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Chinese Company Formation — Forming A Wholly Foreign Owned Entity (WFOE) In China

Posted in Basics of China Business Law, Legal News

By:  Steve Dickinson

This post focuses on how to form a Wholly Foreign Owned Entity (WFOE) in China. I am starting with this type of entity because it is the one we do most often. Subsequent posts will detail the steps required to register other forms of entities in China, such as a representative office (RO) or a contractual or equity joint venture (JV). Each of these forms of foreign invested enterprise (FIE) is subject to its own specific laws and to numerous regulations that apply to all FIEs. Every FIE is formed as a Chinese limited liability company (LLC).

Where the special laws and regulations of an FIE do not apply, the provisions of the Chinese Company Law control. The Company Law was recently completely rewritten to conform more closely to international standards for company formation and management.

The steps for forming a WFOE in China typically consist of the following:

1. Determine if the proposed WFOE will conduct a business approved for foreign investment by the Chinese government. For example, until recently, China prohibited private entities from engaging in export trade. All export trade was handled through certain large, state owned trading companies.

China recently abandoned this system, and now both foreign and domestic companies can set up trading companies.  Restrictions on export oriented trading companies have essentially been eliminated, but there are still controls on import oriented trading companies that can increase expense and raise costs. Because these rules were only recently changed, the local regulators who must approve these projects do not have a great deal of experience with the attendant issues. This sometimes delays the approval process. It also results in an extremely cautious approach towards adequate capitalization even for export oriented trading  companies. I discuss capitalization requirements in greater detail below.

2. Determine if the foreign investor is an approved investor. Basically, any legally formed foreign business entity is authorized to invest in a WFOE in China. China especially welcomes investment that promotes export of Chinese manufactured products. The investor must provide documentation from its home country proving it is a duly formed and validly existing corporation, along with evidence showing the person from the investor authorized to execute documents on behalf of the investor. The investor also must provide documentation demonstrating its capital adequacy in its country of incorporation.

To meet these requirements, the following documents are normally needed from the investing business entity:

a. Articles of Incorporation or equivalent (copy);

b. Business license, both national and local (if any) (copies);

c. Certificate of Status (Original)(U.S. and Canada) or a notarized copy of the Corporate Register for the investor or similar document (original)(Civil Law jurisdictions);

d. Bank Letter attesting to sound banking relationship and account status of the company (original);

e. Description of the investor’s business activities, together with added materials such as an annual report, brochures, website, etc.;

a-d are translated into Chinese. e is either translated into Chinese or summarized in Chinese.

Many investors create special purpose companies to serve as the investor in China. The Chinese regulators have become accustomed to this process. However, the Chinese regulators will still seek to trace the ownership of the foreign investor back to a viable, operating business enterprise. Investor secrecy is not an option in China. However, the corporate register for the Chinese company will merely state the name of the foreign, special entity investing company as the owner. In that sense, as far as public disclosure is concerned, the investor privacy can be maintained. The foreign investor should also understand that this tracing process will add some time and cost to the Chinese company formation process.

3. Chinese government approval for the project. In China, unlike in most countries with which Western companies tend to be familiar, approval of the project by the relevant governmental authority is an integral part of the incorporation process. If the project is not approved, no incorporation is permitted. The two are inextricably linked.

The following documents must be prepared for incorporation/project approval:

a. Articles of Association. This document will set out all of the details of management and capitalization of the company. Nothing can be left for future determination; all basic company and project issues must be determined in advance and incorporated in the Articles. This includes directors, local management, local address, special rules on scope of authority of local managers, company address, and registered capital.

b. Feasibility Study. The project will not be approved unless the local authorities are convinced it is feasible. This usually requires a basic first year business plan and budget. We typically use the client produced business plan and budget to draft up a feasibility study (in Chinese) that will satisfy the requirements of the Chinese approval authority.

c. Leases: An agreement for all required leases must be provided. This includes office space lease and warehouse/factory space lease.  It is customary in China to pay rent one year in advance and this must be taken into account in planning a budget because the governmental authorities will be expecting this.

d. Proposed personnel salary and benefit budget. If the specific people who will work for the company have not yet been identified, one must specify the positions and proposed salaries/benefit package. Benefits for employees in China typically range from 32% to 42% of the employee base salary, depending on the location of the business. Foreign employers are held to a strict standard in paying these benefit amounts. The required initial investment includes an amount sufficient to pay salaries and benefits for a reasonable period of time during the start up phase of the Chinese company.

e. Any other documentation required for the specific business proposed. The more complex the project, the more documentation required.

All of the above documents must be prepared in Chinese.

4. It usually takes three to six months for governmental approval, depending on the location of the project and its size and scope. Large cities like Shanghai tend to be slower than smaller cities. The investor must pay various incorporation fees, which fees vary depending on the location, the amount of registered capital and any special licenses required for the specific project. Typically, these fees equal a little over 1% of the initial capital.

