Setting Up a WFOE in China

Q&As

Setting Up a WFOE in China

What are the requirements of registered capital when establishing a wholly foreign-owned enterprise (WFOE) in China?

Registered capital is the initial investment in a WFOE required to fund its business operations until the WFOE is capable to fund by itself, and it is required to be indicated in the Articles of Association of the WFOE and be registered with government authorities.

Since the Company Law of PRC has been revised in 2013 and then the regulations regarding WFOE has been similarly revised accordingly, there is no more minimum registered capital requirements for WFOE establishment except for a few industries such as bank, insurance company, securities company, and the proportion requirement on the first instalment of the registered capital was cancelled.

The registered capital could be injected over a period time (e.g. 10 years) as per the demand of the operation of the WFOE, and could be divided into several instalments up to the WFOE’s decision.

However, the governing authorities will supervise to ensure that a WFOE’s registered capital be sufficient to support its business operations, including its rentals, labor costs, and office expenses, for at least one year from its establishment.

What contract templates should I prepare once I have established a WFOE in China? And Why?

To a certain extent it depends on the business of WFOE. However, the follow contract templates are normally the “must” you should have on file:

  • Client contract, including:
  1. One-off client contract; and
  2. Long-term contract (“Master Agreement”) with template of Scope of Work (“SOW”)/ Purchase Order (“PO”), which is to be used on a project by project cases.
  •  Vendor contract

As there will be many kinds of vendors, e.g. goods suppliers, service suppliers, logistic suppliers, storehouse suppliers, etc. it is ideal to prepare several templates for the most frequent used kinds of suppliers. The “Master Agreement + SOW/PO” mode is recommended.

  •  Employment agreement
  •  Non-Disclosure Agreement (“NDA”)

With slight revision on a case-by-case basis, NDA can be used along with client contracts, vendor contract, or employment contracts.

If your business requires a lot of personal data (i.e. personal identifiable information), you are strongly recommended to have templates of Data Protection Agreement (“DPA”), of both client version and vendor version.

When you do business in China, it is better to have your own contract template, not only for showing you professionality and passion on your own business, but also for taking control and having more bargaining power from the beginning.

What is the business scope for a WFOE and what is the relevance of this?

The business scope is a one-sentence description of a company’s activity within China; the creation of the business scope is crucial, because it directly affects the legal operations of the company, and the company’s ability to issue official invoices (fapiao) to clients.

The business scope is printed on the company business license, after having been written and approved. Once finalized, the process of changing the business scope is complicated and time-consuming, taking several months, therefore business scopes should be prepared and agreed upon in advance of incorporation.

What are the benefits of using a holding company for a WFOE?

Foreign investors may use an intermediary holding structure to serve as the formal investor shareholder of its WFOE.

This solution can be chosen in order to benefit from preferential tax treatment by setting up the holding company in a region that has favorable tax treaties with China, even if qualification for such tax benefits has become stricter. Another benefit could be that this makes it much simpler for a WFOE wanting to change its shareholders, because formally this requires tax clearance which can be very time-consuming.

How should foreign investors adapt when setting up a wholly foreign owned enterprise (WFOE) in China?

Foreign investors need to adapt their presence to serve China’s domestic consumer market. To engage in distribution, an existing manufacturing wholly foreign-owned enterprise (WFOE) will need to expand its business scope. Adding distribution into its business scope means that the WFOE will be able to import goods to China to sell directly, either in wholesale or retail; as well as establish a fully operational China sales and after sales platform.

What are the benefits of the WFOE structure?

A WFOE is usually the best investment vehicle for investors establishing a long-term presence in China when a joint venture is not required, because they overcome the limitations associated with representative offices (RO):

  • A WFOE can directly employ staff, make profits, issue invoices in RMB, and engage in operations that are precluded to the RO.
  • A WFOE can directly sign contracts with third parties, which can thus eliminate intermediaries, such as agents, when sourcing goods from China.
  • The WFOE structure allows a company to have a wider local presence, a better understanding of the consumer needs as they evolve over time, and onboarding more staff is quite simple.
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