Wholly Foreign Owned Enterprise
There are many investment options when looking to enter the Chinese market. The most popular option is to establish a Wholly Foreign-Owned Enterprise (WFOE).
A Wholly Foreign-Owned Enterprise (WFOE) is a common investment vehicle for mainland China-based business wherein foreign parties (individuals or corporate entities) can incorporate a foreign-owned limited liability company. The unique feature of a WFOE is that involvement of a mainland Chinese investor is not required, unlike most other investment vehicles (most notably, a sino-foreign joint venture).
WFOE is a limited liability corporation organized by foreign nationals and capitalized with foreign funds. This can give greater control over the business venture in mainland China and avoid a multitude of problematic issues which can potentially result from dealing with a domestic joint venture partner.
WFOE is often used to produce the foreign firm’s product in mainland China for later export to a foreign country. In addition, WFOE have the right to distribute their products in mainland China via both wholesale and retail channels.
There are three WFOE setups available:
- Trading WFOE
- Consulting WFOE
- Manufacturing WFOE
Having set up a limited company in China it does not necessary mean you can engage in any kind of business activity. WFOE can only operate within the business scope approved by the authorities. Therefore, it is imperative to determine accurately from the beginning what areas the business is going to operate in.
The amount of registered capital needed in the business depends on a number of different factors such as location, business scope, cash flow. Typically, it will require a minimum commitment of between RMB 200k to RMB 500k for a basic consulting WFOE.
However, in practice the governing authorities will ensure that a company’s registered capital is sufficient to support its business operations for at least one year. Registered capital is typically considered “locked” in China and you would not be able to repatriate it unless the WFOE is dissolved and liquidated.
Office premise requirements
To register a WFOE it is required to own or lease an office premise (as a primary place of business), and register this with the State Administration of Industry and Commerce (SAIC). Only one business may be registered per office unit and it must be located in non-residential building. Virtual address is not allowed.
For WFOE key positions include shareholders, a legal representative (or board of directors), supervisor and general manager. The legal representative and general manager can be the same person. There is no residential requirement for both legal representative and supervisor.
However, a legal representative is the person responsible for performing the duties and powers on behalf of a company. Thus, it is important that the legal representative is not only technically competent but familiar with Chinese legislature as well.
Accounting and reporting
Companies in China should adopt the accrual basis of accounting in accordance with the China Accounting and Reporting Standards. The renminbi (RMB) is the base currency for ledgers and financial reports.
WFOE is required to prepare annual financial statements for their annual audit conducted by a CPA registered in China.
In order to be able to distribute and repatriate profits WFOE must complete annual compliance procedure such as audit, tax filing and annual license inspection and renewal. However, not all profit can be repatriated or reinvested. Thus, a 10% of the profit must be set aside in a reserve fund account for the purpose of remedying potential future operation loss, or funding for capital increase, etc.
- Value Added Tax (VAT) – goods and services at the rate ranging from 0% to 17%.
- Corporate income Tax (IT) – IT will be charged on the profit of the WFOE at a tax rate of 25%
- Individual Income Tax (IIT) – imposed on income from wages and salaries at progressive rates ranging from 5% to 45%. Monthly taxable income is calculated after a standard monthly deduction of RMB 3,500 for local employees and RMB 4,800 for foreign employees
- Withholding tax levied for the shareholder when the dividend is being repatriated. The tax rate is 5% to 10% if the investor resides in an treaty nation
The application process to create a company in China generally takes three to six months. The establishment process varies based on the WFOE form and the planned business scope. Generally the following steps are involved in setting up a WFOE:
- Name Approval
- Application for Approval Certificate
- Application for Business License
- Crafting company chops
- Foreign exchange registration
- Open bank accounts
- Tax, Statistics, Finance, and Customs Registration
- Capital Verification
- Application for VAT General Taxpayer
- Application for import and export license (trading WFOE)