By Kenneth Wong
Many foreign companies that are interested in the investment to mainland China and want to set up their business in China are often faced with such a question – to set a foreign representative office (Rep. office) or a wholly foreign owned enterprise (WFOE)? Which way is suitable for the status quo of the company?

• Representative office (‘RO’)
• Wholly foreign owned enterprise (‘WFOE’)

(In this article, we focus on the discussion of the difference between a representative office and a wholly foreign owned enterprise, particularly the difference between a representative office and a wholly foreign owned enterprise engaging in the “wholesale” and “retail” business.)

These two kinds of establishment are both organizational structures of commercial organization established by foreign companies in China, with the differences as follows:

1. Different Functions and Roles

The biggest difference of the two kinds of organizational structures lies in the functions, which lead to different liabilities and roles.

Generally speaking, a representative office as the spearhead of foreign enterprises in China exists for the liaison and market promotion, with main functions of operation natures of liaison, preparation and assistance in mainland China in assisting the parent companies.

A representative office itself has no qualification of a legal entity, with incomplete economic functions to engage in the commercial activities with common significance. A representative office cannot directly sign contracts with suppliers or customers in its own name and is not entitled to apply for the independent license of import/export, to apply for the qualification of a general taxpayer, to employ staff independently and to open an L/C account in banks. The expenditure of the representative offices must be from the remittance of the parent company overseas. It’s not possible for A Rep. Office to issue invoices (Fapiao) to its clients.

In the case of the representative offices of the commercial companies, representative offices are often established under the following circumstances:

1. In the initial stage for a foreign company to invest in China, there is not much market information available. By establishing a representative office with fewer employees (generally no more than a staff of 10 employees), initial market situations can be obtained, commercial opportunities developed, company image set up and contact with cooperation partners established.
2. In the case that initial contact has been established with domestic enterprises, but the domestic suppliers can directly contact the foreign parent companies, including the signing of contract and delivery of goods in an industry, a representative office is more preferable for the supervision and day-to-day liaison.

A Wholly Foreign Owned Enterprise (WFOE) can be described with much more simple words, that is, with complete functions of a company, entitled to perform all duties of a common company, including signing contracts, employing staff, applying for the license of import and export, issuing various invoices, opening various accountants and engaging in financing etc. independently, on which it would be unnecessary for us to go into more details.

From the perspective of the dynamic functions of a company, a wholly foreign owned enterprise (WFOE) is far more advantageous than a representative office in its applicability, flexibility and expandability and the customers are expected to choose the organizational structure based on their actual situations.

The Beijing Olympics 2008 is coming and it presents a lot of marketing opportunities for the Chinese entrepreneurs. Kenneth Wong, our resident contributor in Shanghai, shares on the general traits of the marketing strategies for Chinese companies on this upcoming event. He will relate how Singaporeans should attempt to create business opportunities such as the coming of the Integrated Resorts in Singapore.

For foreign enterprises, the opportunities presented by the Beijing Olympics are huge. Small businesses should implement a market-driven strategy to leverage on the glory of the games.

According to Tom Doctoroff’s book “Billions”, the Chinese will actively embrace businesses that boast integrated, insightful, China-centric sponsorship strategies. The following are 3 strategies to connect:

