Subscribe to SGEntrepreneurs – Singapore Entrepreneurs (Asia)News Feed About Advertise Contact Partners Resources Team

Introduction to Wholly Foreign Owned Enterprises in China

July 24, 2006 by Kenneth Wong  
Filed under Contributors Corner

Leave a comment

shanghai

We have heard earlier from Gabriel Yong from NUS@Shanghai on doing business in China. Continuing on the business in China series, Kenneth Wong, president of SHEN, introduces us to the concept of wholly foreign owned enterprises in China, and offers the guidelines and rules for a foreign entrepreneur to set up their business in China.

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

shen2
Photograph of SHEN students in Shanghai

Kennethwong

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)

Share and Enjoy:
  • Facebook
  • Twitter
  • Digg
  • StumbleUpon
  • Google Bookmarks
  • Posterous
  • Tumblr
  • del.icio.us
  • LinkedIn
  • Mixx
  • Technorati
  • email

No related posts.

Tags:


triplepoint-job-board-ad-wanted-developers-500x

Comments

  • Registered capital have been lowered, however the reality is that this varies from a city or even district to another, and also this would depend of your business plan. We have seen clients having their application "delayed" due to low registered capital. Nobody clearly told them of the reason of the delay (we are talking 5~7 months to get a simple approval). But surprise surprise as soon as they increased it to the double of initial amount approval was obtained within two weeks
  • Joseph
    To Whom It May Concern:

    I graduated from UC Berkeley, came to China to teach English the first year, and the last 3 years I started a small export business. The company (we have an RO office) has grown to 18 people, with 8 foreigners in the company. Earlier this year half of our staff was on business visas and the other half were on work visas. Our attorney told us that we would have no problem converting the other foreigners to work visas.

    However, the post Olympic reality is that the Shenzhen government’s labor department has put a restriction on all RO’s to 2 or 3 foreign employees per RO office. The problem is that our company depends on our foreign staff to get the orders, and the Chinese staff to follow up with the factory. I understand that the Chinese government wants to encourage firms to hire local Chinese, however it is impossible for local Chinese to be as effective as taking orders and dealing with certain Q & C issues.

    Basically our company has close to a 1 to 1 ratio when it comes to Chinese and foreigners. We had plan on growing the company to about 40 people in 2009 and maintaining the same 1 to 1 ratio. However, with this new law, I devised a way that our company could function with around 8 foreigners supported by around 32 Chinese staff.

    However, as it relates to ROs in Shenzhen, the Shenzhen government seems to be sticking to there limit of 2 to 3 work visas per RO no matter how many Chinese we plan on hiring.

    We have heard that under a WFOE that there is some flexibility in the amount of work visas that we could acquire. However, we are being told that we need a registered capital of around 10,000,000 RMB to even consider getting around 10 foreign work visas.

    We are a small company, so we would not be comfortable with anything more than 500,000 RMB in registered capital. Do we have any options to convincing the labor bureau to issue us 8 to 10 work visas, without starting a WFOE with 10,000,000 RMB in capital?

    Thanks
  • Paul Persaud
    Hi Kenneth!
    I am interested in opening a facility for manufacturing liquid detergents and such type of items. However, I do not possess a lot of finance. While I have enough for a small start up, I would like to know the minimum money I need to show the government and whether I can use this money for operating costs also or it must stay in the bank. I live in the USA.
    Thanks,
    Paul
  • Dwight Nordstrom
    We have a WFOE in Suzhou with Articles of Association that were done at initial time of set-up in 12/2002 to satisfy Suzhou government -- we used standard AofA format.

    We set-up a Mauritius off-shore holding company to own 100% of the WFOE in Suzhou.

    The Mauritius company is owned by 2 USA companies. These 2 companies have a TermSheet Contract in 1/2003 between the 2 of us which governs the management of both Mauritius and Suzhou companies -- Mauritius just a shell holding company.

