Setting up a WFOE – All requirements about WFOE in China

Introduction

Today, we’re going to talk about Setting up a WFOE in China.

You want to know them if you’re considering to open a WFOE (Wholly Foreign Owned Enterprise) in China.

And a WFOE is a good option that allows you to have full control of your business.

Read on and know more about it.

Wholly foreign-owned enterprise (WFOE) establishment approval procedure

1. Pre-Name Registration
2. Application for Approval Certificate
3. Application for Business License
4. Organization Code Certificate
5. Company chop
6. Foreign exchange registration
7. Open foreign currency capital account
8. Open foreign currency settlement account
9. Open RMB settlement account
10. Tax Registration
11. Statistics Registration
12. Finance Registration
13. Customs Registration
14. Capital Verification
15. Apply for VAT general taxpayer

1. Investor’s ID certified by Chinese Embassy

■ For corporate investor, 2x business license certified by Chinese Embassy

■ For individual investor, 2x passport copies certified by Chinese Embassy

2. 2x Bank Reference Letters from investor’s bank to declare a good standing
3. Passport copies of related persons
4. China Legal Representative’s CV and 8 photos
5. Company name and business scope

6. Office registered address

■ For commercial buildings, 2x leasing contracts,2x ownership certificate

■ For individual landlord, 2x leasing contracts:2x ownership certificate, 2x landlord ID

■ Additional docs for sublease, 2x sub-lease agreement, or acceptance by owner

7. Letter of Authorization

■ BOD members

■ Managing Director

■ General Manager

■ Company Supervisor

8. For trading company, additional documents needed

■ The latest annual audit report copy from the parent company provided by CPA

■ Custom HS Code of proposed Import/Export products in China

9. For manufacturing entity,additional docs needed

■ Land use contract or approval issued by the land right management department

■ EIA issued by the Environmental Protection Department

10. For catering company, additional documents needed

■ Fire protection opinion of the registered place issued by PSB

■ Employees’ health certificate

Basic Requirements

Basic Initial Requirements

• At least one investor (his or her nationality is from any country other than China, nor from Hong Kong, Macao or Taiwan. Because these three areas are also Chinese and they are Chinese people);
• One director or a board of directors. The investor can be the director;
• A legal representative;
• One general manager;
• A supervisor (the supervisor cannot be a director, legal representative, or senior executive of the WFOE);
• Registered company address (this address can be a virtual office address);
• The business scope of the proposed new company.

Some industries or regions may have special requirements. Therefore, you can choose to cooperate with local experts, which can ensure your WFOE set up in China. GEI can be your global partner to help you expand to China quickly and in compliance.

WFOE in China requirements for registered capital

Registered Capital vs. Starting Capital

Foreign investors might feel confused about the provisions on the registered capital and the actual initial capital in China.

We’re going to make the process as clear and understandable as possible. And provide you with reliable information on the capital requirements for the establishment of a WFOE in China.

In fact, to successfully register and establish WFOE, the Chinese government has cancelled the regulations on the initial capital and the amount of registered capital. Theoretically, there is no need to invest any capital in advance except for the actual cost of registration.

However, in order to facilitate the administrative procedures for obtaining registration certificates. We clearly suggest that foreign investors only need to declare the registered capital of no less than 1 million yuan (subject to business activities and registration place) when registering a WFOE.

Here’s one thing to note, the WFOE does not need to inject the funds immediately. It’s the amount of money that foreign companies plan to generate over a fixed period of 29 years. To support the newly established WFOE, the registered capital will be used, such as paying wages, renting office or facilities, purchasing products, etc.

In short, the establishment of a WFOE is very simple and direct, because its starting capital is very low.

WFOE in China requirements for address

Registered Address in China

A foreign company must provide a valid registered address to the local government to establish a legal entity in China.

In practice, Chinese regulators will require the following documents:

• 2 originals of the office lease contract.
• 2 copies of the housing ownership certificate related to the registered address stamped with the official stamp of the holder.

The registered address may use a virtual office lease contract. In China’s major cities, the free trade zone (FTZ) can also rent virtual offices. If there is no food and beverage or medical device trading activity, GEI can provide a registered address.

If the company’s main business activities involve export, it is necessary to register a real office address to obtain tax returns. In this case, GEI can also help you with it.

