China: Wholly Foreign-Owned Enterprise (WFOE)
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A DIFFERENT TAX JURISDICTION
On this Page:
- China: Nature of a Wholly
Foreign-Owned Enterprise
- China: Formation of a Wholly Foreign-Owned Enterprise
- China: Ongoing Formalities for a Wholly Foreign-Owned Enterprise
- China: Employing Staff for a Wholly Foreign-Owned Enterprise
- China: Taxation of a Wholly Foreign-Owned Enterprise
China: Nature of a
Wholly Foreign-Owned Enterprise (WFOE)
Although
at one time it was normal for foreigners wishing to do
business in China to use either a Representative Office
or to form a Joint Venture, these forms have their disadvantages,
and it has now become common practice to form a limited
company under the Law of the People's Republic of China
on Enterprises Operated Exclusively with Foreign Capital,
1986.
Originally,
WFOEs were intended for export or high-technology manufacturing,
but China's entry into the WTO has led to a gradual broadening
of the use of WFOEs into service and trading sectors.
When a WFOE is set up for trading purposes within China
itself, it is more normally known as a 'Foreign-Invested
Commercial Enterprise' (FICE), and is governed by the
2004 Measures for Foreign Investment in Commerce. See
here
for a description of the formation and operation of a
FICE.
Detailed
Rules For Implementing The Law Of The People's Republic
Of China On Enterprises Operated Exclusively With Foreign
Capital were enacted in 1990.
While
the legislation lays down highly prescriptive rules for
the formation and operation of a company owned by foreigners,
the actual limited liability company itself must be formed
under The Company Law of the People’s Republic of
China, adopted October 27, 2005, effective January 1,
2006. This was an entirely new piece of legislation which
brought Chinese company law significantly closer to Western
practice.
As
with a Representative Office, the formation of a WFOE
is conducted under local rules, and central government
becomes involved only if the business falls within certain
nominated sectors such as financial services, telecommunications
and the media.
Formation
of a WFOE is not a purely bureaucratic process; the local
authority will want to ensure that the proposed business
will be adequately capitalized and does not present environmental
risks. Their behaviour is normally said to be reasonable
and quite business-minded, although there can be regional
differences.
The
legal minimum capital under the law is RMB100,000 (USD15,000)
for a company with multiple shareholders, or RMB30,000
for a single-shareholder company, but the registered capital
must reflect the needs of the business and is likely to
be far higher than the minimum for most businesses. Capital
requirements need to make allowance for the fact that
many types of payment may have to be made in advance;
business credit is unusual in China.
The
capital required by the business and set down in the approved
business plan will actually have to be provided, in cash
or in kind, according to the timetable proposed, and once
provided cannot be taken back. Profits can be repatriated
by all means, although the renminbi (yuan) is still not
fully convertible, and transfers will have to be approved
and conducted through an authorised bank.
WFOE's
are formed to operate within a defined business sector,
known as business 'scope', and any extension of the business
scope into another sector is likely to require an additional
registration process, although all activities that are
ancillary to the primary purpose are permitted.
WFOEs
can employ both foreign and domestic workers, following
appropriate procedures.
As
with a Representative Office, a WFOE must have procured
suitable premises in order to be registered in the first
place. Such premises are likely to be within government-designated
office, warehousing or manufacturing buildings.
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China: Formation of a
Wholly Foreign-Owned Enterprise (WFOE)
Except
in certain business sectors where central government
permissions are required (eg banking and financial
services) the formation of a WFOE is a regional affair.
Central government ceased to be involved in 2004.
Sectors in which registration can be carried out regionally
include manufacturing, trading, freight, consulting,
contracting and advertising.
A
company name must be in both English and Chinese,
though, for practical purposes, only the Chinese name
is important. It cannot be identical or similar to
a previously registered company name. The name can
be pre-reserved for a period of up to six months,
which will expire if not used for establishment purposes
during this time.
A
WFOE must have a name in the form: Parent Company
- Business activity - City - Ltd, eg Clinton Consulting
(Beijing) Ltd. The chosen name (and proposed alternatives)
can be 'pre-registered' for a period of six months,
allowing time for the registration process itself.
Premises
must also be found before the registration process
begins. It is required to have physical premises in
a building designated for such a purpose by the government.
Accommodation addresses are not available for this
purpose.
