wfoe registration white paper vf - clc-vecta...e n e r cx!! !!page!2!!! 18february!2016!!!...

WFOE registration White Paper

1421 Consulting Group ©

WFO

E re

gist

ratio

n W

hite

Pap

er v

F.do

cx

18 February 2016 Dear Sir/Madam, You have just acquired a White Paper introducing the most important steps when registering a Wholly Foreign Owned Entity (WFOE). We hope that this document provides you with information you were looking to find. As a strategic consulting company we recognized the difficulty of registering a WFOE. Since the foundation of 1421 Consulting Group (1421) we performed company registrations ourselves. We started to provide this service in order to make sure our clients are helped as concise and fast as possible. Over the past 5 years we have registered over 20 WFOE’s around China. In our experience, the process of registering a WFOE goes much smoother when clients are well informed about the process of registering a WFOE. The speed of registering a WFOE (3-‐6 months) depends highly on how fast a client provides the right documentation and collaboration. However we feel that this document should be available to all people who are looking into registering a WFOE. Therefore we have made it available to you. We hope it serves you well in becoming “Chinable”! With my best regards,

Peter Pronk

WFO

E re

gist

ratio

n W

hite

Pap

er v

F.do

cx

Contents

1. Introduction .................................................................................................................................... 4

2. Different types of WFOE’s in China ................................................................................................ 4

3. Advantages of a WFOE ................................................................................................................... 4

4. What to Consider When Setting up a WFOE in China .................................................................... 5

4.1 Articles of Association ............................................................................................................ 5

4.2 Scope of Business Article ........................................................................................................ 5

4.3 Registered and Paid up Capital ............................................................................................... 6

4.4 Shareholders, Board of Directors and the Legal Representative ........................................... 6

4.5 Registered Address ................................................................................................................. 7

4.6 Company Name ...................................................................................................................... 7

4.7 Business License ..................................................................................................................... 8

4.8 Tax .......................................................................................................................................... 8

4.9 Annual Audit Report ............................................................................................................... 8

4.10 Profit Repatriation .................................................................................................................. 8

4.11 Terms and Termination .......................................................................................................... 9

5. Why 1421 Consulting Group ........................................................................................................ 10

WFO

E re

gist

ratio

n W

hite

Pap

er v

F.do

cx

1. Introduction

Foreigners in China looking to set up their business have multiple options. Of these options, a Wholly Foreign Owned Enterprise (WFOE in China) is the most used format. A WFOE in China is a Limited Liability Company (LLC), which is completely owned by one or more foreign investors. WFOE in China were originally created to encourage foreign-‐run manufacturing and exporting activities. However, since China’s entry into the World Trade Organization (WTO) in 2001, limitations on WFOEs have been reduced to allow for their use in the service industry (Consulting WFOEs).

Before setting up a WFOE in China, it is important to understand that many western legal concepts are applied differently in China. For example, a company’s different branches are not recognized in a WFOE because Chinese law does not have a clear definition of the term ‘branch.’ Therefore, any operation set-‐up outside of the WFOE, such as a branch office or Representative Office (RO), is not part of the WFOE according to Chinese law.

Another important factor to consider is that a WFOE’s Registered Capital must be capitalized solely by foreign investors. However, the ability to retain control of the enterprise makes WFOE in China the most attractive option for the majority of our clients.

2. Different types of WFOE’s in China

1. Standard or Consulting WFOE in China -‐ Licensed to conduct business in the Consulting and Service industries

2. Trading WFOE in China -‐ Licensed to conduct Trading, Wholesale, Retail and franchising activity, also referred to as a FICE (Foreign-‐Invested Commercial Enterprise)

3. Manufacturing WFOE in China-‐ Only WFOE allowing foreigners to conduct manufacturing activities. Set-‐up is the same as a Consulting WFOE, but includes an additional license for manufacturing

3. Advantages of a WFOE

1. In contrast to a Representative Office (RO), which is restricted to non-‐commercial activities, a WFOE in China is allowed to conduct business activities, including issuing invoices to customers and receiving payments in CNY;

2. Unlike with a Joint Venture, WFOE in China have no compulsory requirement to involve a Chinese partner and are free to implement their parent company’s or their own strategies

3. Protection of intellectual property and proprietary technology; 4. Manufacturing WFOE in China are licensed to import and export goods 5. Full control of human resources

