• Advantages of WFOEs
• Key Points of WFOEs
• Procedures for registering a WFOE
The Wholly Foreign-Owned Enterprise (WFOE) is one possible business
structure that can be used by foreign investors to register
and license a business in China. The WFOE is a limited liability
company (liability is limited to the amount of the registered
capital) that is 100% owned by foreign investors. WFOEs were
originally conceived to encourage manufacturing activities that
were either oriented towards exporting products or that introduced
advanced technology into China. However, with China's entry
into the WTO, these conditions were gradually abolished and
the WOFE is increasingly being used for service providers such
as a variety of consulting and management services, software
development, trading enterprises, etc.
The WFOE is becoming the most popular business structure used
by foreign investors. Some of the advantages of establishing
a WFOE include:
- Independence and freedom to implement the worldwide strategies
of the parent company without having to consider the involvement
of a local Chinese partner. This is the main reason that most
companies choose the WFOE business structure.
- The ability to formally and legally conduct business inside
China rather than simply functioning as a Representative Office
(RO), including the capability of issuing legal receipts/invoices
to customers in local Chinese currency (RMB) and also the ability
to receive revenue in RMB. This benefit also applies to other
Foreign Investment Structures (JVs, foreign invested holding
companies, etc.) with the exception of ROs.
- The capability for converting profits and revenues received
in local Chinese currency (RMB) to other currencies such as
U.S. dollars, British pounds, Eurodollars, etc.
- Protection of intellectual know-how and technology
- Greater efficiency in operations, management and future development.
Key Points of WFOEs
- Business Scope
The business scope is narrowly defined and interpreted for all
businesses in China; a WFOE may only legally conduct business
within the business scope that appears on its business license.
In the application documents, the business scope is written
as a list of business activities that the WFOE will conduct
in China, and the first business activity will define the overall
nature of the WFOE for classification purposes. The classification
will further define the minimum required capital, type of invoices,
type of applicable taxes, etc. As one example, for a previous
WFOE registration, the company's business scope was written
as "retail of cosmetic products, training on cosmetic products,
after-sales services." The nature of this WFOE was therefore
defined by the Chinese authorities as a "retail-trading WFOE",
thus the required registered capital was RMB300,000, and it
was able to receive the Value-Added-Tax invoices that are essential
to a trading company in China.
Because the scope of business is crucially important in the
WFOE business registration application, Beijing Yafei always
confers with the appropriate officials to ensure that every
business activity that is listed on the registration application
is an approved business activity and that every business activity
is designed as broadly as allowable so that clients can be more
flexible in what activities they are allowed to conduct. We
will not submit an application until we are assured that the
application information follows the pertinent rules and regulations
and that it will allow our clients to achieve the maximum benefits
of running their businesses in China.
- Registered Capital and Total Investment Quota
Registered Capital and Total Investment Quota are two important
types of capital that the Chinese government officials will
check to ensure that both are listed correctly. The amounts
for both types of capital will appear on the Approval Certificate
and Business License. For the WFOE, the minimum amount of Registered
Capital required is RMB100,000; however, a recently enacted
law will decrease this amount to RMB30,000 as of January 2006
to encourage more small businesses by lowering the minimum investment
fund requirements for Registered Capital.
Registered Capital is the amount of funds that
the Chinese government requires of foreign investors to contribute
to their projects in China (e.g. WFOEs). The Chinese government
sets requirements for the minimum amount of registered capital
to start a business. Registered Capital must be of an amount
greater than the minimum requirement of the China Company Law
(currently RMB100,000, RMB30,000 after January 2006.) The Registered
Capital can only come from the foreign investors, and must be
actually paid into the company bank account then verified by
an independent certified accounting agency in China. The amount
of registered capital can be increased but official procedures
will be required. Registered Capital must be no less than 70%
of the Total Investment Quota; however, the ratio may be decreased
when the amount of Registered Capital exceeds US$ 3 million.
The actual amount of Registered Capital required is subject
to the final approval of the approval authority. The Chinese
officials have the right to require a business to increase the
amount of Registered Capital if they deem the minimum Registered
Capital amount as insufficient for the requirements of the startup
business according to the project description as written in
the application documents. The final amount of Registered Capital
required is sometimes a result of negotiations with the appropriate
officials during the registration period.
Total Investment Quota is the total amount
of funds that will be invested in the WFOE during its entire
planned period of operation. The Total Investment Quota must
be greater than or equal to the Registered Capital. Unlike Registered
Capital, which has to be fully paid into the WFOE's Chinese
bank account before starting business operations, the Total
Investment Quota is the total amount of funds planned to be
contributed to the project over its lifespan and it does not
necessarily have to be fully deposited in the bank. The excess
amount of the Total Investment Quota over the Registered Capital
can come from sources other than the foreign investors listed
in the Articles of Association of the WFOE; for example, it
can be borrowed from banks or other sources either inside China
or from overseas. This amount can be increased but any additional
amounts of Total Investment Capital must be approved by the
relevant Chinese authorities.
