Published by Hector Lopez
Though we often talk generally about what it takes to form a company in China, a reader pointed out that we have never set out the basic steps one must take to do so. The following sets out the basic steps a foreigner usually must take to form a Wholly Foreign Owned Entity (WFOE) in China.
1. Make Sure Your Business is Legal For Foreigners
Determine if the proposed WFOE will conduct a business approved for foreign investment by the Chinese government.
For example, until recently, China prohibited private entities from engaging in export trade. Be sure your business will be legal.
2. Provide The Proper Documentation
The investor in the WFOE must provide the documentation from its home country proving it is a duly formed and validly existing corporation or Limited Liability company, along with evidence showing who from the investor is authorized to execute documents on behalf of the investor.
The investor also often must provide documentation demonstrating its financial adequacy in its home country.
3. Investor Documents Needed
The Chinese government normally requires the following documents from the investing business entity:
Articles of Incorporation or equivalent (copy)
Business license, both national and local (if any) (copies)
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)
Bank Letter attesting to the account status of the investor company (original).
Description of the investor’s business activities, together with added materials such as an annual report, brochures, website, etc.
The first four of these must be in Chinese. The last one may be submitted in English, with a Chinese summary.
4. Consider Forming a Special Purpose Company to Own the WFOE
Many investors create special purpose companies to serve as the investor in China. China’s company regulators have become accustomed to this process.
However, the Chinese regulators will often still seek to trace the ownership of the foreign investor back to a viable, operating business enterprise. It is common to form a Hong Kong company for this purpose and there are often tax benefits in doing so.
5. Secure Chinese Government Approval
In China, unlike in most countries with which Western companies tend to be familiar, approval of the project by the relevant government authority is an integral part of the company registration process. If the project is not approved, the company will not be registered.
6. Compile and Provide These Documents for Chinese Government Approval
The following documents must usually be prepared and then submitted to the Chinese government:
Articles of Association. This document will set out all the details of management and capitalization of the company. All basic company and project issues must be determined in advance and incorporated in the Articles. This includes directors, local management, local address, special rules on scope of authority of local managers, company address, and registered capital.
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. We typically use a client produced business plan and budget to draft up the feasibility study (in Chinese).
A Lease. 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 into account in planning a budget because the governmental authorities will be expecting this.
7. Compile and Provide These Additional Documents for Chinese Government Approval
You will also usually be required to provide the following documents:
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 around 30% to 40% 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 (usually one year or more) during the start up phase of the Chinese company. These documents must be in Chinese.
Any other documentation required for the specific business proposed. The more complex the project, the more documentation that will be required.
8. The Approval Process
It usually takes two to five months for governmental approval, depending on the location of the project and its size and scope. Large cities like Shanghai tend to be slower than smaller cities.
The investor must pay various incorporation fees, which fees vary depending on the location, the amount of registered capital and any special licenses required for the specific project. Typically, these fees equal a little over 1% of the initial capital.
On large and/or complex projects, the approval process often involves extensive negotiations with various regulatory authorities whose approval is required. For example, a large factory may have serious land use or environmental issues. Thus, the time frame for approval of incorporation is never certain. It depends on the type of project and the location. Foreign investors must be prepared for this uncertainty from the outset.
If you comply fully with the above, your chance of getting your WFOE approved is nearly 100%.