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How To Start A Business In China — WFOE

Posted in Basics of China Business Law

This post is a re-hash of a post Steve did more than three years ago. We are re-running it now as part of a series of posts we will be running over the next few weeks on the Basics of China Business Law. We are even forming a new category for this series, the first since we started this blog!

This post focuses on the forming of 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 can lead to some delay in 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 the export of Chinese manufactured products. The investor must provide the documentation from its home country proving it is a duly formed and validly existing corporation, along with evidence showing the person from the investor who is 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 created 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 government 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 the 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 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 that will be required.

All of the above documents must be prepared in Chinese.

4. It usually takes two to five 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.

  • Craig

    Thank you for another great post.

  • Chris

    Incredibly helpful. I am looking forward to the other posts in this series.

  • http://www.chinalawblog.com/2009/12/do_i_really_need_a_chinese_com.html China Law Blog

    Do I Really Need A Chinese Company?

    I dunno. We recently did a couple of posts on what is required to form a Wholly Foreign Owned Entity (WFOE) in China. In the first of these posts, “How To Start A Business In China — WFOE,” we we set out the four main steps in forming a WFOE. In our s…

  • http://www.chinalawblog.com/2009/12/china_wfoe_vs_jv_make_mine_a_w.html China Law Blog

    China WFOE vs. JV. Make Mine A WFOE. I Just Call It Like I See It.

    Just got this comment, which poses some pretty important questions and also leaves hanging some very common misperceptions regarding doing business in China: So here’s my question albeit already bounced around but no solid answer given…. JV or WFOE f…

  • Charissa

    Good info. I’m looking to start up a new company as a WFOE in Beijing. I don’t have the funds for leasing an office space at the moment, and would like my apt. to be the official address for the company. Is this possible?
    I’m looking to start by bootstrapping to first test the market’s acceptance of the product (food/drink) with minimal capital investment until I can justify the expenses. Is there any helpful official China gov’t site that gives the basics of setting up a company? I know in the US we have loads of them making it very easy to set up a company. I know nothing is easy in China, but I would assume the gov’t wants this done the proper way and would have the most updated list of requirements posted somewhere. Appreciate any comments.

  • Jon

    Unbelievably helpful. Thanks. When it comes to the nitty gritty of what to do in China business, you are the man!

  • charms

    Congratulations for having the only article on this that explains things clearly. I mean it. I must have read at least ten of these before this one and this is the only one that really made me understand what is involved in forming a WFOE in China. I am now hooked on your blog.

  • Miguel

    This is an actually really helpful post. Clearest explanation I have found yet of what is really a quite difficult process. Thanks.

  • Philip

    This is the best explanation I have seen on how to form a WFOE in China. Thank you for running this. It truly has been invaluable.

  • jim

    Just started researching this issue on the net and this is the best explanation I have found. By far. Thank you for being a lawyer who can actually write with clarity.

  • Mike Button

    It is interesting how China has for so long now had really quite reasonable procedures in place for forming a foreign business and yet it is always getting criticized for being backward on these things. If people actually knew the laws I think they would be saying very different things.

  • http://www.cheapholidaysfromireland.net rob

    Agree with the other comments, there is very little clear info online about the WOFE, besides this.
    I was looking into it last year, and was left pretty confused… I assumed that I had to be a unique technology company or have around $100,000 in capital.
    You sum up the costs in one sentence, “Typically, these fees equal a little over 1% of the initial capital.”
    Finding information such as this is a task in China… also lots of half ass, outdated info.
    Thanks for the info… I’m still not 100% on the WOFE, but getting there.

  • Julian

    There are very few people out there who seem willing to lay out the rules like this. Thank you so much for your clarity.

  • KUMAR

    I WANT TO REGISTERED WFOE COMPANY IN YIWU.
    SO YOU WILL HELP ME TO REGISTERED A WFOE COMPANY…

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  • INS Global Consulting

    Hi,

    Although the procedure is more complicated and time-consumed,I think there are many benefits in choosing this legal form:

    - Autonomy: in the opposite of a representative office, the possibility for the WFOE to conduct itself in normal business operations, issuing invoices and record is a quite great advantage for any firm.;

    - Control: control over capital,management and operations of the company, easy repatriation of dividends andthe safest way to avoid the risks of the joint venture (withdrawal of the
    Chinese partner, etc.).

    - Flexibility of HR policy: no restriction on the number of foreign employees.

    These three main points shall be considered when planning to invest in China, all the more important since contracting a Joint Venture with your Chinese partner does not really allow you to implement the points mentioned above.

    Best regards,
    Simon