Incorporation of WOFE in China

This document outlines the basic requirements and steps required to open a Wholly Owned Foreign Entity (WOFE) in China. The legal definition is Limited Liability Company  (有限责任公司).

A Wholly Foreign Owned Company (WOFE) has the advantage of perform business transactions in CNY and exchange profits into USD. It can be expanded to have import/export rights and further to include manufacturing. The Business License (营业执照) defines the scope of the business.

The whole process should take less than four months. Capital injection is estimated to USD 180,000 whereof 20% needs to be up front. Incorporation related fees should be less than USD 3,000. There are lots of consultants – ranging from cheap, smaller outfits to exclusive law-firms with flashy catalogues – that can assist you with this. I’d recommend not giving this job to someone that cannot be trusted.

Here are the steps:

1 Obtain a notice of pre-approval of the company name 

The applicant picks up the application for company name pre-approval from the local Administration of Industry and Commerce (AIC), or otherwise, downloads the form from AIC’s Web site. The applicant can be the representative designated by all the shareholders or the agent entrusted by all the shareholders. The completed application form shall be signed by all shareholders of the company. The application form together with the business licenses or other registration certificates (if the shareholders are companies or other eligible entities) and the photocopy of the identity card of the individual shareholders shall be filed with the AIC. Effective July 1, 2004, enterprise name registration must follow the amended State Administration of Industry and Commerce (SAIC) rules (that is, the new Enterprise Name Registration Administration Implementing Measures,). According to the new registration rules, if the applicant goes directly to the AIC, a proposed company name is approved or rejected on the spot. This is newly regulated by Article 24 of the aforementioned measures and is implemented in practice. However if the application is made through mail, fax, email, etc., the proposed company name will be approved or rejected within 15 days.

1 day no charge

 

2 Open a preliminary bank account; deposit funds in the account and obtain the certificate of deposit 

The Company Law was modified on October 27, 2005, and became effective on January 1, 2006.

Article 26 lowers the minimum capital requirement to CNY 30,000. According to this article, the shareholders, after paying the required initial capital contribution, may pay off their remaining capital contributions, if any, within 2 years after establishing the company. Note that the required initial capital contribution is at least 20% of the proposed company’s registered capital and shall not be lower than the legal requirement for the registered capital for particular industries.

Article 27 provides the form of the capital contribution. According to this article, if the initial capital contribution is in cash, the shareholders must (a) open a preliminary bank account after obtaining pre-approval of the company name; and (b) deposit the initial capital contribution into the bank account. If the initial capital contribution is in non-monetary assets, the shareholder must transfer the property title of the assets to the company and the value of such assets must be appraised. The initial capital contribution must be verified by legally established verification institutes. The revised Company Law enables shareholders to contribute up to 70% of the registered capital of a limited liability corporation in “non-monetary assets that can be monetarily valued and legally transferred.”

Conditions:

For both Trading and Manufacturing WOFE registration, minimum investment capital suggestion is 140,000 USD$ (20% in advance and the rest 80% should be ready within 1 to 2 years).

1 day no charge

 

3 Obtain capital verification report from an auditing firm 

An auditing firm has to prepare a report that verifies the company capital as past of the documents necessary for registration

2 days CNY 350

 

4 Obtain registration certification “business license of enterprise legal person” 

The steps for forming a WOFE in China typically consist of the following:

A. Determine if the foreign investor is an approved investor. 

Basically, any legally formed foreign business entity is authorized to invest in a WOFE in China. China especially welcomes investment that promotes the export of Chinese manufactured products. The investor must provide the documentation from its home country proving it is a duly formed and validly existing corporation, along with evidence showing the person from the investor who is authorized to execute documents on behalf of the investor. The investor also must provide documentation demonstrating its capital adequacy in its country of incorporation.

To meet these requirements, the following documents are normally needed from the investing business entity:

a. Articles of Incorporation or equivalent (copy)

b. Business license, both national and local (if any) (copies)

c. Certificate of Status (Original)(U.S. and Canada) or a notarized copy of the Corporate Register for the investor or similar document (original)(Civil Law jurisdictions)

d. Bank Letter attesting to sound banking relationship and account status of the company (original).

e. Description of the investor’s business activities, together with added materials such as an annual report, brochures, website, etc.

a-d are translated into Chinese. i.e. is either translated into Chinese or summarized in Chinese.

B. Chinese government approval for the project. 

The following documents must be prepared for incorporation approval:

a. Articles of Association. 

This document will set out all of the details of management and capitalization of the company. Nothing can be left for future determination; all basic company and project issues must be determined in advance and incorporated in the Articles. This includes directors, local management, local address, and special rules on scope of authority of local managers, company address, and registered capital.

b. Feasibility Study. 

