The process and timing of forming a local subsidiary in China, often referred to as a Wholly Foreign Owned Enterprise (WFOE), has improved significantly in recent years. 

In China, a WFOE (Wholly Foreign Owned Enterprise) is one of several foreign company structures available. A FIE (Foreign Invested Enterprise) is a company that has foreign ownership in some form (greater than 25 percent ). Representative Offices (RO) and Joint Ventures (JV) are also possible structures, but are less popular these days as most foreign investors desire the full presence and control offered by a WFOE.

The rules and procedures to setup a WFOE are straightforward:

1) Pick a name for your Chinese company that is available - This is always the first step in registering a Chinese company; you must first receive a Chinese name permission before applying for an English name. Your Chinese company name must not be the same as that of another Chinese company, and both the Chinese and English company names must conclude with Limited or Ltd, or Group.

2) Legally register your office address - There are two sorts of office addresses you may use as your official registered address in mainland China, a virtual registered address (although more and more difficult to do) and a physical address.

3) Confirm the company's legal form and structure - Choose the legal representative and supervisor, as well as members of the board of directors, as selected by the shareholders. 

4) Articles of Association - These are charter legal documents that need the signature of the initial owners and the agreement of all shareholders to all Chinese legal paperwork and files, as well as reporting the corporate structure and organization forms. If you want to update your company's registration data in the future, you'll need to change the Articles of Association.

5) Register your own Chinese business - After receiving the aforementioned confirmation of registered information, you can set up and register your own private limited business in China.

6) Open a local bank account and apply for internet banking and bank permits through a China business once you've accomplished the first five processes.

7) Tax registration for your WFOE - You must first determine which type of tax degree you want to apply for from the tax government; in mainland China, there are typically two types of taxpayers: small scale taxpayers (small invoice) and general taxpayers (VAT invoice), and you must choose one when you apply for tax registration. 

Some of the advantages of WFOEs are as follows:

1) Profitability through Revenue and Costs - Any operating profit made in China can be calculated (including taking account local costs) to be transmitted back to the parent company in another country.

2) Can be started without a Chinese partner - A WFOE is self-contained, with the capacity to manage its own operations, finances, and business development.

3) Ability to hire personnel directly - Rather than depending on a Chinese labor dispatch agency or trying to work via independent contractors, a WFOE may hire employees directly and manage their benefits and social insurance contributions.

4) Local currency - A WFOE can do business in China using the local RMB currency and, critically, can issue RMB tax invoices (fapiao) to its customers when they (routinely) request such documentation.

The following are the major disadvantages of WFOEs:

1) Permitted operations are limited to a specified Business Scope - As part of the setup process, the government develops and approves a single line "Business Scope." This will restrict what a WFOE can do once it has been formed.

2) Complicated and time-consuming setup - Despite recent simplifications, China's WFOE registration procedure is still much more involved than setting up a company in other countries.  To do things right, you'll need some time, resources, and investment - for example, on deciding the legal representative. 

3) Setup capital is restricted - As part of the WFOE registration process, the foreign investor commits to injecting a certain amount of "registered capital". Previously there was a strict deadline to fully contribute that capital.  Although that deadline no longer exists, foreigin investors may be exposed to additional risks and creditor liabilities if they do not ever fully inject the amount of capital they have pledged as "registered capital" for the company.

The WFOE setup process contiues to get simplified. The most noticeable changes are with the company license. The five-in-one company license reduces the need for numerous sets of application documents to multiple authorities, as well as the requirement for more tightly knit and effective management. Faster application times and more uniform ratification and evaluation techniques are made possible by sharing information through integrated and digitalized management systems.  Still the process requires a fair amount of internal organization and time by a company to finally get the WFOE up and running.

Expand into China without setting up a company, by employing or relocating key staff to take a first step in exploring the market. A professional employer organization (PEO) service can act as the official employer of record (EOR) for your staff in China while you expand your business. With the support of our trusted partner network, we can facilitate local hiring and employment without the time and cost of setting up a legal entity in country.

Contact us for more information at inquiries@ChinaLawSolutions.com