Foreign Direct Investment

Overview

The Wholly Foreign-Owned Enterprise (WFOE) is one possible business structure that can be used by foreign investors to register and license a business in China. The WFOE is a limited liability company (liability is limited to the amount of the registered capital) that is 100% owned by foreign investors. WFOEs were originally conceived to encourage manufacturing activities that were either oriented towards exporting products or that introduced advanced technology into China. However, with China’s entry into the WTO, these conditions were gradually abolished and the WFOE is increasingly being used for service providers such as a variety of consulting and management services, software development, trading enterprises, etc.

Shenzhen is one of the best choices for doing business in China. Situated in the Pearl River Delta, Shenzhen is the first Special Economic Zone since China carried out reform and open-door policy 30 years ago. Shenzhen has an area of 1953 square km’s and a population of more than 10 million. Shenzhen is the best city both for living and working in China, as well as the fastest growing city in the world. In Shenzhen you can enjoy the sound infrastructure and the intensive industrial chain for trading, manufacturing and value investment. Since Shenzhen is bordering Hong Kong, you can also take great advantage and opportunity from the “one country, two systems” policy. 

 

Pros & Cons of China Wholly Foreign-Owned Enterprise (WFOE)

Pros

With separate legal entity in China. Can carry out all business activities ( subject to the business scope stated in business licence ). Can negotiate for tax incentive with local government. Can hire local staff.

Cons

Application process is more complex and each step may have profound impact in future development of the company: business scope, financing, tax rates, director board management etc. Capital injection is required to meet the minimum level for specific industry and in specific territory of China (such as free trade zones and export processing zones). The mimimum capital is around US$140,000. Even though WFOE is limited liability in nature, a legal representative needs to be appointed and take up unlimited liability of the WFOE.

 

Key Points of WFOEs

- Business Scope
The Business Scope is narrowly defined and interpreted for all businesses in China; a WFOE may only legally conduct business within the business scope that appears on its business license.

In the application documents, the business scope is written as a list of business activities that the WFOE will conduct in China, and the first business activity will define the overall nature of the WFOE for classification purposes. The classification will further define the minimum required capital, type of invoices, type of applicable taxes, etc. As one example, for a previous WFOE registration, the company’s business scope was written as “retail of cosmetic products, training on cosmetic products, after-sales services.” The nature of this WFOE was therefore defined by the Chinese authorities as a “retail-trading WFOE”, thus the required registered capital was RMB300,000, and it was able to receive the Value-Added-Tax invoices that are essential to a trading company in China.

Because the scope of business is crucially important in the WFOE business registration application, We always confers with the appropriate officials to ensure that every business activity that is listed on the registration application is an approved business activity and that every business activity is designed as broadly as allowable so that clients can be more flexible in what activities they are allowed to conduct. We will not submit an application until we are assured that the application information follows the pertinent rules and regulations and that it will allow our clients to achieve the maximum benefits of running their businesses in China.

- Registered Capital and Total Investment Quota
Registered Capital and Total Investment Quota are two important types of capital that the Chinese government officials will check to ensure that both are listed correctly. The amounts for both types of capital will appear on the Approval Certificate and Business License.

Registered Capital is the amount of funds that the Chinese government requires of foreign investors to contribute to their projects in China (e.g. WFOEs). The Chinese government sets requirements for the minimum amount of registered capital to start a business. Registered Capital must be of an amount greater than the minimum requirement of the China Company Law (currently RMB100,000). The Registered Capital can only come from the foreign investors, and must be actually paid into the company bank account then verified by an independent certified accounting agency in China. The amount of registered capital can be increased but official procedures will be required. Registered Capital must be no less than 70% of the Total Investment Quota; however, the ratio may be decreased when the amount of Registered Capital exceeds US$ 3 million.

The actual amount of Registered Capital required is subject to the final approval of the approval authority. The Chinese officials have the right to require a business to increase the amount of Registered Capital if they deem the minimum Registered Capital amount as insufficient for the requirements of the startup business according to the project description as written in the application documents. The final amount of Registered Capital required is sometimes a result of negotiations with the appropriate officials during the registration period.

Total Investment Quota is the total amount of funds that will be invested in the WFOE during its entire planned period of operation. The Total Investment Quota must be greater than or equal to the Registered Capital. Unlike Registered Capital, which has to be fully paid into the WFOE’s Chinese bank account before starting business operations, the Total Investment Quota is the total amount of funds planned to be contributed to the project over its lifespan and it does not necessarily have to be fully deposited in the bank. The excess amount of the Total Investment Quota over the Registered Capital can come from sources other than the foreign investors listed in the Articles of Association of the WFOE; for example, it can be borrowed from banks or other sources either inside China or from overseas. This amount can be increased but any additional amounts of Total Investment Capital must be approved by the relevant Chinese authorities. 

Setup Steps & Documents Required

Preparing and Presenting a Project Proposal

The foreign investor has to complete a project proposal and present it to the government authority that will decide whether or not to approve the proposal within approximately one month after receiving the proposal.

Submitting the proposed company names

3 optional names are required.

Preparing and Submitting a Feasibility Study Report

After the project is approved, the foreign investor has to prepare a feasibility study. The authority will help to coordinate on the project if any problems should arise.

Submitting the Articles of Association

While the foreign investor is preparing the report on the feasibility study, he may also draw up the articles of association and submit them to the authority that will reply around one month after receiving the feasibility study report and articles of association.

Application for the Approval Certificate

After the report on the feasibility study and articles of association are approved, the foreign investor has to apply for the Approval Certificate, which will normally be issued within one week.

Application for the Business License

The foreign investor has to make an official registration with the government authority within 30 days upon receiving the Approval Certificate and then apply for a Business License. The authority will normally issue the Business License within 30 working days.

The procedures and related documents may vary depending on specific projects, Chinese regulations and special approval as well. However, the Wholly Foreign-Owned Enterprise is officially established on the date when the Business License has been issued.

Document Requirements

Bank creditbility statement of the foreign investor Project proposal (purpose, business scope, period, investment amount, among others) Certificate of registration Statement on the products and technologies Duplicate of confirmation letter of the 3 proposed company names Report on feasibility study Memorandum & Articles of Association Name list of the board and senior executives List of equipment to be provided (if any) Passport or residential card of the legal representative Lease agreement or purchasing contract of company premises Certificate of property of the lessor Authorisation documents for the board and senior executives Photos of legal representative Other documents that the authorities may require as per specific cases.

Summary

Compared to registering a business in most Western countries, registering a business in China is challenging work filled with paperwork and bureaucratic red tape. It is practically impossible to properly complete the registration process without a qualified agency. Be sure that the agency is qualified and the agency has good connections and relationships with the various local authorities, and that they possess comprehensive knowledge about the numerous important aspects involved with legally and properly registering a WFOE.

Client Testimonial

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