China is, without any doubt, one of the leading global economic hubs and a paradise for investors. For about four decades, the country has been experiencing exponential growth, making it the perfect launching pad for a business to reach multinational status. In 2021, the World Bank projects the Chinese economy to grow by 8.5% and 5.4% in 2022. This is even higher than the US growth predictions, which are 6.9% for 2021 and 3.6% for 2022. So, are you looking forward to growing your firm rapidly? Well, it is time to head to China and join other top-performing brands. It is time for a WFOE set up China!
As you make the big decision for WFOE set up China, we must indicate it can be pretty challenging because it involves dealing with multiple departments and preparing multiple documents. So, here is how to go about it and why you should work with experts.
WFOE: How Does it Differ from Joint Ventures and Representative Offices
Before looking at the process of setting up a WFOE in China, you might also want to know how it compares to other top formations, especially joint ventures (JVs) and representative offices (ROs). So, here are the main differences:
This is the most preferred business format, and it is structured as a limited liability company. As the name wholly foreign-owned enterprise suggests, the business is 100% owned by the foreigner or foreign entity. Therefore, the owner has greater control over all the operations, including who to hire and profit targets.
Running as a limited liability company means that the investor has some protection from personal liability. In the event of a problem, such as bankruptcy or other issues, your liability only extends to the shareholding held in the company. So, no authority, entity, or person can come for your personal assets.
Advantages of Using a WFOE in China
- Works very well when targeting long-term presence in China.
- You enjoy total control over decision-making in the company.
- You can engage in all activities that the business is registered for in China.
- A WFOE is a good way for patent protection when opening a business in China.
- There is no sharing of profits with partners
- You have full control over the process of hiring company employees.
Joint Venture (JV)
Like a WFOE, a JV takes the form of a limited liability company. However, that is where the similarities end. This type of business requires you to identify and enter into a partnership with a Chinese partner.
Another important thing about it is that the Chinese partner is required to have controlling shareholding. So, the partner will yield greater control over the running of the company.
Although you get the advantage of taking advantage of the supply chain networks that the Chinese partner had established before the creation of the JV, it is not desirable because profits have to be shared. For most investors, this is a risky undertaking, and the best option is WFOE set up China.
Representative Office (RO)
This is one of the easiest and fastest companies that you can register in China. However, its operational model is entirely different from a WFOE because you are not allowed to undertake profit-making activities. It is considered an extension of your home business and can only be used for non-profit types of activities. So, when should you use a RO?
- Market exploration.
- When aiming at a simple presence in china.
- If your enterprise is doing an initial survey before making the final decision to expand to China.
From these comparisons, you can see that a WFOE is no doubt the best company formation for an investor expanding to China.
WFOE set up China : A Step–By–Step Guide
Registering a WFOE in China requires you to deal with different offices and have all the required documents. So, here are the main steps to follow:
Step One: Select the Company Scope
The Chinese administration has classified its economic sectors into several areas with the aim of achieving faster growth. Therefore, you should start by looking at these classifications on the China’s Catalog for Guidance of Foreign Investment Industries. The Chinese administration is focused on encouraging businesses in manufacturing and innovation. This encouragement is what has made the manufacturing sector in China expand rapidly over the last two-three decades.
Step Two: Prepare All the Required Documents Correctly
A WFOE set up China requires a long list of documents that must be submitted to different departments for approval. Here are the main ones:
- The Company’s Name:
This is very important to avoid conflict of interest with other already established firms in China. To get the name of a WFOE, you need to apply for approval from the Administration of Industry and Commerce (AIC). The approval can take 2-15 days, depending on the province and the city where the business will be located.
- The List of Controlling Partners
These are the shareholders who will have a controlling shareholding in the company. So, you should start by establishing that the shareholders are allowed to acquire shares in the company and listing them based on the number of shares they hold before taking this document to the registrar of companies. For example, if you have a shareholder from a country that is banned from conducting business with China, it might be a source of trouble in the future.
- The Company’s Managerial Structure
This is the operational profile of the company, and it includes different levels of managers. So, provide a clear breakdown, capturing the board of directors, general managers, supervisors, and legal representatives. In addition to this structure, you also need to include copies of directors’ passports.
- The Registered Capital for the Company
This document highlights the resources that are dedicated to meeting the company’s expenses. In addition to the registered capital, you also need to capture the total investment, which is the sum of future loans from investors and registered capital.
