Establishing a WFOE in China

China stands out as one of the leading countries to embark on international investment initiatives. The country attracted a staggering $163.8 billion in foreign direct investment in 2022, ranking first in the world. By 2023, China's GDP will reach a staggering $17.95 trillion, accounting for approximately 18.5% of global GDP.

Key factors increasing foreign investment interest in China

Despite the challenges China has faced recently, these multifaceted advantages continue to cement its status as a leading investment destination for global entrepreneurs. The country's commitment to progress, innovation and economic growth, as well as the active development of an AI-driven industry, ensures that China in 2023 will remain an attractive and dynamic environment for international business enterprises.

A Wholly Foreign-Owned Enterprise (WFOE) in China is a business entity entirely owned by foreign investors, eliminating the necessity for Chinese partners or shareholders. Establishing a WFOE in Mainland China offers several compelling advantages.

1. Full business control. WFOEs grant foreign investors complete control over their enterprise. They have the autonomy to engage in nearly any commercial activity, with exceptions being limited to government-restricted sectors.
2. HR and management autonomy. Overseas investors enjoy can appoint and dismiss employees, define salary and benefit structures, and establish the company's management hierarchy. This level of control provides flexibility in effectively managing operations within China.
3. Profit repatriation. WFOEs provide the capability to freely repatriate profits earned in China to their home countries, facilitating efficient financial management.
4. Employment of foreign staff. WFOEs have the prerogative to employ foreign individuals, which can be advantageous for specific business operations.

Despite these advantages, it's essential to acknowledge certain disadvantages of Chinese WFOEs.

1. Higher initial entry threshold. Setting up a WFOE typically entails a more substantial initial entry threshold when compared to other options, such as joint ventures. This is due to the sole foreign ownership structure and the inherent complexities involved.
2. Complex registration process. Establishing a WFOE demands a more intricate registration process. It necessitates approvals from various competent authorities, making the setup procedure relatively more convoluted.
3. Limited industry scope. Foreign investors are only permitted to operate in industries approved by the Chinese government. This limitation is in line with China's regulatory framework and may impact certain business ventures.

WFOEs stand as a notable avenue for foreign investors looking to establish a presence in China with full control and management autonomy. However, it's crucial for potential investors to carefully evaluate the advantages and disadvantages to determine if this structure aligns with their specific business objectives and industry focus.

Types of Chinese WFOE

WFOEs in China are generally divided into three main types, each with its specialization.

1. Consulting. These organizations offer services covering marketing, finance, management, legal advice and various other areas.
2. Production. Engaged in the production of goods or services either for domestic consumption or for export to foreign markets.
3. Trading. Such companies are mainly engaged in the import/export of goods or services.

Advantages and disadvantages of Chinese WFOE

Each category of WFOE has its own unique set of advantages and disadvantages, making them suitable for different business purposes. A thorough analysis of existing practices will allow you to choose the model that best suits your business strategy.

1. Consulting WFOE
   1. Advantages:
      1. relatively easy to register and manage,
      2. more streamlined operations.
   2. Flaws:
      1. limited growth potential compared to other types.
2. Production WFOE
   1. Advantages:
      1. higher potential profit.
   2. Flaws:
      1. the registration process is significantly more complex and requires a thorough environmental impact assessment (EIA) before business licenses are issued,
      2. an EIA can be a time-consuming and expensive process, requiring months of assessments and significant financial outlay.
3. Trading WFOE
   1. Advantages:
      1. Versatile and widely used for various purposes including import, export, distribution and retail activities.
   2. Flaws:
      1. traders must complete additional registration with customs to import or export goods, known as importer/exporter registration (IEC),
      2. IEC certificates have a one-year validity period and require renewal to maintain their status.

Opening an enterprise with 100% foreign capital in China

This is a multistep process that requires compliance with certain rules and requirements. But there are important steps to establishing a WFOE in China. Let's analyze them.

The number of WFOE founders is not limited; they can be individuals or legal entities.

The WFOE registration process may take several months and may vary slightly depending on the region in China. It is significant to seek professional guidance to ensure compliance with all applicable laws and regulations.