1. Do keep in mind that the 2008 Olympics boasts two massive audiences:
   Chinese (Mainland, Hong Kong, Taiwan and overseas Chinese) and global spectators. A global Olympic advertising strategy will require special tailoring to achieve the optimal “China effect”. Local tobacco manufacturer “The Shanghai Tobacco Company” packages the award of hosting rights to the Olympics in its advertisements as “The glory of the Chinese, Double Happiness abounds”.
2. The Chinese revere winners:
   Link your product to the conquering spirit of the victors.
   Liu Xiang, the first Chinese Olympic Champion who currently holds the world record for the 110-Metre Hurdles sprint is currently the spokesman for over ten products in China, ranging from Nike Shoes to Coca-Cola. Smaller businesses may take a leaf from the “Shanghai Oriental Pearl Mobile Television”. It did not spend a cent on using Liu Xiang directly to endorse its products. Instead, it used a tall guy wearing a green t-shirt printed with the numbers “12.88″, as a veiled reference to Liu Xiang’s character and world record to emphasize on the speed and supremeness of its products.
3. Help increase the chances of success for Beijing 2008:
   The Games represent an affirmation of everything China represents and will become. Beijing 2008 offers regular updates on the ongoing activities going on in the run-up to the games. A business can enhance relevance by highlighting how their goods and services can help in making Beijing 2008 a success. The Beijing 2008 Olympic Marketing Plan will give insights on how a small business owner can work in tandem with China towards achieving common goals: success for the games and profits for the small business who realizes the potential of the games.

As 2008 nears, small businesses should signal respect for the bold aspirations of the nation and its people, riding the games as an express train to the heart of desire.

Perhaps as Singaporeans we can take pride in the many events of which we have organized or about to organize. One good example is the recent IMF/ World bank meetings in Singapore. What new products could or have been developed to facilitate and ensure a smooth running of the event? The many incumbent event companies aside, how could we have added value to the event?

The upcoming Integrated Resorts in Singapore will also make for good food for thought. What new services/products can be developed to complement the resorts? Classes to teach people how to win at Poker? IR novelties such as a “Sands Umbrella” and assorted IR Memorabilla? The possibilities are all up to the entrepreneur’s imagination.

About the author: Kenneth is currently the President of SHEN, the Shanghai House of Entrepreneurs NUS and the Director of the Youth Chapter in the Shanghai Singapore Business Association. He is doing his internship as a corporate services consultant at Willsonn Partners, a fast growing CPA firm in China. He can be contacted at Kenneth@shentrepreneur.com or Kenneth.wong@willsonn.com or via Shanghai Mobile 86-21-13402065607.

In the rush to get into China, many start-up businesses tend to get into trouble because of their naivety in handling their company’s incorporation process and not paying attention to details on tax and legal issues. This article will examine the common mistakes committed by entrepreneurs in their WFOE incorporation and will draw attention to issues that potential investors to China should take note before jumping on board.

Sending Start-up Funds to a third party before WFOE is ready

It takes normally three to four months to complete a WFOE application. However, some foreign investors cannot wait that long and try to send the start-up funds to their local agent or local staff to cover the cost for the initial office fit-out, overhead or even equipment purchases. The problem is that these funds, as paid for the FIE setup can not be recognized as part of an enterprise’s capital injection once the business license is issued, as the capital injection has to be transferred by the foreign investor from their overseas account to the nominated Capital account directly and not via any third party.

An example is a client who had remitted up to USD 100,000 to their local supplier to ask them to pay for rental and purchase equipment prior to the license being issued. Subsequently, it was difficult for them to pursue the balance and to show such purchases as part of their capital injection. It would have been better to arrange this as an internal loan between the parent company and the WFOE and book it as a roll over amount instead of including it as part of the WFOE’s registered capital budget.

Registered Capital Issues

Many ill-advised investments are made in China due to misinterpretation of what the provincial governments term as “minimum registered capital”. Especially for small businesses, this is a much misunderstood area. “Minimum Registered capital” is not supposed to be a ruling on how much an enterprise has to invest, the amount of registered capital needed in the business depends on a number of different factors

Location: Some regions in China apply different levels of capital requirements than others to reflect their lower or higher regional operational costs

Scope: For certain industries or services, the applicable registered capital amount can be quite high. This is sometimes used as a protectionist tool to discourage foreign investment, and is sometimes used to ensure only the right standard of international business can enter the market to ensure the quality of applicant. It would be important to note if an existing business wishes to expand their current scope of business, it may be a requirement to increase the amount of registered capital.

