China is no doubt the land of opportunities. Not so long ago, China used to be an economy closed to foreign intervention. Major industries and sectors were heavily regulated, to the extent where there were state-owned monopolies in various regions.
When the People’s Republic of China became a member of World Trade Organization (WTO) back in 2001, it started opening its economy to foreign investment. The Chinese government revisited and revised many foreign investment reforms and in order to welcome the world economy, it introduced a liberalized framework that offered multiple business opportunities.
Future investors, keep in mind that the success of your foreign investment is dependent on multiple factors including, encouraging policies, ease of entering the market, simple setup, registered capital and most importantly, a business idea that
resonates with the Chinese market.
So, whether you want to setup a joint venture in China or establish a WFOE in China, make sure you consider the following things:
-Check if the business you’re planning to register in China comes under a favored or heavily regulated industry or sector. Setting up a company in an encouraged or a special economic zone can earn you special tax incentives, trade licenses and preferential treatment.
-Know what investment vehicles are at your disposal to access the Chinese market.
Once you know what product, service or business structure you want to establish, familiarize yourself with the registration process. But before all this, go through the investment catalogue.
Investment Catalogue
Foreign Investment Industrial Guidance Catalogue is your key to determining which foreign investment is permitted, banned or favored by the government. It highlights the state and local authorities your foreign company needs approval from and other necessary information related to the registration process.
This catalogue was first published in 1995 and was updated frequently in the following years with new rules and regulations. The catalogue divides the Chinese economy into four major groups or sectors namely, Encouraged, Permitted, Prohibited and Restricted.
Foreign investors can easily explore the encouraged and permitted sector of the Chinese economy and enter the market by setting up a Joint Venture (JV) or establishing a Wholly Foreign Owned Enterprise (WFOE). Using these investment vehicles to operate in encouraged or permitted sector, will entitle you for various tax relaxations and other incentives.
On the other hand, if you want to enter the restricted sector, you will face strict entrance regulations, higher taxes, and multiple government approvals. Lastly, the prohibited category remains off-limits to foreign investors till date.
Moreover, when People’s Republic of China signed the Closer Economic Partnership Arrangement with Hong Kong in January, 2004, it offered investors easy access to the Hong Kong market. Learn as much as you can about the encouraged and facilitated business sectors in China and only then develop a business plan.
Investment Vehicle Options In China
Your foreign investment can be structured in to one of these investment vehicles:
-WFOE
-Representative Office
-Joint Venture
-Foreign-invested joint stock limited liability company
-Special vehicles like:
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a branch office
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a foreign-funded venture investment enterprise (FFVIE)
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a procurement centre
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a research and development (R&D) centre
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an investment
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holding company
Excluding branch and representative office from the above mentioned list, all other investment vehicles own a Foreign Investment Enterprise (FIE) status. Companies that have 25 percent or more, foreign investment are considered as FIEs. Enterprises with less than 25 percent of foreign investment are considered as local or domestic businesses.
Although, most of the laws pertaining to foreign company’s setup and legislations are similar to local or domestic Chinese companies, FIEs do enjoy tax holidays and preferential treatment in certain sectors. This is how the Chinese government attracts, retains and encourages domestic businesses to partner with foreign companies.
Since each investment vehicle is extensive in nature, let’s discuss one at a time. Many foreign investors choose to setup a Wholly Foreign Owned Enterprise (WFOE) to leverage more control over their business operations. Keep reading to explore multiple options that WFOE has to offer.
What is a WFOE?
A limited company formed by one or more than one foreign investors in known as a WFOE. The business has a separate legal identity due to the limited liability that WFOE has to offer. It can own property, make contracts, and conduct business operations under a separate name.
WFOE provides greater control, ownership and operation freedom to foreign investors, which is why more and more foreign companies want to explore this option.
Advantages of WFOE
Independent Operations
Since the company is wholly or completely owned by foreign investors, it can easily replicate global strategies used in their parent company, without fearing government or local intervention. You have 100 percent ownership and liberty to conduct business operations according to your will.
Wider Business Scope
Other investment vehicles, like Registered Office or Branch, have limited business scope, whereas, WFOE liberate foreign investor to benefit from the Chinese market at a greater level. Your business can issue invoices or Fapiaos in RMB to your clients and participate in multiple business activities. Moreover, retained earnings can also be easily transferred to your parent company without any restrictions.
Lower Operational Cost
Compared to RO, WFOE have lower rental expense and they also possess the ability to own property under the business name. In addition to this, WFOE benefit from lower tax rates. WFOE taxes are calculated according to the revenue, whereas, corporate tax is not charged, if the operational cost and expenses don’t exceed your business revenue.
Employment Cost
WFOE have the liberty to hire and fire employees and get into employment contracts directly with the workforce without hiring a third-party, like FESCO.
Intellectual Property Rights
Breakthrough technology, business ideas and intellectual property can be patented and protected under the Chinese law, if you establish a WFOE. This allows foreign companies to test new ideas within China, while enjoying lower operational cost.