WFOE in China requirements for documentation

If the investor of a WFOE is a company, the following documents must be provided for the company incorporated in China:

• The business scope of the proposed new company. In the case of import and export activities, a list of goods is necessary to offer;
• Credit certificate issued by banks or other financial institutions;
• The newly established company shall have at least ten Chinese names. And the names should be in the following forms: 城市名 (city name) + 公司名称 (company name) + 有限公司 (limited company);
• 1 identification or registration certificate of the investor;
• Notarization of 2 investor identification certificates or registration certificates. The notarial certificate must be issued by the local notary organization and verified by the Chinese Embassy in the investor’s country;
• The original and photocopy of the passport of the director, legal representative and supervisor of the WFOE;
• Copies of the passport of the financial manager and tax expert of the proposed enterprise.

WFOE in China requirements for the setup procedure

Pre-licensing procedure:

Before establishing a WFOE in China, you need to complete various activities, including:

• Collect the documents needed in the application process;
• The name of the company approving the application/pre-registration;
• Registration and signature of documents of investors;
• The application process of WFOEs;
• Obtain the approval certificate of the Ministry of foreign economic relations and trade;
• Get the industrial and commercial registration certificate.

Post-licensing procedure:

After you get your business license, you will also take on some continuing responsibilities. We can help you maintain compliance and help you complete the following processes:

• Register with the local Public Security Bureau;
• Make a company seal;
• Open a bank account of the company;
• Application for import and export license, if necessary;
• General taxpayer (VAT taxpayer) application form and tax refund permit application form (on request).

WFOE in China requirements for taxation

China has a complex tax system with 18 types of taxes currently. Although, you don’t have to pay for them all in every case.

So, what kinds of taxes should you know? We’re going to about the most common taxes related to WFOEs in China.

Enterprise Income Tax (EIT)

In practice, the payment of enterprise income tax is monthly or quarterly. And the period is within 15 days after the end of the month/quarter (depending on the size of taxpayers).

The tax department will carry out audit and settlement (within 5 months from December 31).

Generally, the enterprise income tax comes from “business income”. And it calculates the pretax profit (PBT) generated in one month/quarter. Or the contract price of service provided in China. And it covers the income of companies branches without legal entity registered in Mainland China as well. For example, a Hong Kong company providing labour services in Mainland China.

Here’s a formula of Enterprise Income Tax (EIT):

EIT = PBT (Profit Before Tax or Contract Price) x Applicable Profit Tax Rate x Applicable EIT Rate.

And the profit rate usually ranges from 15% to 50%, depending on the type of services.

More explicitly, the profit rates are:

• From 30% to 50% for management services; and
• From 15% to 30% for services such as design and consulting;
• More than 15% for other services;

(Please note that the local tax office selects the profit margin category and the effective tax rate.)

According to China’s enterprise income tax law, the enterprise income tax rate applicable to foreign enterprises can be as high as 25%.

For example, the guiding profit margin of the service industry is 15-30%.

Therefore, corporate income tax = PBT (e.g. contract price) × 15-30% (applicable profit tax rate determined by tax bureau) × 25% (applicable corporate income tax rate).

Value Added Tax (VAT)

The VAT rate in China varies according to the company’s business scope. The standard rate of VAT in China is 17% for trade activities and 6% for consulting activities. Also, a WFOE can deduct your VAT cost.

The three rules of deductible VAT:

A WFOE must be a general taxpayer. Only in this way can the VAT be deducted in the course of operation.

The invoice to be deducted must be a special VAT invoice (China receipt).

A WFOE must have a certain amount of income to pay VAT. A WFOE must generate legal income within its physical capacity to deduct the VAT invoice from the total value-added tax payable on its income.

In China, once you pay the tax (any tax), the possibility of taking it back directly is very low. Unless the company applies for tax administrative review. In other words, the company has to ask the IRD to correct the mistake. Besides, Chinese invoices are only valid for 360 days after deduction.

Withholding Tax

If you want to transfer profits made in China to foreign countries, the withholding tax is applicable.

When Chinese companies remit money to foreign institutions, they must sign a service agreement to confirm the transaction. Generally speaking, a withholding tax of about 10% is imposed on the contract amount. Unlike other countries, in China, the final rate can only be evaluated after careful examination of the contract and invoice.

The withholding tax consists of corporate income tax (EIT), which varies according to the decision of the tax official (usually around 20-25%), value-added tax (ranging from 6% to 17% under the service agreement) and additional tax (11-13% depending on the location of the Chinese tax bureau). According to the remitting country, the amount of enterprise income tax paid in China can be preferential according to the final double taxation agreement.

As for China’s value-added tax and surtax, they are usually not recoverable in other countries. Finally, another option is to pay income tax on the performance of WFOEs in China, and then remit the dividends abroad.

Find more about China tax policy for foreign companies.

What core elements of incorporating a WFOE?

Before you starting up a new WFOE in mainland China, you have to learn the following steps of the core elements of WFOE registration, and you have to decide the key information and prepare the required documents first.