The project will not be approved unless the local authorities are convinced it is feasible. This usually requires a basic first year business plan and budget. Typically the investor prepares a business plan and budget to draft up the feasibility study (in Chinese) that will satisfy the requirements of the Chinese approval authority.

c. Leases: 

An agreement for all required leases must be provided. This includes office space lease and warehouse/factory space lease. It is customary in China to pay rent one year in advance and this must be taken into account in planning a budget because the governmental authorities will be expecting this.

d. Proposed personnel salary and benefit budget. 

If the specific people who will work for the company have not yet been identified, one must specify the positions and proposed salaries/benefit package. Benefits for employees in China typically range from 32% to 42% of the employee base salary, depending on the location of the business. Foreign employers are held to a strict standard in paying these benefit amounts. The required initial investment includes an amount sufficient to pay salaries for a reasonable period of time during the start up phase of the Chinese company.

e. Others:

Any other documentation required for the specific business proposed. The more complex the project, the more documentation that will be required.

 

All of the above documents must be prepared in Chinese.

 

Within 15 working days from receipt of all documents, the AIC should decide to approve or not approve the company registration. After the company registers, it can proceed to have its seal carved, to open formal bank accounts, and to apply for taxation registration.

According to the new administrative rules, application forms may be downloaded from the local government authorities’ Web sites. Statutory time limits were introduced for acceptance of application documents and for registration decision-making, which differs according to the form of application. In practice, the decision will usually be made within 15 days of receipt of the application. Documentation requirements for company registration were standardized. The Registry is now required to publicly display them.

According to Article 52, if an application is filed (by letter, telegraph, telex, fax, email, or electronic data exchange), the Company Registry must, within 5 days of receiving the relevant application documents and materials, decide whether to accept the application. If the application documents and materials are incomplete or do not meet the statutory requirements, the Registry must inform the applicant, within 5 days, of all contents subject to supplementation and correction.

According to Article 54, if the organ in charge of company registration must verify the application documents and materials, it shall decide whether to approve the registration within 15 days of acceptance. In other cases, the organ must decide whether to approve the registration on the spot or within 15 days of acceptance.

According to Article 55, if the organ decides to approve a company registration, it shall issue a “notice on approval for establishment registration” and inform the applicant to collect its business license within 10 days.

5 days 0.08% of registered capital (registration fee)

 

5 Obtain the approval to make a company seal from the police department 

If all the shareholders are individual investors, the registration file will include the duplicate of the business license (the original and one copy) and the legal representative’s identification card. If registration is approved, a notice to make the company seal will be issued to the company.

Required documentation may include:

– Representation authorization.

– Identity cards of shareholders and identification documents of officers.

– Appointment documents and identification documents (certifying name and address) of the directors, supervisors, and officers.

 

1 day no charge

 

6 Make a company seal 

To make the company seal, the company shall designate a company possessing a Special Industry Permit (company seal carving) (《特种行业许可证》（公章刻制业). This process costs CNY 70–300, depending on the design and the quality.

1 day CNY 300

 

7 Obtain the organization code certificate issued by the Quality and Technology Supervision Bureau 

The company must apply for the organization code certificate within 30 days of obtaining the business license, by filing a completed application form with the Organization Code Management Center (a branch of the Quality and Technology Supervision Bureau) along with the following documents:

– Business license (original and one copy)

– Identity card of the legal representative (one copy).

5 days CNY 120

 

8 Register for both state and local tax with the tax bureau 

The tax registration procedures have been simplified since 2004 with the implementation of the Administration Measures of Tax Registration, issued by the State Taxation Bureau. Two separate taxation authorities still exist (the state taxation bureau and local taxation bureau). However, company founders are required to file tax registration only once, to either of these two authorities. The statutory time limit is 30 days from the date of receiving the registration application.

The company must file the tax registration form and the initial tax reporting forms. Together with those forms, the company submits for review the following documents:

– Business license duplicate (original and one copy).

– Organization code certificate (original and one copy).

– Identification card of the legal representative (original and one copy).

– Identification card of the taxation personnel (original and one copy).

– Company seal and financial seal.

– Office lease agreement and receipt(s) for rent paid.

– Articles of association (original and one copy) and bank issued account opening certificate (original and one copy).

– Capital verification report

-Photocopy of property ownership certificate

– Land use right certificate (if applicable)

– Commitment letter regarding the authenticity of the documents submitted.

7 days CNY 20

 

9 Register with the local statistics bureau 

Within 30 days of obtaining the business license, the company must apply for statistics registration by submitting to the local statistics bureau a completed statistics registration form along with the following documents:

– Business license (one copy)

– Organization code certificate (one copy).

1 day no charge

 

* 10 Open a formal bank account of the company and transfer the registered capital to the account 

The procedures and required documents for opening a company bank account and transferring the registered capital to it may vary depending on each bank’s practice.

