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The Resource for the Global Finance Profession

WFOE Registration in China: What Treasurers Need to Know

  • By Larry Harding
  • Published: 2011-09-14

Organizations that have long-term business objectives in China frequently decide to establish a Wholly Foreign Owned Enterprise (WFOE). This private, limited-liability entity lets foreign organizations do business directly in China by means of foreign investment, while allowing the parent to retain control over the business. A WFOE can enter into contracts, hire local employees, conduct research and development, market products and services, issue invoices, and receive payments in Chinese currency. 

Though similar to Western corporations, WFOEs differ in several ways: 

  • A WFOE has a limited existence—typically 20 to 30 years  
  • A WFOE requires registered capital, which varies depending on the industry and business location. The minimum amount is RMB 1 million — approximately $140,000.  
  • A WFOE’s equity holding is not determined through shares, but by percentage of contribution to registered capital. Investors or shareholders must pay for the shares subscribed and deposit the funds into a specified bank account. The amount and actual receipt of the share capital deposited must be formally audited by a local firm of certified public accountants.  
  • A WFOE can only operate within the business scope as defined in its initial business license. If the organization decides to diversify its business scope in China, it will need to apply for approval.  
  • A WFOE must have a separate and unique physical address in space that is zoned for the type of business the WFOE is authorized to undertake. Neither virtualoffices nor subleases are permitted.  

The WFOE registration process can be a protracted affair. Roughly speaking, it has two phases: the first leads to the issuance of a temporary business license (TBL), which is when the WFOE is considered to have a separate legal identity, and the second includes the requirements afterwards, including the issuance of the final business license. 

The list of pre-registration requirements for a TBL include: 

  • Name approval 
  • A feasibility study report 
  • An environmental impact report (depending on business scope) 
  • Draft of Articles of Association 
  • Retention of a Foreign Investment Approval Certificate. 

Post-incorporation requirements after the issuance of the TBL include Enterprise Code Registration, customs, financial, statistics and national and local tax registrations as well as registration with the State Administration of Foreign Exchange, and company registration. The foreign investor also must open a local bank account. 

Office lease considerations 

Lost in this somewhat daunting list of requirements is a little understood connection between the need for leased space and the process of obtaining a business license. Some lease-related specifics that arise during the registration process include: 

  • A valid office lease agreement must be submitted to the Administration of Industry and Commerce (AIC) for review, a process which involves verification of employee headcount, as well as a review of operational and business scope details to ensure alignment with the WFOE’s registration forms. The AIC also checks for address conflicts.
  • The shareholder of the WFOE must be identified/appointed before entering into a lease, a requirement that indicates the foreign company is committed to the WFOE setup.
  • The shareholder’s identity document must be legalized by the Chinese embassy in the country where he/she resides. A passport copy is required if the shareholder is an individual, the company’s incorporation documents if the shareholder is a corporation.
  • The lease must be for a period of at least 12 months.
  • The space must be legally owned by the landlord, who must possess all proper documentation. Surprisingly, problems with documentation are not uncommon, particularly with inexpensive space.
  • The landlord must warrant that that the space can be approved for the use the new WFOE intends to make of it.
  • The landlord must register the lease with the applicable local government real estate administration. This means that the landlord will need to make all tax payments and provide tax receipts (a fa piao, or official invoices registered to the local tax bureau) to you as the tenant, allowing you to take rental payments as a tax deduction.
  • In some locations (Beijing, Shanghai, etc.), the authorities will physically inspect the space and will reject the application if the space is not in compliance.

It is imperative that, before signing a lease agreement, you are assured that the space itself and the landlord are in full compliance with all requirements allowing them to lease space to a newly established WFOE such that approval of the space by AIC will be routine. 

Larry Harding is founder and president of High Street Partners. 

More China resources for treasurers are available here.  

Copyright © 2014 Association for Financial Professionals, Inc.
All rights reserved.

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