How to speed up the process of WFOE registration?

As you can check out by this guidance, the whole process of registering a WFOE in China can be relatively comfortable and simple, however, the procedure only be truly easy if you have a professional adviser or lawyer or a local consultant, they know how to speed up the whole process and how how to guide your Chinese WFOE formation be completed smoothly without wasting time. So, that’s why GEI is here, and looking forward to be your experienced partner and official company formation service provider.

The above clearly says that the required documents is the most important paperwork for a newly company, hence, before you registering a local WFOE, GEI suggests you consulting our lawyers in advance for better preparing the documents for the corporate shareholder(s), director and supervisor, financial manager. To clearly preparing the legal files and documents can speed up the process and make everything smoothly from GEI’s experience.

If all of the required documents and legal forms, application paperwork are in place, you can register your WFOE anytime, any places.

How much does it cost to set up a WFOE in China?

Registered Capital

The cost centre for foreign companies aiming to open a company in China is – Registered capital.

It’s not in China’s interest to let foreign businesses open a company if they aren’t sure that there is sufficient capital in place to keep it running, create jobs, and pay staff on time. This is why the government usually insists on an amount of registered capital being committed to any new WFOE incorporation.

Depending on which industry you’re in, you’re likely to be required to provide the following registered capital levels:

This may not be required ‘at once,’ and often the authorities will put a time limit on when the amount needs to be invested in China, for instance, within one year. This gives new companies time to build up funds in a Chinese bank account, although this allowance is less likely in fields like manufacturing where many jobs are riding on the employer, and the investment acts as a  ‘safety net’ for their salaries were the company to hit a rocky patch.

Also in some regions of China, the local governments don’t insist on any registered capital at all in a move that is meant to level the playing field between foreign companies and their local counterparts who don’t have to provide it. The thinking behind this is that it may spur more job creation by encouraging ever more foreign companies to set up businesses in China, even smaller ones.

Things to be careful of during the company setup

As with any complex business process, it is best to go into China WFOE registration well prepared! At FDI China, we have worked with many companies to successfully open a WFOE. There are a number of things we have seen along the way that can help a new company.

Don’t underestimate the time and resources needed. China WFOE registration can be a long and involved process. Without the right preparation and commitment internally though, this can be made worse! It is important to allocate proper time and resource from all required areas as early as possible.

Beware of regional differences. Although WFOEs are governed at a national level by Chinese Company Law, there are many regional differences. A degree of local government control is very common in China, and this certainly affects WFOEs. They will usually set requirements such as WFOE capital requirements, specific application procedures, and Free Trade Zone benefits and concessions.

Choose the right location and set an appropriate Business Scope from the outset. These are vital parts of WFOE registration that very much define what business the new company can engage in. Changing these later can be very difficult (it effectively requires re-registration), so spending the time to choose these properly is time well spent!

Remember it is easy to make mistakes in the registration process. Especially for those companies new to China, there are many parts of the setup process to be careful with. Interaction with several government bodies is needed, and there are many requests for very specific details and information – for example, company plans and financials, and company ownership/control structure. WFOE documents (such as the Articles of Association) must be completed accurately, using the right terminology. Any mistakes in these areas can unnecessarily lengthen the setup process.

Apply for Intellectual Property (IP) rights registration as early as possible. There have been many issues in the past with IP protection in China. The situation is improving, but it is still important for foreign companies to register for patents, trademarks or copyright as early as practical – this is possible in most cases through agencies prior to registration.

Setting up a WFOE in China can come with certain risks and liabilities:

HR: Direct liability for any dispute with the WFOE’s employees. Direct liability for paying all social benefits and income tax for the WFOE’s employees, under the Chinese labor law.

Finance: Direct risk and liability for paying any WFOE tax liability, including: VAT, profit tax, dividend tax, import VAT, etc.

Trade: Direct liability for any business activity performed by the WFOE’s employees with or without acknowledgment of the parent company.

Operations: Broad exposure for the company’s reputation, assets and business activity, which can be compromised by employees, business partners and competitors.

Conclusion

Today, about WFOE in China requirements, we’ve discussed the following requirements for a WFOE in China:

• The basic requirements, like the number of investors and requirements for company address.
• Requirements for the registered capital. And the difference of registered capital vs staring capital. Actually, it’s quite affordable to start a WFOE now.
• The address. It’s the detailed requirement for the company address.
• Requirements for documentation. You have a full list of the required documents for setting up a WFOE.
• The setup process of a WFOE. The detailed procedure before getting the license and after getting the license.
• The common taxes a WFOE will need to pay.

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