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
WFOE has a limited existence—typically 20 to 30 years
WFOE requires registered capital, which varies depending on the industry and business
location. The minimum amount is RMB 1 million — approximately $140,000.
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.
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.
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:
feasibility study report
environmental impact report (depending on business scope)
of Articles of Association
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
- 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
- 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.