1 day, simultaneous with previous procedure no charge

 

11 Apply for the authorization to print or purchase financial invoices/receipts 

After registering for state or local taxes and obtaining the tax registration certificate, the company must apply separately to the relevant authorities (that is, the state and local taxation offices) for approval to purchase and issue financial invoices/receipts. The taxation authority will issue the invoice purchasing book, if it agrees to grant the company such qualification, upon reviewing the following submitted documents:

– Tax registration certificate (one copy).

– Identity card of taxation personnel (one copy).

– Application forms.

– Models of invoice seal.

10 days no charge

 

12 Purchase uniform invoices 

The company must obtain and submit an application form to purchase uniform invoices (购用统一发票申请单). The form and the authorization book (from Procedure 10) must be submitted to the Tax Office.

The VAT and ordinary invoices are published by the tax authority for anti-forgery reasons (with few exceptions). Taxpayers buy VAT and ordinary invoices from the tax authority.

1 day CNY 1.051.67 per book of invoices

 

13 File for recruitment registration with local career service center 

Within 30 days of recruiting employees, a new company must register with the local career service center, sponsored by the local government. Relevant application forms which can be electronically downloaded or obtained from the local career service center shall be filled and submitted.

1 day no charge

 

* 14 Register with Social Welfare Insurance Center 

Within 30 days of establishment, the company must register for the payment of employee social insurance with the local social insurance office by submitting a completed social insurance registration form and the following documents:

– Company seal.

– Duplicate of business license (original and one copy).

– Organization code certificate (original and one copy).

After all these documents have been verified, the authorities will issue a notice to open a social insurance account for the company. The company must then apply to open a special account at the designated bank. The local social insurance office will issue the social insurance registration card to the company on receiving bank notification of account opening.

1 day no charge 

 

* 15 Apply for Import/Export License 

Apply with Ministry of Foreign Economy & Trade using Business License and completed and chopped application form. The company will need to have access to licensed staff to perform transactions. These staff can be internal or externally hired.

10 days no charge

 

* Takes place simultaneously with another procedure.

 

Appendix

 

Advantages of WOFE

The advantages of establishing a WOFE, compared with other types of enterprises, include, but not limited to:

– Having the freedom and independence to implement the worldwide strategies of its parent company without having to consider the involvement of the Chinese partner;

– Capable to perform business transactions rather than just providing the support functions as a representative office;

– Able to issue invoices to their customers in CNY and receive revenues in CNY;

– Capability of converting CNY profits to US dollars for remittance to its parent company outside of China;

– Protection of intellectual know-how and technology;

– Greater efficiency in operations, management and future development.

 

1 Business Scope

One of the most important issues in WOFE application is business scope. Business scope needs to be defined and the WOFE can only conduct business within its approved business scope, which ultimately appears on the business license. Any amendments to the business scope require further application and approval. Inevitably, there is a negotiation with the approval authorities to approve as broad a business scope as is permitted.

 

2 Taxation 

For sales of goods, a trading WOFE is subject to Value Added Tax (VAT). VAT applies to all enterprises and individuals engaged in sales of goods, provision of processing, repairs and replacement services, and the importation of goods into China.

General VAT rate is 17%, but necessities goods are taxed at 13%. VAT payable or refundable is based on output VAT (for Sales) minus input VAT (for Purchases).

Generally, there is no VAT payable for export.

A trading WOFE is also subject to corporate income tax, incentives on corporate income tax is normally available to high-tech production industry but not trading company.

 

3 China Trading Company

Some examples of the concepts of China Trading Company that you would need to consider include:

– What are all of the legal terms used in the business?

– What are the various taxes, tariffs, and duties that are imposed upon shipments?

– How does the whole customs process work?

– What documents must you carry when meeting with a customs broker?

– What international treaties, embargoes, agreements, and sanctions are in place that might impose limitations on your ability to trade?

– What are the insurance requirements, if any, for shipping cargo?

– What are the specifications for the types of vessels that may be used?

– What licenses or certificates do you require in order to practice this business?

 

4 Manufacture WOFE

The above document is enough to register a Trading & Consulting WOFE. But if you want to register a Manufacture WOFE, you have to prepare following extra documents:

– Purpose and estimated investment

– WOFE operational structure and number of employees

– Permission for land use, environment evaluation report

– Products, size of production, detailed list of equipment, and business plan

– Environmental protection measures

– Requirement for utilities such as power and water supply

 

4 District

If the company is setup in one district (inside a city) it will be cumbersome to move it to another district later on. It is quite easy to move to a different address/location inside the same district. For example, you might want to start with only an office that is then your registered address. Later, you might want to expand into a warehouse/factory space. At this time, it is easy to do if the new location is in the same district but difficult if you want to move to another city. It is therefore important to decide on your initial district.