    We found out that AoA of Suzhou has slight contradiction to the terms of management we agreed upon in our Termsheet 1/2003 contract. Is there any precedent for which Agreement takes precedence -- from our perspective, the AoA is basically irrelevant in how we manage the operation. The area of contention is NOT with Chinese government but our USA partner is interpreting contradiction as way to cancel part of Termsheet.
  • Thought it was appropriate that I got the 100th comment on this blog :)

    Nicole: Do continue reading this site for more! Or perform a google search! Most of my information comes from there. A good website to visit if you understand mandarin is at www.saic.gov.cn which is the state administration of industry and commerce in China.

    Thanks for all your well wishes!
  • Nicole
    Dear Kenneth,

    CONGRATS ON YOUR NEW CONSULTANCY POSITION!! Thanks so much for your generosity and useful advice about doing business in China! I have particularly enjoyed your detailed blogs. You really know your stuff!

    I am a brand new consultant, living my dream--to work in China for a few weeks. Although I work for a non-profit that lends microloans and provides business training and technical support, we will incorporate as a business. I have heard that the labor and tax laws are changing and that business is favorable for wholly owned enterprises. Could you please direct me to any people, sites, blogs, articles, and books about the process to incorporate and which laws apply to incorporation. Any information on current tax, labor, and commerce laws would be so appreciated.

    Thanks so much, again, for your insight and time. Best wishes on your very exciting global career!

    Nicole
  • Hi Chia,

    I will send you an email again with regards to your water treatment project.

    Best Regards,
    Kenneth
  • Dear Readers

    To reply to Chia's query, here is some Information from Deloitte Quarterly October 2007

    China's Tax Reform 2008: Implications for foreign investors

    For those companies with operations in China or contemplating investment in China, it is time to take action on re-evaluating their tax profile and grasp the tax planning opportunities following the key changes in China’s new EIT law.

    Change in Tax rates
    To level the playing field for DE and FIE, a unified income tax rate of 25 % has been established. Reduced rates of 15 % and 20 % are available for high-technology enterprise and qualified small and thin-profit enterprise, respectively. A 20 % withholding tax rate is adopted. However, it is not clear whether the current reduced withholding tax rate of 10 % would survive. (Currently, dividends repatriated to foreign investors by FIE with at least 25 % registered capital held by foreign shareholders are exempted as one of the tax incentives offered by the Chinese government.)

    New Tax Incentive Policy
    China is attempting to move up the value chain. Therefore, the development of technology-led sectors and high-value capabilities has become a key policy focus. Deviating from the geography-based tax incentives of the existing regime, the new law adopts a predominantly industry-oriented tax incentive policy. A series of tax breaks are introduced to promote high-technology, environmental protection and energy-saving industries.
    Most tax incentives currently available only to FIE shall be gradually phased out over the next 5 years including:

    "Two plus three" tax holiday for manufacturing FIE
    Three-year tax holiday extension applicable to high-tech FIE;
    Extended 50 % rate reduction for export oriented FIE
    Preferential tax rates of 15 % and 24 % in certain regions. Tax refund on dividend reinvestment.

    Grandfathering Arrangements
    In order to buffer the reform’s impact and shift to the new regime smoothly, a five-year “grandfathering” period shall be granted for FIEs established before the promulgation of the EIT law, which was 16 March, 2007. (Shang Ban Fa Han [2007]No. 59, issued by the Ministry of Commerce on 23 April 2007, further defines the cut-off date as the date of approval of the set-up by the Ministry of Commerce.)

    FIE enjoying the reduced tax rate of 15 % or 24 % under the existing law will be eligible for a five year transition period during which the tax rate will gradually phase up to the unified tax rate of 25 %.
    Manufacturing FIE that have not yet used their five-year tax holiday will be allowed to continue to enjoy the holiday during the grandfather period. If the five-year tax holiday has not yet begun due to accumulated losses, the holiday will be deemed to commence upon the effective date of the EIT law (i.e. 1 January 2008).

    Enhanced Anti-avoidance Rules
    With a view to cracking down on tax arrangements designed primarily to avoid taxes, besides the existing transfer pricing rules, the EIT law introduces controlled foreign corporation rules (CFC), thin-capitalization rules and general “catch all” anti-tax avoidance rules, which give the tax authorities a stronger hand in assessing and collecting taxes. It signals an aggressive approach by the Chinese tax authorities to review currently implemented tax structures and provides the tax authorities with ample opportunities to make adjustments as they consider necessary in the absence of a reasonable business purpose.