Cash-flow: Registered capital is required to fund the operations of a new business until it is in a position to fund itself. This is usually catered for in the feasibility study report (可行性报告)- which is a business plan type document that is submitted to the authorities as part of the application process. However, in a rush to attract new investments and as a result of a lack of even basic economies, many government agents do not pay much attention to this report.

Often, a foreign investor will naively assume that he has gotten a great deal due to the “minimum amounts” being identified as all that is required. However the business can come to a sudden halt if the registered capital amount is insufficient to support the operations cash flow. Not only would the investor have to wire additional funds to China, it involves the additional procedures as follows:

1. Application to increase the registered capital with the original licensing authority
2. Re-issuing of business license reflecting this- important as the registered capital amount is also the limited liability status of the business
3. Application to the State Administration of Foreign Exchange to transfer funds into China
4. Bank-to-Bank Fund Transfer

The above steps take between six to eight weeks to fulfill. Instead of facing a scenario where one runs out of operational money for his/her business, it would be advisable that one should properly capitalize his/her business in China in accordance not just with government guidelines over ‘minimum registered capital’ but also pure economic and operational realities. Some businesses in China go broke in China because of this issue and certain unscrupulous consultants may not advise on the matter as they may seek to gain more fees from the client in terms of sorting out the problems when they arrive.

Lower Registered Capital Amounts Affecting General VAT Payer Status At Commencement of Business:

VAT refers to Value-Added Tax: It is a type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale. The amount of VAT that the user pays is the cost of the product less any of the costs of materials used in the product that have already been taxed.

Adhering to the said ‘minimum registered capital’ amount figure may cause additional problems when applying for “General VAT payer” status. The benefits of having a “General VAT payer” status is that it gives the VAT payer the right to issue VAT receipts to their clients, which allows them to deduct the input VAT from purchases when it pays the output VAT for sales.

For the FICE or WFOEs who deal with clients that need VAT receipts such as for industrial related produces, they certainly normally will require VAT General Tax Payer status but if the FICE is only engaged in trading consumable products to individual customers, this is probably not necessary. For larger operations with significant amounts of VAT invoicing likely in their books, in order to qualify from the outset of their operations for VAT General Tax Payer Status, the company has to meet the following additional requirements:

1. Minimum Registered Capital
   外高桥 FTZ = RMB 1,000,000
   浦东/浦西 = RMB 5,000,000
2. The total number of employees shall be over 50 (negotiable in some cities)

If the company cannot meet the above two requirements, then it can only apply for such status once they have reached annual sales in excess of RMB 1.8 million which is the next qualifying level. As all FICE are related to trading, usually a FICE needs to apply for VAT General Tax Payer status for the purpose of deduction of input VAT. Certain trading WFOEs also need to bear this figure in mind. Without bearing this figure in mind, it may cause the company to have cash flow problems. For example if the cost of one’s input/import goods unexpectedly go up, the initial 1.8 million sales threshold means that the deduction of input VAT is not permitted should the FICE or WFOE not meet the registered capital requirement.

Kenneth is currently the President of SHEN, the Shanghai House of Entrepreneurs NUS and the Director of the Youth Chapter in the Shanghai Singapore Business Association. He is doing his internship as a corporate services consultant at Willsonn Partners, a fast growing CPA firm in China. He can be contacted at Kenneth@shentrepreneur.com or Kenneth.wong@willsonn.com or via Shanghai Mobile 86-21-13402065607

The most important rule on doing business in China is the guanxi factor or relationship (in translation). How do you cultivate guanxi with the business community in China? Our resident contributor, Kenneth Wong, offers his perspective on guanxi based on his experience working in Shanghai, China.