If
factory or warehouse premises are also to be leased
or acquired, their legal status must be such as to
permit occupation or ownership by a WFOE; in many
cases, especially where premises appear to be cheap,
this may not be the case. Needless to say, expert
advice is required on this and indeed on many aspects
of commencing a business in China.
The
entire formation and registration process will take
up to six months, depending to some extent on the
region or city of registration, and evidently also
upon the complexity of the business plan. The initial
registration of a WFOE must be renewed annually. Registration
is carried out by the local Administration of Industry
and Commerce (AIC) without the involvement of the
Ministry of Commerce (MOFCOM).
The
registration process is conducted by and through
a 'sponsor', being a local company which is appropriately
authorised, and can itself be foreign-owned. The
sponsor submits the required paperwork to the
AIC, and this includes:
- an
application letter and standard application form;
- the
articles of association of the WFOE;
- commercial
feasibility study including the capital requirement;
- an
environmental protection study if appropriate;
- the
certificate of incorporation of the parent company;
- relevant
extracts from the statutes of the parent company;
- a
credit reference from the parent company bankers;
- a
document appointing the director(s);
-
a brief description of each directors and copies
of their passports or other ID;
- evidence
of the lease or purchase of office space;
- power
of attorney in favour of the sponsor.
The
AIC issues a Foreign Investment Approval Certificate once
the business plan has been approved. Once the registration
has been approved, certain other formalities must be completed
within various specified periods:
- Issuance
of a Temporary Business License by the AIC;
- Purchase
of a 'chop' (carved stamp used to authenticate documents)
from an approved maker;
- Provision
of capital, or first tranche of 20% at least, and
audit of this by a local accounting firm;
- Issuance
of Permanent Business License by the AIC;
- Issue
of an Enterprise Code Certificate by the Bureau of
Quality and Technology Supervision, which is required
when registering with the tax authority, the customs
and in order to open a bank account;
- Registration
with the local and central tax authorities;
- Registration
with the customs authority (if it is intended to import
office equipment, automobiles or personal effects);
- Registration
with the local Statistics Bureau.
Some
of the salient characteristics of a WFOE are as follows:
Back to top
China: Ongoing Formalities
for a Wholly Foreign-Owned Enterprise
Books
of account must be set up within 15 days of approval of registration,
and must be kept in the Chinese language. Audited accounts
must be prepared by a domestic accounting firm on an annual
basis which must be submitted to
the tax authority. These are not publicly available.
The
WFOE's Business License and Enterprise Code Certificate must
be renewed annually. Renewal applications must be submitted
one month before the date of expiry.
Remittances
overseas will almost certainly be subject to foreign exchange
controls, and specific permission will probably have to be
obtained on every occasion, although this process can very
often be administered by local banks. Many types of overseas
remittance incur withholding tax.
If
a WFOE ceases operations in China it must apply for de-registration
and return its tax certificate to the tax authorities.
Back to top
China: Employing Staff
for a Wholly Foreign-Owned Enterprise
Under
Chinese law a WFOE may employ both Chinese and foreign workers.
Individual labour contracts are required and must be submitted
for approval to the local labour bureau.
The
contract, which needless to say must be in Chinese, must include
at least a minimum seven clauses as prescribed by Article
19 of the Labour Act, and must follow a format prescribed
by the local labour administration.
PRC
labour law permits the termination of a direct employment
on 30 days' notice, but if there is no demonstrable cause,
there is a definite possibility of legal action. For this
reason it may be better in some circumstances to recruit Chinese
workers through an official 'labour service' office since
there is no direct legal relationship with the employees.
For Representative Offices it is obligatory to hire staff
in this way, but for WFOEs it is optional.
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China: Taxation of a Wholly
Foreign-Owned Enterprise
There
is a great variety of different taxes in China, and a WFOE
may have to file various different types of tax return, monthly,
quarterly or annually, covering Enterprise Income Tax, Value
Added Tax, Business Tax, Consumption Tax, Stamp Duty, Land
Appreciation Tax, Withholding Tax (on foreign remittances),
and, if there are employees, Income Tax and social security
contributions, which are withheld from pay on a 'PAYE' basis.
The
headline rate of taxation for a WFOE on its profits is 25%,
the same as for Chinese-owned companies since 2008. Some companies
may be able to take advantage of a 15% tax rate if they have
successfully 'grandfathered' their previous status; and there
are regional and national incentive schemes in particular
sectors which allow for lower rates.
Corporate
taxation is dealt with more fully here,
and individual taxation is dealt with more fully here.
Incentive schemes are dealt with here.
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