generate profits locally, repatriate funds abroad, and issue invoices in the local currency directly to Chinese clientele—a crucial advantage for navigating the intricate tax landscape of the Middle Kingdom.
With its inherent flexibility, the WFOE has emerged as one of the most sought-after company structures for those eyeing entry into China’s dynamic market. Offering independence from Chinese partners, WFOEs typically take shape as Limited Liability Companies (LLCs), affording investors the protection of limited liability under Chinese law. But how is a WFOE founded? This article explains the process and what you need to bear in mind when setting up a WFOE.
Contact
Founding requirements
Establishing a Wholly Foreign-Owned Enterprise (WFOE) in China entails specific founding requirements. The WFOE was created to promote foreign investment. Therefore, eligibility only extends to foreign companies, associations, and individuals, with all shareholders mandated to be foreign nationals. Notably, individuals or companies from Hong Kong or Taiwan are categorized as foreigners in this context, necessitating the establishment of subsidiaries in the form of WFOEs. A minimum capital requirement and the capital registration mandate for WFOEs were abolished.
Pre-Registration
The Pre-Registration Procedures for establishing a Wholly Foreign-Owned Enterprise (WFOE) in China involve several meticulous steps:
Firstly, it entails determining whether the proposed business activities comply with regulations set by the Chinese government. Since 2016, all activities are presumed permissible unless explicitly listed as restricted or prohibited on the negative list.
Following this, an application for pre-registration is submitted to the competent local authority of the State Administration for Market Regulation (SAMR). This process, spanning 3-6 months, mandates registering the company name with SAMR in Chinese, ensuring it reflects the legal form, and providing valid address proof through office lease contracts and housing ownership certificates.
A feasibility study is then presented to the “State Development and Reform Commission” or a relevant local authority, outlining capital resources, business areas, organizational structures, and business development assessments. Responses are typically received within 20 days.
Furthermore, corporate governance structures must be established, necessitating a board of directors comprising a minimum of three members or one executive director, along with a general manager, legal representative, and supervisor. This ensures effective oversight and regulatory compliance.
Additionally, the declaration of registered capital is crucial, ensuring the WFOE possesses adequate funds until positive cash flow is achieved. Although there is no official minimum requirement, the amount varies based on factors like industry or region of incorporation. Capital can be contributed in cash or in kind, with in-kind contributions capped at 20% of the total registered capital, offering WFOEs financial flexibility.
The approval of articles of association is then sought from the local trade authority or the Ministry of Commerce (MOFCOM) for larger investments, with feedback provided within 90 days. In this regard, companies must submit an application, the articles of association, the feasibility study and other documents. If everything complies with the regulations, the authority issues a permit.
Finally, the WFOE must register with the local authority of the State Administration Market Regulation (SAMR) within 30 days of permit issuance. Subsequently, SAMR issues a business license, officially establishing the company.
Post-Registration Procedures for WFOEs
After the registration process, Wholly Foreign-Owned Enterprises (WFOEs) must undergo essential post-registration procedures to ensure operational readiness:
Firstly, they must register with both local and state tax authorities to obtain a tax number, facilitating the payment of monthly taxes.
Secondly, opening a bank account with a Chinese bank is mandatory. This involves establishing both a foreign currency account and an RMB account. The registered capital is initially paid in foreign currency, converted into RMB, and transferred to the RMB account, making the share capital accessible to the company in RMB.
Additionally, several chops (seals/stamps) must be carved and registered at the Public Security Bureau, including the company chop, financial chop, legal representative chop, and invoice chop (Fapiao chop).
For Trading WFOEs, an import-export registration is necessary to facilitate their import-export activities.
Upon completion of these post-registration procedures, the WFOE is fully operational and prepared to conduct business in China.
In conclusion, while establishing a Wholly Foreign-Owned Enterprise (WFOE) in China offers immense opportunities, navigating the intricate founding process can be challenging. Given the complexities involved, seeking legal counsel is highly advisable. With expert guidance, businesses can effectively navigate regulatory hurdles, safeguard their interests, and unlock the full potential of operating in the dynamic Chinese market. If you have any questions, please feel free to contact Ecovis Richard Hoffmann in Heidelberg or the ECOVIS Ruide China team. Through years of expertise and specific knowledge of the German and Chinese business environment, as well as legal regulations and the establishment of WFOEs, Richard Hoffmann has already successfully advised hundreds of companies in China.
