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Leasing Requirements For A China WFOE To Be

By Dan Harris on Posted in Basics of China Business Law, Legal News

I have always had trouble getting my head around the fact that to secure approval of a Wholly Foreign Owned Enterprise (WFOE or WOFE) in China, the WFOE must first lease appropriate space. But how can a yet to exist entity do anything, much less lease space?

In my email box this morning was an e-mail from co-blogger Steve Dickinson to a client in the process of forming a China WFOE that explains how. To set the scene a bit more, Steve was responding to a client who had just sent Steve a copy of its proposed lease:

This is a set of standard lease documents for leasing to a Chinese entity or to an already existing WFOE. The lease document makes no provision for dealing with the situation of leasing to an entity in preparation for formation of a WFOE. In fact, the lease document requires you to provide a business license before you execute the lease. Obviously, you cannot do that since your WFOE does not yet even exist.

You should contact the landlord and ensure that the landlord understands your exact situation. If the landlord understands and agrees that it understands and will cooperate, then we can add the language necessary for the lease to be acceptable for WFOE formation purposes. The landlord should be aware that the lease will initially be in the name of the WFOE shareholder and then will be transferred to the WFOE upon successful formation of the WFOE. The landlord must agree to that transfer in advance and must agree to cooperate fully in the WFOE formation process. In addition, the landlord must warrant that the premises can be approved for the use to which you intend to make of the premises and that the lease will be registered with the applicable government real estate administration in _______. Of course, this means that the landlord will need to make all tax payments and provide tax receipts to you as the tenant. Note that the lease cannot be entered into until you know the identity of the shareholder of the WFOE.

Please discuss this with the landlord and then advise on how you wish to proceed.

I like this explanation.

  • Sean

    Interesting, I never knew the proper way for that process. For my own (extremely) small WOFE, I used a company-mill with a decent relationship with the local government. As part of the fee I paid them, I was given office space — no more than a desk, really. It serves as the listed space as long as you need, until the registered capital is sent over at the very least. Then you’re free to set up a lease and change address as needed.
    I’m not a lawyer, but among those I spoke with about opening a company, this seemed like the easiest way to satisfy the requirements. I can’t imagine the hassle of your client compared to how easy it was for me. Of course, I’m also sure that I would never attract the scrutiny a manufacturing or larger company would.
    Can’t wait to hear which laws I broke.

  • Paul Gillis

    Practical answer, but the fact that the WFOE shareholder actually has leased property during the period that the WFOE is formed creates risk of creating a permanent establishment for tax purposes for the WFOE shareholder.

  • roger

    So, I have read about many companies who offer the service of a ‘virtual office’. That is, a company will sub-lease out its own office to many different companies who legally need a registered office address, but in practice do not need ( or cannot afford ). So the WFOE gets a registered office address, however cannot use this space usually.
    What is your opinion on doing this for a WFOE? Does this fall under your position from previous posts of ‘ go completely legal or completely illegal’? I know some people who have set up a WFOE like this, and so far no problem, is it something that the authorities will turn a blind eye to?

  • Rats Arse

    @Paul Gillis: Lack of explanation of the details about the landlords property certificate.

  • Dan

    @ Paul Gillis,
    I don’t understand what you are getting at here as i have never heard of the Chinese authorities saying that a foreign company that rents space on behalf of the WFOE to be is doing business in China and should be taxed. Have you?

  • http://www.chinalawblog.com Dan

    @Roger,
    Virtual offices were once common in China though as far as I know, they have always been 100% improper for a WFOE. WFOEs must have a separate and unique address in space that is zoned for the business that the WFOE will be do. If it is an office, then a small office will do, but it must have a separate and unique address and a sublease will not work. However, if the WFOE needs more, like a workshop or a warehouse, then that is what must be leased. In Beijing, Shanghai and Guagzhou, for instance, the authorities actually come out and inspect the space and if it is not in compliance they will reject the application. I am aware that some of the smaller cities let the virtual office thing go. However, this is a progressively smaller and smaller group of cities and even if approved, you always run the risk of a new administration coming in and saying “no” or of Beijing doing an audit and saying “no” because it is NOT legal.
    I have been contacted a couple of times by people who have had their WFOEs rejected because of this and that is not a good thing because once rejected one’s chances of ever getting the WFOE approved go way down.

  • http://www.chinalawblog.com Dan

    @sean,
    See the answer to Roger above. The required office need not be large. an office, a desk and an address on the door is often enough, just so long as 1) the address is a unique, separate address that can be registered in the name of the WFOE, distinct from any other entity, and 2) the nature of the WFOE is consistent with the leased space. Note however that under the new tax code there is no benefit to a virtual office. In the old days, people did the virtual office in order to locate in a tax benefited area like Pudong. All that is over. Since there is no real benefit to a virtual office, the only real penalty these days is that government officials will deny the WFOE application because the lease is not right. This happens all the time in Shanghai, Beijing and Guangzhou. It happens less in the second and third tier cities. There is of course a risk that the company will be “caught” and will be forced to get a lease on a real space. I have no data on how often that happens in the second tier cities, but I know that it does and it happens pretty regularly in Shanghai. Note also that 1) leases must be registered in China. How do you register a virtual lease? 2) in order to take rental payments as a tax deduction, you have to have a tax receipt (a fa piao). No fa piao, no deduction. How do you do this with a virtual lease? How do you write up your tax return saying: here is my office address, but the lease is illegal, but I want to take a tax deduction based on this illegal and unregistered space? I don’t know how this is done. If you are not going to get the right space for a WFOE, you are probably better off not getting a WFOE at all.

  • http://no Tony

    @sean,
    The lease registration office (in Guangzhou) may ask you for the copies of some legal documents of the landlord when you register the lease, such as the ownership certificate of the office space (the land use right certificate shall be a precondition for this certificate).
    Therefore the first thing I want to remind you is that you need to check the nature of the land use right. In PRC, there are many kinds of land use right, such as industrial land use right, commercial land use right, residential land use right, etc. Differing from the above, however, the land used by the government— most of the time— is allocated by the government, which means that any of the property above such land are not allowed to use as a commercial purpose. If so, the lease agreement may be deemed as illegal and shall not be registered legally.