    All the new rules should have a sweeping impact on taxpayers in China.

    Tax Resident
    Following international practice, the new law introduces a concept of “management or control” in determining tax residency. Resident enterprise is defined as an enterprise which is established in China under PRC laws, or which has its place of effective management in China. Where a non-Chinese enterprise is managed or controlled in China, it may be deemed to be Chinese tax resident and hence will be subject to direct taxation on its worldwide income.


    Impact on Foreign Investors
    --------------------------------------------------------

    The impact of the EIT law will differ depending on the type of industry and its location. That said, it will inevitably affect the privileged status and competitive advantage enjoyed by foreign investors in China in the past three decades.
    FIE, especially those currently receiving tax incentives, will see an increase of their income tax burden in China. The time is ripe for them to review their tax profile and revisit their current tax planning structure to ensure effective tax rates in China are appropriately managed. Foreign investors contemplating entry into the Chinese market should consider the impact of the additional income tax burden on the project return in the course of the investment decision.

    The withholding tax rate on passive income derived by non-resident enterprises from China stays at 20 % in the new EIT law. However, it is not clear whether the current withholding tax exemption on dividend remittance and reduced withholding tax rate of 10 % on other passive income will survive. This could significantly impact the after-tax return of foreign investors, especially financial institutions.

    With the increased scrutiny of transfer pricing and increased income tax burden, foreign investors with operations in China should carefully evaluate and assess their transfer pricing to ensure compliance with the arm’s length principle, and appropriate planning strategies.

    Given the announced abolition of tax holidays, acquiring an existing FIE to enter the Chinese market could be more appealing for foreign investors, compared with setting up a new FIE (a typical planning technique under the outgoing law to refresh the tax holiday entitlement). Under the grandfathering arrangement, the foreign investor may be able to inherit the favourable tax treatment by acquiring an existing FIE in a share deal.


    The Challenges and Opportunities Ahead
    --------------------------------------------------------

    The overhaul of the Chinese income tax regime presents both challenges and opportunities for foreign investors. Companies that do business in China are urged to review the impact of the new law on their China operations and consider appropriate action as soon as possible. The following points may require immediate attention.

    Tax resident: With the introduction of the “place of effective management” test in the new residency rules, foreign enterprises with a “substantive presence” inside China need to be careful of the potential risk to be deemed a PRC resident for tax purposes. For multinationals moving regional headquarters to China, particular attention should be paid to corporate governance arrangements.

    Withholding tax: Due to the uncertainty as to the implementation of the new withholding tax rule, one might consider the repatriation of profit through dividend distribution prior to the re-imposition of the dividend withholding tax. Planning in dealing with passive income may be needed.

    Dividend reinvestment refund: FIE need to speed up the dividend reinvestment refund claim process for those eligible FIE and make sure they can secure the benefit before the end of 2007, which may be the final year that this refund is available.

    Tax incentives: Foreign investors should evaluate the new tax incentives under the EIT law and consider how to incorporate them into their operations in China. There is a clear focus on the activities involving high-tech and R&D.

    Transfer pricing: Given the increased transfer pricing risk and the opportunity to use more sophisticated transfer pricing arrangements, such as advanced price agreements and cost sharing arrangements, it is advisable that FIE act immediately to review their transfer pricing policies and consider proper tax planning strategies.
  • Chia
    Hi Kenneth

    Glad to hear that you have gotten an offer. Hope you enjoy your work then.

    We needed some advise for our water treatment project. We are in the mist of studying the best location for us to setup a WFOE in either Chengdu, Guangzhou, Hangzhou or Shanghai. Seeking your view.

    We are Petrochemical engineering company in Singapore. Wonder if you could share with us the cost of rental, tax benefit and incentives, advantages and disadvantages to set up WFOE in Chengdu, Guangzhou, Hangzhou and Shanghai. Especially after the 2008 tax implications.

