How to Set Up a WFOE in China
Thinking about doing business in China? Many cities and provinces are offering tax incentives and easing administrative requirements for foreign investors. One of the several business structures and contracts that are available to foreigner investors in China is WFOE, which stands for Wholly Foreign Owned Enterprise.
The attorneys at YK Law explain the pros and cons of a WFOE and the process for establishing a WFOE in China. With the help of our many close colleagues in China, we’ve helped many clients start their business there, whether as a WFOE or an alternative structure or contract. If you need help or have questions about doing business in China, contact us for a consultation.
What is a WFOE?
A Wholly Foreign Owned Enterprise is a limited liability company in China wholly owned by foreigners. This is an attractive structure for existing businesses outside of China because a foreign parent company has full control over the business operations of the WFOE.
There are three different types of WFOEs:
- Consulting WFOE;
- Manufacturing WFOE, which allows companies to manufacture in China;
- Trading WFOE/Foreign-Invested Commercial Enterprise (FICE), where the WFOE gets import and export licenses and can trade both within China and abroad.
What are the Alternatives to a WFOE?
If you are interested in starting a business in China, you have three alternatives to setting up a WFOE:
- Joint venture
- Distribution agreement
- Umbrella company
A joint venture is one that you undertake with a business partner in China. There are less hoops to jump through than to establish a WFOE, and in general, it is easier to set up. However, you share control with your partner in China.
If your goal is to sell products in China that are made there, you might consider entering into a distribution agreement with your manufacturer in China. If you are planning to distribute the products yourself, you will need a separate business license. But if you want the manufacturer to produce and distribute the products, your arrangement will provide for their sale agency fee.
If you are in the business of import-export, or your business is service-based, you might consider working under an umbrella company. Your employees can be based in a registered office in a host business in China, and work with that local business.
This arrangement has many advantages for foreigners, in that it is a simple matter to obtain work visas for your employees, and your Chinese host business can help you with recruitment and with administrative tasks such as paying salaries and taxes.
How much does it cost to set up a WFOE in China?
If you take on the administrative tasks of setting up a WFOE yourself, you might be all in for under RMB10,000, or about $1,425 USD. But be careful – there are many pitfalls, not to mention the language and cultural differences between the U.S. and China.
Consulting with an experienced law firm with ties to China is your best bet to setting up your WFOE correctly and as quickly as possible. DIY investors often must pay more when they make mistakes in the process. Know also that your reputation in the Chinese market can be made or broken by your initial steps in forming your WFOE.
Steps to Set Up a WFOE in China
Choose a Chinese Business Name
There are specific guidelines in China for choosing an acceptable business name. Because of differences in language and culture, you must choose your business name carefully to avoid unintended associations.
In recent years, Chinese authorities have attempted to limit the use of foreign words in the names of China-based businesses. While big international companies such as Nike or Apple can use their English names, smaller businesses must come up with a business name in Chinese. There are four ways to do this:
- Choose a Chinese name that has no resemblance to the parent company’s name in sound or meaning;
- Choose a Chinese name that sounds like the name of the parent company but the meaning in Chinese has no resemblance to that of the parent company name;
- Choose a Chinese name that resembles the meaning of the name of the parent company, but the sound of it is completely unlike the parent company’s name;
- Choose a Chinese name that means the same and sounds similar to the name of the parent company.
Your legal representative or consultant will speak the local language and can assist you in creating eight options that you must submit with your application for registration.
Prepare Documentation for Registering Your WFOE
In addition to registration forms you will need to collect any lease agreements, your Feasibility Study Report (FSR), bank references, your Articles of Formation, copies of investors’ passports, resume of your legal representative in China, most recent annual audit by the parent company’s CPA, and the customs codes for goods to be imported or exported, if applicable.
In addition to the above, as applicable, a manufacturing WFOE must submit:
- Statement of Business Purpose and estimated amount of investment;
- WFOE’s operational structure and estimated number of employees;
- Permission for land use and an environment evaluation report;
- List of products and anticipated size of production;
- Detailed list of equipment;
- Your business plan;
- Environmental protection measures you will take;
- Estimated requirements for utilities such as power and water supply.
Apply For Your Business License
You will submit your application to the local offices of the Ministry of Commerce (MOFCOM) and the Administration for Industry and Commerce (AIC).
Register For Taxes
Once you have your business license, you must register for taxes at the state and local tax bureaus. You will need most of the documentation you provided for your license, and in addition, your company “chop” which is a stamp that serves as the signature of your business. You can get your chop from the Public Security Bureau (PSB).
Register With Other Authorities
Last, in order for your WFOE to begin business operations in China, you must register with the following authorities:
- The Technology Supervision Bureau, which issues your enterprise code;
- The State Administration and Foreign Exchange;
- Financial registration at the Financial Bureau;
- Statistics registration at the Statistical Bureau.
Open Bank Accounts
The last step is to open a foreigh currency bank account in China in which you deposit the capital backing your WFOE. Many international banking institutions have branches in China and some will allow you to open a Chinese account and transfer funds that way.
We Can Help You Start Doing Business in China
Whether you are interested in creating a WFOE or want to establish one of the WFOE alternatives, we are here to help. And if you are already doing business in China but have not yet registered your trademark, patent, or copyright, let us do that for you sooner rather than later.