We have written frequently on how it is critical for a company that wants to form a WFOE in China to have a proper lease. Among other things, a proper lease means that the property will be used per its zoning requirements and that it is being leased out by a registered landlord in good standing on its taxes. If these requirements have not been met, no WFOE is supposed to be formed.
We are aware of WFOEs that have been registered despite being out of compliance. This mostly happens in remote regions where the local government permits an improper registration because it wants the registration money (or more?) and/or because it wants the business. We think such improper registrations are ill-advised because they make your WFOE subject to closure by Beijing if discovered in an audit of the local company registration bureau.
Last week, I received an email that gives another good reason for not going forward with improper WFOE registrations. The email was from a small company in a remote region. This small company had been able to register its WFOE even though its landlord was not properly registered. The company was writing me because it had just been denied a tax deduction from for its rent because its landlord was not able to issue a fapiao because it is not a legal landlord.
In addition to their tax problems, this company also should worry about the tax authorities reporting them to the company bureau (MOFCOM) for having been illegally formed. Beijing now knows this company was illegally formed and thus is operating illegally and it is at risk of being shut down.
Bottom Line: It pays to operate legally.