Of the long list of documents that are required for business
registration, there are two documents that are very important
and could make the difference in whether or not the WFOE registration
application process goes smoothly.
Articles of Association is one of the most
important documents in the registration process. The Articles
of Association define the rules and principles for the entire
operation of the WFOE. It contains such information as Business
Scope, the amount of Registered Capital and Total Investment
Quota, Management Structure (which defines the highest authority
in the WFOE, either a Board of Directors or a General Manager),
policies and rules on accounting, taxation, profit division,
employment, conditions on termination and liquidation, etc.
There is no universal sample for an appropriate Articles of
Association; each different approval authority may have its
own ideas of what is acceptable. The WFOE representative can
consult the appropriate authorities for a sample Articles of
Association as a guideline in writing the Articles of Association.
Feasibility Study Report is another of the
two most important documents for registration. In this report,
the entire WFOE project must be described, explaining each business
activity that it will conduct in China, demonstrating that all
activities follow Chinese regulations and that the entire project
is feasible both technically and financially. For some small
consulting WFOEs for example, a 3 to 4 page Feasibility Study
Report would be sufficient, while for large projects such as
manufacturing WFOEs, a proper Feasibility Study Report may consist
of dozens of pages.
Writing good Articles of Association and Feasibility Study Reports
can guarantee at least a 50% chance for approval from the Chinese
government. Yafei provides expert consulting services on
the proper completion of these documents. Yafei has also
built up an extensive bank of document samples for various WFOEs;
please contact us if you need any help.
Procedures for Registering a WFOE
To fully and legally register a business in China, you will
be required to visit at least ten different governmental bureaus
and agencies; some of them will require numerous visits. A tremendous
amount of complicated paperwork and physical footwork is involved.
Each bureau has its own specialized documents that are required,
and only Chinese language documents or translations are accepted.
After you have chosen an office site and have signed a lease
agreement, you are ready to dive into the registration procedures.
The entire process can be roughly divided into four steps.
Step One: Pre-registration of the WFOE name
To register a name for your WFOE, you will need to know the
regulations for naming the business. The legal name of a WFOE
consists of four words presented as:
Location (City) + business name + main business activity + structure.
For example: Beijing + ABC + Management Consulting + Co., Ltd
In the example, "ABC" is the Chinese translation of the foreign
business name of the foreign investor; the translation can be
made either by sound or meaning. For example, "Mai Dang Lao"
is the translation of "McDonald's" by sound (the Chinese version
sounds similar to the English pronunciation); "Wei Ruan" is
the translation of "Microsoft" by meaning (it means the same
thing in Chinese as "Microsoft" does in English). "Management
Consulting" is the main business activity of the example WFOE.
"Co., Ltd." is the legal structure of WFOEs.
A basic rule in naming a WFOE is that it can only register "ABC"
as its business name when it has not already been registered
by any other business in China. In practice, due to the vast
number of businesses that have already been registered and thus
a high chance of conflict, it is a good idea for a WFOE to work
out a couple of options for the business name before going to
the AIC for registration. Only the Chinese name of the WFOE
can to be registered. An English name for a WFOE is allowed,
but it is not officially recognized and the registration of
English business names is not allowed, although the business
can apply for trademark protection for its English name in China.
Step Two: Apply for the WFOE Approval Certificate
After obtaining the WFOE name and completing the application
documents, the WFOE representative can then go to the competent
approval authorities for the Approval Certificate.
Identifying competent approval authorities is sometimes difficult,
especially when the WFOE business covers activities that are
deemed "restricted" as listed in the "Guide for Foreign Investment".
The WFOE representative will need to have sound knowledge on
the structure of Chinese government departments and their functions.
Generally, the local commerce bureaus are the right places for
the WFOE representative to visit.
Every approval authority publishes its "standard processing
time", e.g., 10 working days, 30 working days, etc. They can
issue the WFOE Approval Certificate within the stated processing
time if the application documents that are submitted are complete
and everything is in order. But in practice, the WFOE representative
will probably face inquiries about the amount of registered
capital, business scope, and other "hot" checking points. Officials
have the right to require the WFOE to provide more supporting
documents or to allow the amendment of the application documents,
but if this happens, they will start all over and the processing
time will be longer than the one that was published.
Our experience has been that friendly discussions and negotiations
with officials within the approval authority are the keys to
success in this step.
Once issued, the Approval Certificate contains information such
as the WFOE's name, the address of the WFOE's main office site,
Business Scope, Registered Capital, Total Investment Quota,
Foreign Investors, and Terms of Business Operation, etc.
Once the WFOE receives the Approval Certificate, Step Three
can be addressed.
Step Three: Apply for the WFOE's Business License
With the Approval Certificate and other required documents,
the WFOE representative can go to the local Administration for
Industry and Commerce (AIC) to apply for the Business License.
This step is relatively easier than the previous one because
there is much less paperwork involved and a much shorter processing
time. The standard processing time for Beijing's AIC is 5 working
The AIC charges a registration fee of 0.08% of the Registered
Capital. For example, if the WFOE's Registered Capital is US$
1 million, you will need to pay US$ 800 as the registration
The AIC will issue the WFOE with two kinds of Business Licenses.