These future loans can also be sourced from third parties, such as licensed lenders in China or back home.
- The Business Legal Address
Every company registered in China is required to have an address. This should serve as the company’s headquarters where any answer about the firm can be sought. The address of your WFOE should include details such as the phone number and contacts of the land or house owner.
- The Feasibility Study of the Company
Before your company can be issued with an operating license, the Chinese authorities want to be sure beyond reasonable doubt that the enterprise is feasible. This implies that you need to have started earlier to assess the market and craft a good business plan and budget. To do this, it is also important to demonstrate the company’s capital for funding its operations.
If the registrar is not convinced about the company’s feasibility, the approval will be declined. This is why it is a great idea to work with experienced professionals to draw the best plan.
- Articles of Association
The articles of association is another very important document during a WFOE set up China. The document captures crucial information about the business, including the scope of operations and the managerial structure. More importantly, the document includes the details that the company will use to share profits and bring onboard other shareholders.
Step Three: Apply for a Company’s Approval Certificate
This is one of the most important steps because it determines whether you will continue with the rest of the stages or not. Also, applying for an Approval Certificate requires that you deal with multiple departments, including the State Administration of Industry and Commerce (SAIC) and the Ministry of Commerce (MOFCOM). After the review of your documents, your Approval Certificate will be issued or declined.
Step Four: Apply for Business License
Once you are issued with an Approval Certificate for your company, the next step is applying for a business license. Note that this will depend on the area that your company is to operate in. For example, companies in construction, telecoms, beverages, food, and manufacturing require additional licenses.
Step Five: Register Your Company with Public Security Bureau (PCB)
In China, your company cannot operate without a registered chop. Consider this to be equivalent to the registered signature in most western jurisdictions.
Without a registered chop in China, it will be impossible to enter into a contract with other companies.
Step Six: Open the Company’s Bank Account
Once you are through with all the processes, including having the right licenses, it will still be impossible to start operations without a bank account. Therefore, you need to identify a good bank and open an account there. Note that a bank account will not just assist the company in paying or getting paid, but will also come in handy to help with payroll management and filing tax returns.
Before opening a bank account, try to identify the bank that can help your organization to get financial help in time of need. For example, can the bank provide the company with finances to bridge short financial shortfalls or fill gaps when payments from creditors lag?
Step Seven: Register with the Tax Bureau
Every company, be it local or foreign, is required to comply with all tax regulations in China. Therefore, you should start by registering the company’s basic financial and operational structure. This will also be an excellent moment to review and capture all the business tax-related obligations. So, what are the main obligations?
- Transaction tax: In China, this tax is 3-5% of the business sales and can also be referred to as a turnover tax.
- Corporate income tax: This tax is levied on profits and is 25% in China. However, you can enjoy lower rates if the company is in the encouraged areas, free trade zones, or located away from coastal cities.
- Custom duties: If your company deals with imports and exports, this tax will come into play. Check the reduced custom duties rates for companies that are located in free trade zones.
- Value-added tax (VAT): VAT in China varies from 3% to 13%, depending on the industry. To know which VAT rate that your company is supposed to follow, review the China VAT reform of 2019.
- Individual income tax: This tax is charged on dividends levied by businesses and employee salaries.
These are only a few of the obligations that your company should follow. Indeed, there will be a lot more. For example, you need to note the mandatory deductions to the Housing Fund, industrial injury insurance, and social insurance.
WFOE set up China : Work With an Agency for Company Registration
Although the Chinese administration has made commendable efforts to try and simplify the process of company registration, it is still very complex for most companies. Many investors find it challenging to interpret the local laws, deal with different departments, and prepare multiple documents. In addition to these, you might also be required to take multiple flights to China, a fact that can make the process very expensive. The best way to simplify the process is working with an agency of experts:
Because experts will have helped other investors with WFOE set up China, it will be pretty easy for your situation. They have dealt with different departments and can easily make all the documents you need. Moreover, they are always on top of the regular legal and policy changes in China, meaning that you are sure of being compliant when expanding your firm to china.
With experts on your side, the process of registration will also be faster and cheaper. These professionals will also come in handy to help with the following:
- Tax advise
- Tax minimization methods
- Support for the annual financial statements
If you are thinking of a WFOE set up in China, this is one of the best jurisdictions for faster growth and success. However, do not risk trying to do it on your own because it can easily be overwhelming. Select an agency of experts to help with the process.