By Kenneth Wong, SHEN

In China, it is said that anything of consequence in business is done through “guanxi” 关系. With the appropriate “guanxi” (πÿœµ)., it creates a smooth path in wake of potentially cumbersome administrative procedures. In business dealings with the Chinese, knowing the ‘right person’ is of paramount importance. An uninformed foreign entrepreneur who arrives in China with a grand plan to make two/triple-fold profits in the first year would probably concede defeat and say a few months later “ Its taking twice as long to do anything. It costs twice as much. And from what we can tell, we will only make half as much profit, if at all”. Welcome to business in China.

“Guanxi” (πÿœµ).refers to the conduct of relationships, the art of “ you scratch my back, I scratch yours” socio-business culture in China. For example, if the signing of a contract has stalled in spite of the polite words of assurance and head nodding, it can be assumed that the proper relationship has not been developed; that one has not had the appropriate “guanxi”. This presents a big headache to the potential entrepreneur as a stalled initiative can mean months or even years or delay.

1. Being able to communicate across language barriers: If you don’t know the chinese language, at least make youself understood or get a friend who knows the language to go speak together with you. People could understand you speaking in English, but be prepared to pay a hefty price for that.
2. Gift exchange: Should you buy gifts for the appropriate official? Please note there is a fine line between guanxi and what some might consider corruption. This needs to be stressed because often, it is the small details that have a big impact on the success of building relationships. As mentioned by Michael Conolly, an expat in Shanghai, ‘ Learning to understand cultural expectations is not something that can be done overnight or by simply reading a book. Specific actions that allow one to develop guanxi in Chinese culture might seem to the Western mind improper but the basic premise is the same : Working with people who can be trusted is crucial to success.

Xin Bao Ping left his government position to start his private business in the mid-nineties. He now runs a successful financial consulting company and is author of “The Making of a Boss”, a book on business startups in China. In his discussion of some of the momentuous changes that have taken place in China in the last decade as well as the opportunities that have presented themselves, Xin stresses that guanxi is the most important factor in determining the success or failure of a new business. He further elaborates “This is not unique to the Chinese mainland, but is common to all Chinese societies.” A point to ponder: Is it likewise true in Singapore, with us being a predominant Chinese society?

In the current environment, the planned economy is giving way to a market economy while the regulatory infrastructure has yet to be fully developed. Says Xin “The old order is in disuse while the new order is being created, guanxi is there to keep order and allow things to get done.” Many entrepreneurs turn a blind eye to the gray area that exists between guanxi and corruption. Xin adds, “We need to face reality.”

The bottomline is, as entrepreneurs, we want to get things done. And done fast. In a recent interview of a small business owner from the US, it was asked,“What is the single most important thing a person needs in order to do business in China?” The answer was “Without a doubt, working with people you can trust.”

Kenneth is currently the President of SHEN, the Shanghai House of Entrepreneurs NUS and the Director of the Youth Chapter in the Shanghai Singapore Business Association. He is doing his internship as a corporate services consultant at Willsonn Partners, a fast growing CPA firm in China. He can be contacted at Kenneth@shentrepreneur.com or Kenneth.wong@willsonn.com or via Shanghai Mobile 86-21-13402065607

If you have read our guest contributor, Kenneth Wong’s earlier article on wholly foreign owned enterprises (WFOEs) in China, here is some additional information on how it might be advantageous to register a Hong Kong company and how it can help you to expand your enterprise into China.

By Kenneth Wong, SHEN

In the course of my work in Shanghai during the past 5 months, I had set up 5 Hong Kong Limited Companies. Some of these HK-limited companies function as entities on their own but I have found that most of these HK-limited companies are actually used as holding companies for fund transfer/tax minimization. They are also used as parent companies for new entities that wish to set up WFOEs in China. Below, we shall examine the process and reasons behind the setting-up of HK companies.

1. HK Companies- As Parent companies for setting up WFOEs

A company wishing to set up a WFOE must first have a recognized enterprise in the world. Hong Kong is one of the world’s reliable and efficient financial centers. The advantages of no exchange control, sound legal system and efficient transport/communication networks make the incorporation in Hong Kong attractive for international traders. Hong Kong is ranked the freest economy in the world.

