Registering a Wholly Foreign Owned Enterprise (WFOE) is just the first step in your journey of doing business in China. You are going to make some important decisions when you register a WFOE in China that will stay with you for years to come.
Before You Register a WFOE in China
During the pre-registration planning and before you can actually register a WFOE in China you will have to decide on the following; a Chinese name for your business, the city or prefecture where your business will be located, the scope of business, the legally responsible persons in the company, and the registered capital of your new venture. To properly register a WFOE in China, these details must be carefully considered as they could cause significant hurdles for you down the road or create constraints for your business.
The advice we share assumes that you have already decided to register a WFOE – as opposed to a representative office or joint venture – and have already assessed the feasibility of your business idea in China. This article will help you understand how to properly set up a WFOE in China and hopefully set you on the path to success.
Selecting a Name for Your Chinese Business
Businesses in China must follow a predefined format when submitting their name. This includes the unique business name, business type, location, and legal type – in that order.
For example; XYZ trading (shanghai) Ltd.
In China, a business’s name appears frequently including on documents notarized with the company stamp and on government issues VAT invoices (fapiaos). It’s a good idea to choose a simple name if possible as suppliers and employees will need to input the name when obtaining input VAT fapiaos for expense claims and purchases. The name must also include the business type. There are no specific requirements here and whether the name adequately describes the business type comes down to the AIC decision.
Deciding on the location for your new business is one of the most impactful decisions you will make in the early stages of your business. It’s important you do your research and select the right location for your operations in terms of your clients, suppliers, availability of talents, tax liability and supply chain implications. It is not easy to move a business to a new administrative region once it’s registered so make sure to do your research before making a final decision.
The location will appear on your legal name and reflect the administrative region or city in which your business is registered. It worth noting that in some cases China allows for multiple business registrations at a single legal address. However, virtual addresses are illegal and we would advise against using them as this could put your business at risk of having the business license revoked in some circumstances.
For small businesses looking to minimize costs – especially in T1 cities in China which can have high rental prices – shared office space is a viable option. The key difference between virtual offices and shared offices is that the business has a physical presence on location and can be more easily found should the Administration of Industry & Commerce (AIC) wish to visit the place of business.
Lastly, make sure the registered office address you choose permits your business type. Foreign investors and entrepreneurs can only legally register a business in China at addresses permitted for commercial, retail, or industrial properties. Residential property is not permitted.
To come up with the business scope registered on your business license, make an exhaustive list of all the activities your business may engage in. Check the Catalogue of Encouraged Industries for Foreign Investment for the sectors encouraged for foreign investment in China. If a business activity is in an encourage industry, you’re free to include it in your list. Also, check the Special Administrative Measures for Foreign Investment Access for the restricted industries as these may be allowed with the proper approval.
When compiling a list of business activities, it’s okay to add multiple business types. For example; a consulting company may also include import and export activities as part of its business scope, as long as the core business activity is clear. It’s often a good idea to create a broad scope around your core business activities because a business can only issue VAT invoices within its business scope. If there is any chance the business might provide other product variations or services, it’s best to include it within the business scope submitted to the AIC. The AIC will often ask questions for clarification before making the final decision on what goes on the business license, so they may simply remove or adjust items within the scope if necessary.
Legally Responsible Persons
Registering a business in China requires a designated Supervisor, a legal representative, an executive director, and a responsible finance person. Optionally, you can include a board of directors, but for small operations, this may not be necessary. The supervisor and responsible finance person cannot simultaneously be the executive director or the legal representative. Typically, the business owner will be the executive director and the legal representative, and the supervisor and responsible finance person can be your accountant or a trusted business partner.
Gone are the mandatory minimum capital injection requirements for registering a WFOE in China. A business may theoretically register 1 CNY as their registered capital; however, this is usually not advisable. This is because the ratio between the registered capital and the total investment is fixed according to a ration set by the Administration for Industry and Commerce. Payments made by shareholders to the company beyond the total investment are seen as income for the business and will be taxed as such. We advise to register capital equal to roughly two months of projected cash flow or more to avoid needing to increase the registered capital should the business need short term capital from its shareholders to operate the business.
Generally speaking, the registered capital injection must be completed within 20 years of registration. This essentially means there is no time pressure on the business to inject its funds. However, the injected capital is intended to sustain the business until it is earning sufficient income to cover its financial obligations. It is against the law in China to register a business if basic expenses like rent and salary are not able to be met by the capital injection.
Countless problems can arise if mistakes are made when registering a WFOE in China that can cause significant headaches down the road. The most common mistakes are usually submitting a scope which is too narrow or increasing the registered capital when the business needs a short term injection of funds to meet its financial obligations. Less significant problems include suppliers or employees incorrectly recording the business name on invoices, which can delay VAT input deductions. With enough experience, however, these mistakes can often be foreseen in advance and avoided, saving the business time and money. Our advice is to factor in the experience the accountant has when selecting an agent to register your business and help set you on the path to success.