5 Questions to ask when forming Chinese WFOE
China’s huge population has made it an investment hub for many foreign companies looking to grow their businesses outside of their countries. To legally operate in China, foreign-owned companies sometimes opt to go the WFOE way (Wholly foreign-owned enterprise) as opposed to Joint Ventures or Representative Offices. Here are 5 important questions to ask before forming a WFOE in China.
1. What is a WFOE?
WFOEs or Wholly Foreign Owned Enterprises offer foreign investors a chance to do business in China while retaining their independence. WFOEs can hire both local and foreign staff, make profits in China, be formed without a Chinese partner, offer the best protection and registration of IPR in China, send funds overseas, and get long-term licensing.
WFOEs are able to take advantage of the huge population in China with great spending power to make profits.
2. How Long Does it Take?
As a quest to improve the registration process for foreign companies, China has made part of the application process accessible online (Via MOFCOM), has introduced a 5-in-1 license (online application done to the local Administration for Industry and Commerce) and relaxed the WFOE capital requirements. WFOEs generally fall under 3 categories; consulting, trading, and manufacturing. Registering a WFOE will depend on the category under which it belongs.
3. Has the Name Approval Application been Received?
When researching a name for the enterprise, a foreign-owned entity should be careful to make note of the Chinese language to avoid misinterpretation of the name. One word said could mean different things when pronounced differently or with different intonations used. It is very crucial that a company researches and understands this.
The company name must include the administrative region name of the company’s incorporation, the brand name, industry or business the company is operating in, and finally must include “Company Limited”.
4. What is the Formation Process Like?
The WFOE registration process generally involves name approval and registration, obtaining a registered office address, applying for business licenses, carving a seal for the company (also known as carving chops), opening bank accounts, registration of VAT with the local tax authority, and finally, employee contracts. The processing periods for these applications and registrations may vary depending on the industry the company is being registered under and whether the company has all the required documentation ready. In a case where the company has all its legal documentation in order, the formation process could take about 21 days.
5. What is the Post-Formation Process?
Like every other company, a WFOE is subject to taxes and on-going reporting of financial and tax audits. The financial and tax audits involve an annual audit by a Chinese Certified Public Accounting Firm, annual tax returns, and an annual report containing the company and financial information, which should be submitted to the local AIC. The main taxes levied on a WFOE include a withholding tax, a consumption tax on products & services, a corporate income tax, a consumption tax on manufactured or imported goods, and stamp duty.
To stay in business and to continue being considered a legal entity, a WFOE has to ensure that the registration and day-to-day running of the organization are done in adherence to business laws in China.
Excerpt from Market Entry 10x Series (2020), co-published by Brainsfeed and TCP Growth