HK companies are fast to set-up. A ready-made company takes just 3 working days to set up. A tailor-made companies may take 7-10 working days. Thus, an entrepreneur without a current company set-up could quickly set up a company with a full (minimum) company structure of one director, one reserve director and 2 shareholders in HK with HKD 4,000 (equivalent to SGD 800) in 2 weeks with a registered address and company secretary. Thereafter, he could quickly use this registered entity to set up a business in China.

Because of Hong Kong’s proximity to and it being part of China, HK companies are more recognized by China. The government authorities in China perceive HK companies as under their surveillance and thus, more authentic than most companies elsewhere in the world.

2. HK Companies- As Fund Transfer/ Transfer Pricing/Tax Minimization Vehicles

-One of the major advantages of Hong Kong company incorporation is that it will not be perceived as a tax avoidance vehicle, as Hong Kong is a major trading entity in its own right. There is no capital gains tax and exchange control. The basic law of Hong Kong guarantees free trade as well as low taxes for a Hong Kong company

WFOEs can transfer their dividends following tax clearance directly to the HK company offshore bank account. The money transferred to the HK Company can be then used for investment purposes anywhere else in the world as per international financial transactions. Usually used for companies with potentially high returns from businesses in China.

WFOEs can freely import/export goods from China without paying additional import/export tax. For example, if the cost price of a good is RMB5, the entrepreneur similarly pays RMB$5 to import the good into HK without allowing paying further import tax. This allows for further profit margins for the entrepreneur.

Related Articles
[1] Kenneth Wong, Introduction to Wholly Foreign Owned Enterprises in China, SG Entrepreneurs

About Kenneth Wong:Kenneth is currently the President of SHEN, the Shanghai House of Entrepreneurs and is doing his internship as a corporate services consultant at Willsonn Partners, a fast growing CPA firm in China. He can be contacted at Kenneth@shentrepreneur.com or Kenneth.wong@willsonn.com or via Shanghai Mobile 86-21-13402065607

Wholly Foreign Owned Enterprises (WFOEs) have become the investment vehicle of choice for the international investor wishing to manufacture, process, or assemble in China. It negates the need for a Chinese partner and does not require large amounts of registered capital to fund. Although WFOEs are in essence to be used for facilities involving production lines, they have under certain conditions also proved suitable for service industries albeit with some restrictions over location. Manufacturing WFOE’s, with an eye on total export of their China manufactured product, may also enjoy significant tax and other incentives if based in Free Trade or Export Processing Zones.

Legal Status & Limited Liability Definition
WFOE’s are limited liability companies established under Chinese Company Law. The shareholders are 100% foreign, usually an international business who would own the company 100%. Limited Liability is recognized by the amount of registered capital injected into the business. Although this may in fact be a combination of two assets, cash injection and equipment, the total value of these also represents the extent of the WFOE’s liability. This affects situations involving insolvency as the assets may depreciate and the cash is legally allowed to be used as operational capital. Under these quite normal circumstances then it is wise just to bear in mind that in the event of bankruptcy the parent would be expected to make up, via injection, the difference between the registered capital amount and the actual value of cash and equipment in order to satisfy creditors.

Reduced Capital requirements
The lure of huge market potential coupled with the promise of tax holidays, tax incentives and financial rebates has helped China attract foreign direct investment (FDI) and to become the biggest recipient and utilizer of FRI in the world. A significant factor contributing to that is the reduced minimum paid-up registered capital requirement for the formation of WFOEs.

Previous Requirements

• Consulting/IT/Design/Manufacturing WFOE – USD 140,000
• Retailing WFOE – Not Permitted
• Trading WFOE- USD 200,000 permitted to be incorporated only in the Waigaoqiao Free Trade Zone (WGQ FTZ) and not eligible for Import/Export (I/X) License.

