Study of Wholly Foreign-Owned Enterprise (WFOE) in

Editor:at0086 |



l          Overview

l          Advantages of WFOEs

l          Key Points of WFOEs

l          Registration Paperwork

l          Procedures for registering a WFOE

l          Summary




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 WOFE is increasingly being used for service providers such as a variety of consulting and management services, software development, trading enterprises, etc.


Advantages of WFOEs


The WFOE is becoming the most popular business structure used by foreign investors. Some of the advantages of establishing a WFOE include:


l          Independence and freedom to implement the worldwide strategies of the parent company without having to consider the involvement of a local Chinese partner. This is the main reason that most companies choose the WFOE business structure.

l          The ability to formally and legally conduct business inside China rather than simply functioning as a Representative Office (RO), including the capability of issuing legal receipts/invoices to customers in local Chinese currency (RMB) and also the ability to receive revenue in RMB. This benefit also applies to other Foreign Investment Structures (JVs, foreign invested holding companies, etc.) with the exception of ROs.

l          The capability for converting profits and revenues received in local Chinese currency (RMB) to other currencies such as U.S. dollars, British pounds, Eurodollars, etc.

l          Protection of intellectual know-how and technology

l          Greater efficiency in operations, management and future development.


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, Beijing Newspeed 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. For the WFOE, the minimum amount of Registered Capital required is RMB100,000; however, a recently enacted law will decrease this amount to RMB30,000 as of January 2006 to encourage more small businesses by lowering the minimum investment fund requirements for Registered Capital.


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, RMB30,000 after January 2006.) 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.


Registration Paperwork


Of the long list of documents that are required for business registration, there are two documents that are very important and could make the difference in whether or not the WFOE registration application process goes smoothly.


Articles of Association is one of the most important documents in the registration process. The Articles of Association define the rules and principles for the entire operation of the WFOE. It contains such information as Business Scope, the amount of Registered Capital and Total Investment Quota, Management Structure (which defines the highest authority in the WFOE, either a Board of Directors or a General Manager), policies and rules on accounting, taxation, profit division, employment, conditions on termination and liquidation, etc. There is no universal sample for an appropriate Articles of Association; each different approval authority may have its own ideas of what is acceptable. The WFOE representative can consult the appropriate authorities for a sample Articles of Association as a guideline in writing the Articles of Association.


Feasibility Study Report is another of the two most important documents for registration. In this report, the entire WFOE project must be described, explaining each business activity that it will conduct in China, demonstrating that all activities follow Chinese regulations and that the entire project is feasible both technically and financially. For some small consulting WFOEs for example, a 3 to 4 page Feasibility Study Report would be sufficient, while for large projects such as manufacturing WFOEs, a proper Feasibility Study Report may consist of dozens of pages.


Writing good Articles of Association and Feasibility Study Reports can guarantee at least a 50% chance for approval from the Chinese government. NewSpeed provides expert consulting services on the proper completion of these documents. NewSpeed has also built up an extensive bank of document samples for various WFOEs; please contact us if you need any help.


Procedures for Registering a WFOE


To fully and legally register a business in China, you will be required to visit at least ten different governmental bureaus and agencies; some of them will require numerous visits. A tremendous amount of complicated paperwork and physical footwork is involved. Each bureau has its own specialized documents that are required, and only Chinese language documents or translations are accepted. After you have chosen an office site and have signed a lease agreement, you are ready to dive into the registration procedures. The entire process can be roughly divided into four steps.


Step One: Pre-registration of the WFOE name

To register a name for your WFOE, you will need to know the regulations for naming the business. The legal name of a WFOE consists of four words presented as:

Location (City) + business name + main business activity + structure.


For example: Beijing + ABC + Management Consulting + Co., Ltd


In the example, "ABC" is the Chinese translation of the foreign business name of the foreign investor; the translation can be made either by sound or meaning. For example, "Mai Dang Lao" is the translation of "McDonald's" by sound (the Chinese version sounds similar to the English pronunciation); "Wei Ruan" is the translation of "Microsoft" by meaning (it means the same thing in Chinese as "Microsoft" does in English). "Management Consulting" is the main business activity of the example WFOE. "Co., Ltd." is the legal structure of WFOEs.


A basic rule in naming a WFOE is that it can only register "ABC" as its business name when it has not already been registered by any other business in China. In practice, due to the vast number of businesses that have already been registered and thus a high chance of conflict, it is a good idea for a WFOE to work out a couple of options for the business name before going to the AIC for registration. Only the Chinese name of the WFOE can to be registered. An English name for a WFOE is allowed, but it is not officially recognized and the registration of English business names is not allowed, although the business can apply for trademark protection for its English name in China.


Step Two: Apply for the WFOE Approval Certificate

After obtaining the WFOE name and completing the application documents, the WFOE representative can then go to the competent approval authorities for the Approval Certificate.


Identifying competent approval authorities is sometimes difficult, especially when the WFOE business covers activities that are deemed "restricted" as listed in the "Guide for Foreign Investment". The WFOE representative will need to have sound knowledge on the structure of Chinese government departments and their functions. Generally, the local commerce bureaus are the right places for the WFOE representative to visit.


Every approval authority publishes its "standard processing time", e.g., 10 working days, 30 working days, etc. They can issue the WFOE Approval Certificate within the stated processing time if the application documents that are submitted are complete and everything is in order. But in practice, the WFOE representative will probably face inquiries about the amount of registered capital, business scope, and other "hot" checking points. Officials have the right to require the WFOE to provide more supporting documents or to allow the amendment of the application documents, but if this happens, they will start all over and the processing time will be longer than the one that was published.


Our experience has been that friendly discussions and negotiations with officials within the approval authority are the keys to success in this step.