The management structure of WFOE in China is established in accordance with the provisions set forth in the Company Law of the People's Republic of China. The following are key components of the leadership structure of all types of WFOE.

Board of Directors

This is the highest governing body of WFOE. He is responsible for general management, making decisions regarding the company's strategy and structure, and appointing or dismissing members of the executive body.

Executive body

It is responsible for the day-to-day management of WFOE. Responsibilities are focused on implementing the decisions of the Board of Directors, monitoring the financial activities of the company and formulating personnel policies.

The complexity of the leadership structure may vary depending on

1. Company size
   • Larger companies often require more complex leadership structures to effectively manage their operations.
2. Field of activity
   • The management structure must correspond to the specifics of the company's activities.
3. Operational area
   • The structure must also be adapted to the size of the company's activities.

Documentation for WFOE registration in China

Preparing the necessary documentation to register a WFOE in China is a painstaking process. List of necessary documents that must be carefully prepared for successful registration:

1. Application for registration
   1. The registration application is the main document submitted to the relevant local government authorities. It should include important information such as company name, address, activities, share capital and shareholder details.
2. Charter
   1. The charter is the fundamental document regulating the activities of the enterprise. It outlines the company's objectives, management structure, and the rights and responsibilities of shareholders.
3. Founding protocol
   1. The constituent protocol must be signed by all shareholders and must contain a detailed description of the size of the contribution of each shareholder, the distribution of participation shares and the procedures for managing the enterprise.
4. Appointment of a director
   1. A decision must be made on the appointment of a director. This document must indicate the name, position, and authority of the director.
5. Copies of passport and visa
   1. For verification, copies of passports and visas of all shareholders of the enterprise are usually requested.

Opening a bank account for WFOE in China

Once registered as a WFOE, one of the important steps after registration is to open a bank account. To complete this, you must provide copies of organizational and personal documents to the bank.

1. Permit to operate in China, also known as a Chinese business license. This document serves as proof of the legal existence of the company and permission to do business in China.
2. Articles of Association, which set out the company's internal rules and management structure.
3. Certificate of registration.
4. Passport of the director of the enterprise.
5. Additional documents:
   • company activity plan,
   • financial report to assess the financial condition of the company,
   • list of company shareholders with information on the ownership structure.

When choosing a bank, it is important to consider the following nuances:

• commission structures vary from bank to bank,
• availability of an account type in the bank that meets the needs of the company,
• your company profile must meet the bank's requirements,
• proximity to the company's operating base will be of practical importance,
• the size of the initial deposit varies depending on the type of account and the specific bank.

Taxes, accounting, and audit

When setting up a WFOE in China, it is critical to understand tax obligations, accounting requirements and audit procedures.

1. Basic tax obligations of WFOE
   1. WFOEs are subject to corporate income tax at 25%. However, certain circumstances may result in tax benefits or a reduced rate.
   2. WFOEs are required to pay VAT at the standard rate of 13%. Some goods and services may qualify for reduced rates of 9% or 6%.
   3. WFOEs are responsible for withholding income taxes from their employees. The rate varies from 3% to 45% depending on the employee’s income level.
2. Accounting requirements
   1. The balance sheet must include the company's assets, liabilities, capital, income, and expenses.
   2. The income statement should detail sales revenue, cost of goods sold, operating expenses, profit before taxes, and net income.
   3. The cash flow statement must show the company's cash flows from operating, investing, and financing activities.

In addition, WFOEs are required to prepare additional reports such as an asset flow report, an inventory flow report, and an accounts receivable and payable flow report.

Annual audit

All companies with foreign participation, including WFOE, are required to undergo an annual audit. This audit is carried out by an independent auditor registered in China. The main objectives of the audit are:

• ensure the reliability and completeness of the company’s financial statements,
• assess the company’s compliance with Chinese regulations,
• provide an overview of the financial position and performance of the company,
• the audit report must be submitted to the State Administration of Industry and Trade (AIC).

Conclusion

Setting up a WFOE in China is a complex and time-consuming process that requires a profound understanding of local laws and business practices. Enlisting the help of subject-matter experts who offer a wide range of corporate services is invaluable in managing this process and avoiding potential mistakes that could lead to delays or financial loss.