In the past, only large multinationals and medium-sized corporations were able to afford the above-mentioned registered capital requirements and were willing to take greater risks when venturing into China. However, their subsequent success then created a ‘ripple’ effect on their supplier/service providers outside of China, including the smaller companies. This then initiated the next phase necessary to sustain the influx of FDI into China.

Following the amendment of the Company Law and the Administrative regulations for the Registration of companies, it is now possible to incorporate WFOEs with the following paid-up registered capital

• Consulting/IT/Design WFOE – RMB 100,000
• Retailing WFOE – RMB 300,000
• Trading WFOE inside WGQ FTZ- RMB 500,000 for “small-scale tax payer” and RMB 1 million if 17% Value-Added tax (VAT) status is required. Import/Export License can now be issued

Domestic Trading (i.e. buying and selling of goods within China) can now be added into the business scope of a trading WFOE. To differentiate this newly-approved structure, the term Foreign-Invested Commercial Enterprise (FICE) has been introduced. Minimum paid up registered capital is RMB 500,000 for “small-scale taxpayers” and RMB 5 million if 17% VAT status is required but certain districts may allow application with RMB 3 million paid-up registered capital.

• Manufacturing WFOE – RMB 500,000 and not subjected to additional paid-up registered capital in order to apply for 17% VAT status.

As an added incentive, the regulations for the administration of the registration of companies’ paid-up registered capital were amended to allow a longer period of capitalization as follows:

• First 3 months- 20% of paid-up capital subject to a minimum of RMB 30,000
• Within 24 months – remaining 80% of paid-up capital.

As part of this significant reduction in the paid-up registered capital requirement for WFOEs, there are now several far-reaching implications for changes in regulations.

1. The Representative Office (RO) has become more or less a redundant structure due to its inherent weakness, which includes the following:

• Not a legal entity licensed to conduct business in China
• Cannot receive revenue in China nor issue official tax invoices (fapiao)
• Cannot hire local staff directly unless through government agencies
• Chief Representative (CR) full salary will be taxed according to the number of days spent in China. Monthly tax submission will still have to be filed even if the CR does not enter China during that calendar year.
• All expenses incurred by the RO (including staff salary and rental) will be taxed at 9.82%.

2. A local company formed with two local PRC nationals acting as nominee shareholders is not only severely risky but also unnecessary.

• A foreign beneficial owner bears a tremendous amount of risk in such arrangements because the so-called “contract” signed between the foreigner and the locals is not recognized by the courts in China and there is no nominee law to protect the investment of the foreigner.
• Dividend are taxed at 20% as opposed to zero for a WFOE

A local company or an RO is popularly used for carrying out market studies, as a liaison office for customers and suppliers or die to either a lack funds to risk USD 140,000-200,000 before a final investment decision is made. Nonetheless, under the new law, a foreign investor can set up a WFOE with a minimum paid-up registered capital of RMB 100,000-500,000 even for this sole purpose and yet avoid the inherent weaknesses outlined above.

The only exceptions are industries closed to foreigners where only an RO structure is permitted e.g. banks, securities companies and law firms.

3. Trading WFOEs and FICEs with Import/Export License

• Need not be restricted in setting up within WGQ FTZ. Establishment in all other districts in Shanghai is now possible.
• Can conduct both domestic and international trading, including importing and exporting.
• Need not pay 1-5% on sales value to use the license of a local Import/Export company for importing/exporting.
• Need not take receipts of payments for goods sold through a third-party local I/X company.
• Customers of trading WFOEs deal directly with the company and will not know the supplier or Original Equipment
• Manufacturer (OEM) through import-export document trail or through bank account details

4. Retail WFOEs can be owned 100% by foreigners

• Need not form a joint venture nor require two PRC nationals to hold shares under a local company

About Kenneth Wong: Kenneth was formerly the President of SHEN, the Shanghai House of Entrepreneurs. He can be contacted at gryeon@gmail.com. (Updated on 31 Jan 2008)