China WFOE formation

If you as a foreign entrepreneur plan to conduct business directly in Mainland China, the best option for you is to get set-up as a WFOE (Wholly Foreign Owned Enterprise). This business vehicle will let you be closer to your suppliers or customers in China, take care of import and export formalities here, make working visas for foreign staff etc. If you incorporate your company in the form of WFOE (not Joint Venture Enterprise) you will not need to depend on your Chinese partner, and you can independently manage your company business affairs and its bank account in China. It also gives you many more possibilities in comparison with registration of representative office in China (which usually cannot conduct any commercial activity).

Our company has provided company registration services to foreigners in China for more than 20 years. Also, we provide accounting, working visa and trademark services here.

Pros and cons of registering a company in Mainland China:

Pros:

• LEGALIZATION OF BUSINESS ACTIVITY IN CHINA: the ability to legally pursue an independent commercial activity inside of China.
For example, o DIRECT IMPORTING AND EXPORTING IN CHINA: the ability to carry out customs procedures independently, to process directly import and export documents in China on behalf of a Chinese company; o DIRECT BUSINESS IN LOCAL MARKET: the ability to conduct trading transactions (purchase and sale of goods), produce goods, provide services and other business activities directly in local market of China;
• VAT REFUND IN CHINA: the ability to refund "incoming" value added tax after exporting goods from China.
• OFFICIALLY HIRING LOCAL STAFF: the ability to legally hire local staff, pay social insurance.
• MAKE WORK AND RESIDENCE PERMITS FOR FOREIGN EMPLOYEES: the ability to make "working visas" (work permits, residence permits) for foreign employees (and their families) for their work and living in China.
• DEVELOPED BUSINESS INFRASTRUCTURE: developed transport, finance, industrial infrastructure in China.

Cons:

• TAXES: although VAT is exempt for export trading activities, there is still corporate income tax (but in many situations there are lower tax rates available), individual income tax and mandatory social insurance.
• ACCOUNTING: the company has to maintain accounting records, pass an annual audit and annual check-up.
• CUSTOMS AND FOREIGN CURRENCY CONTROL: comparatively strict foreign currency exchange control and customs control.
• REGISTERED CAPITAL: there is a requirement for an actual transfer of the amount of registered capital from the foreign bank account of the founder to the special registered capital account of the WFOE over 5 years since the date of registration. The company can then transfer these funds to the current account of Chinese company and use them in the course of economic activity (purchase of goods, payment of rent, salaries and so forth).

Requirements for formation of WFOE:

Prior to the process of the formation of a company in China, you need to fulfill the following requirements: to provide documents of the foreign founder and future legal representative and to rent office premises in China. List of documents you need to prepare before starting a registration process:

1. Documents from the founder and legal representative: for foreign citizens as individuals it is passport (for Chinese citizens it is national ID) and for legal entities those are business license or similar corporate registration certificate and other significant corporate documents confirming details of the legal entity (containing information about directors, founders, address, registered capital, renewal of annual license if applicable). For information: a founder can be a legal entity or an individual, but a legal representative should be an individual. Note 1: Passports of foreign citizens can be provided in original in personal presence in registration authority. In this case no apostille is required. But if those individuals cannot visit registration authority in China or if it is a legal entity founder, in this case the documents should be translated in Chinese and apostilled in the country of issue. Personal presence of the legal representative will be needed later anyway, e.g. in bank, but presence of founder often is not needed if apostilled documents are provided. Note 2: Usually there is no mandatory requirement of participation of Chinese citizens as co-founders or legal representative.
2. Documents regarding rent of office premises: • office rent agreement in China with rent period for not less than 1 year; • copy of landlord documents: certificate of ownership of office premises; if it is an individual - identity card, or if it is a legal entity - business license and identity card of legal representative of that legal entity. Note 1: Before process of company registration an office should be rented in the name of the individual, usually that is the future legal representative of the company. After the registration of the company the premises rent agreement should be reassigned to the name of the company. Note 2: The purpose of the premises should be relevant to business activity of a company. For example, for a trading company a relevant purpose of the premises is an “office”, for a manufacturing company – a “factory”, for training courses – “commercial”. Premises with a “living” purpose are not suitable for company registration. Note 3: Virtual addresses or co-working spaces in most cases are not suitable for company registration. Note 4: The space should not be too small; usually the minimum should be 30-50 sq. m.

China company registration process:

• The registration procedure begins with registration of a name of a company in Chinese in the electronic system of Administration of Industry and Commerce of China.
The name of Chinese company consists of 4 parts:
1. name of the city or province, where the company is located
2. a unique trade name
3. main business activity (e.g. “Trading”)
4. organizational form (e.g. “Limited”).
Also, a company name in English can be provided which should correlate to a Chinese name. It will be reflected on the company’s stamps along with the name in Chinese and will be registered in a bank. If you cannot provide a name in Chinese, we can translate it based on the English version of it provided by you. At this stage the company should provide information about the scope of business: - a list of business activities - categories of goods, services intended to be carried out by the company - the amount of registered capital - a list of the founders (and their percentage of ownership) - the address of the office where the company will be registered.
• After this, registration of company in China goes to the stage where Business License in Administration of Industry and Commerce will be obtained.
• When you already have a Business License, the registration of a company in China proceeds to the next stage - production of stamps (main stamp of the company, legal representative stamp, financial stamp, invoice stamp) with following registration of the stamps with the police.
Note: Usually the whole set of stamps is given for free after a Business License issued by the Administration of Industry and Commerce, but without the name of the company in English. So, to add the English name, the part of the set should be re-made again.
• Next step: registration of the company with tax authorities (where also a verification of the legal representative and employee responsible for finances of the company should be conducted)
• If the company intends to carry out export and import activities, then it is obliged to apply for registration in the State Administration of Foreign Exchange
• Also, a company which intends to carry out import and export activities should register with customs authorities (where registration of the electronic port of customs also should be conducted)
• Opening of bank accounts: usually this step includes opening of a basic account, common account (for example, a foreign currency account for import-export companies) and a registered capital account. The personal presence of a legal representative of a Chinese company on this stage is required. Usually, before bank account opening, bank officers come to the office of the company to check it.
• In case of some special business activities like the sale of food products or dangerous chemical products the obtaining of additional special licenses is required.