On large and/or complex projects, the approval process often involves extensive negotiations with various regulatory authorities whose approval is required. For example, a large factory may have serious land use or environmental issues. Thus, the time frame for approval of incorporation is never certain. It depends on the type of project and the location. Foreign investors must be prepared for this uncertainty from the outset.

Tomorrow’s post will discuss a WFOE’s minimum capital requirements.

  • Dawson

    I like your site.

  • David

    In practice, once you have the documents ready, you can have a running WFOE within a month. It all depends who you talk to.

  • http://www.chinalawblog.com/2006/03/chinese_company_formation_part.html China Law Blog

    Chinese Company Formation, Part II — WFOE Minimum Capital Requirements

    By: Steve Dickinson Yesterday, in a post called Chinese Company Formation — Forming a Wholly Foreign Owned Entity (WFOE) in China, I discussed the basic requirements for forming a wholly foreign owned entity (WFOE) in China. One of the questions

  • http://www.chinalawblog.com China Law Blog

    The “waiting period” depends on much more than just with whom one talks. The nature of the project and its locale are big factors as well.

  • louis

    very instructive
    thks a lot

  • http://www.chinalawblog.com China Law Blog

    Louis –
    Thanks for checking in. Compliments are always appreciated.

  • Johnson Kofi

    From: Mr. John Kofi.
    The Manager International
    Commercial Bank Ghana,
    First Light Branch
    Accra, Ghana.
    Attn, Sir.
    First I must solicit your confidence in this transaction; this is by virtue of its nature as being utterly Confidential and top secret. Though I know that a transaction of this magnitude will make any one apprehensive and worried, but I am assuring you that this is real and genuine.
    I am John Kofi; I am the manager of the International Commercial Bank, First Light Branch, Accra Ghana. I am a Ghanaian, married with two kids
    I write to solicit for your assistance in the transfer of funds valued at US$7,300.000.00.
    .
    The Proposition:
    A foreigner an American, late Mr. Morris Thompson (SNR) who died on February
    4th, 2000 board Alaska Airlines Flight 261. Alongside other 87 passengers.
    Please view the website below for verification.
    While returning to his country from a business trip. He banked with us at ICB Accra-Ghana and had a closing balance worth
    US$7.3, Million, having heard of the tragic incident involving late Mr.
    Morris Thompson (SNR) the bank now expects a next of kin as beneficiary.
    Valuable efforts have been made by (Citibank) to get in touch with any of his family’s but I personally found out that until his death neither had wife nor children that are known to us.
    Meanwhile the above is the website of the people that died in the Alaska Airlines
    Flight 261, the only name of next of kin given to us by late Mr. Morris
    Thompson unfortunately was with him in the same flight that crashed, and this is unknown to the bank.
    I have since then, placed this amount of us$7,300.000.00 on a suspense account without a beneficiary.
    I now decided to seek your permission to have you stand as next of kin to late Mr. Morris Thompson, so that the fund (US$7.3M) will be released in to your account as the next of kin.
    All documents and proves to enable you get this fund will be carefully worked out,
    I am assuring you that this transaction and its procedures is 100% legal and risk free involvement.
    The sharing of the fund between the two of us will be as follows: 30% of the total sum will go to you for your effort and commitment to the success of this transaction. 65% will be for me here. While 5% as been set aside for any expenses incurred during the course of transfer.
    As soon as I receive acknowledge of the receipt of this message in
    Acceptance, I will immediately start up with the process. If this proposal is acceptable by you, kindly get to me.
    I want you to also furnish me with your private telephone/fax or preferably your mobile numbers.
    Your full contact Address and I will intall your name in our computer database as the nest of kin to late Mr.Thompson Morris.
    Thanking you anticipation
    Yours faithfully,
    Mr. John Kofi.

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    Excellent post over at the China Briefing Blog on a topic that makes my blood boil. Forming a company in China. It makes my blood boil because, quite frankly, there are a number of consultants out there who are essentially lying to their clients about …

  • http://www.google.ru/ kiloutimuk

    Hi
    I am really excited. Keep up the great work. Good resources here.
    Bye

  • http://www.altec-china.com Chris Barclay

    Hi, does a WOFE have the right to branch or set up rep offices in China?
    Thanks,
    Chris

  • Jaap

    Chris,
    Interesting question, i am planning to set up rep offices all over china as well. Did you already got an answer on that?
    My company formation is not 100% complete yet, but sofar there where not many restrictions or questions. No business plans needed, just a lot of forms.
    I do get a lot support from the local government partly because we were lucky to get a very pro active woman for whom we are the first wfoe and even her boss is very helpful because he thinks we are the first foreign company of this type (internet) in the Jiangsu province.
    However, the bear is not dead yet, i am expecting registration in about 2 weeks.

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  • Marliona

    This is the clearest explanation I have seen. Thanks.

  • Tom

    Hello. I am involved with a Chinese Corporation who now wishes me to invest in their company. I am a United States Citizen. What is the process? They just asked me to send cash, but I asked to take a look at their corporate documents. What protections are in place for me, if any? Is it unusual to want to see their corporate documents?
    Thank you.

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