WFOE Setup: 10 Common Mistakes
Setting up a WFOE (Wholly Foreign-Owned Enterprise) in China requires a thorough and well-thought-out approach in order to avoid complications down the road. A single oversight during the planning phase can impact multiple subsequent steps, potentially derailing an otherwise well-prepared process. In this article, we present 10 common mistakes to avoid:
1. Insufficient Registered Capital
Registered capital represents the company’s initial investment and constitutes its equity. This investment may consist of cash or tangible/intangible assets such as machinery, equipment, or intellectual property.
Although China no longer has a legal minimum for registered capital, investors must still submit a feasibility study to local authorities demonstrating that the proposed capital amount is adequate and aligns with the assumptions of the business plan.
In practice, the lowest approved registered capital is still approximately RMB 100,000, with at least 30% of the capital in cash. Accurate calculation is crucial. We recommend estimating the timeframe until the company expects its first cash inflow in China, then calculating the necessary capital based on this.
Importantly, registered capital is the only tax-free way to transfer funds into China. Most problems stem from underestimating capital needs, leading to cash flow issues during operations. While increasing capital later is possible, it involves additional bureaucratic hurdles, knowledge, time, and costs.
Alternatives include:
- Increasing registered capital (requires a complex administrative process)
- Applying for local bank loans (often difficult without collateral)
- Loans from the parent company (limited by the ratio between total investment and registered capital)
2. Unclear Language in the Articles of Association
The Articles of Association are the company’s internal governance document and a core part of the incorporation process in China. It defines the company’s structure, scope of business, and essential operational rules.
Chinese corporate law mandates submission of this document to relevant authorities. It must clearly outline the company’s duties and responsibilities, and—depending on the case—should cover the following:
- Scope of business
• Total investment and registered capital
• Management structure and hierarchy
• Accounting and finance
• Taxes and insurance
• Human resources
• Profit distribution
• Termination and liquidation procedures
3. Omitting Total Investment in the Articles of Association
Total investment refers to the full amount of funds planned to be invested throughout the WFOE’s operational lifespan. It is essential for defining the ratio between registered capital and total investment, which in turn affects borrowing capacity. Failing to include this in the Articles of Association may hinder the company’s ability to take out loans.
4. Underestimating the Timeframe of a WFOE Setup
Foreign investors often misjudge how long the WFOE incorporation takes. Depending on location, the efficiency of authorities, timely preparation of required documents, the process can be more complex.
5. Wrong Choice of Location
One of the earliest steps is to submit the intended office address. This is a crucial decision, as any changes later on require additional effort. Relocation within the same district requires a change procedure, while moving to a different district or city may necessitate de-registration and new registration with local tax authorities.
6. Incorrect WFOE Type Selection
The business scope must be defined during the registration process, and the WFOE can only operate within that scope. Generally, there are three types of WFOEs:
- Service WFOE (Consulting) are the easiest to establish, requiring the least capital and time.
- Trading WFOE (Foreign-invested Commercial Enterprise or “FICE”) require registration with Chinese customs authorities.
- Manufacturing WFOE must already have a factory site before registration. The site is subject to inspection by the local Administration for Market Regulation. An environmental impact assessment may also be required.
7. Underestimating Labor Law Requirements
A carefully drafted employment contract is essential. Companies should also maintain an employee handbook. Chinese labor law imposes responsibilities on the employer, including ensuring proper visas for employees.
Work visas must be issued by local authorities, often involving delays and detailed reviews—especially when applying for multiple visas at once.
8. Improper Management of Company Seals
Company seals are vital in China and carry legal significance similar to a signature in other jurisdictions. Many foreign companies are unfamiliar with this system.
Key seals include:
- Company seal
• Legal representative’s seal
• Contract seal
ECOVIS Heidelberg recommends distributing control of the seals among multiple trusted individuals. If a company lacks enough internal personnel, it is advisable to entrust a reliable third party, such as ECOVIS Ruide, with seal management.
9. Improper Appointment of Representatives
Several key roles must be assigned within a WFOE:
- Board of Directors / Chairman
• Supervisory Board / Supervisor
• General Manager
• Legal Representative
These appointments are important and carry specific legal responsibilities.
10. Failure to Register Trademarks and Intellectual Property
To ensure protection from competitors, trademark and IP registration should be completed before setting up a WFOE. Even if the business only manufactures in China while conducting all sales abroad, Chinese registration is still required.
China operates on a “first-to-file” principle, meaning the first company to register a trademark in China owns the rights—regardless of prior use elsewhere.
Conclusion
Establishing a company in China remains a complex legal and bureaucratic process, full of potential pitfalls. ECOVIS Heidelberg can guide you through this journey with deep knowledge of the procedures and help you successfully establish your WFOE in China.