WFO

E re

gist

ratio

n W

hite

Pap

er v

F.do

cx

4. What to Consider When Setting up a WFOE in China

4.1 Articles of Association

The Articles of Association (AoA) form the operating rules of the WFOE in China, meaning shareholders are legally bound to operate according to the Articles they choose to establish. It is a common misconception that establishing the AoA is a simple administrative step that can be handled by local consultants. On the contrary, if the WFOE’s Articles of Association are not prepared carefully, it can create significant legal problems for a company. For example, if a WFOE’s Board of Directors Article is not designed with care, shareholders can completely lose control of their company. 1421 has extensive experience assisting companies to create Articles of Association that allow for flexible yet secure company structures. Some of the important areas defined in the Articles of Association include;

Scope of Business Article Production Scale Article Total Investment Article Board of Directors Article General Manager Article Profits Repatriation Article

4.2 Scope of Business Article

A very important aspect of a WFOE in China is the Business Scope. This Article is a one-‐sentence description of the industry and market in which the WFOE is planning to do business. Chinese regulations stipulate: "Foreign investors are permitted to set-‐up a 100% foreign-‐owned enterprise in industries that are conducive to the development of China’s economic benefits, and not prohibited or restricted by China government." This means a foreign-‐owned enterprise is only allowed to conduct business in certain types of industries and fields as defined in its Business Scope. It may seem tempting to define a wide Business Scope, but this is unwise because it can lead to post-‐licensing problems with the Chinese tax bureau. Further, adjusting the Business Scope requires new applications and approvals which could harm a WFOE in times where flexibility is needed. For these reasons, 1421 advises our clients to select an honest and clear Business Scope that both reflects their company’s planned business activities and protects their ability to expand in the future.

WFO

E re

gist

ratio

n W

hite

Pap

er v

F.do

cx

4.3 Registered and Paid up Capital

In order to establish a WFOE, a firm is required to deposit in China the amount of money that they estimate they will need until their business turns a profit and reaches the break-‐even point. This money is called the ‘Registered Capital.’ It is a common misconception that registered capital is a ‘lost investment.’ On the contrary, from the first day of a WFOE’s registration, the firm can use this capital for all operational expenses, including salaries, rent, and other overhead. The registered capital does not have to be injected as a lump sum, but can be transferred over a period of time.

The amount of the registered capital is of importance for governmental approval of company registration. Since March 2014 there is no set minimum amount of registered capital required by the government. However, if government employees responsible for approving a company’s WFOE registration believe that the amount invested is not enough to guarantee success for the company, they reject the application. 1421 agrees with the principle of registering enough capital to conduct operations until the break-‐even point. As only 20% of foreign companies succeed past the three-‐year mark in China, caution is necessary. For manufacturing firms the set-‐up costs are higher and this should be taken into account before applying for a WFOE. A side note should be added that different provinces and even districts in cities have different requirements what the minimum registered capital should be. 1421’s analysts can assist a firm to select an appropriate amount of registered capital to both expedite their WFOE application and ensure their firm has enough funds to operate.

4.4 Shareholders, Board of Directors and the Legal Representative

In contrast to limited liability companies in Western countries, in China shareholders are of less importance than the board of directors. According to Chinese law the board of directors gets the final say in company decisions. While this is of very much important for a Joint Venture where Chinese employees could end up with company ownership despite holding a minority of the shares, this is still a very important issue for WFOEs.

Another important position is that of the legal representative. This person is appointed by law as the responsible person for the company’s operations. Seeing this person is of such importance, one must carefully consider whom this task is delegated to. The legal representative often is managing the company chops. In China, each company has a set of unique chops, or stamps, that are used to make documents legal. The individual who controls the company chops holds immense power. It is integral that foreigners setting up a WFOE in China structure their board of directors carefully and assign control of the company chops to a trusted individual.

WFO

E re

gist

ratio

n W

hite

Pap

er v

F.do

cx

4.5 Registered Address

A necessity for WFOE registration is the address on which the company will be registered. There are some requirements regarding the address:

1. The office or plant (for a manufacturing WFOE) should be rented beforehand because it is a requirement to apply for WFOE registration. Preparing all rental documents according to the WFOE application’s requirements can minimize costs; a process in which 1421 has extensive experience. Once all documents are properly prepared a lease can be signed and process of registration can be resumed.

2. The registered address cannot be in a residential building and has to be the sole company registered at the specific address. 1421 recommends adding an article in the rental agreement stating that the contract is void if the company cannot register its WFOE at the address.

3. The address where the company is registered must also be the address where business operations are performed.

4.6 Company Name

Every WFOE is required to have a Chinese name. Legally, the Western name is of less importance, as only the Chinese name is noted on official documents. If a company does not choose a specific Chinese name, government authorities usually translate the English name literally, leading to unfortunate translations. 1421 can help you choose a catchy and practical Chinese company name.

