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How To Form A Company In China. The Basics.

Posted in Basics of China Business Law, China Business, Legal News

Though we often talk generally about what it takes to form a company in China, a reader recently pointed out to me that we have never set out the basic steps one must take to do so. The following sets out the basic steps a foreigner usually must take to form a Wholly Foreign Owned Entity (WFOE) in China. For more information on what is required to form a company in China, check out How To Start A Business In China — WFOE and How To Start A Business In China — The Minimum Capital Requirements For A WFOE.

 Forming a WFOE in China typically requires the following:

1. Make Sure Your Business is Legal For Foreigners. 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. Be sure your business will be legal.

2. Provide The Proper Documentation. The investor in the WFOE must provide the documentation from its home country proving it is a duly formed and validly existing corporation or Limited Liability company, along with evidence showing who from the investor is authorized to execute documents on behalf of the investor. The investor also often must provide documentation demonstrating its financial adequacy in its home country. 

3. Investor Documents Needed. The Chinese government normally requires the following documents from the investing business entity:

  • Articles of Incorporation or equivalent (copy)
  • Business license, both national and local (if any) (copies)
  • 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)
  • Bank Letter attesting to the account status of the investor company (original).
  • Description of the investor’s business activities, together with added materials such as an annual report, brochures, website, etc. The first four of these must be in Chinese. The last one may be submitted in English, with a Chinese summary.

4. Consider Forming a Special Purpose Company to Own the WFOE. Many investors create special purpose companies to serve as the investor in China. China’s company regulators have become accustomed to this process. However, the Chinese regulators will often still seek to trace the ownership of the foreign investor back to a viable, operating business enterprise. It is common to form a Hong Kong company for this purpose and there are often tax benefits in doing so. 

5. Secure Chinese Government Approval. 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 company registration process. If the project is not approved, the company will not be registered. 

6. Compile and Provide These Documents for Chinese Government Approval. The following documents must usually be prepared and then submitted to the Chinese government:

  • Articles of Association. This document will set out all the details of management and capitalization of the company. 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.
  • 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 a client produced business plan and budget to draft up the feasibility study (in Chinese).
  • A Lease. 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 into account in planning a budget because the governmental authorities will be expecting this.

7. Compile and Provide These Additional Documents for Chinese Government Approval. You will also usually be required to provide the following documents:

  • 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 around 30% to 40% 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 (usually one year or more) during the start up phase of the Chinese company. These documents must be in Chinese.
  • Any other documentation required for the specific business proposed. The more complex the project, the more documentation that will be required.

8. The Approval Process. 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.

if you comply fully with the above, your chance of getting your WFOE approved is nearly 100%.

  • John

    Interesting article. I’ve got to believe that the process seems to be dependent upon the market segment of the WFOE. I have been the GM of 3 technology WFOE’s and the time frame for approval never took 5 months; more typically 2-3 months. Additionally, in no way is it “customary” to pay one year office rent up-front. In Beijing and Shanghai, the more typical requirement is a security deposit of 2-3 months.
    I think it also important to point out that technically a company cannot execute a property lease without a business license and you can’t get company registration without an office lease (as you mentioned). Everyone knows this so it is important to get the correct paperwork from the landlord.

  • China Guy

    All very helpful. Thanks. You make a good point about the differences in time for approval depending on location. I too have noticed that.

  • winter

    All very helpful stuff, thanks! My question is if I want to start a consulting firm in china (no manufacturing), what the best way to start? WFOE seems a bit over kill…

  • http://www.chinalawblog.com Dan

    It seems like overkill to me too, but the only other options are usually just to do a rep office, which is rarely legally appropriate and even more rarely makes sense, and a joint venture. China is not at all friendly to micro-foreign companies, particularly in certain cities.

  • Chris

    @ Winter: “WFOE seems a bit over kill…”
    Despite what looks like an arduous process, once you get yourself organised with the paperwork, a WFOE is not that tough. The upsides are enormous and it is critical for a consulting firm to have full registration and relevant business licenses. You can then happily undertake your consulting and focus on the business issues. For a very small firm, on-going compliance is relatively straightforward (get yourself a great local accountant who can handle HR as well as business licensing).
    Read the China Law Blog to identify key legal issues you will need to focus on. Ignore noise on the registered capital issue, it is a requirement and having working capital in the bank is very useful (remember the cash is still yours).

  • Volker Müller

    Is it necessary that the investor of a WFOE is a registered company?
    Or can a private person act as an investor?
    I have heard of quite a lot of foreigners setting up their own SME in China. There must be a legal way to do so.

  • Straydog

    Dear Volker,
    Yes, a private person can be the investor as well. It is common in China and in some cases the paperwork for the registration is less as well. You will just need a notarized and authenticated copy of the investor’s passport (in most cities at least). You won’t need any audit or other documents of a foreign company since there is none.
    The other advantage for an individual investor is that there is less (or no) tax when getting the profits out of China.
    The downside is that it might not be convenient for some companies if the entity in China belongs to a private person and not maybe the foreign company.

  • Tim

    If you are an individual investor, you normally have to show that you have all funds for the capital available in your personal bank account. When you pay yourself dividends and you are living in the PRC, you are likely to have to pay tax on this income. Using a holding company has the advantage of ease of disposal as well as ease of restructuring your equity. Some people will go ahead as a single investor; however you need to weigh the advantages and disadvantages before proceeding.
    One note on SPV’s – they are still very useful but China has taken a substance over form approach with these types of entities. Unless there is a substantive business operation within the parent company, you may not be able to enjoy preferential tax policies.
    Finally, you will ‘hear’ quite a lot within the expat circles; the information is often based on truth but is generally misleading as is missing significant pieces of the process. Also, I’ve noticed that quite a few revel in what they were able to get away with as if it is foolish to actually play by the rules here.
    Run, do not walk, in the other direction.