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.