Over the years, Wholly Foreign Owned Enterprise has become a favored platform for foreign investors to enter the Chinese market. Not only does it offer greater control to investors, it allows businesses to expand its business scope within China. Most of the WFOEs are issued a business license that’s valid for 15 to 30 years, which provides WFOE a huge growth and development opportunity.
So, let’s look into the different WFOE options available to foreign investors.
Types of WFOE
Consulting Wholly Foreign Owned Enterprise
Consulting businesses are categorized under the consulting or services sector. This the
most basic type of WFOE, which has fewer registration formalities, legal approvals and documentations, compared to its counterparts. Meaning, your consulting WFOE can be operational in China, within 2 to 4 months.
Another important aspect to keep in mind, when setting up a consulting firm is the scope of its business. Avoid limiting yourself to certain services, keep future growth and expansion prospects in mind, when identifying your scope in the business plan. The Chinese government will not allow you to participate in activities not included within the business scope, earlier approved by the local authorities.
Manufacturing Wholly Foreign Owned Enterprise
WFOEs can also enter the manufacturing sector by adhering to certain business requirements, registration process and local and state approval.
In order to operate in the manufacturing sector, foreign investors need to scout a property for the production facility. When scouting for factory premises, consider the following aspects:
-Determine the cost of transporting raw material and end-product to the consumers
-Availability of road, rail or port
-Nearness to the supplier
-Availability of gas and electricity
-Special Economic Zones
-And rent expense
Find the most suitable spot for establishing your factory. Sign a lease agreement with the landlord. Add a clause in the leasing agreement stating that the down payment must be returned, if the registration application to establish a WFOE is rejected.
Once government approval is acquired on the location, apply for permits essential to your business operations. Lastly, get your production facility and equipment approved for production by a third-party.
The third-party will issue a detailed Environmental Impact Assessment Report for your factory. Submit this report along with other necessary documents to the local and state authorities to get your business license issued.
Trading Wholly Foreign Owned Enterprise
Trading WFOE is also known as FICE or Foreign Invested Commercial Enterprise. The business scope of such companies is limited to trading of products as a wholesaler or retailer. Businesses can either export goods from China or sell them to customers located outside China or sell imported goods to the Chinese customers.
This makes it an ideal option for foreign investors who want to sell a dynamic product within or outside of China.
Registration Process Of WFOE
Business Scope
In the initial steps of the registration process you’re required to identify the scope of your business by developing a 5-year business plan. This document proves the viability of your business idea, resource and capital required to keep the business running and the expected income stream for the next five years.
Make sure your business scope accommodates growth and allows you to participate in different business activities. Changing the scope of business is a long process which requires:
-Approval from all shareholders
-An application of change approved from AIC
-A new registration form
-New business license allowing the new business activity
Registered Capital
Registered capital is required for the safety of suppliers, employees and customers. Although, 30 percent of registered capital requirement is no longer applicable on establishment of a WFOE, it’s a common practice to show sufficient register capital to cover the initial operational activities of a new business.
Industries like, retailing, consulting, trading, and information technology have no minimum registered capital requirement, but if foreign investors want to enter the banking industry, it will be asked to register a predetermined level of registered capital.
Here is an estimate capital requirement for each sector.
Industry Type Estimate Registered Capital Requirement
Manufacturing
USD $75,000 and above
Food and Beverage
USD $ 75,000 to 140,000
Trading
USD $ 75,000 to 140,000
Hi-Tech
USD $ 150,000 to 50,000
Services
USD $150,000 to 50,000
Consulting
USD $150,000 to 50,000
Chinese Business Name
Next, you need to get your Chinese business name approved from the local Administration for Industry and Commerce (AIC) authority. Follow the official format of naming the company and use the order highlighted below:
1.Name of the region, where your WFOE was incorporated
2.Brand name
3.Industry type
4.Entity type (LTD or Inc)
Business License
Your business needs to have a registered office, and a record filling system approved by MOFCOM (Ministry of Commerce) in order to further progress in the registration process.
MOFCOM issues an approval certificate to the WFOE, once this approval is issued, you can easily get a business license. The standard elements of a business license include:
-Organization code
-Tax registration certificate
-Social security registration certificate (new addition)
-Statistical registration certificate (new addition)
Issuance of a business license makes you a legal entity authorized to conduct business within China.
Starting a WFOE in China can be difficult. Most of the paperwork is in Mandarin and requires countless approvals from local and state authorities. Business China can simplify and streamline the registration process for you.
We have connections with all state and local authorities to speed up the registration process and make your business operational as soon as possible. Our consultants are proficient in English and aid you throughout the registration process, cross all the red tape and make sure that the entire process is convenient and hassle-free.
Along with providing assistance in the registration and incorporation of WFOE, joint ventures and partnerships; we also offer premium accounting and company management services to all our clients.
Email us your Business Plan and we will get back to you with a simple incorporation plan within 24-hours.
Call us at +86-020-2917 9715 to learn more about our services.