China company registered capital: Unlike Hong Kong companies, for Chinese companies (including WFOE) there is a requirement of actual payment of registered capital. According to the new regulations it should be paid during 5 years from the date of registration. It should be paid from the founder’s account in a foreign bank to the account of the registered capital of the Chinese company (the purpose of the payment should be “payment of registered capital”). The amount of registered capital of any Chinese company starts from about RMB100,000 for a trading company, and it can be a bit less for a service company. Basically, the amount should be considered to be enough to maintain the company before it starts to earn enough to maintain itself (for example, you can calculate for 1 year: 12 months of office rent, utility expenses, salaries, transport fees, communication fees, for trading companies - initial goods purchases amount, etc.). Registered capital can be paid in any parts any time during the 5 years. There is no requirement to freeze any part of registered capital; all funds can be used in economic activity. Terms of company registration in China The time of formation of WFOE in recent years was greatly reduced, now it takes about 1,5 months after providing all necessary documents (in comparison with 4-6 months like in previous years). This period includes all procedures including opening of bank accounts (additional licenses for special business activities are not included).

Cost of Chinese company registration service:

Price for company registration services in our company: In Guangzhou it is RMB9,500 (apostille procedures, additional licenses for special business activities, accounting and visa services are not included).

Other costs connected to the registration of a Chinese company are below:

• Office rent. A company in China should always rent (or own) a real office. Let’s describe the situation in Guangzhou. There are two main types of office premises here: just offices and double-use apartments (around 30 to 50 sq. m in average). According to documents this type of double-use apartments are considered as offices. Usually apartment offices are cheaper, starting from about RMB2,500 per month (in this example an office is not downtown, but about 30 minutes away by subway). Note: at the time of signing a rent agreement, a deposit is required to pay to a landlord (in Guangzhou it is usually the amount of 2 months’ rent). It is refundable if the agreement is not broken before the end of the specified term, which is at least 1 year. Also, a commission for a real estate agent is usually paid at the time (about 50% of month’ rent).
• Apostillization of documents: for those persons who cannot visit a registration authority in China, or if the founder is a legal entity, the documents should be translated to Chinese and apostilled in the country of issue.

Chinese company maintenance expenses:

- Office rent: about RMB2,000-2,500 per month for a small apartment office not in the downtown. Other expenses connected to the office rent: utility fees (water, electricity) and management fee around RMB300, rent tax around 8% of rent amount if a landlord will pass this expense to you (it often happens if the landlord is an individual). - Accounting and tax service fees: a company in China should maintain bookkeeping and monthly/quarterly filing tax reports. Usually small and medium scale companies don’t hire an accountant, but use outsourcing services of accounting companies instead. We also provide accounting services. In our company the price of such services starts from RMB1,000 per month. In case you are planning to make a working visa in China for a foreign employee of a Chinese company (usually the director or other administrative personnel), hiring local staff (Chinese citizens) and paying taxes is strongly recommended. These two criteria are important for a successful application and prolongation of a foreign employee’s working visa. So, below are expenses connected to a working visa: - Visa services: our company’s visa service fee is about RMB6,000 per person at the first-time application, and for prolongation (usually once a year or once in several years), it is about RMB4,000 per person. - If you hire local staff, the salary starts from RMB5,000-6,000/month plus mandatory social insurance of about RMB2,000/month. - Also, personal income tax should be paid for employees, but the amount of RMB5,000 of salary is deductible each month. So only an amount above this sum is taxable. For example, if salary is RMB6,000, in this case personal income tax will be around RMB30 per month. And if it is RMB12,000, in that case the sum of personal income tax will be around RMB500-600 per month (in the beginning of the year the sum will be less, and in the end of the year it will be greater). - Corporate taxes: the amount of taxes depends on income and turnover. Please note that to not pay corporate taxes at all is not a good sign in the eyes of Chinese tax or immigration authorities. Usually the payment at least several hundreds of RMB (RMB800 and more) per month is recommended (actual sum depends on real income and turnover). The last two typical company expenses are annual audit reports and an annual inspection: - The price of two annual audit reports usually can be around RMB3,500 once a year - The service fee for an arrangement of annual inspection by tax authority and registration authority in our company is RMB1,500 once a year. To sum it up, the expenses amount calculated in US dollars will be: - at the stage of registration of a Chinese company roughly USD2,500 – USD3,000, including:  office rent fee plus deposit (refundable) plus realty estate agent fee USD1,000-1,500 altogether  company registration service fee around USD1,300  apostille fee (if needed) around USD200 per document. - if you plan to make “working visa” in China the cost in the first year will be roughly USD1,000-1,500 (visa service fee, apostille fee) - an annual company maintenance fee will be roughly USD12,000-15,000 per year for small size enterprise plus about USD1,000 per year if you make “working” visa. These amounts are just for reference only and does not include salaries amount. Actual sum depends on location and size of your office, quantity of employees, amount of their salary, turnover etc.