I. KEY CONSIDERATIONS IN SETTING UP A WFOE
- Site Search: The first thing you need to do is to conduct a site search and identify appropriate space for your WFOE. A site search is particularly important because: (i) a fully executed lease must be submitted to the government authority as part of the WFOE application package; and (ii) different districts (even in the same city) may have different rules and policies on WFOE registration. A “virtual” office address is not allowed.
- Total Investment and Registered Capital: Total investment and registered capital figures are both required during the application procedure. Total investment is the total amount of funds that the WFOE is expected to need from non-Chinese sources during its planned period of operations. Registered Capital is the amount you must initially invest so that the WFOE can operate until it becomes profitable. For a WFOE with less than USD$3million total investment, the registered capital must be at least 70% of the total investment.
In reality, the minimum capital requirements vary drastically by industry and location. Moreover, the minimum requirement is a guideline only. Note that a WFOE may not increase or reduce its registered capital without first obtaining approval from the relevant government authority, a process that is costly and time consuming. Therefore, it is crucial for you to look beyond the relatively low minimum capital requirement and have a good estimate of the real working capital the WFOE may require until the business is self-sufficient. If you simply follow the minimum registered capital requirement during initial capitalization, you may soon find the business is under-capitalized, unable to pay its bills and out of funds. In case of an urgent need for extra cash, government approval may be too late, and the company is only allowed to obtain a foreign loan in a maximum amount equal to the difference between total investment and registered capital. On the other hand, the WFOE may be over-funded. Registered capital is typically considered “locked” in China and you would not be able to repatriate it unless the WFOE is dissolved and liquidated.
- Business Scope: Business scope needs to be defined, and the WFOE can only conduct business within its approved business scope, which ultimately appears on the business license. Any amendment to the business scope requires further application and approval.
II. WFOE REGISTRATION PROCEDURES
As previously mentioned, the registration procedures may vary drastically by location and industry. Generally the following steps are involved in setting up a WFOE:
- Name Approval: the first step during the application process is to propose a company name and submit an application for name approval, which would be decided within 10 business days.
- Application for Approval Certificate: Upon receipt of the name approval, you will need to submit the application to the relevant authority, which should include the following key documents (not an exhaustive list):
- Feasibility Study Report
- Environmental Protection Valuation Report
- Articles of Association
- Incorporation documents concerning the foreign investor(s)
- Bank letter attesting to the account status of the investor company
- Application Forms
- Application for Business License: usually issued within 5 business days upon submission of a complete application.
- Application for Organization Code Certificate
- Obtain company chop (which is required in China)
- Foreign exchange registration: It may take at least 20 business days to receive approval.
- Open bank accounts: in general you will need at least three types of accounts: (i) Registered Capital Account (it is the account where your registered capital will go); (ii) RMB Basic Account (it is the primary account during daily operations); and (iii) RMB General Account(s) (it can make RMB payments except for cash withdrawal and payroll).
- Tax, Statistics, Finance, and Customs Registration
- Capital Verification
- Apply for VAT General Taxpayer
The order of the steps above may vary by location. The time frame for approval of incorporation is never certain. It depends on the type of project and the location. The bottom line is that WFOE registration is a very complicated process and requires careful planning ahead.