1. Several WOFE categories according to their main activity
- Services and business consulting WOFE : typically used to provide B2B services to companies or B2C services to individuals. Subject to regulations applicable to the very nature of the deliverable, a service oriented WOFE can issue a service invoice to its customers. Still, it is not allowed to engage in products trading or import/export operations.
- Trading WOFE : used for wholesale, retail, eCommerce or import export trading. If solely involved in commercial activities, these companies are also called FICE (Foreign Invested Commercial Enterprises). They can obtain Import Export Rights, buy and sell local or imported products to their customers in China and/or export them. The quick development of online sales (e-commerce) as well as the possibility to offer domestic mobile payment solutions (Alipay, Wechat) have motivated many western companies to go for a WOFE as their China development base.
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Production or assembly WOFE : from the simple assembly workshop to more sophisticated production activities, this kind of WOFE were the first authorized in China. Many companies with a long-standing import activity in China, but facing increased local competition, decided when relevant to engage in an assembly or production in China.
2. Regulatory WOFE news : updates for 2023
On January 01, 2020, a Law on foreign investments in China stipulates the previously required Registration Approval Receipt is now cancelled if the nature of the investment does not belong to the "foreign investment negative list". This list highlights the business activities not authorized or subject to restrictions for a WOFE.
Practically, this means the incorporation or AOA modification of a WOFE (not engaged in the negative list's prohibited activities) follows administrative procedures in line with those applicable to the Chinese invested enterprises. Still, a suitable business scope should be carefully drafted so as to effectively allow your expected activities. Up to now, we observe the administrations remain very autonomous. They do not coordinate with each other (tax bureau, China customs, Trade Administration, Immigration Bureau, Health Bureau FDA-NMPA, etc).
For individual entrepreneurs business activities : a new regulation of the Market Management and Supervision Administration (MSA) came into force in 2020. It authorizes the registration of a sino-foreign joint venture (JV) between a chinese natural person and a foreign legal or natural person. This was previously prohibited as it required the Chinese party be a legal person. However, this provision currently only concerns projects registered in Shanghai or the neighboring provinces of Jiangsu, Zhejiang and Anhui. True to the spirit of test measures (called "pilot measures") often conducted in China, this could, in the future, be extended to the rest of the country. This pattern facilitates the prospective of a sino-foreign cooperation. Still, it is recommended not to forget some key questions such as the director's liability and the profit repatriation matters. You may seek professional advice to compare the cooperation options and conditions before going for a JV association.
3. Classification of investment activities for foreign investors
Before 2016, a prior formal approval (in WOFE or in joint-venture) must be obtained by any foreign investor before being authorized to register his company. This official approval depended on the exact nature of the intended activity. A former catalog of foreign investments classified foreign investments as :
- Encouraged (research and development, environmental protection, etc.)
- Authorized (for example as a WOFE or only as a Joint-venture)
- Restricted (additional licenses requested, prohibitive minimum investment for example)
- Prohibited (strategic sectors or monopolies : many remain, even in services)
In October 2016, the National Reform Commission and the Trade Commission published the “Provisional measures for the management of the registration of creations and modifications of enterprises with foreign capital in China'. The measures stipulated that, for any project not contained in the "negative list", the previous approval logic was replaced by a declarative logic. Thus, the "Certificate of approval" was replaced by a "Registration receipt".
In addition, a “negative list” of foreign investments in China is periodically updated by the two Commissions (Refom and Trade). It is based on an official principle of “reduction of restrictions and no additional restrictions”. Globally, we can keep in mind the existence of specific regulations governing foreign investments still display a difference with the rules governing the Chinese domestic investments.
The previous 2015 Catalog of Foreign Investments is then no longer in force since it has been replaced by the Negative List. The latest version was drafted in January 2020, still in force today. Here you can read the current Negative list of foreign investments in China.
Globally, the evolution of these measures indicates that China broadly announces a higher degree of openness for foreign investors by communicating on a simplification of the registration procedures for a WOFE. Practically, if the sectors authorized for foreign investments have gradually increased, and if the number of Licenses or Certificates is less than a few years ago, the content & details of the application files to submit to the authorities have become much more dense. After a first phase of documents applications online, follows a second phase of remittance of the signed & chopped application files.
4. Legal incorporation and shareholders status
A WOFE is a Limited Liability Company (LLC) which shareholders can either be a legal person (overseas parent company) or one or more natural persons. Choosing to setup a WFOE is a recommended alternative to the sino-foreign Joint Venture in business fields for which an investment in WOFE is permitted. It gives a clear advantage in management and strategy control.
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5. What minimum registered capital is required for a WOFE ?
