Most foreign-owned companies are registered as wholly foreign owned enterprises (WFOEs) in China. A WFOE is a Chinese limited liability company composed entirely of foreign capital owned by one or more foreign investors, excluding branches set up in China by foreign enterprises and other foreign economic organizations. China encourages the establishment of WFOEs with the capacity to export their products or that are equipped with innovative technology. The WFOE must conduct its activities and its business under the precise category for which the commercial licence granted. In order to comply with Chinese law, it should retain formal and independent accountants, keep organized and independent accounting records, approve and register its balance sheets and financial statements and be ready for any kind of supervision by the Chinese regulatory and financial authorities. Registering a WFOE requires compliance with a large body of regulations, and involves an extensive and rigorous application process. Because of this, most foreign investors engage specialized WFOE consultants to register their companies.
There are a number of documents required for registering a WFOE. As of 2013, the documents in the following table are required to establish a WFOE in China.
|Company name search request form||Used to ensure that the name selected for the WFOE does not conflict with existing company names.|
|Identification Document of shareholder(s)||Passport for individuals, business registration documents for corporations.|
|Application Form for establishing a WFOE|
|Company Minutes||Describes the structure of the new WFOE|
|Business Plan||Describes the business strategy and plan of the new WFOE.|
Proof of employment from previous employer for the following roles in the WFOE:
· Legal Representative of the WFOE
|A written document from the employers, either previous of current, of each person appointed to the specified role in the WFOE.|
|Legal service attorney document|
|Office Lease Contract||The lease contract @ Qilusoft Park|
|Power of Attorney document issued by the Ministry of State Security|
|Resume and 1-inch photo of the Legal Representative of the WFOE|
Photocopies of identification documents for the following roles in the WFOE:
|Passport(s) if the individuals are foreign nationals|
|Photocopies of identification document for the Legal Representation of the WFOE||Passport if the individual is a foreign national|
|Letter of Reference from the bank of the WFOE’s shareholder(s)||A letter of reference issued by the WFOE’s shareholders’ bank.|
WFOE Registration Process
The required documents described above will be used in support of the WFOE registration process. As of 2013, the steps in the WFOE registration process are described in the following table.
|Step||Estimated Processing Time (Business Days)|
|Company name search||Provincial WFOE: 3 City WFOE: 1|
|Review and approval by the Ministry of State Security||5|
|Review and approval by the Ministry of Commerce||1|
|Code issued by the Bureau of Quality Supervision||1|
|Approval Certificate issued by the Ministry of Commerce||1|
|Registration with the Trade and Industry Bureau||5|
|Record filing and creation of company stamps at the Department of Public Safety||1|
|Obtain Certificate of Organization Code||1|
|Obtain Foreign Exchange Registration Certificate||5|
|Obtain Corporate Tax Registration Certificate||1|
|Open business account at designated financial institution and obtain investment capital verification||4|
|Update registration details with the Trade and Industry Bureau||3|
|Update the Organization Code||3|
|Update registration details with the Inland Revenue Department||3|
The required amount of registered capital (equity) is fixed as a percentage of total investment. In practice, this limits the amount of foreign debt that a WFOE can incur. Registered capital represents the equity that an investor holds in a WFOE. Registered capital and debt together represent a WFOE’s total investment, an amount that should correspond to the planned scale of its business operations. Appropriate amounts of total investment and registered capital must be determined before applying to set up a WFOE. These amounts will be subject to approval. The ratio of registered capital to total investment is fixed by regulation. The ratios are:
|Total investment||Registered capital (as percentage of total investment)|
|Up to US$3 million||At least 70%|
|Over US$3 million up to US$10 million||At least 50% (minimum of US$2.1 million)|
|Over US$10 million up to US$30 million||At least 40% (minimum of US$5 million)|
|Over US$30 million||At least one-third (minimum of US$12 million)|
This means, for instance, that:
• A WFOE set up with a total investment of US$500,000 is required to have a registered capital of at least US$350,000 and can only incur foreign debt up to an amount of US$150,000.
• A WFOE set up with a total investment of US$51 million is required to have a registered capital of at least US$17 million and can only incur foreign debt up to an amount of US$34 million.
Registered capital may be set in RMB or a freely convertible foreign currency. The initial payment for registered capital being paid in installments may be as low as a 15% of the registered capital. The initial payment must be made within three months of issuance of the business license. The balance of registered capital paid in installments must be paid within two years. Each payment of registered capital needs to be verified by a duly qualified accountant registered in China, who will issue a capital verification report. The report should be filed at the local authorities.