Step-by-step guide for setting up a WFOE (Wholly Foreign-Owned Enterprise)

Step-by-step guide for setting up a WFOE (Wholly Foreign-Owned Enterprise)

You may have already heard that company registration in China takes time and requires a lot of documents. This still holds true today, however, Chinese authorities make gradual advances to ease access to the local market for foreign investors and some businesses in certain regions may already benefit from lower registered capital thresholds and simplified procedures for WFOE setup.

If you are looking for the most pro-business regulations, consider one of the Chinese Free Trade Zones (FTZs).

The standard WFOE registration procedure can be divided into two parts:

  • Pre-registration – what happens before your company in China formally exists
  • Post-registration – what happens after your company is registered

Pre-registration

It’s all about choosing and registering the right company name and obtaining temporary business license:

1. Company name registration

The name of your company must be in Chinese, it can be translated from another language by meaning and/or phonetically. Please note that the English name is not legally binding for Chinese authorities. Note also that you can’t freely include in your company name such words as “China”, “International” and some others.

The name should include 4 components: enterprise name + industry + location + company/limited, for example, our company name will be Masson de Morfontaine Business Advisory Shanghai Limited.

The name you’ve chosen will be verified by the local Administration of Industry and Commerce (AIC) in China, the verification will take a few working days.

2. Approval certificate and temporary business license

The authorities will issue for you approval certificate and temporary business license after assessing the following documentation:

From the investor:
  • Business license (certificate of incorporation – depending on location, you may need to notarize it in your country of origin and translate into Chinese)
  • Bank reference letter confirming good financial standing (from your bank, translated into Chinese)
  • Photocopy of passport and photos of the legal representative of the investor company. Under PRC Company Law the Chairman of the board of directors, executive director or manager of a company can act as your legal representative and should be registered with the company registry authority. Since the legal representative represents your company, his/her name will be indicated on the company’s business license.
From the new company:
  • About your business:
  1. Name of the company
  2. Business scope
  3. Registered capital. Registered capital is initial investment that will support your WFOE until your business reaches break-even point. A detail funding plan is recommended to avoid running out of cash. Thresholds vary per types of WFOE (Consulting, Manufacturing and Trading) and regions (FTZ or not).
  4. Business term
  5. Lease contract. Investor should rent a plant (for a Manufacturing WFOE) or an office in advance. It should be a physical space, virtual office is allowed only in certain FTZs. You need to pay attention to the nature of Land for the plant lease. In any case it’s necessary to check that the premises you’ve selected is allowed to serve as a registered office for WFOE.
  • About the directors – CVs, photocopies of passports and photos. WFOE requires a minimum of one director. The sole director is the executive director or managing director. The director should be an individual of any nationality.  It’s not required to hold board meetings in China and directors can be resident anywhere.
  • If the investor decides to set up a board of director for WFOE, the minimum of directors are 3 and the maximum are 13.
  • Feasibility study report outlining the estimated cash flow for the next three years
  • Articles of association
  • Environmental protection evaluation report (if applicable)

The approval certificate will be issued by the local office of the Ministry of Commerce (MOFCOM). Upon issuance, you’ll have a 30-day limit to register your company with the AIC, which then issues the temporary business license.

Post-registration

Following the issuance of the temporary business license the WFOE would need to perform a number of formal registrations at various Chinese government entities such as local tax authorities, apply for seals and open an RMB bank account for managing daily operating expenses and a foreign capital account for receiving foreign currency.

1. Tax registration

Tax registration in China is often regarded as onerous. Two separate tax authorities exist, the state taxation bureau and local taxation bureau. Company founders are required to file tax registration only once, to either of these 2 authorities. The statutory time limit is 30 days from the date of receiving business licence. The company must file the tax registration form and the initial tax reporting forms. Together with those forms, you’ll have to submit several original corporate documents for review. A number of follow-up visits should be expected during the entire tax registration process, after its completion  your company will be eligible to issues invoices – “fapiao” (发票).

Trading and Manufacturing WFOEs are eligible to apply for an import and export licence if they fulfil some legal and commercial criteria set forth in the China law.  Import duties, including custom tariff and importation VAT, are levied at both general and preferential rates in China. The preferential rates apply to imports originating from countries or regions that have signed with China agreements containing reciprocal preferential tariff clauses, and the general tariff rates apply to imports originating from all other countries or regions. However, if the State Council Customs Tariff Commission grants special approval, preferential tariff rates may be applied to imports that otherwise would be subject to the general rates. To encourage foreign investments certain WFOEs may be exempt from customs duties on the importation of machinery and equipment for self-use. For exports of goods, enterprises are allowable to claim a VAT refund in normal circumstances.

VAT is levied on all companies and individuals engaged in sales of goods, provision of processing, repairs & replacement services or importation of goods in China. Every VAT invoice, “fapiao”, should have Company & Tax code. Investors have to use these specific “fapiao” for any invoicing.

2. Application for seals (chops)

In China every Company is required to have a “chop” which will be in the custody of the legal representative. The legal representative’s chop is required for many documents and is regarded as a signature. Any person who has the legal representative’s chop may exercise their power to bind the company, so it’s very important to ensure good control of your chop.

3. Opening bank account

Basically, your WFOE should have a Foreign Currency Capital Account for payment purposes and a RMB Current Account for RMB collection and payments, such as salaries to your employees, and cash withdrawals. You are free to choose between a foreign bank and a Chinese local bank.

The application process to create a company in China generally takes 3 to 6 months:

Company name search5-7 days
Company name approval5-10 days
Certificate of name approval issuance5-10 days
Company registration30-60 days
Opening Bank Account (Capital Account & Current Account)10-14 days
Capital injection (FX Registration)3-5 days
Tax account registration (including third party agreement), can be done at the same time as bank account opening60-90 days

Check our WFOE Incorporation Package or contact us for more information.