Fully usable to pay all operating expenses, the minimum capital level required for a WOFE varies according to several criteria, and in particular :
- The business field of activity considered, according to its classification in the Negative List
- The geographical area (province and city or district) where the WOFE will be incorporated
- Specific areas requirements (free trade zones, Special Economic Zones, Technological Park, etc)
- Your investment financing needs and cash requirements we recommend to forecast realistically
- The investment requirements coming from industrial zones. For assembly and production activities, they have highly variable KPI ratios from one to another. Both about the investment level and the tax paid target.
The capital level and payment deadlines (in one or more installments) are listed in the company's Articles of Association (AOA). This must be proposed in the feasibility report submitted to the authorities. It is part of the criteria to get approved for registration. In Shanghai for example, the authorities consider a foreign entrepreneur or investor is "serious" if he proposes a minimum capital level covering his need in investment until break-even. The investment need should follow a well drafted business plan which is also part of the investment feasibility report. For services activities, the financing need could be lower than the one of a trading or distribution activity (as no stock financing).
Overseas capital payments to a WOFE's current accounts are not allowed to date. t is treated as an taxable income. Accordingly, under-financing a WOFE at start can be damaging to the business start. Damaging from the investment approval conditions point of view and from the corporate tax status.
Increasing the capital level of a registered WOFE is authorized. Still, the overall process remains procedural and time-consuming. It is subject to an approval logic from the authorities and your bank. Expect few weeks before a capital increase can be credited on the WOFE's accounts. It is not a suitable option to meet urgent need of cash.
6. Financing and capital contribution of a WOFE subsidiary
The WOFE's parent company can pay part or all of the registered capital as soon as its bank accounts are opened and active. The banker proceeds with the WOFE's bank accounts opening after all its business license is issued. The Chinese regulations allow individual investors to be the direct shareholders of a WOFE, meaning no parent company or holding company. Here too, we recommend the structuring options should be compared for your project. For example, thinking first about the tax treatment for the profit repatriation and the conditions for the shares sale or transfer.
7. Directors liability in China
The nomination and liability of managerial functions are defined in the WOFE's Articles of Association (AOA). They concern the Legal Head whose name is shown on the Business License. They also concern other managerial functions surch as an executive director and/or a general manager. Subject to the opinion of the authorities after review of an investment feasibility report, it may be authorized for one person to hold several of the above positions. Some of the positions may also be occupied by non-China resident. To assess & compare.
To date, in january 2023, the regulations applicable to foreign investments do not contain provision for the business status of what, in western countries, we call self-entrepreneurs, micro-entrepreneurs, self-employed or liberal professions.
8. Hiring Chinese and foreign employees with a WOFE
A WOFE subsidiary has a legal capacity and can sign a direct employment contract with its Chinese and foreign employees. For the latter, allowed to help getting their mandatory work permit and resident visa. Many WFOE managers require the service of a third-party authorized HR agency to manage payrolls, welfare and tax declarations.
9. Recommendations before setting up a WOFE subsidiary in China
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First consult the negative list of foreign investments cited above.
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This list does not however indicate the specific conditions which may be required for the investments which are authorized. These conditions can be variable according to the cities (and districts). It is a first possible point of optimization : conducting a pre-setup analysis helps to compare the requirements based on an overall project and pre-negotiate some key points with the authorities. These would be the minimum capital level required, know the official and effective taxation rates, the availability of specific premises, customs procedures, VAT treatment, conditions to get the VAT back after products are exported, etc.
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The foreign investment applications approval is, except in special cases, delegated to several provincial or municipal authorities. They treat the applications according to their own development priorities. That is to say in a manner that is not standardized at the national level.
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The serious filling of WOFE's application for registration requires drafting an investment feasibility report. It is carefully reviewed by the authorities. When the company operations started, expect regular administrative checks aimed to mostly verify the activities conducted are well in accordance with the approved business scope.
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A pre-setup report may also include the review of possible requirements in terms of products certification conditions and overall compliance to Chinese standards.
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Finally, for some projects, it may be useful to conduct at first a broader analysis (market survey, competition, positioning) so as to confirm the company's project is suited for the Chinese market.
10. Dormant company status or how to put a business on hold
Since March 1, 2022, a new clause in Chinese business regulations allows a company or subsidiary to apply for a suspended activity status. This recent measure comes in response to the difficulties encountered by many domestic businesses during the Covid-19 pandemic. Inspired by the spirit of Western regulations in this area, this new option makes it possible to reduce current expenses or fixed charges in times of temporary difficulty. This status remains open to domestic and foreign owned companies operating normally and not blacklisted. Here you can read more about the rules for putting a company on hold in China.
The proper preparation and optimization of your China set-up project is one of our core business. Upon request, we keep at your disposal many examples of registration & licensing deliverable for our customer. They include references in B2B or B2C service activities, import-export trading, wholesale and retail distribution, online sales (e-Commerce) and assembly + industrial production.
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