The rapid development of the economy and technology of China have caught the eyes of oversea investors and businesses. Businesses are becoming aware of the enormous market size as well as the numbers of opportunities. However, with its policies and regulation system in China, businesses must carefully invest time into research and analysis in preparation for its entrances.
What is WFOE?
To start a business in China from oversea, filing for under the appropriate system is key. Most businesses utilize The Wholly Foreign Owned Enterprise (WFOE) for foreign businesses. WFOE is a china-based business/company owned by foreign investors or entrepreneurs, allowing investors and business owners to operate independently.
The WFOE system allows foreign businesses to be established without a native partner, which also signifies that the business manages its operations, funds, strategies, developments and more, on its own. Additionally, businesses can employ local and foreign individuals and process funds between China to headquarter or vice versa, at their convenience.
However, the application process of WFOE can be deemed as complex, where it requires numerous approvals from certain departments and load sum of paper work. The entire process may take over two months and based on the industries the business is involved in, there may be additional requirements and regulations.
WFOE Application
The application process has been simplified in several steps for WFOE setup previously by the government. In order for the process to be completed and approved efficiently and accurately, the list of documents and required registration is listed below:
- Name Registration – up to 5 business days
- Property rent
- Environmental Impact Assessment (Manufacturer WFOE) – Up to 5 business days
- MOFCOM Online Registration – up to 3 business days
- “5 in 1 Business License from Local Administration of Industry and Commerce (AIC)” Application – Up to 30 days
- Obtain Official Company Chops – up to 1 business days
- Obtain business bank account – up to 10 business days
- Customs and Import-Exist Registration (Trading related WFOE only)
- Issued Contracts and necessary registration for employees
Things To Consider
Prior to the official establishment, business owners must consider whether if the system is suitable for the business.
Company Ownership Declaration
With the changes to the policies for WFOE, the system states that an individual for the management must be declared and be held responsible. Additionally, the policies also require all investors to be clearly identified as well. However, this may create some issues for investors whom like to be undisclosed and anonymous. For additional information about the regulations, click here to read.
Management
All roles of each individual must be clearly identified in the WFOE structure in following categories.
Board of Directors: the board of directors is typically a group of three to thirteen direction or an executive director. The board or executive director is responsible for any major business plans and other business decisions.
Manager: individuals appointed by board of director(s) to be responsible for the operations in the business, including banking, taxation, and more. It is highly recommended to employ an native individual as a manager for day to day operation as it requires communication with local municipals and more, whom have more knowledge.
Supervisor: A group of no less than three members to continuously track the activities of general managers and board of directors, representing the shareholders. Person whom is in board of directors or manager cannot be a supervisor.
Note* no member of any of the management is required to be a Chinese native or nationality. All business are to employ any individual at their own discretion.
Capital Requirements
As of 2016, the capital requirements for WFOE have been revised by the government. It is no longer required to have a minimum registered capital. However, local authorities have continued to evaluate the estimated funding of businesses during registration process.
The estimated funding registered is closely related to the industry the business will be involved in. For example, a small start-up consultation business will require less of a funding capital than a manufacturing business. It is highly recommended to register the appropriate level for the business when establishing a WFOE. If funding level is overestimated, it can create issues for fund release. And if the funding is underestimated, additional incoming funds may be taxed.
Business Scope
The WFOE system have two requirements to the business scope. Firstly, the business scope must align with the regulations in the Foreign Investment Market Access Special Administrative Measure (Negative List) (2018 Version). Secondly, the business scope must be in great detail, covering the range of activities planned for present and future of the business after establishment. Thirdly, the business license must include a short description of activities approved by MOFCOM and AIC. An option is available to alternate the business scope, which is not recommended as the procedure period may be long.
Company Name Registration
Any WFOE in China must have a valid Chinese name standardized into a specific format to be registered with the local AIC. The AIC will also evaluate and ensure the company name do not include any prohibited words in the according industry, field, and duplicate with others.
Intellectual Property Protection
The IP system in China follows by the “First to file” principle for trademarks and patients. This principle signifies that the first to register any trademark and/or patent will be its lawful owner with little to no assessment to determine its rightful owner. Thus, it is highly recommended that the registration should be completed and filed as soon as possible, or prior to WFOE application in China for oversea business. Otherwise, “squatters” whom are able to file trademarks may utilize other tactics, before the rightful businesses may make requests to the businesses in order to gain back the IP.
Taxation System
An understanding of the taxation system in China is also crucial prior to an WFOE setup for all businesses to finely outline the funds to be circulated around in the near future. Unfortunately, the taxation system in China is not clearly defined by any standards, varying from industry to industry.
Business Address
The company’s business address should be carefully chosen before the registration, as any change to this information involves a long and complex process to complete.
It is crucial for all foreign businesses to understand the layout of establishing an WFOE in China to benefit from the system. Although the application and setup process can be pondering, it is recommended that businesses can find local consulting agencies to retrieve help on attaining the accurate documents and parties involved to ensure an efficient procedure.
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