    Looking forward to hearing from you.

    Regards
    Chia
  • Kenneth Wong
    Dear Readers,

    I have started work at an Investment Management Firm Schroders PLC. You may contact me via email at kenneth.wong@schroders.com
  • Dear Readers,

    Thank you for reading and supporting this column.I am currently looking for a job after graduating from the National University of Singapore with an Honours Degree in Economics and Finance.

    I am particularly interested in jobs in the areas of Investment/Business Analysis. I can also be an in-house consultant/China representative for your business needs in China. As you can see, I have assisted many on this column with their business/incorporation needs in China and possess three years of consulting experience with regards to China Business Set-up/Incorporation, working with companies such as Willsonn Partners and Chiolim Stoneforest. I had also previously wrote a winning business case, analyzing the Mergers and Acquisitions Market in China and generated close to RMB140,000 of business revenues for my previous companies via e-marketing.

    Please give me a call at 96704750 or email me at gryeon@gmail.com if you would have any available job opportunities or would like to hear about what I could offer to your esteemed company. Thanks once again for supporting this column.

    Best Regards,
    Kenneth
  • Shauna: Yes the capital required should be about RMB 100,000 and is grouped under service. But do bear in mind that this is the minimal cost. Other considerations include rent/location of your company and renovation costs. Shanghai may also be expensive for an operation such as a school, as you may have to locate in high traffic areas where the rent is usually higher.
  • Shauna
    Hi Kenneth,
    Must say this is like finding a saviour-like guiding hand along the road to setting up a business in Shanghai. I am currently still in Singapore, with plans to move over to Shanghai by next year.

    I plan to set up a studio for teaching young children music. Would like to confirm with you that this is grouped under service and the capital required is RMB100,000?

    I would also greatly appreciate some pointers on renting a space for my studio, setting it up and on running a school as mentioned in Shanghai.

    Regards,
    Jazzed
  • Smith Ho
    Thank you all for the efforts on WFOE introduction. I've just have my consulting company established with www.pathtochina.com in Beijing. It's a small company with RMB 100,000 capital and it's not that complicated like before.
  • Leeanne
    Andy, thank you very much for your assistance, I will look at the website and post my thoughts later. Cheers
  • Simon Bond
    I have heard good reports of this company which assists with the setting up of enterprises in Shanghai.

    www.rhklegal.cn
  • Andy
    Hi Leeanne,

    I'm not associated to this website, but looking at your question I know of a company in Hong Kong that not only can answer your questions but also execute the very service you need. Check out www.tridenttrust.com and look for their HK office. I think their enquiry email is hongkong@tridenttrust.com. Give it a try and let us know how it goes!
  • Andrew
    Hello Ken,
    Thank you for providing a clear overview. Do you have any references to options for companies that *are* interested in bootstrapping, or is China simply unfriendly to these endeavors at the moment?

    Thanks
  • Leeanne
    Hi Ken,

    As per many of the above posts, very suprised to find this website - thank you!

    I am an Australian working in a mining consultancy firm, currently setting up a WOFE in Beijing. Our company has engaged PwC Australia, HK and China to assist in this process. However, as I do not have any backround knowledge to this complex process, I have been trying to find assistance.

    Could you please kindly assist with a few questions I have:

    1. For a WOFE with the nature of the business being mining consultancy, are there any other provinces that will allow a better tax scheme than Beijing (Currently my understanding is 5%BT and 25%FEIT)?
    2. If there is such an option, can a company be registered in a certain location but have its office in another state?
    3. What tax implications am I looking at when I transfer profits out of China back to Australia via a HK company (holding company of the WOFE)?

    Thank you very much for your assistance, it is greatly appreciated!

    Leeanne
  • Richard
    Hi Kenneth,

    My company is based in Australia where i manufacture and import from China. I am looking to move my factory to China and set up a small manufacturing and import/export company in Foshan. I was wondering if you know what the requirements are for the city of Foshan? I currently import products from this area so I feel it will be easier to source the raw materials i require.

    Kind Regards

    Richard
blog comments powered by Disqus