Global Tax Insights
Setting up a Wholly Foreign-Owned Enterprise in ChinaDecember 30, 2013
American manufacturers considering this type of business structure will need to follow a strict set of rules.
Wholly foreign-owned enterprises are the most common type of business structure established in China. In fact, research shows that 75 percent of all American entities set up in China are WFOEs, namely because they afford owners maximum control. WFOEs are popular because they typically operate with more independence, are able to better safeguard intellectual property and are permitted to employ local staff directly.
However, they are also the most complex with regard to setting up these enterprises, and American manufacturers considering this type of business structure will need to follow a strict set of rules with regard to setup procedures, costs and the range of commercial activities in which they are allowed to engage in order to avoid legal and tax issues.
There are very particular rules that apply to setting up manufacturing WFOEs in China, and according to the country’s laws, manufacturing industries are defined as those engaged in the following sectors: machine manufacturing and electronics; energy; building materials and construction; medical equipment; transportation; and animal and plant raising and breeding. Listed below are several unyielding stipulations that companies must follow in order to comply with Chinese laws:
- Manufacturing WFOEs are required to rent a factory space as its registered address
- Rented factory spaces will be subject to physical inspections by the local Administration of Industry and Commerce
- Manufacturing WFOEs are required to obtain approval from the Environmental Protection Bureau
- WFOEs will be required to provide information to the EPB regarding the raw materials used, the machinery and equipment, consumption and safe disposal of toxic products
Registered capital requirements
Companies structured as wholly foreign-owned entities will also be required to comply with Chinese registered capital laws before being permitted to operate within its borders. These funds must be injected into a Chinese bank. Registered capital amounts - or the initial investment into a company that is required to fund its business operations - vary by industry, region, factory size and equipment costs, making it critical that companies inquire with the authorities of the city in which they plan to operate.
However, China recently implemented a piloted “zero registered capital rule” for domestic companies in the cities of Shenzhen, Zhuhai, Dongguan and Shunde, under which the AIC will not verify a company’s capital injection at the time of registration. The delay will permit companies to complete the business registration process without the need to actually inject any capital.
Registering a WFOE
In order to register a manufacturing WFOE in China, owners will also be required to provide several documents to the Chinese authorities, many of which will depend on the region in which the business will operate. Similar to determining registered capital requirements, it will be essential to contact local and federal Chinese authorities to determine which documents are needed. In general, government authorities may require the paperwork outlined below:
- Two copies of Certificate of Incorporations, Articles of Formation or Equivalent document certified by Chinese embassy or Chinese consulate overseas
- Two copies of Bank Reference Letters from investor’s bank
- Passport copy of: (i) Parent company’s director (ii) China company’s Legal Representative and (iii) China company’s supervisor
- China Legal Representative provides: 6 photos (2 inches in size), brief resume
- Registered capital; Business Scope; 8 proposed Chinese names of China company
- Office address in China, 2 copies of leasing contracts, certificate of real estate ownership and landlord identification
- Four copies of Letter of Authorization