Before the Registered Capital is fully paid into the Chinese
bank and certified by an independent accounting agency, the
WFOE will only receive a Temporary Business License. The Formal
Business License will be issued only after the Registered Capital
has been deposited and certified by the accounting agency.
Once the Temporary Business License has been received, the WFOE
is officially established as a legal entity and can legally
conduct business. The Temporary Business License also allows
the WFOE representative to continue on with the remaining registration
steps, open a bank account, etc.
Step Four: Post-registration Activities
After the WFOE has received the Temporary Business License,
it will need to be registered with a dozen bureaus and their
local offices. The WFOE will need to have its "chops" carved
and open bank accounts. Each bureau has its own specific list
of documents that will be required. The processing time for
Step Four varies from 1~10 working days. Overall, the WFOE will
need 4-5 weeks to complete these post registration activities.
Some key points of Step Four are:
- Registration with tax bureaus and reporting to local
The WFOE will need to register with two local Tax bureaus: the
State Tax Bureau and the Local Tax Bureau. These bureaus will
issue the Tax Registration Certificates that the WFOE will present
to the bank when opening bank accounts. These certificates will
also used for purchasing official invoices, which are essential
documents for doing business in China.
In addition to registering with the tax bureaus, the WFOE will
need to report to their local tax offices. There are two tax
offices that require WFOE to visit, one has authority over Local
Tax, the other has authority over State Tax. The local tax offices
will assign tax officers who will set tax filing schedules and
determine a tax filing method (mostly likely online at present)
for the WFOE. The WFOE will receive an account number and password
for online tax filing and receive the appropriate type of invoices
to provide its clients when providing services or goods. Finally,
the tax officers may also recommend the specific machine models
that will be needed for printing invoices. It is suggested that
the WFOE send its (future) accountant for reporting to the local
- Opening of bank accounts
A WFOE is allowed to open at least one RMB account and one foreign
currency account, depending on the number of and the nationalities
of the foreign investors. The WFOE can choose a bank branch
for opening the foreign currency accounts but the branch bank
must be approved by the local Foreign Exchange Bureaus.
The main foreign currency account is used for receiving registered
capital from foreign investors. Total injected funds cannot
exceed the Total Investment Quota that is set for the WFOE in
the registration application. Repatriating the Registered Capital
to home countries is forbidden during the term of business operation.
The WFOE can open another foreign currency account for use in
business operations. This is subject to approval by local the
Foreign Exchange Bureaus. For detailed information please contact
The RMB accounts are used for expenses and other business operation
uses in China. The money going into the RMB accounts can come
from its foreign currency accounts via a bank transfer, or from
the income the WFOE receives from doing business in China.
- Registering the WFOE's expatriate employees with the
Expatriate employees who will work full-time for more than six
months in the WFOE will need to be registered with the Beijing
Labor Bureaus to receive a Work Permit for each of them. Foreign
employees will also need to get a Residence Permit from the
local Public Security Bureau. With a Work Permit and a Residence
Permit, the WFOE's foreign employees can legally work and reside
As of October 2005, expatriate employees from Taiwan, Hong Kong
and Macau are required to join China's "Social Security System"
which basically requires employers to pay unemployment insurance,
health insurance and accidental injury insurance, as well as
into pension funds housing funds and education funds for these
Chops are commonly used in official documents such as contracts,
application forms, checks, etc. It is mandatory for a WFOE to
have a Company Chop carved and a Finance Chop carved. Personal
Name stamps are optional.
To carve (make) chops, the WFOE will need to design samples
of its desired company chops and present them to the Public
Security Bureau (PSB) for approval. The PSB will appoint a chop
shop for you to make the chops once the designs have been approved.
The Company Chop is used as on any company documentation as
a mark of authenticity to prove that it did indeed come from
that particular company. The Finance Chop will be mainly used
to make bank checks and other financial documents valid with
the chop acting much like a company's "signature".
The Finance Chop is not enough to make a check valid; the check
will also have to be "chopped" with the Personal Name Chop.
Another option for validating checks is to use both the Finance
Chop and an authorized employee's handwritten signature.
- Other registrations Apart from the authorities mentioned
The WFOE representative will also need to visit even more authorities
to complete the WFOE registration. These other authorities include
the local Technology Supervision Bureau, Statistics Bureau,
Finance Bureau, and the local AIC office. Each of them set a
specific deadline for the WFOE to register with them; usually
all of them require registration within 30 days of receiving
the Temporary Business License. Missing the deadlines or failing
to register with any of them could result in fines for the WFOE.
Compared to registering a business in most Western countries,
registering a business in China is challenging work filled with
paperwork and bureaucratic red tape. It is practically impossible
to properly complete the registration process without a qualified
agency. Be sure that the agency is certified by the Beijing
AIC, that the agency has good connections and relationships
with the various local authorities, and that they possess comprehensive
knowledge about the numerous important aspects involved with
legally and properly registering a WFOE. Please contact us for
professional and honest registration services at reasonable