Certain rules and regulations are also important to know when registering a company name in China. Using “China” and/or “International” in the Chinese name needs to have a minimum registered capital of $10,000,000. The format of the Chinese company name is ‘City – Name – Activity – Company Structure.’ EX: Beijing 1421 Business Consultancy Co., Ltd.

It is required to pre-‐register your company name before you register you WFOE. Therefore, you must propose at least three possible names. The State Administration of Industry and Commerce (SAIC) will have the final say in whether or not a name is approved.

WFO

E re

gist

ratio

n W

hite

Pap

er v

F.do

cx

4.7 Business License

Obtaining the business license is one of the most important activities during WFOE registration. Once the license is obtained, a WFOE is required by law to register at multiple government authorities, such as the tax authority and the statistics bureau. Opening a corporate bank account in China is also done during this period. These activities are time-‐bound and require the legal representative of the company to be present. 1421 works side-‐by-‐side with clients to prepare these documents and complete this part of the registration process, which makes only one trip to China necessary.

Having obtained a certificate from the tax authority, you are now legally entitled to open foreign exchange and RMB accounts and can begin to hire staff, sign contracts, and apply for work and residence permits; the WFOE is now officially in business.

4.8 Tax

The rate of company income tax is dependent on industry and place of registration. Certain Special Economic Zones (SEZ) can have a maximum of 15% corporate income tax, which is very beneficial for your company. 1421 is up-‐to-‐date in which areas this is applicable and can help you register there. Besides advising on location, 1421 has Accounting Services, which can help your company do monthly, quarterly and annual tax reports, which are required by law.

4.9 Annual Audit Report

All limited companies in China, including WFOEs, are required to submit annual audit reports to the relevant authorities. In this report are a balance sheet, income statements and location dependent documents. This annual audit report must be submitted in a timely manner or the company will be subject to fines. 1421 can help you with the report.

4.10 Profit Repatriation

The Chinese government allows WFOEs to remit their profits out of the country and such remittances do not require the prior approval of the State Administration of Foreign Exchange (SAFE). Dividends cannot be distributed or repatriated overseas if the losses of previous years have not been covered. Dividends not distributed in previous years may be distributed together with those of the current year. Repatriating the Registered Capital to home countries is forbidden during the term of business operation.

WFO

E re

gist

ratio

n W

hite

Pap

er v

F.do

cx

4.11 Terms and Termination

WFOEs are typically registered for a period of 15 to 30 years, but it is possible to obtain extensions. With special approval from the State Council, the term may be even longer than 50 years.

Terminating a WFOE can be done under certain conditions and 1421 is able to assist you with this. In our experience this process takes a period of 1 to 2 years, during which tax still needs to be paid. This can lead to a considerable expense and therefore 1421 wants to make sure your company becomes successful in China. With our services you can be assured that you will get the best possible chance of success.

WFO

E re

gist

ratio

n W

hite

Pap

er v

F.do

cx

5. Why 1421 Consulting Group

Extensive experience

Served 75+ clients in 5 years Registered 20+ company registrations Performed 15+ Market Entry Studies

Locally present

Office in Beijing Office in Shenzhen Office in Hong Kong

Internationally operative

Offices in China & the Netherlands Representatives in 7 countries Clients from over 10 countries

Extensive Network

IP Specialists HR Specialists Interpreters Marketers

1421 Consulting Group is the proud winner of the Dragons Business Award 2016. The Dragons Business Award is awarded by the board of the Dragons Businessclub. They look at the impact a company has on Sino-‐Dutch trade and at the growth a company achieved.

WWW.DRAGONSBUSINESSCLUB.NL

“1421 Consulting Group is assisting our law firm in registering a

representative office and WFOE in Beijing. With their experience in this field they have been able to provide a very clear plan and have been a

great help in guiding our preparation for the registration

process. We are also glad to be able to use their office facilitating

services to house our operations during this period.”

PAOLO BECONCINI, MANAGING PARTNER – CBM INTERNATIONAL

LAWYER LLP

“1421 Consulting Group is assisting Holland Container Innovations (HCI)

with pay rolling services in Shenzhen, China. 1421 looked at

our needs and presented us with a comparison between setting up our own entity or the use of their pay rolling service. They subsequently

advised us to choose the pay rolling service at this time, which for us is the cheapest and easiest way to

meet our needs, saving HCI the time and cost involved with registering a

WFOE.”

PETER BROUWER, GENERAL MANAGER – HOLLAND CONTAINER

INNOVATIONS

wfoe registration white paper vf - clc-vecta...e n e r cx!! !!page!2!!! 18february!2016!!!...

Documents