Once issued, the Approval Certificate contains information such as the WFOE's name, the address of the WFOE's main office site, Business Scope, Registered Capital, Total Investment Quota, Foreign Investors, and Terms of Business Operation, etc.


Once the WFOE receives the Approval Certificate, Step Three can be addressed.


Step Three: Apply for the WFOE's Business License

With the Approval Certificate and other required documents, the WFOE representative can go to the local Administration for Industry and Commerce (AIC) to apply for the Business License.


This step is relatively easier than the previous one because there is much less paperwork involved and a much shorter processing time. The standard processing time for Beijing's AIC is 5 working days.


The AIC charges a registration fee of 0.08% of the Registered Capital. For example, if the WFOE's Registered Capital is US$ 1 million, you will need to pay US$ 800 as the registration fee.


The AIC will issue the WFOE with two kinds of Business Licenses. Before the Registered Capital is fully paid into the Chinese bank and certified by an independent accounting agency, the WFOE will only receive a Temporary Business License. The Formal Business License will be issued only after the Registered Capital has been deposited and certified by the accounting agency.


Once the Temporary Business License has been received, the WFOE is officially established as a legal entity and can legally conduct business. The Temporary Business License also allows the WFOE representative to continue on with the remaining registration steps, open a bank account, etc.


Last, but not least, if the foreign business decides to appoint an agency to submit a registration application on its behalf, it needs to be sure that the agency is legally recognized and authorized by the AIC. The AIC will not accept any applications from any non-authorized agencies. To check an agency's qualifications, you can contact Beijing Administraton for Industry and Commerce by phone at (8610) 82691919, or the BAIC Broker Association at (8610) 63329782.


Step Four: Post-registration Activities

After the WFOE has received the Temporary Business License, it will need to be registered with a dozen bureaus and their local offices. The WFOE will need to have its "chops" carved and open bank accounts. Each bureau has its own specific list of documents that will be required. The processing time for Step Four varies from 1~10 working days. Overall, the WFOE will need 4-5 weeks to complete these post registration activities. Some key points of Step Four are:


- Registration with tax bureaus and reporting to local tax offices:

The WFOE will need to register with two local Tax bureaus: the State Tax Bureau and the Local Tax Bureau. These bureaus will issue the Tax Registration Certificates that the WFOE will present to the bank when opening bank accounts. These certificates will also used for purchasing official invoices, which are essential documents for doing business in China.


In addition to registering with the tax bureaus, the WFOE will need to report to their local tax offices. There are two tax offices that require WFOE to visit, one has authority over Local Tax, the other has authority over State Tax. The local tax offices will assign tax officers who will set tax filing schedules and determine a tax filing method (mostly likely online at present) for the WFOE. The WFOE will receive an account number and password for online tax filing and receive the appropriate type of invoices to provide its clients when providing services or goods. Finally, the tax officers may also recommend the specific machine models that will be needed for printing invoices. It is suggested that the WFOE send its (future) accountant for reporting to the local tax offices.


- Opening of bank accounts

A WFOE is allowed to open at least one RMB account and one foreign currency account, depending on the number of and the nationalities of the foreign investors. The WFOE can choose a bank branch for opening the foreign currency accounts but the branch bank must be approved by the local Foreign Exchange Bureaus.


The main foreign currency account is used for receiving registered capital from foreign investors. Total injected funds cannot exceed the Total Investment Quota that is set for the WFOE in the registration application. Repatriating the Registered Capital to home countries is forbidden during the term of business operation.


The WFOE can open another foreign currency account for use in business operations. This is subject to approval by local the Foreign Exchange Bureaus. For detailed information please contact us.


The RMB accounts are used for expenses and other business operation uses in China. The money going into the RMB accounts can come from its foreign currency accounts via a bank transfer, or from the income the WFOE receives from doing business in China.


- Registering the WFOE's expatriate employees with the Labor Bureau

Expatriate employees who will work full-time for more than six months in the WFOE will need to be registered with the Beijing Labor Bureaus to receive a Work Permit for each of them. Foreign employees will also need to get a Residence Permit from the local Public Security Bureau. With a Work Permit and a Residence Permit, the WFOE's foreign employees can legally work and reside in China.


As of October 2005, expatriate employees from Taiwan, Hong Kong and Macau are required to join China's "Social Security System" which basically requires employers to pay unemployment insurance, health insurance and accidental injury insurance, as well as into pension funds housing funds and education funds for these employees.


- Chops

Chops are commonly used in official documents such as contracts, application forms, checks, etc. It is mandatory for a WFOE to have a Company Chop carved and a Finance Chop carved. Personal Name stamps are optional.


To carve (make) chops, the WFOE will need to design samples of its desired company chops and present them to the Public Security Bureau (PSB) for approval. The PSB will appoint a chop shop for you to make the chops once the designs have been approved.


The Company Chop is used as on any company documentation as a mark of authenticity to prove that it did indeed come from that particular company. The Finance Chop will be mainly used to make bank checks and other financial documents valid with the chop acting much like a company's "signature".


The Finance Chop is not enough to make a check valid; the check will also have to be "chopped" with the Personal Name Chop. Another option for validating checks is to use both the Finance Chop and an authorized employee's handwritten signature.


- Other registrations Apart from the authorities mentioned above

The WFOE representative will also need to visit even more authorities to complete the WFOE registration. These other authorities include the local Technology Supervision Bureau, Statistics Bureau, Finance Bureau, and the local AIC office. Each of them set a specific deadline for the WFOE to register with them; usually all of them require registration within 30 days of receiving the Temporary Business License. Missing the deadlines or failing to register with any of them could result in fines for the WFOE.



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 certified by the Beijing AIC, that 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. Please contact us for professional and honest registration services at reasonable prices.



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