Establishing a wholly foreign-owned enterprise in China
A “wholly foreign-owned enterprise” is a limited-liability company, which is wholly owned by one or more foreign investors. Unlike a representative office, these enterprises can make profits and issue local invoices in renminbi (RMB), China’s official currency, to suppliers. The liabilities of shareholders to a wholly foreign-owned enterprise (WFOE) are limited by the assets they bring to the business. They can also employ local staff directly.
There are three distinct WFOE set-ups:
- service (or consulting)
- trading (or foreign-invested commercial enterprise)
All three structures have the same legal identity, but they differ significantly in terms of:
- set-up procedures
- range of commercial activities in which they can engage
Trading and manufacturing WFOEs need to derive most of their revenue from their namesake business but can also provide associated services. Service WFOEs are additionally allowed to conduct training activities related to their services.
The advantages of a WFOE company are that it has:
- greater freedom in business activities than a representative office
- 100% ownership and management control
- a suitable investment mode for having a long-term presence in China
- the ability to provide a wide variety of services
- the ability to hire employees directly
- the capability of converting RMB profits to U.S. dollars for remittance to its parent company outside of China
- protection of intellectual property
The establishment process differs based on the chosen investment structure and business scope. Manufacturing WFOEs need to complete an environmental evaluation report. Trading WFOEs must undergo customs and commodity inspection registration.
Text version - Set-up procedures in China for wholly foreign-owned enterprises
Pre-licensing (2 to 3 months):
- Basic information collection from client (7 working days)
- Name pre-approval (5 to 7 working days)
- Certificates on lawful use of office premises (depends on clients/landlord)
- Environmental impact assessment (4 to 8 weeks, for manufacturing WFOEs)
- Incorporation documents prepared by client (several weeks)
- Certificate of Approval from China’s Ministry of Commerce (MOFCOM) (4 weeks) or record-filing (3 working days)
- China’s administration for industry and commerce (AIC) issues 5-in-1 business license (10 to 14 working days), combining
- the old business license
- the organization code certificate
- the tax registration certificate
- the social security registration certificate
- the statistics registration certificate
Company now legally exists
Post-licensing (2 to 3 months or more):
- Carve company chop, financial chop, invoice (“fapiao”) chop and legal representative chop (1 to 2 working days)
- Foreign exchange registration certificate (5 to 10 working days)
- Foreign capital account (5 to 7 working days)
- Capital injection (in accordance with articles of association)
- Capital foreign exchange registration (5 to 7 working days)
- RMB basic account (2 weeks)
- MOFCOM foreign trade dealer and operator filing (5 to 8 working days)
- Customs registration certificate (5 to 8 working days)
- General Administration of Quality Supervision, Inspection and Quarantine inspection and quarantine license (5 to 8 working days)
- Customs IC card application (21 to 28 working days)
- Safe preliminary foreign trader filing (2 to 3 working days)
- General value-added tax (VAT) taxpayer filing (1 to 2 working days)
- General VAT taxpayer invoice quota (30 to 60 working days)
Office and lease requirements
The applicant registering a WFOE (if the intended office premises are owned by the same individual or company applying for registration) needs to:
- show a certificate of premises ownership (CPO) issued by the real-estate authority
- submit a copy to the local AIC
AIC does not accept “residential” CPOs for registration.
If the office premises are leased, the applicant needs to provide the:
- original lease agreement (with a minimum one-year lease term)
- copy of the CPO
The landlord should be an AIC-registered business, and applicants may require a copy of the landlord company’s business license, including the company’s official chop (a seal or stamp).
Both parties to the lease agreement should complete the registration process and record-filing procedures with the local real-estate authority within 30 days following the agreement’s conclusion. Once the lease’s legitimacy is confirmed, the authority will issue a housing lease certificate, which basically allows the property to be used for business or manufacturing operations.
If a CPO cannot be produced for AIC registration, you will need to obtain a certificate to prove you are the legitimate owner of the property. Certificates are issued by either the:
- local real-estate administration authority
- sub-district office
- neighbourhood committee
- administrative institution of a development zone
If the company needs to build a facility, it needs to apply for a construction permit from the local land resources and urban planning committee. Once it is constructed, several inspections are required before the company is provided with a CPO from the local real-estate authority, such as:
- an environmental check
- a fire inspection
- a quality review
MOFCOM approval or record filing
The company needs to go through an approval application or record-filing process with MOFCOM or any of its local branches. The choice will depend on the:
- type of industry
- investment size
- location of your facility
Five-in-one business license
To ease the business licensing process, China introduced the five-in-one business license in 2016. It combines in one single document with a single social credit code, a:
- business tax registration certificate
- organization code
- business license
- social security registration certificate
- statistical registration certificate
Previously, China had a three-in-one system, which did not include the social insurance registration or the statistical registration certificates. Local regulations may vary in terms of the types of certificates required.
To get a business license from the local AIC, companies need to submit the following documents:
company business license (may need to be notarized in home country)
- bank statement to show the company’s creditworthiness
- copy of the legal representative’s passport
- copy of the directors’ passports and CVs
- draft articles of association
- environmental protection valuation report
- feasibility study report (if applicable)
- intended name of the company
- business scope
- registered capital
- business term
- lease contract for the premises or CPO
A company’s seal, or official “chop” in China, can be used to validate documents and contracts in place of the legal representatives’ signature. All companies are required to have an official chop, which bears the official company name in Chinese and, where applicable, in English.
In addition, a company also needs to have a legal representative chop or a financial chop. It is used for “fapiao” (official invoices). In case of trading WFOEs, a customs chop is required.
Foreign exchange and RMB bank account
A WFOE in China is required to have a minimum of two bank accounts: an RMB basic account and a foreign currency capital contribution account.
An RMB basic account is for the WFOE’s day-to-day operations in China. This is the only account from which companies can withdraw RMB cash and is often the designated account for tax payments. The foreign current account is for receiving capital injections from overseas.
Manufacturing or trading WFOEs with trading activities in its business scope are required to go through customs registration.
In a WFOE, the key positions are the
- executive director (or board of directors)
- general manager
- legal representative
Shareholders are the highest authority of a company. The executive director, or board of directors, is responsible for executing the decisions of the shareholders.
WFOEs are required to have at least one supervisor to oversee the execution of company duties by the director(s) and senior management personnel. The company’s director(s) may not be both director and supervisor at the same time. The same is true for senior management personnel. This policy is to ensure there is no conflict of interest.
The general manager is responsible for the daily operations, and this position can be concurrently filled by the executive director or a member of the board of directors.
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