Last week I did a quick post on the leasing requirements for forming a WFOE. That post generated some excellent comments/questions, hence, this Part II.

A couple people asked about the legality of “virtual offices.” 

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 a 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 Guangzhou, for instance, the authorities actually come out and inspect the space and if it is not in compliance with the requirements for a WFOE they will reject the application for the WFOE.

I have received calls from people who have had their WFOE rejected for this very reason and, as I have written previously, once you have your WFOE application rejected (no matter for what reason), it becomes much more difficult ever to get it accepted.

In the old days, companies oftentimes wanted a virtual office in a favorable tax district (e.g., Pudong) and then had their real office in some other district or city.  However, under China’s new tax code this tax reason is no more.

Note also that for the WFOE to be approved, the lease is supposed to be registered and if you are going to get the tax deduction for your lease payments, you need a registered lease and a receipt (a fa piao) from your landlord. I do not see how this can be done if you are using illegal and unregistered space. 

If you are not going to get the right space for a WFOE, you are probably better off not getting a WFOE at all. Registering a WFOE and then not complying with ALL of the requirements for having a legally operating WFOE is a classic example of trying to operate quasi-legally in China. For why this is a bad idea, check out “Quasi-Legal In China. Not The Place You Want To Be” and “Forming A Company in China. Do It Right Or Do It ALL Wrong, But Don’t Do A Rep Office.

  • AEK

    The problems I have with renting or leasing before having the WOFE business license is the following:
    1) I have to sign a lease that runs for more then 2 years or else my chances of getting approved are not as good. Now for most companies that is a 24 times 13.500 yuan investment = 324.000 Yuan.
    What if your company does not get approved? This means that in the contract there has to be a article stating that you can get out of the contract if you don’t get approved. Still you are looking at losing 50.000 yuan for just trying.
    I was told that it is sometimes possible in the beginning to just show a fotocopy of the intended place of operation or maybe the ownership certificate and then rent later on. Still that is betting on handing in the paperwork on a day when the one approving you is having a good day. This could also give you away when dealing wiht the landlord. He might give you a big fat rent hike if he knows you have showed his office space to the authorities. Therefore pull down the description from the net if possible.
    2) If my head office or my lawyers or myself rent the office space, then what and how are we liable until handing over the lease to the WOFE. No one knows. The answer you gave to Paul Giles was an appeal to precedent. I also never hear of people being tax liable or otherwise liable for holding a office space lease until it is handed over to the WOFE. Still in China that does not mean that there is no liablity.
    3) The work needed to clear the leased area needs a lot of work and can leave some loose ends. Any prior company registration has to be cleared, any prior tax issues have to be cleared, the landlord has to agree to pay taxes according to the rules and regulation ( that is one most difficult things to convince them of), The rented space has to at best be business space. Not a mix. Still I also understand that the police station has to be involved. Why I don’t quite know.
    To me some of the requirements are somewhat vague. What is the correct size of office space? 80 or 180 square metres? What is the correct length of the lease? 1 year, 2 years. How many computers do I need to get approved? what kind of internet connection etc..
    All this ununcertainty is something one has to be ready to live with. The good thing is that this is just the beginning, this is just for getting a place to run your business from. Your business has not even started yet.

  • Thanks for an excellent post, both this one and also the corresponding Part I. Informative, helpful, and timely. We ourselves are in the middle of WFOE formation and have just signed on a lease for an office space, with a clause agreed to by our landlady that we will be released from the terms of the lease contract if the WFOE approval process does not go through.